[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2000 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
26
Part 1 (Sec. 1.1401 to end)
Revised as of April 1, 2000
Internal Revenue
Containing a Codification of documents of general
applicability and future effect
As of April 1, 2000
With Ancillaries
Published by
Office of the Federal Register
National Archives and Records
Administration
As a Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2000
For sale by U.S. Government Printing Office
Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
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Table of Contents
Page
Explanation................................................. v
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 1189
Alphabetical List of Agencies Appearing in the CFR...... 1207
Table of OMB Control Numbers............................ 1217
List of CFR Sections Affected........................... 1235
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 1.1401-1
refers to title 26, part
1, section 1401-1.
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[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
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To determine whether a Code volume has been amended since its
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Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
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citations for the regulations are referred to by volume number and page
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those instances where a regulation published in the Federal Register
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inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
amendments to existing regulations in the CFR. These OMB numbers are
placed as close as possible to the applicable recordkeeping or reporting
requirements.
OBSOLETE PROVISIONS
Provisions that become obsolete before the revision date stated on
the cover of each volume are not carried. Code users may find the text
of provisions in effect on a given date in the past by using the
appropriate numerical list of sections affected. For the period before
January 1, 1986, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, or 1973-1985, published in seven separate volumes. For
the period beginning January 1, 1986, a ``List of CFR Sections
Affected'' is published at the end of each CFR volume.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Statutory
Authorities and Agency Rules (Table I). A list of CFR titles, chapters,
and parts and an alphabetical list of agencies publishing in the CFR are
also included in this volume.
An index to the text of ``Title 3--The President'' is carried within
that volume.
The Federal Register Index is issued monthly in cumulative form.
This index is based on a consolidation of the ``Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
There are no restrictions on the republication of material appearing
in the Code of Federal Regulations.
INQUIRIES
For a legal interpretation or explanation of any regulation in this
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ELECTRONIC SERVICES
The full text of the Code of Federal Regulations, the LSA (List of
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[[Page vii]]
The Office of the Federal Register also offers a free service on the
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site also contains links to GPO Access.
Raymond A. Mosley,
Director,
Office of the Federal Register.
April 1, 2000.
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of nineteen volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2000. The first twelve volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Secs. 1.0-1-1.60;
Secs. 1.61-1.169; Secs. 1.170-1.300; Secs. 1.301-1.400; Secs. 1.401-
1.440; Secs. 1.441-1.500; Secs. 1.501-1.640; Secs. 1.641-1.850;
Secs. 1.851-1.907; Secs. 1.908-1.1000; Secs. 1.1001-1.1400 and
Sec. 1.1401 to end. The thirteenth volume containing parts 2-29,
includes the remainder of subchapter A and all of Subchapter B--Estate
and Gift Taxes. The last six volumes contain parts 30-39 (Subchapter C--
Employment Taxes and Collection of Income Tax at Source); parts 40-49;
parts 50-299 (Subchapter D--Miscellaneous Excise Taxes); parts 300-499
(Subchapter F--Procedure and Administration); parts 500-599 (Subchapter
G--Regulations under Tax Conventions); and part 600 to end (Subchapter
H--Internal Revenue Practice).
The OMB control numbers for Title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Carol Conroy was Chief Editor. The Code of Federal
Regulations publication program is under the direction of Frances D.
McDonald, assisted by Alomha S. Morris.
[[Page x]]
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Sec. 1.1401 to End)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury (Continued)...................................... 1
[[Page 3]]
CHAPTER I--INTERNAL REVENUE SERVICE,
DEPARTMENT OF THE TREASURY (Continued)
(Part 1, Sec. 1.1401 to End)
--------------------------------------------------------------------
Editorial Note: IRS published a document at 45 FR 6088, January 25,
1980, deleting statutory sections from their regulations. In Chapter I
cross references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy, the
cross reference has been deleted. For further explanation, see 45 FR
20795, March 31, 1980.
SUBCHAPTER A--INCOME TAX (CONTINUED)
Part Page
1 Income taxes (continued).................... 5
Supplementary Publications: Internal Revenue Service Looseleaf
Regulations System.
Additional supplementary publications are issued covering Alcohol and
Tobacco Tax Regulations, and Regulations Under Tax Conventions.
[[Page 5]]
SUBCHAPTER A--INCOME TAX (Continued)
PART 1--INCOME TAXES (Continued)--Table of Contents
Normal Taxes and Surtaxes (Continued)
TAX ON SELF-EMPLOYMENT INCOME
Sec.
1.1401-1 Tax on self-employment income.
1.1402(a)-1 Definition of net earnings from self-employment.
1.1402(a)-2 Computation of net earnings from self-employment.
1.1402(a)-3 Special rules for computing net earnings from self-
employment.
1.1402(a)-4 Rentals from real estate.
1.1402(a)-5 Dividends and interest.
1.1402(a)-6 Gain or loss from disposition of property.
1.1402(a)-7 Net operating loss deduction.
1.1402(a)-8 Community income.
1.1402(a)-9 Puerto Rico.
1.1402(a)-10 Personal exemption deduction.
1.1402(a)-11 Ministers and members of religious orders.
1.1402(a)-12 Possession of the United States.
1.1402(a)-13 Income from agricultural activity.
1.1402(a)-14 Options available to farmers in computing net earnings
from self-employment for taxable years ending after 1954 and
before December 31, 1956.
1.1402(a)-15 Options available to farmers in computing net earnings
from self-employment for taxable years ending on or after
December 31, 1956.
1.1402(a)-16 Exercise of option.
1.1402(a)-17 Retirement payments to retired partners.
1.1402(b)-1 Self-employment income.
1.1402(c)-1 Trade or business.
1.1402(c)-2 Public office.
1.1402(c)-3 Employees.
1.1402(c)-4 Individuals under Railroad Retirement System.
1.1402(c)-5 Ministers and members of religious orders.
1.1402(c)-6 Members of certain professions.
1.1402(c)-7 Members of religious groups opposed to insurance.
1.1402(d)-1 Employee and wages.
1.1402(e)-1A Application of regulations under section 1402(e).
1.1402(e)-2A Ministers, members of religious orders and Christian
Science practitioners; application for exemption from self-
employment tax.
1.1402(e)-3A Time limitation for filing application for exemption.
1.1402(e)-4A Period for which exemption is effective.
1.1402(e)-5A Applications for exemption from self-employment taxes
filed after December 31, 1986, by ministers, certain members
of religious orders, and Christian Science practitioners.
1.1402(e)(1)-1 Election by ministers, members of religious orders, and
Christian Science practitioners for self-employment coverage.
1.1402(e)(2)-1 Time limitation for filing waiver certificate.
1.1402(e)(3)-1 Effective date of waiver certificate.
1.1402(e)(4)-1 Treatment of certain remuneration paid in 1955 and 1956
as wages.
1.1402(e)(5)-1 Optional provision for certain certificates filed before
April 15, 1962.
1.1402(e)(5)-2 Optional provisions for certain certificates filed on or
before April 17, 1967.
1.1402(e)(6)-1 Certificates filed by fiduciaries or survivors on or
before April 15, 1962.
1.1402(f)-1 Computation of partner's net earnings from self-employment
for taxable year which ends as result of his death.
1.1402(g)-1 Treatment of certain remuneration erroneously reported as
net earnings from self-employment.
1.1402(h)-1 Members of certain religious groups opposed to insurance.
1.1403-1 Cross references.
Withholding of Tax on Nonresident Aliens and Foreign Corporations and
Tax-Free Covenant Bonds
NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
1.1441-0 Outline of regulation provisions for section 1441.
1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
1.1441-2 Amounts subject to withholding.
1.1441-3 Determination of amounts to be withheld.
1.1441-4 Exemptions from withholding for certain effectively connected
income and other amounts.
1.1441-4T Exemption from withholding (temporary).
1.1441-5 Withholding on payments to partnerships, trusts, and estates.
1.1441-6 Claim of reduced withholding under an income tax treaty.
1.1441-7 General provisions relating to withholding agents.
1.1441-8 Exemption from withholding for payments to foreign
governments, international organizations, foreign central
banks of issue, and the Bank for International Settlements.
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1.1441-9 Exemption from withholding on exempt income of a foreign tax-
exempt organization, including foreign private foundations.
1.1441-10 Withholding agents with respect to fact-pay arrangements.
1.1442-1 Withholding of tax on foreign corporations.
1.1442-2 Exemption under a tax treaty.
1.1442-3 Tax exempt income of a foreign tax-exempt corporations.
1.1443-1 Foreign tax-exempt organizations.
1.1445-1 Withholding on dispositions of U.S. real property interests by
foreign persons: In general.
1.1445-2 Situations in which withholding is not required under section
1445(a).
1.1445-3 Adjustments to amount required to be withheld pursuant to
withholding certificate.
1.1445-4 Liability of agents.
1.1445-5 Special rules concerning distributions and other transactions
by corporations, partnerships, trusts, and estates.
1.1445-6 Adjustments pursuant to withhold certificate of amount
required to be withheld under section 1445(e).
1.1445-7 Treatment of foreign corporation that has made an election
under section 897(i) to be treated as a domestic corporation.
1.1445-8 Special rules regarding publicly traded partnerships, publicly
traded trusts and real estate investment trusts (REITs).
1.1445-9T Special rule for section 1034 nonrecognition (temporary).
1.1445-10T Special rule for Foreign governments (temporary).
1.1445-11T Special rules requiring withholding under Sec. 1.1445-5
(temporary).
TAX-FREE COVENANT BONDS
1.1451-1 Tax-free covenant bonds issued before January 1, 1934.
1.1451-2 Exemptions from withholding under section 1451.
APPLICATION OF WITHHOLDING PROVISIONS
1.1461-1 Payment and returns of tax withheld.
1.1461-2 Adjustments for overwithholding or underwithholding of tax.
1.1461-3 Payment of withheld tax.
1.1461-4 Adjustments for overwithholding of tax.
1.1462-1 Withheld tax as credit to recipient of income.
1.1463-1 Tax paid by recipient of income.
1.1464-1 Refunds or credits.
Rules Applicable to Recovery of Excessive Profits on Government
Contracts
RECOVERY OF EXCESSIVE PROFITS ON GOVERNMENT CONTRACTS
1.1471-1 Recovery of excessive profits on government contracts.
MITIGATION OF EFFECT OF RENEGOTIATION OF GOVERNMENT CONTRACTS
1.1481-1 [Reserved]
Tax on Transfers To Avoid Income Tax
1.1491-1 Imposition of tax.
1.1492-1 Nontaxable transfers.
1.1493-1 Definition of foreign trust.
1.1494-1 Returns; payment and collection of tax.
1.1494-2 Effective date.
Consolidated Returns
RETURNS AND PAYMENT OF TAX
Consolidated Return Regulations
1.1502-0 Effective dates.
1.1502-1 Definitions.
Consolidated Tax Liability
1.1502-2 Computation of tax liability.
1.1502-3 Consolidated investment credit.
1.1502-3T Consolidated investment credit (temporary).
1.1502-4 Consolidated foreign tax credit.
1.1502-4T Consolidated foreign tax credit (temporary).
1.1502-5 Estimated tax.
1.1502-6 Liability for tax.
1.1502-9 Consolidated overall foreign losses and separate limitation
losses.
Computation of Consolidated Taxable Income
1.1502-11 Consolidated taxable income.
Computation of Separate Taxable Income
1.1502-12 Separate taxable income.
1.1502-13 Intercompany transactions.
1.1502-15 SRLY limitation on built-in losses.
1.1502-16 Mine exploration expenditures.
1.1502-17 Methods of accounting.
1.1502-18 Inventory adjustment.
1.1502-19 Excess loss accounts.
1.1502-20 Disposition or deconsolidation of subsidiary stock.
Computation of Consolidated Items
1.1502-21 Net operating losses.
1.1502-22 Consolidated capital gain and loss.
1.1502-23 Consolidated net section 1231 gain or loss.
1.1502-24 Consolidated charitable contributions deduction.
1.1502-26 Consolidated dividends received deduction.
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1.1502-27 Consolidated section 247 deduction.
Basis, Stock Ownership, and Earnings and Profits Rules
1.1502-30 Stock basis after certain triangular reorganizations.
1.1502-31 Stock basis after a group structure change.
1.1502-32 Investment adjustments.
1.1502-33 Earnings and profits.
1.1502-34 Special aggregate stock ownership rules.
Special Taxes and Taxpayers
1.1502-42 Mutual savings banks, etc.
1.1502-43 Consolidated accumulated earnings tax.
1.1502-44 Percentage depletion for independent producers and royalty
owners.
1.1502-47 Consolidated returns by life-nonlife groups.
1.1502-55T Computation of alternative minimum tax of consolidated
groups (temporary).
Administrative Provisions and Other Rules
1.1502-75 Filing of consolidated returns.
1.1502-76 Taxable year of members of group.
1.1502-77 Common parent agent for subsidiaries.
1.1502-77T Alternative agents of the group (temporary).
1.1502-78 Tentative carryback adjustments.
1.1502-79 Separate return years.
1.1502-80 Applicability of other provisions of law.
1.1502-81T Alaska Native Corporations.
1.1502-90 Table of contents.
1.1502-91 Application of section 382 with respect to a consolidated
group.
1.1502-92 Ownership change of a loss group or a loss subgroup.
1.1502-93 Consolidated section 382 limitation (or subgroup section 382
limitation).
1.1502-94 Coordination with section 382 and the regulations thereunder
when a corporation becomes a member of a consolidated group.
1.1502-95 Rules on ceasing to be a member of a consolidated group (or
loss subgroup).
1.1502-96 Miscellaneous rules.
1.1502-97 Special rules under section 382 for members under the
jurisdiction of a court in a title 11 similar case. [Reserved]
1.1502-98 Coordination with section 383.
1.1502-99 Effective dates.
1.1502-100 Corporations exempt from tax.
1.1503-1 Computation and payment of tax.
1.1503-2 Dual consolidated loss.
1.1504-0 Outline of provisions.
1.1504-1 Definitions.
1.1504-2--1.1504-3 [Reserved]
1.1504-4 Treatment of warrants, options, convertible obligations, and
other similar interests.
Regulations Applicable for Tax Years for Which a Return Is Due on or
Before August 11, 1999
1.1502-9A Applications of overall foreign loss recapture rules to
corporations filing consolidated returns due on or before
August 11, 1999.
Regulations Applicable to Taxable Years Before January 1, 1997
1.1502-15A Limitations on the allowance of built-in deductions for
consolidated return years beginning before January 1, 1997.
1.1502-21A Consolidated net operating loss deduction generally
applicable for consolidated return years beginning before
January 1, 1997.
1.1502-22A Consolidated net capital gain or loss generally applicable
for consolidated return years beginning before January 1,
1997.
1.1502-23A Consolidated net section 1231 gain or loss generally
applicable for consolidated return years beginning before
January 1, 1997.
1.1502-41A Determination of consolidated net long-term capital gain and
consolidated net short-term capital loss generally applicable
for consolidated return years beginning before January 1,
1997.
1.1502-79A Separate return years generally applicable for consolidated
return years beginning before January 1, 1997.
REGULATIONS APPLYING SECTION 382 WITH RESPECT TO TESTING DATES (AND
CORPORATIONS JOINING OR LEAVING CONSOLIDATED GROUPS) BEFORE JUNE 25,
1999
1.1502-90A Table of contents.
1.1502-91A Application of section 382 with respect to a consolidated
group generally applicable for testing dates before June 25,
1999.
1.1502-92A Ownership change of a loss group or a loss subgroup
generally applicable for testing dates before June 25, 1999.
1.1502-93A Consolidated section 382 limitation (or subgroup section 382
limitation) generally applicable for testing dates before June
25, 1999.
1.1502-94A Coordination with section 382 and the regulations thereunder
when a corporation becomes a member of a consolidated group
generally applicable for corporations becoming members of a
group before June 25, 1999.
1.1502-95A Rules on ceasing to be a member of a consolidated group
generally applicable for corporations ceasing to be members
before June 25, 1999.
[[Page 8]]
1.1502-96A Miscellaneous rules generally applicable for testing dates
before June 25, 1999.
1.1502-97A Special rules under section 382 for members under the
jurisdiction of a court in a title 11 similar case. [Reserved]
1.1502-98A Coordination with section 383 generally applicable for
testing dates (or members joining or leaving a group) before
June 25, 1999.
1.1502-99A Effective dates.
DUAL CONSOLIDATED LOSSES INCURRED IN TAXABLE YEARS BEGINNING BEFORE
OCTOBER 1, 1992
1.1503-2A Dual consolidated loss.
RELATED RULES
1.1551-1 Disallowance of surtax exemption and accumulated earnings
credit.
1.1552-1 Earnings and profits.
Certain Controlled Corporartions
1.1561-0 Effective date.
1.1561-1 Limitations on certain multiple tax benefits in the case of
certain controlled corporations.
1.1561-2 Determination of amount of tax benefits.
1.1561-3 Apportionment of surtax exemption.
1.1562-0 Effective date.
1.1562-1 Privilege of controlled group to elect multiple surtax
exemptions.
1.1562-2 Termination of election.
1.1562-3 Consents to election and termination.
1.1562-4 Election after termination.
1.1562-5 Continuing and successor controlled groups.
1.1562-6 Election for short taxable years.
1.1562-7 Extension of statutory periods of limitation.
1.1563-1 Definition of controlled group of corporations and component
members.
1.1563-2 Excluded stock.
1.1563-3 Rules for determining stock ownership.
1.1563-4 Franchised corporations.
1.1564-1 Limitations on additional benefits for members of controlled
groups.
Procedure and Administration
INFORMATION AND RETURNS
returns and records
Records, Statements, and Special Returns
1.6001-1 Records.
1.6001-2 Returns.
Tax Returns or Statements
1.6011-1 General requirement of return, statement, or list.
1.6011-2 Returns, etc., of DISC's and former DISC's.
1.6011-3 Requirement of statement from payees of certain gambling
winnings.
1.6011-4T Requirement of statement disclosing participation in certain
transactions by corporate taxpayers (Temporary).
1.6012-1 Individuals required to make returns of income.
1.6012-2 Corporations required to make returns of income.
1.6012-3 Returns by fiduciaries.
1.6012-4 Miscellaneous returns.
1.6012-5 Composite return in lieu of specified form.
1.6012-6 Returns by political organizations.
1.6012-7T Telephone return filing using voice signature (temporary).
1.6013-1 Joint returns.
1.6013-2 Joint return after filing separate return.
1.6013-3 Treatment of joint return after death of either spouse.
1.6013-4 Applicable rules.
1.6013-5 Spouse relieved of liability in certain cases.
1.6013-6 Election to treat nonresident alien individual as resident of
the United States.
1.6013-7 Joint return for year in which nonresident alien becomes
resident of the United States.
1.6014-1 Tax not computed by taxpayer for taxable years beginning
before January 1, 1970.
1.6014-2 Tax not computed by taxpayer for taxable years beginning after
December 31, 1969.
1.6015(a)-1 Declaration of estimated income tax by individuals.
1.6015(b)-1 Joint declaration by husband and wife.
1.6015(c)-1 Definition of estimated tax.
1.6015(d)-1 Contents of declaration of estimated tax.
1.6015(e)-1 Amendment of declaration.
1.6015(f)-1 Return as declaration or amendment.
1.6015(g)-1 Short taxable years of individuals.
1.6015(h)-1 Estates and trusts.
1.6015(i)-1 Nonresident alien individuals.
1.6015(j)-1 Applicability.
1.6016-1 Declarations of estimated income tax by corporations.
1.6016-2 Contents of declaration of estimated tax.
1.6016-3 Amendment of declaration.
1.6016-4 Short taxable year.
1.6017-1 Self-employment tax returns.
Information Returns
1.6031(a)-1 Return of partnership income.
1.6031(b)-1T Statements to partners (temporary).
[[Page 9]]
1.6031(b)-2T REMIC reporting requirements (temporary). [Reserved]
1.6031(c)-1T Nominee reporting of partnership information (temporary).
1.6031(c)-2T Nominee reporting of REMIC information (temporary).
[Reserved]
1.6032-1 Returns of banks with respect to common trust funds.
1.6033-1 Returns by exempt organizations; taxable years beginning
before January 1, 1970.
1.6033-2 Returns by exempt organizations (taxable years beginning after
December 31, 1969) and returns by certain nonexempt
organizations (taxable years beginning after December 31,
1980).
1.6033-3 Additional provisions relating to private foundations.
1.6034-1 Information returns required of trusts described in section
4947(a)(2) or claiming charitable or other deductions under
section 642(c).
1.6035-1 Returns of U.S. officers, directors and 10-percent
shareholders of foreign personal holding companies for taxable
years beginning after September 3, 1982.
1.6035-2 Returns of U.S. officers and directors of foreign personal
holding companies for taxable years beginning before September
4, 1982.
1.6035-3 Returns of 50-percent U.S. shareholders of foreign personal
holding companies for taxable years beginning before September
4, 1982.
1.6036-1 Notice of qualification as executor or receiver.
1.6037-1 Return of electing small business corporation.
1.6038-1 Information returns required of domestic corporations with
respect to annual accounting periods of certain foreign
corporations beginning before January 1, 1963.
1.6038-2 Information returns required of United States persons with
respect to annual accounting periods of certain foreign
corporations beginning after December 31, 1962.
1.6038-3 Information returns required of certain United States persons
with respect to controlled foreign partnerships (CFPs).
1.6038A-0 Table of contents.
1.6038A-1 General requirements and definitions.
1.6038A-2 Requirement of return.
1.6038A-3 Record maintenance.
1.6038A-4 Monetary penalty.
1.6038A-5 Authorization of agent.
1.6038A-6 Failure to furnish information.
1.6038A-7 Noncompliance.
1.6038B-1 Reporting of certain transfers to foreign corporations.
1.6038B-1T Reporting of certain transactions to foreign corporations
(temporary).
1.6038B-2 Reporting of certain transfers to foreign partnerships.
1.6039-1 Information returns required of corporations with respect to
certain stock option transactions occurring on or after
January 1, 1964.
1.6039-2 Statements to persons with respect to whom information is
furnished.
1.6041-1 Return of information as to payments of $600 or more.
1.6041-2 Return of information as to payments to employees.
1.6041-3 Payments for which no return of information is required under
section 6041.
1.6041-4 Foreign-related items and other exceptions.
1.6041-5 Information as to actual owner.
1.6041-6 Returns made on Forms 1096 and 1099 under section 6041;
contents and time and place for filing.
1.6041-7 Magnetic media requirement.
1.6041-8 Cross-reference to penalties.
1.6041A-1 Returns regarding payments of remuneration for services and
certain direct sales.
1.6042-1 Return of information as to dividends paid in calendar years
before 1963.
1.6042-2 Returns of information as to dividends paid.
1.6042-3 Dividends subject to reporting.
1.6042-4 Statements to recipients of dividend payments.
1.6043-1 Return regarding corporate dissolution or liquidation.
1.6043-2 Return of information respecting distributions in liquidation.
1.6043-3 Return regarding liquidation, dissolution, termination, or
substantial contraction of organizations exempt from taxation
under section 501(a).
1.6044-1 Returns of information as to patronage dividends with respect
to patronage occurring in taxable years beginning before 1963.
1.6044-2 Returns of information as to payments of patronage dividends.
1.6044-3 Amounts subject to reporting.
1.6044-4 Exemption for certain consumer cooperatives.
1.6044-5 Statements to recipients of patronage dividends.
1.6045-1 Returns of information of brokers and barter exchanges.
1.6045-1T Returns of information of brokers and barter exchanges
(temporary).
1.6045-2 Furnishing statement required with respect to certain
substitute payments.
1.6045-2T Furnishing statement required with respect to certain
substitute payments (temporary).
1.6045-4 Information reporting on real estate transactions with dates
of closing on or after January 1, 1991.
1.6046-1 Returns as to organization or reorganization of foreign
corporations and as to acquisitions of their stock, on or
after January 1, 1963.
[[Page 10]]
1.6046-2 Returns as to foreign corporations which are created or
organized, or reorganized, on or after September 15, 1960, and
before January 1, 1963.
1.6046-3 Returns as to formation or reorganization of foreign
corporations prior to September 15, 1960.
1.6047-1 Information to be furnished with regard to employee retirement
plan covering an owner-employee.
1.6049-1 Returns of information as to interest paid in calendar years
before 1983 and original issue discount includible in gross
income for calendar years before 1983.
1.6049-2 Interest and original issue discount subject to reporting in
calendar years before 1983.
1.6049-3 Statements to recipients of interest payments and holders of
obligations to which there is attributed original issue
discount in calendar years before 1983.
1.6049-4 Return of information as to interest paid and original issue
discount includible in gross income after December 31, 1982.
1.6049-5 Interest and original issue discount subject to reporting
after December 31, 1982.
1.6049-5T Reporting by brokers of interest and original issue discount
on and after January 1, 1986 (temporary).
1.6049-6 Statements to recipients of interest payments and holders of
obligations for attributed original issue discount.
1.6049-7 Returns of information with respect to REMIC regular interests
and collateralized debt obligations.
1.6049-7T Market discount fraction reported with other financial
information with respect to REMICs and collateralized debt
obligations (temporary).
1.6049-8 Interest and original issue discount paid to residents of
Canada.
1.6046A-1 Return requirement for United States persons who acquire or
dispose of an interest in a foreign partnership, or whose
proportional interest in a foreign partnership changes
substantially.
1.6050A-1 Reporting requirements of certain fishing boat operators.
1.6050B-1 Information returns by person making unemployment
compensation payments.
1.6050D-1 Information returns relating to energy grants and financing.
1.6050E-1 Reporting of State and local income tax refunds.
1.6050H-0 Table of contents.
1.6050H-1 Information reporting of mortgage interest received in a
trade or business from an individual.
1.6050H-1T Information reporting of mortgage interest received in a
trade or business from individuals after 1985 and before 1988
(temporary).
1.6050H-2 Time, form, and manner of reporting interest received on
qualified mortgage.
1.6050I-0 Table of contents.
1.6050I-1 Returns relating to cash in excess of $10,000 received in a
trade or business.
1.6050I-2 Returns relating to cash in excess of $10,000 received as
bail by court clerks.
1.6050J-1T Questions and answers concerning information returns
relating to foreclosures and abandonments of security
(temporary).
1.6050K-1 Returns relating to sales or exchanges of certain partnership
interests.
1.6050L-1 Information return by donees relating to certain dispositions
of donated property.
1.6050M-1 Information returns relating to persons receiving contracts
from certain Federal executive agencies.
1.6050N-1 Statements to recipients of royalties paid after December 31,
1986.
1.6050P-0 Table of contents.
1.6050P-1 Information reporting for discharges of indebtedness by
certain financial entities.
1.6052-1 Information returns regarding payment of wages in the form of
group-term life insurance.
1.6052-2 Statements to be furnished employees with respect to wages
paid in the form of group-term life insurance.
1.6060-1 Reporting requirements for income tax return preparers.
Signing and Verifying of Returns and Other Documents
1.6061-1 Signing of returns and other documents by individuals.
1.6061-2T Signing of returns by voice signature (temporary).
1.6062-1 Signing of returns, statements, and other documents made by
corporations.
1.6063-1 Signing of returns, statements, and other documents made by
partnerships.
1.6065-1 Verification of returns.
1.6065-2T Verification of returns by voice signature (temporary).
Time for Filing Returns and Other Documents
1.6071-1 Time for filing returns and other documents.
1.6072-1 Time for filing returns of individuals, estates, and trusts.
1.6072-2 Time for filing returns of corporations.
1.6072-3 Income tax due dates postponed in case of China Trade Act
corporations.
1.6072-4 Time for filing other returns of income.
1.6073-1 Time and place for filing declarations of estimated income tax
by individuals.
1.6073-2 Fiscal years.
1.6073-3 Short taxable years.
[[Page 11]]
1.6073-4 Extension of time for filing declarations by individuals.
1.6074-1 Time and place for filing declarations of estimated income tax
by corporations.
1.6074-2 Time for filing declarations by corporations in case of a
short taxable year.
1.6074-3 Extension of time for filing declarations by corporations.
Extension of Time for Filing Returns
1.6081-1 Extension of time for filing returns.
1.6081-1T Extension of time to file return in case of taxpayers with
mixed straddles (temporary).
1.6081-2 Automatic extension of time to file partnership return of
income.
1.6081-3 Automatic extension of time for filing corporation income tax
returns.
1.6081-4 Automatic extension of time for filing individual income tax
returns.
1.6081-5 Extensions of time in the case of certain partnerships,
corporations and U.S. citizens and residents.
1.6081-6 Automatic extension of time to file trust income tax return.
1.6081-7 Automatic extension of time to file Real Estate Mortgage
Investment Conduit (REMIC) income tax return.
Place for Filing Returns or Other Documents
1.6091-1 Place for filing returns or other documents.
1.6091-2 Place for filing income tax returns.
1.6091-3 Income tax returns required to be filed with Director of
International Operations.
1.6091-4 Exceptional cases.
Miscellaneous Provisions
1.6102-1 Computations on returns or other documents.
1.6107-1 Income tax return preparer must furnish copy of return to
taxpayer and must retain a copy or record.
1.6109-1 Identifying numbers.
1.6109-2 Furnishing identifying number of income tax return preparer.
1.6109-2T Furnishing identifying number of income tax return preparer
(temporary).
1.6115-1 Disclosure requirements for quid pro quo contributions.
TIME AND PLACE FOR PAYING TAX
Place and Due Date for Payment of Tax
1.6151-1 Time and place for paying tax shown on returns.
1.6152-1 Installment payments.
1.6153-1 Payment of estimated tax by individuals.
1.6153-2 Fiscal years.
1.6153-3 Short taxable years.
1.6153-4 Extension of time for paying the estimated tax.
1.6154-1 Payment of estimated tax by corporations.
1.6154-2 Short taxable years.
1.6154-3 Extension of time for paying estimated tax.
1.6154-4 Use of Government depositaries.
1.6154-5 Definition of estimated tax.
Extensions of Time for Payment
1.6161-1 Extension of time for paying tax or deficiency.
1.6162-1 Extension of time for payment of tax on gain attributable to
liquidation of personal holding companies.
1.6164-1 Extensions of time for payment of taxes by corporations
expecting carrybacks.
1.6164-2 Amount of tax the time for payment of which may be extended.
1.6164-3 Computation of the amount of reduction of the tax previously
determined.
1.6164-4 Payment of remainder of tax where extension relates to only
part of the tax.
1.6164-5 Period of extension.
1.6164-6 Revised statements.
1.6164-7 Termination by district director.
1.6164-8 Payments on termination.
1.6164-9 Cross references.
1.6165-1 Bonds where time to pay the tax or deficiency has been
extended.
COLLECTION
General Provisions
1.6302-1 Use of Government depositaries in connection with corporation
income and estimated income taxes and certain taxes of tax-
exempt organizations.
1.6302-2 Use of Government depositaries for payment of tax withheld on
nonresident aliens and foreign corporations.
1.6302-3 Use of Government depositaries in connection with estimated
taxes of certain trusts.
1.6302-4 Use of financial institutions in connection with income taxes;
voluntary payments by electronic funds transfer.
1.6361-1 Collection and administration of qualified State individual
income taxes.
ABATEMENTS, CREDITS, AND REFUNDS
1.6411-1 Tentative carryback adjustments.
1.6411-2 Computation of tentative carryback adjustment.
1.6411-3 Allowance of adjustments.
1.6411-4 Consolidated groups.
1.6414-1 Credit or refund of tax withheld on nonresident aliens and
foreign corporations.
1.6425-1 Adjustment of overpayment of estimated income tax by
corporation.
1.6425-2 Computation of adjustment of overpayment of estimated tax.
1.6425-3 Allowance of adjustments.
[[Page 12]]
ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES
1.6654-1 Addition to the tax in the case of an individual.
1.6654-2 Exceptions to imposition of the addition to the tax in the
case of individuals.
1.6654-3 Short taxable years of individuals.
1.6654-4 Waiver of penalty for underpayment of 1971 estimated tax by an
individual.
1.6654-5 Applicability.
1.6655-1 Addition to the tax in the case of a corporation.
1.6655-2 Exceptions to imposition of the addition to the tax in the
case of corporations.
1.6655-2T Safe harbor for certain installments of tax due before July
1, 1987 (temporary).
1.6655-3 Short taxable years in the case of corporations.
1.6655-5 Addition to tax on account of excessive adjustment under
section 6425.
1.6655-7 Special rules for estimating the corporate alternative minimum
tax book income adjustment under the annualization exception.
1.6655(e)-1 Time and manner for making election under the Omnibus
Budget Reconciliation Act of 1993.
1.6661-1 Addition to tax in the case of a substantial understatement of
tax liability.
1.6661-2 Computation of penalty; meaning of terms.
1.6661-3 Substantial authority.
1.6661-4 Disclosure of certain information.
1.6661-5 Items relating to tax shelters.
1.6661-6 Waiver of penalty.
1.6662-0 Table of contents.
1.6662-1 Overview of the accuracy-related penalty.
1.6662-2 Accuracy-related penalty.
1.6662-3 Negligence or disregard of rules or regulations.
1.6662-4 Substantial understatement of income tax.
1.6662-5 Substantial and gross valuation misstatements under chapter 1.
1.6662-5T Substantial and gross valuation misstatements under chapter 1
(temporary).
1.6662-6 Transactions between persons described in section 482 and net
section 482 transfer price adjustments.
1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes to the
accuracy-related penalty.
1.6664-0 Table of contents.
1.6664-1 Accuracy-related and fraud penalties; definitions and special
rules.
1.6664-2 Underpayment.
1.6664-3 Ordering rules for determining the total amount of penalties
imposed.
1.6664-4 Reasonable cause and good faith exception to section 6662
penalties.
1.6664-4T Reasonable cause and good faith exception to section 6662
penalties.
1.6694-0 Table of contents.
1.6694-1 Section 6694 penalties applicable to income tax return
preparer.
1.6694-2 Penalty for understatement due to an unrealistic position.
1.6694-3 Penalty for understatement due to willful, reckless, or
intentional conduct.
1.6694-4 Extension of period of collection where preparer pays 15
percent of a penalty for understatement of taxpayer's
liability and certain other procedural matters.
1.6695-1 Other assessable penalties with respect to the preparation of
income tax returns for other persons.
1.6695-1T Other assessable penalties with respect to the preparation of
income tax returns for other persons (temporary).
1.6695-2T Preparer due diligence requirements for determining earned
income credit eligibility (temporary).
1.6696-1 Claims for credit or refund by income tax return preparers.
1.6709-1T Penalties with respect to mortgage credit certificates
(temporary).
JEOPARDY, BANKRUPTCY, AND RECEIVERSHIPS
1.6851-1 Termination assessments of income tax.
1.6851-2 Certificates of compliance with income tax laws by departing
aliens.
1.6851-3 Furnishing of bond to insure payment; cross reference.
THE TAX COURT
Declaratory Judgements Relating to Qualification of Certain Retirement
Plans
1.7476-1 Interested parties.
1.7476-2 Notice to interested parties.
1.7476-3 Notice of determination.
1.7519-0T Table of contents (temporary).
1.7519-1T Required payments for entities electing not to have required
year (temporary).
1.7519-2T Required payments--procedures and administration (temporary).
1.7519-3T Effective date (temporary).
General Actuarial Valuations
1.7520-1 Valuation of annuities, unitrust interests, interests for life
or terms of years, and remainder or reversionary interests.
1.7520-1T Valuation of annuities, unitrust interests, interests for
life or terms of years, and remainder or reversionary
interests (temporary).
1.7520-2 Valuation of charitable interests.
1.7520-3 Limitation on the application of section 7520.
1.7520-4 Transitional rules.
[[Page 13]]
1.7701(l)-0 Table of contents.
1.7701(l)-1 Conduit financing arrangements.
1.7701(l)-3 Recharacterizing financing arrangements involving fast-pay
stock.
1.7702B-1 Consumer protection provisions.
1.7702B-2 Special rules for pre-1997 long-term care insurance
contracts.
1.7703-1 Determination of marital status.
1.7704-1 Publicly traded partnerships.
1.7704-2 Transition provisions.
1.7704-3 Qualifying income.
1.7872-1--1.7872-4 [Reserved]
1.7872-5T Exempted loans (temporary).
PUBLIC LAW 74, 84TH CONGRESS
1.9000-1 Statutory provisions.
1.9000-2 Effect of repeal in general.
1.9000-3 Requirement of statement showing increase in tax liability.
1.9000-4 Form and content of statement.
1.9000-5 Effect of filing statement.
1.9000-6 Provisions for the waiver of interest.
1.9000-7 Provisions for estimated tax.
1.9000-8 Extension of time for making certain payments.
RETIREMENT-STRAIGHT LINE ADJUSTMENT ACT OF 1958
1.9001 Statutory provisions; Retirement-Straight Line Adjustment Act of
1958.
1.9001-1 Change from retirement to straight-line method of computing
depreciation.
1.9001-2 Basis adjustments for taxable years beginning on or after 1956
adjustment date.
1.9001-3 Basis adjustments for taxable years between changeover date
and 1956 adjustment date.
1.9001-4 Adjustments required in computing excess-profits credit.
DEALER RESERVE INCOME ADJUSTMENT ACT OF 1960
1.9002 Statutory provisions; Dealer Reserve Income Adjustment Act of
1960 (74 Stat. 124).
1.9002-1 Purpose, applicability, and definitions.
1.9002-2 Election to have the provisions of section 481 of the Internal
Revenue Code of 1954 apply.
1.9002-3 Election to have the provisions of section 481 of the Internal
Revenue Code of 1954 not apply.
1.9002-4 Election to pay net increase in tax in installments.
1.9002-5 Special rules relating to interest.
1.9002-6 Acquiring corporation.
1.9002-7 Statute of limitations.
1.9002-8 Manner of exercising elections.
PUBLIC DEBT AND TAX RATE EXTENSION ACT OF 1960
1.9003 Statutory provisions; section 4 of the Act of September 14, 1960
(Pub. L. 86-781, 74 Stat. 1017).
1.9003-1 Election to have the provisions of section 613(c)(2) and (4)
of the 1954 Code, as amended, apply for past years.
1.9003-2 Effect of election.
1.9003-3 Statutes of limitation.
1.9003-4 Manner of exercising election.
1.9003-5 Terms; applicability of other laws.
CERTAIN BRICK AND TILE CLAY, FIRE CLAY, AND SHALE; REGULATIONS UNDER THE
ACT OF SEPTEMBER 26, 1961
1.9004 Statutory provisions; the Act of September 26, 1961 (Pub. L. 87-
312, 75 Stat. 674).
1.9004-1 Election relating to the determination of gross income from
the property for taxable years beginning prior to 1961 in the
case of certain clays and shale.
1.9004-2 Effect of election.
1.9004-3 Statutes of limitation.
1.9004-4 Manner of exercising election.
1.9004-5 Terms; applicability of other laws.
QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS; ELECTION
FOR PRIOR TAXABLE YEARS
1.9005 Statutory provisions; section 2 of the Act of September 26, 1961
(Pub. L. 87-321, 75 Stat. 683).
1.9005-1 Election relating to the determination of gross income from
the property for taxable years beginning prior to 1961 in the
case of clay and quartzite used in making refractory products.
1.9005-2 Effect of election.
1.9005-3 Statutes of limitation.
1.9005-4 Manner of exercising election.
1.9005-5 Terms; applicability of other laws.
Tax Reform Act of 1969
1.9006 Statutory provisions; Tax Reform Act of 1969.
1.9006-1 Interest and penalties in case of certain taxable years.
MISCELLANEOUS PROVISIONS
1.9101-1 Permission to submit information required by certain returns
and statements on magnetic tape.
1.9200-1 Deduction for motor carrier operating authority.
1.9200-2 Manner of taking deduction.
Authority: 26 U.S.C. 7805, unless otherwise noted.
Section 1.1402 (e)-5T also is issued under 26 U.S.C. 1402(e)(1) and (2).
Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26 U.S.C.
3401(a)(6).
[[Page 14]]
Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C.
3401(a)(6) and 26 U.S.C. 7701(l).
Section 1.1441-4 also issued under 26 U.S.C. 1441(c)(4) and 26 U.S.C.
3401(a)(6).
Section 1.1441-5 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C.
3401(a)(6) and 26 U.S.C. 7701(b)(11).
Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26 U.S.C.
3401(a)(6).
Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C.
3401(a)(6) and 26 U.S.C. 7701(l).
Section 1.1443-1 also issued under 26 U.S.C. 1443(a).
Section 1.1445-5 also issued under 26 U.S.C. 1445(e)(6).
Section 1.1445-8 also issued under 26 U.S.C. 1445(e)(6).
Section 1.1461-1 also issued under 26 U.S.C. 1441(c)(4) and 26 U.S.C.
3401(a)(6).
Section 1.1461-2 also issued under 26 U.S.C. 1441(c)(4) and 26 U.S.C.
3401(a)(6).
Section 1.1462-1 also issued under 26 U.S.C. 1441(c)(4) and 26 U.S.C.
3401(a)(6).
Section 1.1502-0 also issued under 26 U.S.C. 1502.
Section 1.1502-1 also issued under 26 U.S.C. 1502.
Section 1.1502-2 also issued under 26 U.S.C. 1502.
Section 1.1502-3T also issued under 26 U.S.C. 1502.
Section 1.1502-9 also issued under 26 U.S.C. 1502.
Section 1.1502-11 also issued under 26 U.S.C. 1502.
Section 1.1502-12 also issued under 26 U.S.C. 1502.
Section 1.1502-13 also issued under 26 U.S.C. 1502.
Section 1.1502-15 also issued under 26 U.S.C. 1502.
Section 1.1502-17 also issued under 26 U.S.C. 446 and 1502.
Section 1.1502-18 also issued under 26 U.S.C. 1502.
Section 1.1502-19 also issued under 26 U.S.C. 301, 1502, and 1503.
Section 1.1502-20 also issued under 26 U.S.C. 337(d) and 1502.
Section 1.1502-21 also issued under 26 U.S.C. 1502 and 6402(i).
Section 1.1502-22 also issued under 26 U.S.C. 1502.
Section 1.1502-23 also issued under 26 U.S.C. 1502.
Section 1.1502-26 also issued under 26 U.S.C. 1502.
Section 1.1502-30 also issued under 26 U.S.C. 1502.
Section 1.1502-31 also issued under 26 U.S.C. 1502.
Section 1.1502-32 also issued under 26 U.S.C. 301, 1502, and 1503.
Section 1.1502-33 also issued under 26 U.S.C. 1502.
Section 1.1502-55T also issued under 26 U.S.C. 1502.
Section 1.1502-75 also issued under 26 U.S.C. 1502.
Section 1.1502-76 also issued under 26 U.S.C. 1502.
Section 1.1502-77(e) also issued under 26 U.S.C. 1502 and 6402(i).
Section 1.1502-78(b) also issued under 26 U.S.C. 1502, 6402(i), and
6411(c).
Section 1.1502-79 also issued under 26 U.S.C. 1502.
Section 1.1502-80 also issued under 26 U.S.C. 1502.
Section 1.1502-81T also issued under 26 U.S.C. 1502.
Section 1.1502-91 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-92 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-93 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-94 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-95 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-96 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-98 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502-99 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1503-2T also issued under 26 U.S.C. 1503(d).
Section 1.1504-4 also issued under 26 U.S.C. 1504(a)(5).
Section 1.1502-9A also issued under 26 U.S.C. 1502.
Section 1.1502-15A also issued under 26 U.S.C. 1502.
Section 1.1502-21A also issued under 26 U.S.C. 1502.
Section 1.1502-22A also issued under 26 U.S.C. 1502.
Section 1.1502-23A also issued under 26 U.S.C. 1502.
Section 1.1502-41A also issued under 26 U.S.C. 1502.
Section 1.1502-79A also issued under 26 U.S.C. 1502.
Section 1.1502-91A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-92A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-93A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-94A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-95A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-96A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-98A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-99A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
[[Page 15]]
Section 1.6011-4T also issued under 26 U.S.C. 6001 and 6011(a).
Section 1.6013-6 also issued under 26 U.S.C. 7701(b)(11).
Section 1.6031(a)-1 also issued under 26 U.S.C. 6031.
Sections 1.6035-1 through 1.6035-3 also issued under 26 U.S.C. 6035 (a),
(d), and (e).
Section 1.6038-2 also issued under 26 U.S.C. 6038.
Section 1.6038-3 also issued under 26 U.S.C. 6038.
Section 1.6038A-1 also issued under 26 U.S.C. 6038A.
Section 1.6038A-2 also issued under 26 U.S.C. 6038A.
Section 1.6038A-3 also issued under 26 U.S.C. 6038A and 7701(l).
Section 1.6038A-4 also issued under 26 U.S.C. 6038A.
Section 1.6038A-5 also issued under 26 U.S.C. 6038A.
Section 1.6038A-6 also issued under 26 U.S.C. 6038A.
Section 1.6038A-7 also issued under 26 U.S.C. 6038A.
Section 1.6038B-1 also issued under 26 U.S.C. 6038B.
Section 1.6038B-1T also issued under 26 U.S.C 6038B.
Section 1.6038B-2 also issued under 26 U.S.C. 6038B.
Section 1.6041-3 also issued under 26 U.S.C. 62 and 6041(a).
Section 1.6042-3 also issued under 26 U.S.C. 6045.
Section 1.6045-1 also issued under 26 U.S.C. 6045.
Section 1.6045-2 also issued under 26 U.S.C. 6045.
Section 1.6045-4 also issued under 26 U.S.C. 6045.
Section 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b), and (d).
Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), and (d).
Section 1.6049-5T also issued under 26 U.S.C. 6049.
Section 1.6049-6 also issued under 6049(a), (b), and (d).
Section 1.6049-7 also issued under 26 U.S.C. 860G(e), 1275(c) and 26
U.S.C. 6049(d)(7)(D).
Section 1.6046A-1 also issued under 26 U.S.C. 6046A.
Section 1.6050E-1 also issued under 26 U.S.C. 6050E.
Section 1.6050H-1 also issued under 26 U.S.C. 6050H.
Section 1.6050H-1T also issued under 26 U.S.C. 6050H.
Section 1.6050H-2 also issued under 26 U.S.C. 6050H.
Section 1.6050I-1 also issued under 26 U.S.C. 6050I.
Section 1.6050I-2 also issued under 26 U.S.C. 6050I.
Section 1.6050K-1 also issued under 26 U.S.C. 6050K.
Section 1.6050M-1 also issued under 26 U.S.C. 6050M.
Section 1.6050P-1 also issued under 26 U.S.C. 6050P.
Section 1.6061-2T also issued under 26 U.S.C. 6061.
Section 1.6065-2T also issued under 26 U.S.C. 6065.
Section 1.6081-2 also issued under 26 U.S.C. 6081(a).
Section 1.6081-4 also issued under 26 U.S.C. 6081(a).
Section 1.6081-6 also issued under 26 U.S.C. 6081(a).
Section 1.6081-7 also issued under 26 U.S.C. 6081(a).
Section 1.6302-1 also issued under 26 U.S.C. 6302(c) and (h).
Section 1.6302-2 also issued under 26 U.S.C. 6302(h).
Section 1.6302-3 also issued under 26 U.S.C. 6302(h).
Section 1.6302-4 also issued under 26 U.S.C. 6302(a), (c), and (h).
Section 1.6411-4 also issued under 26 U.S.C. 6402(i) and 6411(c).
Section 1.6662-6 also issued under 26 U.S.C. 6662.
Section 1.6695-1 also issued under 26 U.S.C. 6695(b).
Section 1.6695-1T also issued under 26 U.S.C. 6695(b).
Section 1.6695-2T also issued under 26 U.S.C. 6695(g).
Section 1.6851-2 also issued under 26 U.S.C 6851(d).
Section 1.7520-1 also issued under 26 U.S.C. 7520(c)(2).
Section 1.7520-1T also issued under 26 U.S.C. 7520(c)(2).
Section 1.7520-2 also issued under 26 U.S.C. 7520(c)(2).
Section 1.7520-3 also issued under 26 U.S.C. 7520(c)(2).
Section 1.7520-4 also issued under 26 U.S.C. 7520(c)(2).
Section 1.7701(l)-1 also issued under 26 U.S.C. 7701(l).
Section 1.7701(l)-3 also issued under 26 U.S.C. 7701(l).
Section 1.7872-5T also issued under 26 U.S.C. 7872.
TAX ON SELF-EMPLOYMENT INCOME--Table of Contents
Source: Sections 1.1401-1 to 1.1403-1 contained in T.D. 6691, 28 FR
12796, Dec. 3, 1963, unless otherwise noted.
[[Page 16]]
Sec. 1.1401-1 Tax on self-employment income.
(a) There is imposed, in addition to other taxes, a tax upon the
self-employment income of every individual at the rates prescribed in
section 1401(a) (old-age, survivors, and disability insurance) and (b)
(hospital insurance). (See subparagraphs (1) and (2) of paragraph (b) of
this section.) This tax shall be levied, assessed, and collected as part
of the income tax imposed by subtitle A of the Code and, except as
otherwise expressly provided, will be included with the tax imposed by
section 1 or 3 in computing any deficiency or overpayment and in
computing the interest and additions to any deficiency, overpayment, or
tax. Since the tax on self-employment income is part of the income tax,
it is subject to the jurisdiction of the Tax Court of the United States
to the same extent and in the same manner as the other taxes under
subtitle A of the Code. Furthermore, with respect to taxable years
beginning after December 31, 1966, this tax must be taken into account
in computing any estimate of the taxes required to be declared under
section 6015.
(b) The rates of tax on self-employment income are as follows:
(1) For old-age, survivors, and disability insurance:
Taxable year Percent
Beginning before January 1, 1957............................. 3
Beginning after December 31, 1956 and before January 1, 1959. 3.375
Beginning after December 31, 1958 and before January 1, 1960. 3.75
Beginning after December 31, 1959 and before January 1, 1962. 4.5
Beginning after December 31, 1961 and before January 1, 1963. 4.7
Beginning after December 31, 1962 and before January 1, 1966. 5.4
Beginning after December 31, 1965 and before January 1, 1967. 5.8
Beginning after December 31, 1966 and before January 1, 1968. 5.9
Beginning after December 31, 1967 and before January 1, 1969. 5.8
Beginning after December 31, 1968 and before January 1, 1971. 6.3
Beginning after December 31, 1970 and before January 1, 1973. 6.9
Beginning after December 31, 1972............................ 7.0
(2) For hospital insurance:
Taxable year Percent
Beginning after December 31, 1965 and before January 1, 1967. 0.35
Beginning after December 31, 1966 and before January 1, 1968. .50
Beginning after December 31, 1967 and before January 1, 1973. .60
Beginning after December 31, 1972 and before January 1, 1974. 1.0
Beginning after December 31, 1973 and before January 1, 1978. .90
Beginning after December 31, 1977 and before January 1, 1981. 1.10
Beginning after December 31, 1980 and before January 1, 1986. 1.35
Beginning after December 31, 1985............................ 1.50
(c) In general, self-employment income consists of the net earnings
derived by an individual (other than a nonresident alien) from a trade
or business carried on by him as sole proprietor or by a partnership of
which he is a member, including the net earnings of certain employees as
set forth in Sec. 1.1402(c)-3, and of crew leaders, as defined in
section 3121(o) (see such section and the regulations thereunder in part
31 of this chapter (Employment Tax Regulations)). See, however, the
exclusions, exceptions, and limitations set forth in Secs. 1.1402(a)-1
through 1.1402(h)-1.
[T.D. 6993, 34 FR 828, Jan. 18, 1969, as amended by T.D. 7333, 39 FR
44445, Dec. 24, 1974]
Sec. 1.1402(a)-1 Definition of net earnings from self-employment.
(a) Subject to the special rules set forth in Secs. 1.1402(a)-3 to
1.1402(a)-17, inclusive, and to the exclusions set forth in
Secs. 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term ``net earnings
from self-employment'' means:
(1) The gross income derived by an individual from any trade or
business carried on by such individual, less the deductions allowed by
chapter 1 of the Code which are attributable to such trade or business,
plus
(2) His distributive share (whether or not distributed), as
determined under section 704, of the income (or minus the loss),
described in section 702(a)(9) and as computed under section 703, from
any trade or business carried on by any partnership of which he is a
member.
(b) Gross income derived by an individual from a trade or business
includes payments received by him from a partnership of which he is a
member for services rendered to the partnership or for the use of
capital by the partnership, to the extent the payments are
[[Page 17]]
determined without regard to the income of the partnership. However,
such payments received from a partnership not engaged in a trade or
business within the meaning of section 1402(c) and Sec. 1.1402(c)-1 do
not constitute gross income derived by an individual from a trade or
business. See section 707(c) and the regulations thereunder, relating to
guaranteed payments to a member of a partnership for services or the use
of capital. See also section 706(a) and the regulations thereunder,
relating to the taxable year of the partner in which such guaranteed
payments are to be included in computing taxable income.
(c) Gross income derived by an individual from a trade or business
includes gross income received (in the case of an individual reporting
income on the cash receipts and disbursements method) or accrued (in the
case of an individual reporting income on the accrual method) in the
taxable year from a trade or business even though such income may be
attributable in whole or in part to services rendered or other acts
performed in a prior taxable year as to which the individual was not
subject to the tax on self-employment income.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR
44445, Dec. 24, 1974]
Sec. 1.1402(a)-2 Computation of net earnings from self-employment.
(a) General rule. In general, the gross income and deductions of an
individual attributable to a trade or business (including a trade or
business conducted by an employee referred to in paragraphs (b), (c),
(d), or (e) of Sec. 1.1402(c)-3), for the purpose of ascertaining his
net earnings from self-employment, are to be determined by reference to
the provisions of law and regulations applicable with respect to the
taxes imposed by sections 1 and 3. Thus, if an individual uses the
accrual method of accounting in computing taxable income from a trade or
business for the purpose of the tax imposed by section 1 or 3, he must
use the same method in determining net earnings from self-employment.
Likewise, if a taxpayer engaged in a trade or business of selling
property on the installment plan elects, under the provisions of section
453, to use the installment method in computing income for purposes of
the tax under section 1 or 3, he must use the same method in determining
net earnings from self-employment. Income which is excludable from gross
income under any provision of subtitle A of the Internal Revenue Code is
not taken into account in determining net earnings from self-employment
except as otherwise provided in Sec. 1.1402(a)-9, relating to certain
residents of Puerto Rico, in Sec. 1.1402(a)-11, relating to ministers or
members of religious orders, and in Sec. 1.1402(a)-12, relating to the
term ``possession of the United States'' as used for purposes of the tax
on self-employment income. Thus, in the case of a citizen of the United
States conducting, in a foreign country, a trade or business in which
both personal services and capital are material income-producing
factors, any part of the income therefrom which is excluded from gross
income as earned income under the provisions of section 911 and the
regulations thereunder is not taken into account in determining net
earnings from self-employment.
(b) Trade or business carried on. The trade or business must be
carried on by the individual, either personally or through agents or
employees. Accordingly, income derived from a trade or business carried
on by an estate or trust is not included in determining the net earnings
from self-employment of the individual beneficiaries of such estate or
trust.
(c) Aggregate net earnings. Where an individual is engaged in more
than one trade or business within the meaning of section 1402(c) and
Sec. 1.1402(c)-1, his net earnings from self-employment consist of the
aggregate of the net income and losses (computed subject to the special
rules provided in Secs. 1.1402(a)-1 to 1.1402(a)-17 inclusive) of all
such trades or businesses carried on by him. Thus, a loss sustained in
one trade or business carried on by an individual will operate to offset
the income derived by him from another trade or business.
(d) Partnerships. The net earnings from self-employment of an
individual include, in addition to the earnings from a trade or business
carried on by
[[Page 18]]
him, his distributive share of the income or loss, described in section
702(a)(9), from any trade or business carried on by each partnership of
which he is a member. An individual's distributive share of such income
or loss of a partnership shall be determined as provided in section 704,
subject to the special rules set forth in section 1402(a) and in
Secs. 1.1402(a)-1 to 1.1402(a)-17, inclusive, and to the exclusions
provided in section 1402(c) and Secs. 1.1402(c)-2 to 1.1402(c)-7,
inclusive. For provisions relating to the computation of the taxable
income of a partnership, see section 703.
(e) Different taxable years. If the taxable year of a partner
differs from that of the partnership, the partner shall include, in
computing net earnings from self-employment, his distributive share of
the income or loss, described in section 702(a)(9), of the partnership
for its taxable year ending with or within the taxable year of the
partner. For the special rule in case of the termination of a partner's
taxable year as result of death, see Secs. 1.1402(f) and 1.1402(f)-1.
(f) Meaning of partnerships. For the purpose of determining net
earnings from self-employment, a partnership is one which is recognized
as such for income tax purposes. For income tax purposes, the term
``partnership'' includes not only a partnership as known at common law,
but, also a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any trade or business,
financial operation, or venture, and which is not, within the meaning of
the Code, a trust, estate, or a corporation. An organization described
in the preceding sentence shall be treated as a partnership for purposes
of the tax on self-employment income even though such organization has
elected, pursuant to section 1361 and the regulations thereunder, to be
taxed as a domestic corporation.
(g) Nature of partnership interest. The net earnings from self-
employment of a partner include his distributive share of the income or
loss, described in section 702(a)(9), of the partnership of which he is
a member, irrespective of the nature of his membership. Thus, in
determining his net earnings from self-employment, a limited or inactive
partner includes his distributive share of such partnership income or
loss. In the case of a partner who is a member of a partnership with
respect to which an election has been made pursuant to section 1361 and
the regulations thereunder to be taxed as a domestic corporation, net
earnings from self-employment include his distributive share of the
income or loss, described in section 702(a)(9), from the trade or
business carried on by the partnership computed without regard to the
fact that the partnership has elected to be taxed as a domestic
corporation.
(h) Proprietorship taxed as domestic corporation. A proprietor of an
unincorporated business enterprise with respect to which an election has
been made pursuant to section 1361 and the regulations thereunder to be
taxed as a domestic corporation shall compute his net earnings from
self-employment without regard to the fact that such election has been
made.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR
44445, Dec. 24, 1974]
Sec. 1.1402(a)-3 Special rules for computing net earnings from self-employment.
For the purpose of computing net earnings from self-employment, the
gross income derived by an individual from a trade or business carried
on by him, the allowable deductions attributable to such trade or
business, and the individual's distributive share of the income or loss,
described in section 702(a)(9), from any trade or business carrier on by
a partnership of which he is a member shall be computed in accordance
with the special rules set forth in Secs. 1.1402(a)-4 to 1.1402(a)-17,
inclusive.
[T.D. 7333, 39 FR 44445, Dec. 24, 1974]
Sec. 1.1402(a)-4 Rentals from real estate.
(a) In general. Rentals from real estate and from personal property
leased with the real estate (including such rentals paid in crop shares)
and the deductions attributable thereto, unless such rentals are
received by an individual in the course of a trade or business as a
real-estate dealer, are excluded. Whether or not an individual is
engaged in the trade or business of a
[[Page 19]]
real-estate dealer is determined by the application of the principles
followed in respect of the taxes imposed by sections 1 and 3. In
general, an individual who is engaged in the business of selling real
estate to customers with a view to the gains and profits that may be
derived from such sales is a real-estate dealer. On the other hand, an
individual who merely holds real estate for investment or speculation
and receives rentals therefrom is not considered a real-estate dealer.
Where a real-estate dealer holds real estate for investment or
speculation in addition to real estate held for sale to customers in the
ordinary course of his trade or business as a real-estate dealer, only
the rentals from the real estate held for sale to customers in the
ordinary course of his trade or business as a real-estate dealer, and
the deductions attributable thereto, are included in determining net
earnings from self-employment; the rentals from the real estate held for
investment or speculation, and the deductions attributable thereto, are
excluded. Rentals paid in crop shares include income derived by an owner
or lessee of land under an agreement entered into with another person
pursuant to which such other person undertakes to produce a crop or
livestock on such land and pursuant to which (1) the crop or livestock,
or the proceeds thereof, are to be divided between such owner or lessee
and such other person, and (2) the share of the owner or lessee depends
on the amount of the crop or livestock produced. See, however, paragraph
(b) of this section.
(b) Special rule for ``includible farm rental income''--(1) In
general. Notwithstanding the rules set forth in paragraph (a) of this
section, there shall be included in determining net earnings from self-
employment for taxable years ending after 1955 any income derived by an
owner or tenant of land, if the following requirements are met with
respect to such income:
(i) The income is derived under an arrangement between the owner or
tenant of land and another person which provides that such other person
shall produce agricultural or horticultural commodities on such land,
and that there shall be material participation by the owner or tenant in
the production or the management of the production of such agricultural
or horticultural commodities; and
(ii) There is material participation by the owner or tenant with
respect to any such agricultural or horticultural commodity.
Income so derived shall be referred to in this section as ``includible
farm rental income''.
(2) Requirement that income be derived under an arrangement. In
order for rental income received by an owner or tenant of land to be
treated as includible farm rental income, such income must be derived
pursuant to a share-farming or other rental arrangement which
contemplates material participation by the owner or tenant in the
production or management of production of agricultural or horticultural
commodities.
(3) Nature of arrangement. (i) The arrangement between the owner or
tenant and the person referred to in subparagraph (1) of this paragraph
may be either oral or written. The arrangement must impose upon such
other person the obligation to produce one or more agricultural or
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on the land of the owner or tenant. In
addition, it must be within the contemplation of the parties that the
owner or tenant will participate in the production or the management of
the production of the agricultural or horticultural commodities required
to be produced by the other person under such arrangement to an extent
which is material with respect either to the production or to the
management of production of such commodities or is material with respect
to the production and management of production when the total required
participation in connection with both is considered.
(ii) The term ``production'', wherever used in this paragraph,
refers to the physical work performed and the expenses incurred in
producing a commodity. It includes such activities as the actual work of
planting, cultivating, and harvesting crops, and the furnishing of
machinery, implements, seed, and livestock. An arrangement will be
treated as contemplating that the owner or tenant will materially
participate in the ``production'' of the
[[Page 20]]
commodities required to be produced by the other person under the
arrangement if under the arrangement it is understood that the owner or
tenant is to engage to a material degree in the physical work related to
the production of such commodities. The mere undertaking to furnish
machinery, implements, and livestock and to incur expenses is not, in
and of itself, sufficient. Such factors may be significant, however, in
cases where the degree of physical work intended of the owner or tenant
is not material. For example, if under the arrangement it is understood
that the owner or tenant is to engage periodically in physical work to a
degree which is not material in and of itself and, in addition, to
furnish a substantial portion of the machinery, implements, and
livestock to be used in the production of the commodities or to furnish
or advance funds or assume financial responsibility for a substantial
part of the expense involved in the production of the commodities, the
arrangement will be treated as contemplating material participation of
the owner or tenant in the production of such commodities.
(iii) The term ``management of the production'', wherever used in
this paragraph, refers to services performed in making managerial
decisions relating to the production, such as when to plant, cultivate,
dust, spray, or harvest the crop, and includes advising and consulting,
making inspections, and making decisions as to matters such as rotation
of crops, the type of crops to be grown, the type of livestock to be
raised, and the type of machinery and implements to be furnished. An
arrangement will be treated as contemplating that the owner or tenant is
to participate materially in the ``management of the production'' of the
commodities required to be produced by the other person under the
arrangement if the owner or tenant is to engage to a material degree in
the management decisions related to the production of such commodities.
The services which are considered of particular importance in making
such management decisions are those services performed in making
inspections of the production activities and in advising and consulting
with such person as to the production of the commodities. Thus, if under
the arrangement it is understood that the owner or tenant is to advise
or consult periodically with the other person as to the production of
the commodities required to be produced by such person under the
arrangement and to inspect periodically the production activities on the
land, a strong inference will be drawn that the arrangement contemplates
participation by the owner or tenant in the management of the production
of such commodities. The mere undertaking to select the crops or
livestock to be produced or the type of machinery and implements to be
furnished or to make decisions as to the rotation of crops generally is
not, in and of itself, sufficient. Such factors may be significant,
however, in making the overall determination of whether the arrangement
contemplates that the owner or tenant is to participate materially in
the management of the production of the commodities. Thus, if in
addition to the understanding that the owner or tenant is to advise or
consult periodically with the other person as to the production of the
commodities and to inspect periodically the production activities on the
land, it is also understood that the owner is to select the type of
crops and livestock to be produced and the type of machinery and
implements to be furnished and to make decisions as to the rotation of
crops, the arrangement will be treated as contemplating material
participation of the owner or tenant in the management of production of
such commodities.
(4) Actual participation. In order for the rental income received by
the owner or tenant of land to be treated as includible farm rental
income, not only must it be derived pursuant to the arrangement
described in subparagraph (1) of this paragraph, but also the owner or
tenant must actually participate to a material degree in the production
or in the management of the production of any of the commodities
required to be produced under the arrangement, or he must actually
participate in both the production and the management of the production
to an extent that his participation in the one when combined with his
participation
[[Page 21]]
in the other will be considered participation to a material degree. If
the owner or tenant shows that he periodically advises or consults with
the other person, who under the arrangement produces the agricultural or
horticultural commodities, as to the production of any of these
commodities and also shows that he periodically inspects the production
activities on the land, he will have presented strong evidence of the
existence of the degree of participation contemplated by section
1402(a)(1). If, in addition to the foregoing, the owner or tenant shows
that he furnishes a substantial portion of the machinery, implements,
and livestock used in the production of the commodities or that he
furnishes or advances funds, or assumes financial responsibility, for a
substantial part of the expense involved in the production of the
commodities, he will have established the existence of the degree of
participation contemplated by section 1402(a)(1) and this paragraph.
(5) Employees or agents. An agreement entered into by an employee or
agent of an owner or tenant and another person is considered to be an
arrangement entered into by the owner or tenant for purposes of
satisfying the requirement set forth in paragraph (b)(2) that the income
must be derived under an arrangement between the owner or tenant and
another person. For purposes of determining whether the arrangement
satisfies the requirement set forth in paragraph (b)(3) that the parties
contemplate that the owner or tenant will materially participate in the
production or management of production of a commodity, services which
will be performed by an employee or agent of the owner or tenant are not
considered to be services which the arrangement contemplates will be
performed by the owner or tenant. Services actually performed by such
employee or agent are not considered services performed by the owner or
tenant in determining the extent to which the owner or tenant has
participated in the production or management of production of a
commodity. For taxable years beginning before January 1, 1974,
contemplated or actual services of an agent or an employee of the owner
or tenant are deemed to be contemplated or actual services of the owner
or tenant under paragraphs (b)(3) and (b)(4) of this section.
(6) Examples. Application of the rules prescribed in this paragraph
may be illustrated by the following examples:
Example (1). After the death of her husband, Mrs. A rents her farm,
together with its machinery and equipment, to B for one-half of the
proceeds from the commodities produced on such farm by B. It is agreed
that B will live in the tenant house on the farm and be responsible for
the over-all operation of the farm, such as planting, cultivating, and
harvesting the field crops, caring for the orchard and harvesting the
fruit and caring for the livestock and poultry. It also is agreed that
Mrs. A will continue to live in the farm residence and help B operate
the farm. Under the agreement it is contemplated that Mrs. A will
regularly operate and clean the cream separator and feed the poultry
flock and collect the eggs. When possible she will assist B in such work
as spraying the fruit trees, penning livestock, culling the poultry, and
controlling weeds. She will also assist in preparing the meals when B
engages seasonal workers. The agreement between Mrs. A and B clearly
provides that she will materially participate in the over-all production
operations to be conducted on her farm by B. In actual practice, Mrs. A
performs such regular and intermittent services. The regularly performed
services are material to the production of an agricultural commodity,
and the intermittent services performed are material to the production
operations to which they relate. The furnishing of a substantial portion
of the farm machinery and equipment also adds support to a conclusion
that Mrs. A has materially participated. Accordingly, the rental income
Mrs. A receives from her farm should be included in net earnings from
self-employment.
Example (2). D agrees to produce a crop on C's cotton farm under an
arrangement providing that C and D will each receive one-half of the
proceeds from such production. C agrees to furnish all the necessary
equipment, and it is understood that he is to advise D when to plant the
cotton and when it needs to be chopped, plowed, sprayed, and picked. It
is also understood that during the growing season C is to inspect the
crop every few days to determine whether D is properly taking care of
the crop. Under the arrangement, D is required to furnish all labor
needed to grow and harvest the crop. C, in fact, renders such advice,
makes such inspections, and furnishes such equipment. C's contemplated
participation in management decisions is considered material with
respect to the management of the cotton production operation. C's actual
participation pursuant
[[Page 22]]
to the arrangement is also considered to be material with respect to the
management of the production of cotton. Accordingly, the income C
receives from his cotton farm is to be included in computing his net
earnings from self-employment.
Example (3). E owns a grain farm and turns its operation over to his
son, F. By the oral rental arrangement between E and F, the latter
agrees to produce crops of grain on the farm, and E agrees that he will
be available for consultation and advice and will inspect and help to
harvest the crops. E furnishes most of the equipment, including a
tractor, a combine, plows, wagons, drills, and harrows; he continues to
live on the farm and does some of the work such as repairing barns and
farm machinery, going to town for supplies, cutting weeds, etc.; he
regularly inspects the crops during the growing season; and he helps F
to harvest the crops. Although the final decisions are made by F, he
frequently consults with his father regarding the production of the
crops. An evaluation of all of E's actual activities indicates that they
are sufficiently substantial and regular to support a conclusion that he
is materially participating in the crop production operations and the
management thereof. If it can be shown that the degree of E's actual
participation was contemplated by the arrangement, E's income from the
grain farm will be included in computing net earnings from self-
employment.
Example (4). G owns a fully-equipped farm which he rents to H under
an arrangement which contemplates that G shall materially participate in
the management of the production of crops raised on the farm pursuant to
the arrangement. G lives in town about 5 miles from the farm. About
twice a month he visits the farm and looks over the buildings and
equipment. G may occasionally, in an emergency, discuss with H some
phase of a crop production activity. In effect, H has complete charge of
the management of farming operations regardless of the understanding
between him and G. Although G pays one-half of the cost of the seed and
fertilizer and is charged for the cost of materials purchased by H to
make all necessary repairs, G's activities do not constitute material
participation in the crop production activities. Accordingly, G's income
from the crops is not included in computing net earnings from self-
employment.
Example (5). I owned a farm several miles from the town in which he
lived. He rented the farm to J under an arrangement which contemplated
I's material participation in the management of production of wheat. I
furnished one-half of the seed and fertilizer and all the farm equipment
and livestock. He employed K to perform all the services in advising,
consulting, and inspecting contemplated by the arrangement. I is not
materially participating in the management of production of wheat by J.
The work done by I's employee, K, is not attributable to I in
determining the extent of I's participation. I's rental income from the
arrangement is, therefore, not to be included in computing his net
earnings from self-employment. For taxable years beginning before
January 1, 1974, however, I's rental income would be includible in those
earnings.
Example (6). L, a calendar-year taxpayer, appointed M as his agent
to rent his fully equipped farm for 1974. M entered into a rental
arrangement with N under which M was to direct the planting of crops,
inspect them weekly during the growing season, and consult with N on any
problems that might arise in connection with irrigation, etc., while N
furnished all the labor needed to grow and harvest the crops. M did in
fact fulfill its responsibilities under the arrangement. Although the
arrangement entered into by M and N is considered to have been made by
L, M's services are not attributable to L, and L's furnishing of a fully
equipped farm is insufficient by itself to constitute material
participation in the production of the crops. Accordingly, L's rental
income from the arrangement is not included in his net earnings from
self-employment for that year. For taxable years beginning before
January 1, 1974, however, L's rental income would be includible in those
earnings.
(c) Rentals from living quarters--(1) No services rendered for
occupants. Payments for the use or occupancy of entire private
residences or living quarters in duplex or multiple-housing units are
generally rentals from real estate. Except in the case of real-estate
dealers, such payments are excluded in determining net earnings from
self-employment even though such payments are in part attributable to
personal property furnished under the lease.
(2) Services rendered for occupants. Payments for the use or
occupancy of rooms or other space where services are also rendered to
the occupant, such as for the use or occupancy of rooms or other
quarters in hotels, boarding houses, or apartment houses furnishing
hotel services, or in tourist camps or tourist homes, or payments for
the use or occupancy of space in parking lots, warehouses, or storage
garages, do not constitute rentals from real estate; consequently, such
payments are included in determining net earnings from self-employment.
Generally, services are considered rendered to the occupant if they are
primarily for his convenience and are other than those
[[Page 23]]
usually or customarily rendered in connection with the rental of rooms
or other space for occupancy only. The supplying of maid service, for
example, constitutes such service; whereas the furnishing of heat and
light, the cleaning of public entrances, exits, stairways and lobbies,
the collection of trash, and so forth, are not considered as services
rendered to the occupant.
(3) Example. The application of this paragraph may be illustrated by
the following example:
Example. A, an individual, owns a building containing four
apartments. During the taxable year, he receives $1,400 from apartments
numbered 1 and 2, which are rented without services rendered to the
occupants, and $3,600 from apartments numbered 3 and 4, which are rented
with services rendered to the occupants. His fixed expenses for the four
apartments aggregate $1,200 during the taxable year. In addition, he has
$500 of expenses attributable to the services rendered to the occupants
of apartments 3 and 4. In determining his net earnings from self-
employment, A includes the $3,600 received from apartments 3 and 4, and
the expenses of $1,100 ($500 plus one-half of $1,200) attributable
thereto. The rentals and expenses attributable to apartments 1 and 2 are
excluded. Therefore, A has $2,500 of net earnings from self-employment
for the taxable year from the building.
(d) Treatment of business income which includes rentals from real
estate. Except in the case of a real-estate dealer, where an individual
or a partnership is engaged in a trade or business the income of which
is classifiable in part as rentals from real estate, only that portion
of such income which is not classifiable as rentals from real estate,
and the expenses attributable to such portion, are included in
determining net earnings from self-employment.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7710, 45 FR
50739, July 31, 1980]
Sec. 1.1402(a)-5 Dividends and interest.
(a) All dividends on shares of stock are excluded unless they are
received by an individual in the course of his trade or business as a
dealer in stocks or securities.
(b) Interest on any bond, debenture, note, or certificate, or other
evidence of indebtedness, issued with interest coupons or in registered
form by any corporation (including one issued by a government or
political subdivision thereof) is excluded unless such interest is
received in the course of a trade or business as a dealer in stocks or
securities. However, interest with respect to which a credit against tax
is allowable as provided in section 35, that is, interest on certain
obligations of the United States and its instrumentalities, is not
included in net earnings from self-employment even though received in
the course of a trade or business as a dealer in stocks or securities.
Only interest on bonds, debentures, notes, or certificates, or other
evidence of indebtedness, issued with interest coupons or in registered
form by a corporation, is excluded in the case of all persons other than
dealers in stocks or securities; other interest received in the course
of any trade or business (such as interest received by a pawnbroker on
his loans or interest received by a merchant on his accounts or notes
receivable) is not excluded.
(c) Dividends and interest of the character excludable under
paragraphs (a) and (b) of this section received by an individual on
stocks or securities held for speculation or investment are excluded
whether or not the individual is a dealer in stocks or securities.
(d) A dealer in stocks or securities is a merchant of stocks or
securities with an established place of business, regularly engaged in
the business of purchasing stocks or securities and reselling them to
customers; that is, he is one who as a merchant buys stocks or
securities and sells them to customers with a view to the gains and
profits that may be derived therefrom. Persons who buy and sell or hold
stocks or securities for investment or speculation, irrespective of
whether such buying or selling constitutes the carrying on of a trade or
business, are not dealers in stocks or securities.
Sec. 1.1402(a)-6 Gain or loss from disposition of property.
(a) There is excluded any gain or loss: (1) Which is considered as
gain or loss from the sale or exchange of a capital asset; (2) from the
cutting of timber or the disposal of timber, coal, or iron ore, even
though held primarily for sale to customers, if section 631 is
applicable to such gain or loss; and (3)
[[Page 24]]
from the sale, exchange, involuntary conversion, or other disposition of
property if such property is neither (i) stock in trade or other
property of a kind which would properly be includible in inventory if on
hand at the close of the taxable year, nor (ii) property held primarily
for sale to customers in the ordinary course of a trade or business. For
the purpose of the special rule in subparagraph (3) of this paragraph,
it is immaterial whether a gain or loss is treated as a capital gain or
loss or as an ordinary gain or loss for purposes other than determining
net earnings from self-employment. For instance, where the character of
a loss is governed by the provisions of section 1231, such loss is
excluded in determining net earnings from self-employment even though
such loss is treated under section 1231 as an ordinary loss. For the
purposes of this special rule, the term ``involuntary conversion'' means
a compulsory or involuntary conversion of property into other property
or money as a result of its destruction in whole or in part, theft or
seizure, or an exercise of the power of requisition or condemnation or
the threat or imminence thereof; and the term ``other dispostion''
includes the destruction or loss, in whole or in part, of property by
fire, storm, shipwreck, or other casualty, or by theft, even though
there is no conversion of such property into other property or money.
(b) The application of this section may be illustrated by the
following example:
Example. During the taxable year 1954, A, who owns a grocery store,
realized a net profit of $1,500 from the sale of groceries and a gain of
$350 from the sale of a refrigerator case. During the same year, he
sustained a loss of $2,000 as a result of damage by fire to the store
building. In computing taxable income, all of these items are taken into
account. In determining net earnings from self-employment, however, only
the $1,500 of profit derived from the sale of groceries is included. The
$350 gain and the $2,000 loss are excluded.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6841, 30 FR
9309, July 27, 1965]
Sec. 1.1402(a)-7 Net operating loss deduction.
The deduction provided by section 172, relating to net operating
losses sustained in years other than the taxable year, is excluded.
Sec. 1.1402(a)-8 Community income.
(a) In case of an individual. If any of the income derived by an
individual from a trade or business (other than a trade or business
carried on by a partnership) is community income under community
property laws applicable to such income, all of the gross income, and
the deductions attributable to such income, shall be treated as the
gross income and deductions of the husband unless the wife exercises
substantially all of the management and control of such trade or
business, in which case all of such gross income and deductions shall be
treated as the gross income and deductions of the wife. For the purpose
of this special rule, the term ``management and control'' means
management and control in fact, not the management and control imputed
to the husband under the community property laws. For example, a wife
who operates a beauty parlor without any appreciable collaboration on
the part of her husband will be considered as having substantially all
of the management and control of such business despite the provision of
any community property law vesting in the husband the right of
management and control of community property; and the income and
deductions attributable to the operation of such beauty parlor will be
considered the income and deductions of the wife.
(b) In case of a partnership. Even though a portion of a partner's
distributive share of the income or loss, described in section
702(a)(9), from a trade or business carried on by a partnership is
community income or loss under the community property laws applicable to
such share, all of such distributive share shall be included in
computing the net earnings from self-employment of such partner; no part
of such share shall be taken into account in computing the net earnings
from self-employment of the spouse of such partner. In any case in which
both spouses are members of the same partnership, the distributive share
of the income or loss of each spouse is included in computing the net
earnings from self-employment of that spouse.
[[Page 25]]
Sec. 1.1402(a)-9 Puerto Rico.
(a) Residents. A resident of Puerto Rico, whether or not a bona fide
resident thereof during the entire taxable year, and whether or not an
alien, a citizen of the United States, or a citizen of Puerto Rico,
shall compute his net earnings from self-employment in the same manner
as would a citizen of the United States residing in the United States.
See paragraph (d) of Sec. 1.1402(b)-1 for regulations relating to
nonresident aliens. For the purpose of the tax on self-employment
income, the gross income of such a resident of Puerto Rico also includes
income from Puerto Rican sources. Thus, under this special rule, income
from Puerto Rican sources will be included in determining net earnings
from self-employment of a resident of Puerto Rico engaged in the active
conduct of a trade or business in Puerto Rico despite the fact that,
under section 933, such income may not be taken into account for
purposes of the tax under section 1 or 3.
(b) Nonresidents. A citizen of Puerto Rico who is also a citizen of
the United States and who is not a resident of Puerto Rico will compute
his net earnings from self-employment in the same manner and subject to
the same provisions of law and regulations as other citizens of the
United States.
Sec. 1.1402(a)-10 Personal exemption deduction.
The deduction provided by section 151, relating to personal
exemptions, is excluded.
Sec. 1.1402(a)-11 Ministers and members of religious orders.
(a) In general. For each taxable year ending after 1954 in which a
minister or member of a religious order is engaged in a trade or
business, within the meaning of section 1402(c) and Sec. 1.1402(c)-5,
with respect to service performed in the exercise of his ministry or in
the exercise of duties required by such order, net earnings from self-
employment from such trade or business include the gross income derived
during the taxable year from any such service, less the deductions
attributable to such gross income. For each taxable year ending on or
after December 31, 1957, such minister or member of a religious order
shall compute his net earnings from self-employment derived from the
performance of such service without regard to the exclusions from gross
income provided by section 107 (relating to rental value of parsonages)
and section 119 (relating to meals and lodging furnished for the
convenience of the employer). Thus, a minister who is subject to self-
employment tax with respect to his services as a minister will include
in the computation of his net earnings from self-employment for a
taxable year ending on or after December 31, 1957, the rental value of a
home furnished to him as remuneration for services performed in the
exercise of his ministry or the rental allowance paid to him as
remuneration for such services irrespective of whether such rental value
or rental allowance is excluded from gross income by section 107.
Similarly, the value of any meals or lodging furnished to a minister or
to a member of a religious order in connection with service performed in
the exercise of his ministry or as a member of such order will be
included in the computation of his net earnings from self-employment for
a taxable year ending on or after December 31, 1957, notwithstanding the
exclusion of such value from gross income by section 119.
(b) In employ of American employer. If a minister or member of a
religious order engaged in a trade or business described in section
1402(c) and Sec. 1.1402(c)-5 is a citizen of the United States and
performs service, in his capacity as a minister or member of a religious
order, as an employee of an American employer, as defined in section
3121(h) and the regulations thereunder in Part 31 of this chapter
(Employment Tax Regulations), his net earnings from self-employment
derived from such service shall be computed as provided in paragraph (a)
of this section but without regard to the exclusions from gross income
provided in section 911, relating to earned income from sources without
the United States, and section 931, relating to income from sources
within possessions of the United States. Thus, even though all the
income of the minister or member for service of the character to which
this paragraph is applicable was derived from sources without the United
[[Page 26]]
States, or from sources within possessions of the United States, and
therefore may be excluded from gross income, such income is included in
computing net earnings from self-employment.
(c) Minister in a foreign country whose congregation is composed
predominantly of citizens of the United States--(1) Taxable years ending
after 1956. For any taxable year ending after 1956, a minister of a
church, who is engaged in a trade or business within the meaning of
section 1402(c) and Sec. 1.1402(c)-5, is a citizen of the United States,
is performing service in the exercise of his ministry in a foreign
country, and has a congregation composed predominantly of United States
citizens, shall compute his net earnings from self-employment derived
from his services as a minister for such taxable year without regard to
the exclusion from gross income provided in section 911, relating to
earned income from sources without the United States. For taxable years
ending on or after December 31, 1957, such minister shall also disregard
sections 107 and 119 in the computation of his net earnings from self-
employment. (See paragraph (a) of this section.) For purposes of section
1402(a)(8) and this paragraph a ``congregation composed predominantly of
citizens of the United States'' means a congregation the majority of
which throughout the greater portion of its minister's taxable year were
United States citizens.
(2) Election for taxable years ending after 1954 and before 1957.
(i) A minister described in subparagraph (1) of this paragraph who, for
a taxable year ending after 1954 and before 1957, had income from
service described in such subparagraph which would have been included in
computing net earnings from self-employment if such income had been
derived in a taxable year ending after 1956 by an individual who had
filed a waiver certificate under section 1402(e), may elect to have
section 1402(a)(8) and subparagraph (1) of this paragraph apply to his
income from such service for his taxable years ending after 1954 and
before 1957. If such minister filed a waiver certificate prior to August
1, 1956, in accordance with Sec. 1.1402(e)(1)-1, or he files such a
waiver certificate on or before the due date of his return (including
any extensions thereof) for his last taxable year ending before 1957, he
must make such election on or before the due date of his return
(including any extensions thereof) for such taxable year or before April
16, 1957, whichever is the later. If the waiver certificate is not so
filed, the minister must make his election on or before the due date of
the return (including any extensions thereof) for his first taxable year
ending after 1956. Notwithstanding the expiration of the period
prescribed by section 1402(e)(2) for filing such waiver, the minister
may file a waiver certificate at the time he makes the election. In no
event shall an election be valid unless the minister files prior to or
at the time of the election a waiver certificate in accordance with
Sec. 1.1402(e)(1)-1.
(ii) The election shall be made by filing with the district director
of internal revenue with whom the waiver certificate, Form 2031, is
filed a written statement indicating that, by reason of the Social
Security Amendments of 1956, the minister desires to have the Federal
old-age, survivors, and disability insurance system established by title
II of the Social Security Act extended to his services performed in a
foreign country as a minister of a congregation composed predominantly
of United States citizens beginning with the first taxable year ending
after 1954 and prior to 1957 for which he had income from such services.
The statement shall be dated and signed by the minister and shall
clearly state that it is an election for retroactive self-employment tax
coverage under the Self-Employment Contributions Act of 1954. In
addition, the statement shall include the following information:
(a) The name and address of the minister.
(b) His social security account number, if he has one.
(c) That he is a duly ordained, commissioned, or licensed minister
of a church.
(d) That he is a citizen of the United States.
(e) That he is performing services in the exercise of his ministry
in a foreign country.
[[Page 27]]
(f) That his congregation is composed predominantly of citizens of
the United States.
(g)(1) That he has filed a waiver certificate and, if so, where and
under what circumstances the certificate was filed and the taxable year
for which it is effective; or (2) that he is filing a waiver certificate
with his election for retroactive coverage and, if so, the taxable year
for which it is effective.
(h) That he has or has not filed income tax returns for his taxable
years ending after 1954 and before 1957. If he has filed such returns,
he shall state the years for which they were filed and indicate the
district director of internal revenue with whom they were filed.
(iii) Notwithstanding section 1402(e)(3), a waiver certificate filed
pursuant to Sec. 1.1402(e)(1)-1 by a minister making an election under
this paragraph shall be effective (regardless of when such certificate
is filed) for such minister's first taxable year ending after 1954 in
which he had income from service described in subparagraph (1) of this
paragraph or for the taxable year of the minister prescribed by section
1402(e)(3), if such taxable year is earlier, and for all succeeding
taxable years.
(iv) No interest or penalty shall be assessed or collected for
failure to file a return within the time prescribed by law if such
failure arises solely by reason of an election made by a minister
pursuant to this paragraph or for any underpayment of self-employment
income tax arising solely by reason of such election, for the period
ending with the date such minister makes an election pursuant to this
paragraph.
(d) Treatment of certain remuneration paid in 1955 and 1956 as
wages. For treatment of remuneration paid to an individual for service
described in section 3121(b)(8)(A) which was erroneously treated by the
organization employing him as employment with-in the meaning of chapter
21 of the Internal Revenue Code, see Sec. 1.1402(e)(4)-1.
Sec. 1.1402(a)-12 Possession of the United States.
For purposes of the tax on self-employment income, the term
``possession of the United States,'' as used in section 931 (relating to
income from sources within possessions of the United States) and section
932 (relating to citizens of possessions of the United States) shall be
deemed not to include the Virgin Islands, Guam, or American Samoa. The
provisions of section 1402(a)(9) and of this section insofar as they
involve nonapplication of sections 931 and 932 to Guam or American
Samoa, shall apply only in the case of taxable years beginning after
1960. For definition of the term ``United States'' and for other
geographical definitions relating to the Continental Shelf see section
638 and Sec. 1.638-1.
[T.D. 7277, 38 FR 12742, May 15, 1973]
Sec. 1.1402(a)-13 Income from agricultural activity.
(a) Agricultural trade or business. (1) An agricultural trade or
business is one in which, if the trade or business were carried on
exclusively by employees, the major portion of the services would
constitute agricultural labor as defined in section 3121(g) and the
regulations thereunder in part 31 of this chapter (Employment Tax
Regulations). In case the services are in part agricultural and in part
nonagricultural, the time devoted to the performance of each type of
service is the test to be used to determine whether the major portion of
the services would constitute agricultural labor. If more than half of
the time spent in performing all the services is spent in performing
services which would constitute agricultural labor under section
3121(g), the trade or business is agricultural. If only half, or less,
of the time spent in performing all the services is spent in performing
services which would constitute agricultural labor under section
3121(g), the trade or business is not agricultural. In every case the
time spent in performing the services will be computed by adding the
time spent in the trade or business during the taxable year by every
individual (including the individual carrying on such trade or business
and the members of his family) in performing such services. The
operation of this special rule is not affected by section 3121(c),
relating to the included-excluded rule for determining employment.
[[Page 28]]
(2) The rules prescribed in subparagraph (1) of this paragraph have
no application where the nonagricultural services are performed in
connection with an enterprise which constitutes a trade or business
separate and distinct from the trade or business conducted as an
agricultural enterprise. Thus, the operation of a roadside automobile
service station on farm premises constitutes a trade or business
separate and distinct from the agricultural enterprise, and the gross
income derived from such service station, less the deductions
attributable thereto, is to be taken into account in determining net
earnings from self-employment.
(b) Farm operator's income for taxable years ending before 1955.
Income derived in a taxable year ending before 1955 from any
agricultural trade or business (see paragraph (a) of this section), and
all deductions attributable to such income, are excluded in computing
net earnings from self-employment.
(c) Farm operator's income for taxable years ending after 1954.
Income derived in a taxable year ending after 1954 from an agricultural
trade or business (see paragraph (a) of this section) is includible in
computing net earnings from self-employment. Income derived from an
agricultural trade or business includes income derived by an individual
under an agreement entered into by such individual with another person
pursuant to which such individual undertakes to produce agricultural or
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on land owned or leased by such other
person and pursuant to which the agricultural or horticultural
commodities produced by such individual, or the proceeds therefrom, are
to be divided between such individual and such other person, and the
amount of such individual's share depends on the amount of the
agricultural or horticultural commodities produced. However, except as
provided in paragraph (d) of this section, relating to arrangements
involving material participation, the income derived under such an
agreement by the owner or lessee of the land is not includible in
computing net earnings from self-employment. See Sec. 1.1402(a)-4. For
options relating to the computation of net earnings from self-
employment, see Secs. 1.1402(a)-14 and 1.1402(a)-15.
(d) Includible farm rental income for taxable years ending after
1955. For taxable years ending after 1955, income derived from an
agricultural trade or business (see paragraph (a) of this section)
includes also income derived by the owner or tenant of land under an
arrangement between such owner or tenant and another person, if such
arrangement provides that such other person shall produce agricultural
or horticultural commodities (including livestock, bees, poultry, and
fur-bearing animals and wildlife) on such land, and that there shall be
material participation by the owner or tenant in the production or the
management of the production of such agricultural or horticultural
commodities, and if there is material participation by the owner or
tenant with respect to any such agricultural or horticultural commodity.
See paragraph (b) of Sec. 1.1402(a)-4. For options relating to the
computation of net earnings from self-employment, see Secs. 1.1402(a)-14
and 1.1402(a)-15.
(e) Income from service performed after 1956 as a crew leader.
Income derived by a crew leader (see section 3121(o) and the regulations
thereunder in Part 31 of this chapter (Employment Tax Regulations)) from
service performed after 1956 in furnishing individuals to perform
agricultural labor for another person and from service performed after
1956 in agricultural labor as a member of the crew is considered to be
income derived from a trade or business for purposes of Sec. 1.1402(c)-
1. Whether such trade or business is an agricultural trade or business
shall be determined by applying the rules set forth in this section.
Sec. 1.1402(a)-14 Options available to farmers in computing net earnings from self-employment for taxable years ending after 1954 and before December 31, 1956.
(a) Computation of net earnings. In the case of any trade or
business which is carried on by an individual who reports his income on
the cash receipts and disbursements method, and in which, if it were
carried on exclusively by employees, the major portion of the services
would constitute agricultural labor as defined in section 3121(g) (see
[[Page 29]]
paragraph (a) of Sec. 1.1402(a)-13), net earnings from self-employment
may, for a taxable year ending after 1954, at the option of the
taxpayer, be computed as follows:
(1) Gross income $1,800 or less. If the gross income, computed as
provided in paragraph (b) of this section, from such trade or business
is $1,800 or less, the taxpayer may, at his option, treat as net
earnings from self-employment from such trade or business an amount
equal to 50 percent of such gross income. If the taxpayer so elects, the
amount equal to 50 percent of such gross income shall be used in
computing his self-employment income in lieu of his actual net earnings
from such trade or business, if any.
(2) Gross income in excess of $1,800. If the gross income, computed
as provided in paragraph (b) of this section, from such trade or
business is more than $1,800, and the actual net earnings from self-
employment from such trade or business are less than $900, the taxpayer
may, at his option, treat $900 as net earnings from self-employment. If
the taxpayer so elects, $900 shall be used in computing his self-
employment income in lieu of his actual net earnings from such trade or
business, if any. However, if the taxpayer's actual net earnings from
such trade or business, as computed in accordance with Secs. 1.1402(a)-1
through 1.1402(a)-3 are $900 or more, such actual net earnings shall be
used in computing his self-employment income.
(b) Computation of gross income. For purposes of paragraph (a) of
this section, gross income shall consist of the gross receipts from such
trade or business reduced by the cost or other basis of property which
was purchased and sold in carrying on such trade or business, adjusted
(after such reduction) in accordance with the provisions of
Sec. 1.1402(a)-3, relating to income and deductions not included in
computing net earnings from self-employment.
(c) Two or more agricultural activities. If an individual is engaged
in more than one agricultural trade or business within the meaning of
paragraph (a) of Sec. 1.1402(a)-13 (for example, the business of
ordinary farming and the business of cotton ginning), the gross income
derived from each agricultural trade or business shall be aggregated for
purposes of the optional method provided in paragraph (a) of this
section for computing net earnings from self-employment.
(d) Examples. Application of the regulations prescribed in
paragraphs (a) and (b) of this section may be illustrated by the
following examples:
Example (1). F, a farmer, uses the cash receipts and disbursements
method of accounting in making his income tax returns. F's books and
records show that during the calendar year 1955 he received $1,200 from
the sale of produce raised on the farm, $200 from the sale of livestock
raised on the farm and not held for breeding or dairy purposes, and $600
from the sale of a tractor. The income from the sale of the tractor is
of a type which is excluded from net earnings from self-employment by
section 1402(a). F's actual net earnings from self-employment, computed
in accordance with the provisions of Secs. 1.1402(a)-1 through
1.1402(a)-3, are $450. F may report $450 as his net earnings from self-
employment or he may elect to report $700 (one-half of $1,400).
Example (2). C, a cattleman, uses the cash receipts and
disbursements method of accounting in making his income tax returns. C
had actual net earnings from self-employment, computed in accordance
with the provisions of Secs. 1.1402(a)-1 through 1.1402(a)-3, of $725.
His gross receipts were $1,000 from the sale of produce raised on the
farm and $1,200 from the sale of feeder cattle, which C bought for $500.
The income from the sale of the feeder cattle is of a type which is
included in computing net earnings from self-employment. Therefore, C
may report $725 as his net earnings from self-employment or he may elect
to report $850, one-half of $1,700 ($2,200 minus $500).
Example (3). R, a rancher, has gross income of $3,000 from the
operation of his ranch, computed as provided in paragraph (b) of this
section. His actual net earnings from self-employment from farming
activities are less than $900. R, nevertheless, may elect to report $900
as net earnings from self-employment from such trade or business. If R
had actual net earnings from self-employment from his farming activities
in the amount of $900 or more, he would be required to report such
amount in computing his self-employment income.
(e) Members of farm partnerships. The optional method provided by
paragraph (a) of this section for computing net earnings from self-
employment is not available to a member of a partnership with respect to
his distributive share of the income or loss from any trade or
[[Page 30]]
business carried on by any partnership of which he is a member.
Sec. 1.1402(a)-15 Options available to farmers in computing net earnings from self-employment for taxable years ending on or after December 31, 1956.
(a) Computation of net earnings. In the case of any trade or
business which is carried on by an individual or by a partnership and in
which, if such trade or business were carried on exclusively by
employees, the major portion of the services would constitute
agricultural labor as defined in section 3121(g) (see paragraph (a) of
Sec. 1.1402(a)-13), net earnings from self-employment may, for a taxable
year ending on or after December 31, 1956, at the option of the
taxpayer, be computed as follows:
(1) In case of an individual--(i) Gross income of less than
specified amount. If the gross income, computed as provided in paragraph
(b) of this section, from such trade or business is $2,400 or less
($1,800 or less for a taxable year ending on or after December 31, 1956,
and beginning before January 1, 1966), the taxpayer may, at his option,
treat as net earnings from self-employment from such trade or business
an amount equal to 66\2/3\ percent of such gross income. If the taxpayer
so elects, the amount equal to 66\2/3\ percent of such gross income
shall be used in computing his self-employment income in lieu of his
actual net earnings from such trade or business, if any.
(ii) Gross income in excess of specified amount. If the gross
income, computed as provided in paragraph (b) of this section, from such
trade or business is more than $2,400 ($1,800 for a taxable year ending
on or after December 31, 1956, and beginning before January 1, 1966),
and the net earnings from self-employment from such trade or business
(computed without regard to this section) are less than $1,600 ($1,200
for a taxable year ending on or after December 31, 1956, and beginning
before January 1, 1966), the taxpayer may, at his option, treat $1,600
($1,200 for a taxable year ending on or after December 31, 1956, and
beginning before January 1, 1966) as net earnings from self-employment.
If the taxpayer so elects, $1,600 ($1,200 for a taxable year ending on
or after December 31, 1956, and beginning before January 1, 1966) shall
be used in computing his self-employment income in lieu of his actual
net earnings from such trade or business, if any. However, if the
taxpayer's actual net earnings from such trade or business, as computed
in accordance with the applicable provisions of Secs. 1.1402(a)-1 to
1.1402(a)-13, inclusive, are $1,600 or more ($1,200 or more for a
taxable year ending on or after December 31, 1956, and beginning before
January 1, 1966) such actual net earnings shall be used in computing his
self-employment income.
(2) In case of a member of a partnership--(i) Distributive share of
gross income of less than specified amount. If a taxpayer's distributive
share of the gross income of a partnership (as such gross income is
computed under the provisions of paragraph (b) of this section) derived
from such trade or business (after such gross income has been reduced by
the sum of all payments to which section 707(c) applies) is $2,400 or
less ($1,800 or less for a taxable year ending on or after December 31,
1956, and beginning before January 1, 1966), the taxpayer may, at his
option, treat as his distributive share of income described in section
702(a)(9) derived from such trade or business an amount equal to 66\2/3\
percent of his distributive share of such gross income (after such gross
income has been reduced by the sum of all payments to which section
707(c) applies). If the taxpayer so elects, the amount equal to 66\2/3\
percent of his distributive share of such gross income shall be used by
him in the computation of his net earnings from self-employment in lieu
of the actual amount of his distributive share of income described in
section 702(a)(9) from such trade or business, if any.
(ii) Distributive share of gross income in excess of specified
amount. If a taxpayer's distributive share of the gross income of the
partnership (as such gross income is computed under the provisions of
paragraph (b) of this section) derived from such trade or business
(after such gross income has been reduced by the sum of all payments to
which section 707(c) applies) is more than $2,400 ($1,800 for a taxable
year ending on or after December 31, 1956, and beginning before January
1, 1966)
[[Page 31]]
and the actual amount of his distributive share (whether or not
distributed) of income described in section 702(a)(9) derived from such
trade or business (computed without regard to this section) is less than
$1,600 ($1,200 for a taxable year ending on or after December 31, 1956,
and beginning before January 1, 1966), the taxpayer may, at his option,
treat $1,600 ($1,200 for a taxable year ending on or after December 31,
1956, and beginning before January 1, 1966) as his distributive share of
income described in section 702(a)(9) derived from such trade or
business. If the taxpayer so elects, $1,600 ($1,200 for a taxable year
ending on or after December 31, 1956, and beginning before January 1,
1966) shall be used by him in the computation of his net earnings from
self-employment in lieu of the actual amount of his distributive share
of income described in section 702(a)(9) from such trade or business, if
any. However, if the actual amount of the taxpayer's distributive share
of income described in section 702(a)(9) from such trade or business, as
computed in accordance with the applicable provisions of
Secs. 1.1402(a)-1 to 1.1402(a)-13, inclusive, is $1,600 or more ($1,200
or more for a taxable year ending on or after December 31, 1956, and
beginning before January 1, 1966), such actual amount of the taxpayer's
distributive share shall be used in computing his net earnings from
self-employment.
(iii) Cross reference. For a special rule in the case of certain
deceased partners, see paragraph (c) of Sec. 1.1402(f)-1.
(b) Computation of gross income. For purposes of this section gross
income has the following meanings:
(1) In the case of any such trade or business in which the income is
computed under a cash receipts and disbursements method, the gross
receipts from such trade or business reduced by the cost or other basis
of property which was purchased and sold in carrying on such trade or
business (see paragraphs (a) and (c), other than paragraph (a)(5), of
Sec. 1.61-4), adjusted (after such reduction) in accordance with the
applicable provisions of Secs. 1.1402(a)-3 to 1.1402(a)-13, inclusive.
(2) In the case of any such trade or business in which the income is
computed under an accrual method (see paragraphs (b) and (c), other than
paragraph (b)(5), of Sec. 1.61-4), the gross income from such trade or
business, adjusted in accordance with the applicable provisions of
Secs. 1.1402(a)-3 to 1.1402(a)-13, inclusive.
(c) Two or more agricultural activities. If an individual (including
a member of a partnership) derives gross income (as defined in paragraph
(b) of this section) from more than one agricultural trade or business,
such gross income (including his distributive share of the gross income
of any partnership derived from any such trade or business) shall be
deemed to have been derived from one trade or business. Thus, such an
individual shall aggregate his gross income derived from each
agricultural trade or business carried on by him (which includes, under
paragraph (b) of Sec. 1.1402(a)-1, any guaranteed payment, within the
meaning of section 707(c), received by him from a farm partnership of
which he is a member) and his distributive share of partnership gross
income (after such gross income has been reduced by any guaranteed
payment within the meaning of section 707(c)) derived from each farm
partnership of which he is a member. Such gross income is the amount to
be considered for purposes of the optional method provided in this
section for computing net earnings from self-employment. If the
aggregate gross income of an individual includes income derived from an
agricultural trade or business carried on by him and a distributive
share of partnership income derived from an agricultural trade or
business carried on by a partnership of which he is a member, such
aggregate gross income shall be treated as income derived from a single
trade or business carried on by him, and such individual shall apply the
optional method applicable to individuals set forth in paragraph (a)(1)
of this section for purposes of computing his net earnings from self-
employment.
(d) Examples. The application of this section may be illustrated by
the following examples:
Example (1). F is engaged in the business of farming and computes
his income under the cash receipts and disbursements method. He files
his income tax returns on the basis of the calendar year. During the
year 1966, F's
[[Page 32]]
gross income from the business of farming (computed in accordance with
paragraph (b) (1) of this section) is $2,325. His actual net earnings
from self-employment derived from such business are $1,250. As his net
earnings from self-employment, F may report $1,250 or, by the optional
computation method, he may report $1,550 (66\2/3\ percent of $2,325).
Example (2). G is engaged in the business of farming and computes
his income under the accrual method. His income tax returns are filed on
the calendar year basis. For the year 1966, G's gross income from the
operation of his farm (computed in accordance with paragraph (b)(2) of
this section) is $2,800. He has actual net earnings from self-employment
derived from such farm in the amount of $1,250. As his net earnings from
self-employment derived from his farm, G may report his actual net
earnings of $1,250, or by the optional method he may report $1,600. If
G's actual net earnings from self-employment from his farming activities
for 1966 were in an amount of $1,600 or more, he would be required to
report such amount in computing his self-employment income.
Example (3). M, who files his income tax returns on a calendar year
basis, is one of the three partners of the XYZ Company, a partnership,
engaged in the business of farming. The taxable year of the partnership
is the calendar year, and its income is computed under the cash receipts
and disbursements method. For M's services in connection with the
planting, cultivating, and harvesting of the crops during the year 1966
the partnership agrees to pay him $500, the full amount of which is
determined without regard to the income of the partnership and
constitutes a guaranteed payment within the meaning of section 707(c).
This guaranteed payment to M is the only such payment made during such
year. The gross income derived from the business for the year 1966
computed in accordance with paragraph (b)(1) of this section and after
being reduced by the guaranteed payment of $500 made to M, is $3,000.
One-third of the $3,000 ($1,000), is M's distributive share of such
gross income. Under paragraph (c) of this section, the guaranteed
payment ($500) received by M and his distributive share of the
partnership gross income ($1,000) are deemed to have been derived from
one trade or business, and such amounts must be aggregated for purposes
of the optional method of computing net earnings from self-employment.
Since M's combined gross income from his two agricultural businesses
($1,000 and $500) is not more than $2,400 and since such income is
deemed to be derived from one trade or business, M's net earnings from
self-employment derived from such farming business may, at his option,
be deemed to be $1,000 (66\2/3\ percent of $1,500).
Example (4). A is one of the two partners of the AB partnership
which is engaged in the business of farming. The taxable year of the
partnership is the calendar year and its income is computed under the
accrual method. A files his income tax returns on the calendar year
basis. The partnership agreement provides for an equal sharing in the
profits and losses of the partnership by the two partners. A is an
experienced farmer and for his services as manager of the partnership's
farm activities during the year 1966 he receives $6,000 which amount
constitutes a guaranteed payment within the meaning of section 707(c).
The gross income of the partnership derived from such business for the
year 1966, computed in accordance with paragraph (b)(2) of this section
and after being reduced by the guaranteed payment made to A, is $9,600.
A's distributive share of such gross income is $4,800 and his
distributive share of income described in section 702(a)(9) derived from
the partnership's business is $1,900. Under paragraph (c) of this
section, the guaranteed payment received by A and his distributive share
of the partnership gross income are deemed to have been derived from one
trade or business, and such amounts must be aggregated for purposes of
the optional method of computing his net earnings from self-employment.
Since the aggregate of A's guaranteed payment ($6,000) and his
distributive share of partnership gross income ($4,800) is more than
$2,400 and since the aggregate of A's guaranteed payment ($6,000) and
his distributive share ($1,900) of partnership income described in
section 702(a)(9) is not less than $1,600, the optional method of
computing net earnings from self-employment is not available to A.
Example (5). F is a member of the EFG partnership which is engaged
in the business of farming. F files his income tax returns on the
calendar year basis. The taxable year of the partnership is the calendar
year, and its income is computed under a cash receipts and disbursements
method. Under the partnership agreement the partners are to share
equally the profits or losses of the business. The gross income derived
from the partnership business for the year 1966, computed in accordance
with paragraph (b)(1) of this section is $7,500. F's share of such gross
income is $2,500. Due to drought and an epidemic among the livestock,
the partnership sustains a net loss of $7,800 for the year 1966 of which
loss F's share is $2,600. Since F's distributive share of gross income
derived from such business is in excess of $2,400 and since F does not
receive income described in section 702(a)(9) of $1,600 or more from
such business, he may, at his option, be deemed to have received $1,600
as his distributive share of income described in section 702(a)(9) from
such business.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR
828, Jan. 18, 1969]
[[Page 33]]
Sec. 1.1402(a)-16 Exercise of option.
A taxpayer shall, for each taxable year with respect to which he is
eligible to use the optional method described in Sec. 1.1402(a)-14 or
Sec. 1.1402(a)-15, make a determination as to whether his net earnings
from self-employment are to be computed in accordance with such method.
If the taxpayer elects the optional method for a taxable year, he shall
signify such election by computing net earnings from self-employment
under the optional method as set forth in Schedule F (Form 1040) of the
income tax return filed by the taxpayer for such taxable year. If the
optional method is not elected at the time of the filing of the return
for a taxable year with respect to which the taxpayer is eligible to
elect such optional method, such method may be elected on an amended
return (or on such other form as may be prescribed for such use) filed
within the period prescribed by section 6501 and the regulations
thereunder for the assessment of the tax for such taxable year. If the
optional method is elected on a return for a taxable year, the taxpayer
may revoke such election by filing an amended return (or such other form
as may be prescribed for such use) for the taxable year within the
period prescribed by section 6501 and the regulations thereunder for the
assessment of the tax for such taxable year. If the taxpayer is deceased
or unable to make an election, the person designated in section 6012(b)
and the regulations thereunder may, within the period prescribed in this
section elect the optional method for any taxable year with respect to
which the taxpayer is eligible to use the optional method and revoke an
election previously made by or for the taxpayer.
Sec. 1.1402(a)-17 Retirement payments to retired partners.
(a) In general. There shall be excluded, in computing net earnings
from self-employment for taxable years ending on or after December 31,
1967, certain payments made on a periodic basis by a partnership,
pursuant to a written plan of the partnership, to a retired partner on
account of his retirement. The exclusion applies only if the payments
are made pursuant to a plan which meets the requirements prescribed in
paragraph (b) of this section, and, in addition, the conditions set
forth in paragraph (c) of this section are met.
(b) Retirement plan of partnership. (1) To meet the requirements of
section 1402(a)(10), the written plan of the partnership must set forth
the terms and conditions of the program or system established by the
partnership for the purpose of making payments to retired partners on
account of their retirement. To qualify as payments on account of
retirement, the payments must constitute bona fide retirement income.
Thus, payments of benefits not customarily included in a pension or
retirement plan such as layoff benefits are not payments on account of
retirement. Eligibility for retirement generally is established on the
basis of age, physical condition, or a combination of age or physical
condition and years of service. Generally, retirement benefits are
measured by, and based on, such factors as years of service and
compensation received. In determining whether the plan of the
partnership provides for payments on account of retirement, factors,
formulas, etc., reflected in public, and in broad based private, pension
or retirement plans in prescribing eligibility requirements and in
computing benefits may be taken into account.
(2) The plan of the partnership must provide for payments on account
of retirement:
(i) To partners generally or to a class or classes of partners,
(ii) On a periodic basis, and
(iii) Which continue at least until the partner's death.
For purposes of subdivision (i) of this subparagraph, a class of
partners may, in an appropriate case, contain only one member. Payments
are made on a periodic basis if made at regularly recurring intervals
(usually monthly) not exceeding one year.
(c) Conditions relating to exclusion--(1) In general. A payment made
pursuant to a written plan of a partnership which meets the requirements
of paragraph (b) of this section shall be excluded, in computing net
earnings from self-employment, only if:
[[Page 34]]
(i) The retired partner to whom the payment is made rendered no
service with respect to any trade or business carried on by the
partnership (or its successors) during the taxable year of the
partnership (or its successors), which ends within or with the taxable
year of the retired partner and in which the payment was received by
him;
(ii) No obligation (whether certain in amount or contingent on a
subsequent event) exists (as of the close of the partnership's taxable
year referred to in subdivision (i) of this subparagraph) from the other
partners to the retired partner except with respect to retirement
payments under the plan or rights such as benefits payable on account of
sickness, accident, hospitalization, medical expenses, or death; and
(iii) The retired partner's share (if any) of the capital of the
partnership has been paid to him in full before the close of the
partnership's taxable year referred to in subdivision (i) of this
subparagraph.
By application of the conditions set forth in this subparagraph, either
all payments on account of retirement received by a retired partner
during the taxable year of the partnership ending within or with his
taxable year are excluded or none of the payments are excluded.
Subdivision (ii) of this subparagraph has application only to
obligations from other partners in their capacity as partners as
distinguished from an obligation which arose and exists from a
transaction unrelated to the partnership or to a trade or business
carried on by the partnership. The effect of the conditions set forth in
subdivisions (ii) and (iii) of this subparagraph is that the exclusion
may apply with respect to payments received by a retired partner during
the taxable year of the partnership ending within or with his taxable
year only if at the close of the partnership's taxable year the retired
partner had no financial interest in the partnership except for the
right to retirement payments.
(2) Examples. The application of subparagraph (1) of this paragraph
may be illustrated by the following examples. Each example assumes that
the partnership plan pursuant to which the payments are made meets the
requirements of paragraph (b) of this section.
Example (1). A, who files his income tax returns on a calendar year
basis, is a partner in the ABC partnership. The taxable year of the
partnership is the period July 1 to June 30, inclusive. A retired from
the partnership on January 1, 1973, and receives monthly payments on
account of his retirement. As of June 30, 1973, no obligation existed
from the other partners to A (except with respect to retirement payments
under the plan) and A's share of the capital of the partnership had been
paid to him in full. The monthly retirement payments received by A from
the partnership in his taxable year ending on December 31, 1973, are not
excluded from net earnings from self-employment since A rendered service
to the partnership during a portion of the partnership's taxable year
(July 1, 1972, through June 30, 1973) which ends within A's taxable year
ending on December 31, 1973.
Example (2). D, a partner in the DEF partnership, retired from the
partnership as of the close of December 31, 1972. The taxable year of
both D and the partnership is the calendar year. During the
partnership's taxable year ending December 31, 1973, D rendered no
service with respect to any trade or business carried on by the
partnership. On or before December 31, 1973, all obligations (other than
with respect to retirement payments under the plan) from the other
partners to D have been liquidated, and D's share of the capital of the
partnership has been paid to him. Retirement payments received by D
pursuant to the partnership's plan in his taxable year ending December
31, 1973, are excluded in determining his net earnings from self-
employment (if any) for that taxable year.
Example (3). Assume the same facts as in example (2) except that as
of the close of December 31, 1973, D has a right to a fixed percentage
of any amounts collected by the partnership after that date which are
attributable to services rendered by him prior to his retirement for
clients of the partnership. The monthly payments received by D in his
taxable year ending December 31, 1973, are not excluded from net
earnings from self-employment since as of the close of the partnership's
taxable year which ends with D's taxable year, an obligation (other than
an obligation with respect to retirement payments) exists from the other
partners to D.
[T.D. 7333, 39 FR 44446, Dec. 24, 1974]
Sec. 1.1402(b)-1 Self-employment income.
(a) In general. Except for the exclusions in paragraphs (b) and (c)
of this section and the exception in paragraph
[[Page 35]]
(d) of this section, the term ``self-employment income'' means the net
earnings from self-employment derived by an individual during a taxable
year.
(b) Maximum self-employment income--(1) General rule. Subject to the
special rules described in subparagraph (2) of this paragraph, the
maximum self-employment income of an individual for a taxable year
(whether a period of 12 months or less) is:
(i) For any taxable year beginning in a calendar year after 1974, an
amount equal to the contribution and benefit base (as determined under
section 230 of the Social Security Act) which is effective for such
calendar year; and
(ii) For any taxable year:
Ending before 1955................................................$3,600
Ending after 1954 and before 1959..................................4,200
Ending after 1958 and before 1966..................................4,800
Ending after 1965 and before 1968..................................6,600
Ending after 1967 and beginning before 1972........................7,800
Beginning after 1971 and before 1973...............................9,000
Beginning after 1972 and before 1974..............................10,800
Beginning after 1973 and before 1975..............................13,200
(2) Special rules. (i) If an individual is paid wages as defined in
subparagraph (3) of this paragraph in a taxable year, the maximum self-
employment income for such taxable year is computed as provided in
subdivision (ii) or (iii) of this subparagraph.
(ii) If an individual is paid wages as defined in subparagraph (3)
(i) or (ii) of this paragraph in a taxable year, the maximum self-
employment income of such individual for such taxable year is the excess
of the amounts indicated in subparagraph (1) of this paragraph over the
amount of the wages, as defined in subparagraph (3) (i) and (ii) of this
paragraph, paid to him during the taxable year. For example, if for his
taxable year beginning in 1974, an individual has $15,000 of net
earnings from self-employment and during such taxable year is paid
$1,000 of wages as defined in section 3121(a) (see subparagraph (3)(i)
of this paragraph), he has $12,200 ($13,200 -$1,000) of self-employment
income for the taxable year.
(iii) For taxable years ending on or after December 31, 1968, wages,
as defined in subparagraph (3)(iii) of this paragraph, are taken into
account in determining the maximum self-employment income of an
individual for purposes of the tax imposed under section 1401(b)
(hospital insurance), but not for purposes of the tax imposed under
section 1401(a) (old-age survivors, and disability insurance). If an
individual is paid wages as defined in subparagraph (3)(iii) of this
paragraph in a taxable year, his maximum self-employment income for such
taxable year for purposes of the tax imposed under section 1401(a) is
computed under subparagraph (1) of this paragraph or subdivision (ii) of
this subparagraph (whichever is applicable), and his maximum self-
employment income for such taxable year for purposes of the tax imposed
under section 1401(b) is the excess of his section 1401(a) maximum self-
employment income over the amount of wages, as defined in subparagraph
(3)(iii) of this paragraph, paid to him during the taxable year. For
purposes of this subdivision, wages as defined in subparagraph (3)(iii)
of this paragraph are deemed paid to an individual in the period with
respect to which the payment is made, that is, the period in which the
compensation was earned or deemed earned within the meaning of section
3231(e). For an explanation of the term ``compensation'' and for
provisions relating to when compensation is earned, see the regulations
under section 3231(e) in part 31 of this chapter (Employment Tax
Regulations). The application of the rules set forth in this subdivision
may be illustrated by the following example:
Example. M, a calendar-year taxpayer, has $15,000 of net earnings
from self-employment for 1974 and during the taxable year is paid $1,000
of wages as defined in section 3121(a) (see subparagraph (3)(i) of this
paragraph) and $1,600 of compensation subject to tax under section 3201
(see subparagraph (3)(iii) of this paragraph). Of the $1,600 of taxable
compensation, $1,200 represents compensation for services rendered in
1974 and the balance ($400) represents compensation which pursuant to
the provisions of section 3231(e) is earned or deemed earned in 1973.
M's maximum self-employment income for 1974 for purposes of the tax
imposed under section 1401(a), computed as provided in subdivision (ii)
of this subparagraph, is $12,200 ($13,200-$1,000), and for purposes of
the tax imposed under section 1401(b) is $11,000 ($12,200-$1,200).
However, M may recompute his maximum self-employment income for 1973 for
purposes of the tax imposed under section 1401(b) by taking into account
the
[[Page 36]]
$400 of compensation which is deemed paid in 1973.
(3) Meaning of term ``wages''. For the purpose of the computation
described in subparagraph (2) of this paragraph, the term ``wages''
includes:
(i) Wages as defined in section 3121(a);
(ii) Such remuneration paid to an employee for services covered by:
(a) An agreement entered into pursuant to section 218 of the Social
Security Act (42 U.S.C. 418), which section provides for extension of
the Federal old-age, survivors and disability insurance system to State
and local government employees under voluntary agreements between the
States and the Secretary of Health, Education, and Welfare (Federal
Security Administrator before April 11, 1953), or
(b) An agreement entered into pursuant to the provisions of section
3121(1), relating to coverage of citizens of the United States who are
employees of foreign subsidiaries of domestic corporations,
as would be wages under section 3121(a) if such services constituted
employment under section 3121(b). For an explanation of the term
``wages'', see the regulations under section 3121(a) in part 31 of this
chapter (Employment Tax Regulations); and
(iii) Compensation, as defined in section 3231(e), which is subject
to the employee tax imposed by section 3201 or the employee
representative tax imposed by section 3211.
(c) Minimum net earnings from self-employment. Self-employment
income does not include the net earnings from self-employment of an
individual when the amount of such earnings for the taxable year is less
than $400. Thus, an individual having only $300 of net earnings from
self-employment for the taxable year would not have any self-employment
income. However, an individual having net earnings from self-employment
of $400 or more for the taxable year may, by application of paragraph
(b)(2) of this section, have less than $400 of self-employment income
for purposes of the tax imposed under section 1401(a) and the tax
imposed under section 1401(b) or may have self-employment income of $400
or more for purposes of the tax imposed under section 1401(a) and of
less than $400 for purposes of the tax imposed under section 1401(b).
This could occur in a case in which the amount of the individual's net
earnings from self-employment is $400 or more for a taxable year and the
amount of such net earnings from self-employment plus the amount of
wages, as defined in paragraph (b)(3) of this section, paid to him
during the taxable year exceed the maximum self-employment income, as
set forth in paragraph (b)(1) of this section, for the taxable year.
However, the result occurs only if such maximum self-employment income
exceeds the amount of such wages. The application of this paragraph may
be illustrated by the following example:
Example. For 1974 M, a calendar-year taxpayer, has net earnings from
self-employment of $2,000 and wages (as defined in paragraph (b)(3) (i)
and (ii) of this section) of $12,500. Since M's net earnings from self-
employment plus his wages exceed the maximum self-employment income for
1974 ($13,200), his self-employment income for 1974 is $700
($13,200-$12,500). If M also had wages, as defined in paragraph
(b)(3)(iii) of this section, of $200, his self-employment income would
be $700 for purposes of the tax imposed under section 1401(a) and $500
($13,200-$12,700 ($12,500+$200)) for purposes of the tax imposed under
section 1401(b).
For provisions relating to when wages as defined in paragraph
(b)(3)(iii) of this section are treated as paid, see paragraph
(b)(2)(iii) of this section.
(d) Nonresident aliens. A nonresident alien individual never has
self-employment income. While a nonresident alien individual who derives
income from a trade or business carried on within the United States,
Puerto Rico, the Virgin Islands, Guam, or American Samoa (whether by
agents or employees, or by a partnership of which he is a member) may be
subject to the applicable income tax provisions on such income, such
nonresident alien individual will not be subject to the tax on self-
employment income, since any net earnings which he may have from self-
employment do not constitute self-employment income. For the purpose of
the tax on self-employment income, an individual who is not a citizen of
the United States but who is a resident of the Commonwealth of Puerto
Rico, the
[[Page 37]]
Virgin Islands, or, for taxable years beginning after 1960, of Guam or
American Samoa is not considered to be a nonresident alien individual.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR
44447, Dec. 24, 1974]
Sec. 1.1402(c)-1 Trade or business.
In order for an individual to have net earnings from self-
employment, he must carry on a trade or business, either as an
individual or as a member of a partnership. Except for the exclusions
discussed in Secs. 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term
``trade or business'', for the purpose of the tax on self-employment
income, shall have the same meaning as when used in section 162. An
individual engaged in one of the excluded activities specified in such
sections of the regulations may also be engaged in carrying on
activities which constitute a trade or business for purposes of the tax
on self-employment income. Whether or not he is also engaged in carrying
on a trade or business will be dependent upon all of the facts and
circumstances in the particular case. An individual who is a crew
leader, as defined in section 3121(o) (see such section and the
regulations thereunder in part 31 of this chapter (Employment Tax
Regulations)), is considered to be engaged in carrying on a trade or
business with respect to services performed by him after 1956 in
furnishing individuals to perform agricultural labor for another person
or services performed by him after 1956 as a member of the crew.
[T.D. 6978, 33 FR 15937, Oct. 30, 1968]
Sec. 1.1402(c)-2 Public office.
(a) In general--(1) General rule. Except as otherwise provided in
subparagraph (2) of this paragraph, the performance of the functions of
a public office does not constitute a trade or business.
(2) Fee basis public officials--(i) In general. If an individual
receives fees after 1967 for the performance of the functions of a
public office of a State or a political subdivision thereof for which he
is compensated solely on a fee basis, and if the service performed in
such office is eligible for (but is not made the subject of) an
agreement between the State and the Secretary of Health, Education, and
Welfare pursuant to section 218 of the Social Security Act to extend
social security coverage thereto, the service for which such fees are
received constitutes a trade or business within the meaning of section
1402(c) and Sec. 1.1402(c)-1. If an individual performs service for a
State or a political subdivision thereof in any period in more than one
position, each position is treated separately for purposes of the
preceding sentence. See also paragraph (f) of Sec. 1.1402(c)-3 relating
to the performance of service by an individual as an employee of a State
or a political subdivision thereof in a position compensated solely on a
fee basis.
(ii) Election with respect to fees received in 1968. (A) Any
individual who in 1968 receives fees for service performed by him with
respect to the functions of a public office of a State or a political
subdivision thereof in any period in which the functions are performed
in a position compensated solely on a fee basis may elect, if the
performance of the service for which such fees are received constitutes
a trade or business pursuant to the provisions of subdivision (i) of
this subparagraph, to have such performance of service treated as
excluded from the term ``trade or business'' for the purpose of the tax
on self-employment income, pursuant to the provisions of section
122(c)(2) of the Social Security Amendments of 1967 (as quoted in
Sec. 1.1402(c)). Such election shall not be limited to service to which
the fees received in 1968 are attributable but must also be applicable
to service (if any) in subsequent years which, except for the election,
would constitute a trade or business pursuant to the provisions of
subdivision (i) of this subparagraph. An election made pursuant to the
provisions of this subparagraph is irrevocable.
(B) The election referred to in subdivision (ii)(A) of this
subparagraph shall be made by filing a certificate of election of
exemption (Form 4415) on or before the due date of the income tax return
(see section 6072), including any extension thereof (see section 6081),
for the taxable year of the individual making the election which begins
in 1968.
[[Page 38]]
The certificate of election of exemption shall be filed with an internal
revenue office in accordance with the instructions on the certificate.
(b) Meaning of public office. The term ``public office'' includes
any elective or appointive office of the United States or any possession
thereof, of the District of Columbia, of a State or its political
subdivisions, or a wholly-owned instrumentality of any one or more of
the foregoing. For example, the President, the Vice President, a
governor, a mayor, the Secretary of State, a member of Congress, a State
representative, a county commissioner, a judge, a justice of the peace,
a county or city attorney, a marshal, a sheriff, a constable, a
registrar of deeds, or a notary public performs the functions of a
public office. (However, the service of a notary public could not be
made the subject of a section 218 agreement under the Social Security
Act because notaries are not ``employees'' within the meaning of that
section. Accordingly, such service does not constitute a trade or
business.)
[T.D. 7333, 39 FR 44448, Dec. 24, 1974, as amended by T.D. 7372, 40 FR
30945, July 24, 1975]
Sec. 1.1402(c)-3 Employees.
(a) General rule. Generally, the performance of service by an
individual as an employee, as defined in the Federal Insurance
Contributions Act (Chapter 21 of the Internal Revenue Code) does not
constitute a trade or business within the meaning of section 1402(c) and
Sec. 1.1402(c)-1. However, in six cases set forth in paragraphs (b) to
(g), inclusive, of this section, the performance of service by an
individual is considered to constitute a trade or business within the
meaning of section 1402(c) and Sec. 1.1402(c)-1. (As to when an
individual is an employee, see section 3121 (d) and (o) and section 3506
and the regulations under those sections in part 31 of this chapter
(Employment Tax Regulations).)
(b) Newspaper vendors. Service performed by an individual who has
attained the age of 18 constitutes a trade or business for purposes of
the tax on self-employment income within the meaning of section 1402(c)
and Sec. 1.1402(c)-1 if performed in, and at the time of, the sale of
newspapers or magazines to ultimate consumers, under an arrangement
under which the newspapers or magazines are to be sold by him at a fixed
price, his compensation being based on the retention of the excess of
such price over the amount at which the newspapers or magazines are
charged to him, whether or not he is guaranteed a minimum amount of
compensation for such service, or is entitled to be credited with the
unsold newspapers or magazines turned back.
(c) Sharecroppers. Service performed by an individual under an
arrangement with the owner or tenant of land pursuant to which:
(1) Such individual undertakes to produce agricultural or
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
(2) The agricultural or horticultural commodities produced by such
individual, or the proceeds therefrom, are to be divided between such
individual and such owner or tenant, and
(3) The amount of such individual's share depends on the amount of
the agricultural or horticultural commodities produced, constitutes a
trade or business within the meaning of section 1402(c) and
Sec. 1.1402(c)-1.
(d) Employees of foreign government, instrumentality wholly owned by
foreign government, or international organization. Service performed in
the United States, as defined in section 3121(e)(2) (see such section
and the regulations thereunder in part 31 of this chapter (Employment
Tax Regulations)), by an individual who is a citizen of the United
States constitutes a trade or business within the meaning of section
1402(c) and Sec. 1.1402(c)-1 if such service is excepted from
employment, for purposes of the Federal Insurance Contributions Act
(chapter 21 of the Code), by:
(1) Section 3121(b)(11), relating to service in the employ of a
foreign government (for regulations under section 3121(b)(11), see
Sec. 31.3121(b)(11)-1 of this chapter);
(2) Section 3121(b)(12), relating to service in the employ of an
instrumentality wholly owned by a foreign government (for regulations
under section
[[Page 39]]
3121(b)(12), see Sec. 31.3121(b)(12)-1 of this chapter); or
(3) Section 3121(b)(15), relating to service in the employ of an
international organization (for regulations under section 3121(b)(15),
see Sec. 31.3121(b)(15)-1 of this chapter).
This paragraph is applicable to service performed in any taxable year
ending on or after December 31, 1960, except that it does not apply to
service performed before 1961 in Guam or American Samoa.
(e) Ministers and members of religious orders--(1) Taxable years
ending before 1968. Service described in section 1402(c)(4) performed by
an individual during taxable years ending before 1968 for which a
certificate filed pursuant to section 1402(e) is in effect constitutes a
trade or business within the meaning of section 1402(c) and
Sec. 1.1402(c)-1. See also Sec. 1.1402(c)-5.
(2) Taxable years ending after 1967. Service described in section
1402(c)(4) performed by an individual during taxable years ending after
1967 constitutes a trade or business within the meaning of section
1402(c) and Sec. 1.1402(c)-1 unless an exemption under section 1402(e)
(see Secs. 1.1402(e)-1A through 1.1402(e)-4A) is effective with respect
to such individual for the taxable year during which the service is
performed. See also Sec. 1.1402(c)-5.
(f) State and local government employees compensated on fee basis--
(1) In general. (i) Section 1402(c)(2)(E) and this paragraph are
applicable only with respect to fees received by an individual after
1967 for service performed by him as an employee of a State or a
political subdivision thereof in a position compensated solely on a fee
basis. If an individual performs service for a State or a political
subdivision thereof in more than one position, each position is treated
separately for purposes of determining whether the service performed in
such position is performed by an employee and whether compensation for
service performed in the position is solely on a fee basis.
(ii) If an individual receives fees after 1967 for service performed
by him as an employee of a State or a political subdivision thereof in a
position compensated solely on a fee basis, the service for which such
fees are received constitutes a trade or business within the meaning of
section 1402(c) and Sec. 1.1402(c)-1 except that if service performed in
such position is covered under an agreement entered into by the State
and the Secretary of Health, Education, and Welfare pursuant to section
218 of the Social Security Act at the time a fee is received, the
service to which such fee relates does not constitute a trade or
business. See also paragraph (a) of Sec. 1.1402(c)-2, relating, in part,
to the performance of the functions of a public office of a State or a
political subdivision thereof by an individual.
(2) Election with respect to fees received in 1968. (i) Any
individual who in 1968 receives fees for service as an employee of a
State or a political subdivision thereof in a position compensated
solely on a fee basis may elect, if the performance of the service for
which such fees are received constitutes a trade or business pursuant to
the provisions of subparagraph (1) of this paragraph, to have such
performance of service treated as excluded from the term ``trade or
business'' for the purpose of the tax on self-employment income,
pursuant to the provisions of section 122(c)(2) of the Social Security
Amendments of 1967 (as quoted in Sec. 1.1402(c)). Such election shall
not be limited to service to which the fees received in 1968 are
attributable but must also be applicable to service (if any) in
subsequent years which, except for the election, would constitute a
trade or business pursuant to the provisions of subparagraph (1) of this
paragraph. An election made pursuant to the provisions of this
subparagraph is irrevocable.
(ii) The election referred to in subdivision (i) of this
subparagraph shall be made by filing a certificate of election of
exemption (Form 4415) on or before the due date of the income tax return
(see section 6072), including any extension thereof (see section 6081),
for the taxable year of the individual making the election which begins
in 1968. The certificate of election of exemption shall be filed with an
internal revenue office in accordance with the instructions on the
certificate.
(g) Individuals engaged in fishing. For taxable years ending after
December
[[Page 40]]
31, 1954, service performed by an individual on a boat engaged in
catching fish or other forms of aquatic animal life (hereinafter
``fish'') constitutes a trade or business within the meaning of section
1402(c) and Sec. 1.1402(c)-1 if the service is excepted from the
definition of employment by section 3121(b)(20) and Sec. 31.3121(b)(20)-
1(a). However, the preceding sentence does not apply to services
performed after December 31, 1954, and before October 4, 1976, on a boat
engaged in catching fish if the owner or operator of the boat treated
the individual as an employee in the manner described in
Sec. 31.3121(b)(20)-1(b).
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR
15937, Oct. 30, 1968; T.D. 7333, 39 FR 44448, Dec. 24, 1974; T.D. 7691,
45 FR 24129, Apr. 9, 1980; T.D. 7716, 45 FR 57123, Aug. 27, 1980]
Sec. 1.1402(c)-4 Individuals under Railroad Retirement System.
The performance of service by an individual as an employee or
employee representative as defined in section 3231(b) and (c),
respectively (see Secs. 31.3231(b)-1 and 31.3231(c)-1 of Part 31 of this
chapter (Employment Tax Regulations)), that is, an individual covered
under the railroad retirement system, does not constitute a trade or
business.
Sec. 1.1402(c)-5 Ministers and members of religious orders.
(a) In general--(1) Taxable years ending before 1968. For taxable
years ending before 1955, a duly ordained, commissioned, or licensed
minister of a church or a member of a religious order is not engaged in
carrying on a trade or business with respect to service performed by him
in the exercise of his ministry or in the exercise of duties required by
such order. However, for taxable years ending after 1954 and before
1968, any individual who is a duly ordained, commissioned, or licensed
minister of a church or a member of a religious order (other than a
member of a religious order who has taken a vow of poverty as a member
of such order) may elect, as provided in Sec. 1.1402(e)(1)-1, to have
the Federal old-age, survivors, and disability insurance system
established by title II of the Social Security Act extended to service
performed by him in his capacity as such a minister or member. If such a
minister or a member of a religious order makes an election pursuant to
Sec. 1.1402(e)(1)-1 he is, with respect to service performed by him in
such capacity, engaged in carrying on a trade or business for each
taxable year to which the election is effective. An election by a
minister or member of a religious order has no application to service
performed by such minister or member which is not in the exercise of his
ministry or in the exercise of duties required by such order.
(2) Taxable years ending after 1967. For any taxable year ending
after 1967, a duly ordained, commissioned, or licensed minister of a
church or a member of a religious order (other than a member of a
religious order who has taken a vow of poverty as a member of such
order) is engaged in carrying on a trade or business with respect to
service performed by him in the exercise of his ministry or in the
exercise of duties required by such order unless an exemption under
section 1402(e) (see Secs. 1.1402(e)-1A through 1.1402(e)-4A) is
effective with respect to such individual for the taxable year during
which the service is performed. An exemption which is effective with
respect to a minister or a member of a religious order has no
application to service performed by such minister or member which is not
in the exercise of his ministry or in the exercise of duties required by
such order.
(b) Service by a minister in the exercise of his ministry. (1)(i) A
certificate of election filed by a duly ordained, commissioned, or
licensed minister of a church under the provisions of Sec. 1.1402(e)(1)-
1 has application only to service performed by him in the exercise of
his ministry.
(ii) An exemption under section 1402(e) (see Secs. 1.1402(e)-1A
through 1.1402(e)-4A) which is effective with respect to a duly
ordained, commissioned, or licensed minister of a church has application
only to service performed by him in the exercise of his ministry.
(2) Except as provided in paragraph (c)(3) of this section, service
performed by a minister in the exercise of his ministry includes the
ministration of sacerdotal functions and the conduct of
[[Page 41]]
religious worship, and the control, conduct, and maintenance of
religious organizations (including the religious boards, societies, and
other integral agencies of such organizations), under the authority of a
religious body constituting a church or church denomination. The
following rules are applicable in determining whether services performed
by a minister are performed in the exercise of his ministry:
(i) Whether service performed by a minister constitutes the conduct
of religious worship or the ministration of sacerdotal functions depends
on the tenets and practices of the particular religious body
constituting his church or church denomination.
(ii) Service performed by a minister in the control, conduct, and
maintenance of a religious organization relates to directing, managing,
or promoting the activities of such organization. Any religious
organization is deemed to be under the authority of a religious body
constituting a church or church denomination if it is organized and
dedicated to carrying out the tenets and principles of a faith in
accordance with either the requirements or sanctions governing the
creation of institutions of the faith. The term ``religious
organization'' has the same meaning and application as is given to the
term for income tax purposes.
(iii) If a minister is performing service in the conduct of
religious worship or the ministration of sacerdotal functions, such
service is in the exercise of his ministry whether or not it is
performed for a religious organization. The application of this rule may
be illustrated by the following example:
Example. M, a duly ordained minister, is engaged to perform service
as chaplain at N University. M devotes his entire time to performing his
duties as chaplain which include the conduct of religious worship,
offering spiritual counsel to the university students, and teaching a
class in religion. M is performing service in the exercise of his
ministry.
(iv) If a minister is performing service for an organization which
is operated as an integral agency of a religious organization under the
authority of a religious body constituting a church or church
denomination, all service performed by the minister in the conduct of
religious worship, in the ministration of sacerdotal functions, or in
the control, conduct, and maintenance of such organization (see
subparagraph (2)(ii) of this paragraph) is in the exercise of his
ministry. The application of this rule may be illustrated by the
following example:
Example. M, a duly ordained minister, is engaged by the N Religious
Board to serve as director of one of its departments. He performs no
other service. The N Religious Board is an integral agency of O, a
religious organization operating under the authority of a religious body
constituting a church denomination. M is performing service in the
exercise of his ministry.
(v) If a minister, pursuant to an assignment or designation by a
religious body constituting his church, performs service for an
organization which is neither a religious organization nor operated as
an integral agency of a religious organization, all service performed by
him, even though such service may not involve the conduct of religious
worship or the ministration of sacerdotal functions, is in the exercise
of his ministry. The application of this rule may be illustrated by the
following example:
Example. M, a duly ordained minister, is assigned by X, the
religious body constituting his church, to perform advisory service to Y
Company in connection with the publication of a book dealing with the
history of M's church denomination. Y is neither a religious
organization nor operated as an integral agency of a religious
organization. M performs no other service for X or Y. M is performing
service in the exercise of his ministry.
(c) Service by a minister not in the exercise of his ministry.
(1)(i) A certificate filed by a duly ordained, commissioned, or licensed
minister of a church under the provisions of Sec. 1.1402(e)(1)-1 has no
application to service performed by him which is not in the exercise of
his ministry.
(ii) An exemption under section 1402(e) (see Secs. 1.1402(e)-1A
through 1.1402(e)-4A) which is effective with respect to a duly
ordained, commissioned, or licensed minister of a church has no
application to service performed by him which is not in the exercise of
his ministry.
[[Page 42]]
(2) If a minister is performing service for an organization which is
neither a religious organization nor operated as an integral agency of a
religious organization and the service is not performed pursuant to an
assignment or designation by his ecclesiastical superiors, then only the
service performed by him in the conduct of religious worship or the
ministration of sacerdotal functions is in the exercise of his ministry.
See, however, subparagraph (3) of this paragraph. The application of the
rule in this subparagraph may be illustrated by the following example:
Example. M, a duly ordained minister, is engaged by N University to
teach history and mathematics. He performs no other service for N
although from time to time he performs marriages and conducts funerals
for relatives and friends. N University is neither a religious
organization nor operated as an integral agency of a religious
organization. M is not performing the service for N pursuant to an
assignment or designation by his ecclesiastical superiors. The service
performed by M for N University is not in the exercise of his ministry.
However, service performed by M in performing marriages and conducting
funerals is in the exercise of his ministry.
(3) Service performed by a duly ordained, commissioned, or licensed
minister of a church as an employee of the United States, or a State,
Territory, or possession of the United States, or the District of
Columbia, or a foreign government, or a political subdivision of any of
the foregoing, is not considered to be in the exercise of his ministry
for purposes of the tax on self-employment income, even though such
service may involve the ministration of sacerdotal functions or the
conduct of religious worship. Thus, for example, service performed by an
individual as a chaplain in the Armed Forces of the United States is
considered to be performed by a commissioned officer in his capacity as
such, and not by a minister in the exercise of his ministry. Similarly,
service performed by an employee of a State as a chaplain in a State
prison is considered to be performed by a civil servant of the State and
not by a minister in the exercise of his ministry.
(d) Service in the exercise of duties required by a religious
order--(1) Certificate of election. A certificate of election filed by a
member of a religious order (other than a member of a religious order
who has taken a vow of poverty as a member of such order) under the
provisions of Sec. 1.1402(e)(1)-1 has application to all duties required
of him by such order.
(2) Exemption. An exemption under section 1402(e) (see
Secs. 1.1402(e)-1A through 1.1402(e)-4A) which is effective with respect
to a member of a religious order (other than a member of a religious
order who has taken a vow of poverty as a member of such order) has
application only to the duties required of him by such order.
(3) Service. For purposes of subparagraphs (1) and (2) of this
paragraph, the nature or extent of the duties required of the member by
the order is immaterial so long as it is a service which he is directed
or required to perform by his ecclesiastical superiors.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR
15937, Oct. 30, 1968]
Sec. 1.1402(c)-6 Members of certain professions.
(a) Periods of exclusion--(1) Taxable years ending before 1955. For
taxable years ending before 1955, an individual is not engaged in
carrying on a trade or business with respect to the performance of
service in the exercise of his profession as a physician, lawyer,
dentist, osteopath, veterinarian, chiropractor, naturopath, optometrist,
Christian Science practitioner, architect, certified public accountant,
accountant registered or licensed as an accountant under State or
municipal law, full-time practicing public accountant, funeral director,
or professional engineer.
(2) Taxable years ending in 1955. Except as provided in paragraph
(b) of this section, for a taxable year ending in 1955 an individual is
not engaged in carrying on a trade or business with respect to the
performance of service in the exercise of his profession as a physician,
lawyer, dentist, osteopath, veterinarian, chiropractor, naturopath,
optometrist, or Christian Science practitioner.
(3) Taxable years ending after 1955--(i) Doctors of medicine. For
taxable years ending after 1955 and before December 31, 1965, and
individual is not engaged in carrying on a trade or business with
[[Page 43]]
respect to the performance of service in the exercise of his profession
as a doctor of medicine. For taxable years ending after December 30,
1965, an individual is engaged in carrying on a trade or business with
respect to the performance of service in the exercise of his profession
as a doctor of medicine.
(ii) Christian Science practitioners. Except as provided in
paragraph (b)(1) of this section, for taxable years ending after 1955
and before 1968, an individual is not engaged in carrying on a trade or
business with respect to the performance of service in the exercise of
his profession as a Christian Science practitioner. For provisions
relating to the performance of service in taxable years ending after
1967 by an individual in the exercise of his profession as a Christian
Science practitioner, see paragraph (b)(2) of this section.
(b) Christian Science practitioner--(1) Certain taxable years ending
before 1968; election. For taxable years ending after 1954 and before
1968, a Christian Science practitioner may elect, as provided in
Sec. 1.1402(e)(1)-1, to have the Federal old-age, survivors, and
disability insurance system established by title II of the Social
Security Act extended to service performed by him in the exercise of his
profession as a Christian Science practitioner. If an election is made
pursuant to Sec. 1.1402(e)(1)-1, the Christian Science practitioner is,
with respect to the performance of service in the exercise of such
profession, engaged in carrying on a trade or business for each taxable
year for which the election is effective. An election by a Christian
Science practitioner has no application to service performed by him
which is not in the exercise of his profession as a Christian Science
practitioner.
(2) Taxable years ending after 1967; exemption. For a taxable year
ending after 1967, a Christian Science practitioner is, with respect to
the performance of service in the exercise of his profession as a
Christian Science practitioner, engaged in carrying on a trade or
business unless an exemption under section 1402(e) (see Secs. 1.1402(e)-
1A through 1.1402(e)-4A) is effective with respect to him for the
taxable year during which the service is performed. An exemption which
is effective with respect to a Christian Science practitioner has no
application to service performed by him which is not in the exercise of
his profession as a Christian Science practitioner.
(c) Meaning of terms. The designations in this section are to be
given their commonly accepted meanings. For taxable years ending after
1955, an individual who is a doctor of osteopathy, and who is not a
doctor of medicine within the commonly accepted meaning of that term, is
deemed, for purposes of this section, not to be engaged in carrying on a
trade or business in the exercise of the profession of doctor of
medicine.
(d) Legal requirements. The exclusions specified in paragraph (a) of
this section apply only if the individuals meet the legal requirements,
if any, for practicing their professions in the place where they perform
the service.
(e) Partnerships. In the case of a partnership engaged in the
practice of any of the designated excluded professions, the partnership
shall not be considered as carrying on a trade or business for the
purpose of the tax on self-employment income, and none of the
distributive shares of the income or loss, described in section
702(a)(9), of such partnership shall be included in computing net
earnings from self-employment of any member of the partnership. On the
other hand, where a partnership is engaged in a trade or business not
within any of the designated excluded professions, each partner must
include his distributive share of the income or loss, described in
section 702(a)(9), of such partnership in computing his net earnings
from self-employment, irrespective of whether such partner is engaged in
the practice of one or more of such professions and contributes his
professional services to the partnership.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR
15938, Oct. 30, 1968]
Sec. 1.1402(c)-7 Members of religious groups opposed to insurance.
The performance of service by an individual:
(a) Who is a member of a recognized religious sect or division
thereof, and
[[Page 44]]
(b) Who is an adherent of established tenets or teachings of such
sect or division by reason of which he is conscientiously opposed to
acceptance of the benefits of any private or public insurance which
makes payments in the event of death, disability, old age, or retirement
or makes payments toward the cost of, or provides services for, medical
care (including the benefits of any insurance system established by the
Social Security Act),
during any taxable year for which he is granted a tax exemption,
pursuant to section 1402(h), does not constitute a trade or business
within the meaning of section 1402(c) and Sec. 1.1402(c)-1. See also
Secs. 1.1402(h) and 1.1402(h)-1.
[T.D. 6993, 34 FR 830, Jan. 18, 1969]
Sec. 1.1402(d)-1 Employee and wages.
For the purpose of the tax on self-employment income, the term
``employee'' and the term ``wages'' shall have the same meaning as when
used in the Federal Insurance Contributions Act. For an explanation of
these terms, see Subpart B of Part 31 of this chapter (Employment Tax
Regulations).
Sec. 1.1402(e)-1A Application of regulations under section 1402(e).
The regulations in Secs. 1.1402(e)-2A through 1.1402(e)-4A relate to
section 1402(e) as amended by section 115(b)(2) of the Social Security
Amendments of 1967 (81 Stat. 839) and apply to taxable years ending
after 1967. Section 1.1402(e)-5A reflects changes made by section
1704(a) of the Tax Reform Act of 1986 (100 Stat. 2085, 2779) and applies
to applications for exemption under section 1402(e) filed after December
31, 1986. For regulations under section 1402(e) (as in effect prior to
amendment by the Social Security Amendments of 1967) applicable to
taxable years ending before 1968, see Secs. 1.1402(e)(1)-1 through
1.1402(e)(6)-1.
[T.D. 8221, 53 FR 33461, Aug. 31, 1988]
Sec. 1.1402(e)-2A Ministers, members of religious orders and Christian Science practitioners; application for exemption from self-employment tax.
(a) In general. (1) Subject to the limitations set forth in
subparagraphs (2) and (3) of this paragraph, any individual who is (i) a
duly ordained, commissioned, or licensed minister of a church or a
member of a religious order (other than a member of a religious order
who has taken a vow of poverty as a member of such order) or (ii) a
Christian Science practitioner may request an exemption from the tax on
self-employment income (see section 1401 and Sec. 1.1401-1) with respect
to services performed by him in his capacity as a minister or member, or
as a Christian Science practitioner, as the case may be. Such a request
shall be made by filing an application for exemption on Form 4361 in the
manner provided in paragraph (b) of this section and within the time
specified in Sec. 1.1402(e)-3A. For provisions relating to the taxable
year or years for which an exemption from the tax on self-employment
income with respect to service performed by a minister or member or a
Christian Science practitioner in his capacity as such is effective, see
Sec. 1.1402(e)-4A. For additional provisions applicable to services
performed by individuals referred to in this subparagraph, see paragraph
(e) of Sec. 1.1402(c)-3 and Sec. 1.1402(c)-5 relating to ministers and
members of religious orders, and paragraphs (a)(3)(ii) and (b) of
Sec. 1.1402(c)-6 relating to Christian Science practitioners.
(2) The application for exemption shall contain, or there shall be
filed with such application, a statement to the effect that the
individual making application for exemption is conscientiously opposed
to, or because of religious principles is opposed to, the acceptance
(with respect to services performed by him in his capacity as a
minister, member, or Christian Science practitioner) of any public
insurance which makes payments in the event of death, disability, old
age, or retirement or makes payments toward the cost of, or provides
services for, medical care (including the benefits of any insurance
system established by the Social Security Act). Thus, ministers, members
of religious orders, and Christian Science practitioners requesting
exemption from social security coverage must meet either of two
alternative tests: (1) A religious principles test
[[Page 45]]
which refers to the institutional principles and discipline of the
particular religious denomination to which he belongs, or (2) a
conscientious opposition test which refers to the opposition because of
religious considerations of individual ministers, members of religious
orders, and Christian Science practitioners (rather than opposition
based upon the general conscience of any such individual or
individuals). The term ``public insurance'', as used in section 1402(e)
and this paragraph, refers to governmental, as distinguished from
private, insurance and does not include insurance carried with a
commercial insurance carrier. To be eligible to file an application for
exemption on Form 4361, a minister, member, or Christian Science
practitioners need not be opposed to the acceptance of all public
insurance making payments of this specified type; he must, however, be
opposed on religious grounds to the acceptance of any such payment
which, in whole or in part, is based on, or measured by earnings from,
services performed by in his capacity as a minister or member (see
Sec. 1.1402(c)-5) or in his capacity as a Christian Science practitioner
(see paragraph (b)(2) of Sec. 1.1402(c)-6). For example, a minister
performing service in the exercise of his ministry may be eligible to
file an application for exemption on Form 4361 even though he is not
opposed to the acceptance of benefits under the Social Security Act with
respect to service performed by him which is not in the exercise of his
ministry.
(3) An exemption from the tax imposed on self-employment income with
respect to service performed by a minister, member, or Christian Science
practitioner in his capacity as such may not be granted to a minister,
member, or practitioner who (in accordance with the provisions of
section 1402(e) as in effect prior to amendment by section 115(b)(2) of
the Social Security Amendments of 1967 (81 Stat. 839)) filed a valid
waiver certificate on Form 2031 electing to have the Federal old-age,
survivors, and disability insurance system establish by title II of the
Social Security Act extended to service performed by him in the exercise
of his ministry or in the exercise of duties required by the order of
which he is a member, or in the exercise of his profession as a
Christian Science practitioner. For provisions relating to waiver
certificates on Form 2031, see Secs. 1.1402(e)(1)-1 through
1.1402(e)(6)-1.
(b) Application for exemption. An application for exemption on Form
4361 shall be filed in triplicate with the internal revenue officer or
the internal revenue office, as the case may be, designated in the
instructions relating to the application for exemption. The application
for exemption must be filed within the time prescribed in
Sec. 1.1402(e)-3A. If the last original Federal income tax return of an
individual to whom paragraph (a) of this section applies which was filed
before the expiration of such time limitation for filing an application
for exemption shows no liability for tax on self-employment income, such
return will be treated as an application for exemption, provided that
before February 28, 1975 such individual also files a properly executed
Form 4361.
(c) Approval of application for exemption. The filing of an
application for exemption on Form 4361 by a minister, a member of a
religious order, or a Christian Science practitioner does not constitute
an exemption from the tax on self-employment income with respect to
services performed by him in his capacity as a minister, member, or
practitioner. The exemption is granted only if the application is
approved by an appropriate internal revenue officer. See Sec. 1.1402(e)-
4A relating to the period for which an exemption is effective.
[T.D. 7333, 39 FR 44448, Dec. 24, 1974; 39 FR 45216, Dec. 31, 1974]
Sec. 1.1402(e)-3A Time limitation for filing application for exemption.
(a) General rule. (1) Any individual referred to in paragraph (a) of
Sec. 1.1402(e)-2A who desires an exemption from the tax on self-
employment income with respect to service performed by him in his
capacity as a minister or member of a religious order or as a Christian
Science practitioner must file the application for exemption (Form 4361)
prescribed by Sec. 1.1402(e)-2A on or before whichever of the following
dates is later:
[[Page 46]]
(i) The due date of the income tax return (see section 6072),
including any extension thereof (see section 6081), for his second
taxable year ending after 1967, or
(ii) The due date of the income tax return, including any extension
thereof, for his second taxable year beginning after 1953 for which he
has net earnings from self-employment of $400 or more, any part of
which:
(a) In the case of a duly ordained, commissioned, or licensed
minister of a church, consists of remuneration for service performed in
the exercise of his ministry,
(b) In the case of a member of a religious order who has not taken a
vow of poverty as a member of such order, consists of remuneration for
service performed in the exercise of duties required by such order, or
(c) In the case of a Christian Science practitioner, consists of
remuneration for service performed in the exercise of his profession as
a Christian Science practitioner.
See paragraph (c) of this section for provisions relating to the
computation of net earnings from self-employment.
(2) If a minister, a member of a religious order, or a Christian
Science practitioner derives gross income in a taxable year both from
service performed in such capacity and from the conduct of another trade
or business, and the deductions allowed by Chapter 1 of the Internal
Revenue Code which are attributable to the gross income derived from
service performed in such capacity equal or exceed the gross income
derived from service performed in such capacity, no part of the net
earnings from self-employment (computed as prescribed in paragraph (c)
of this section) for the taxable year shall be considered as derived
from service performed in such capacity.
(3) The application of the rules set forth in subparagraphs (1) and
(2) of this paragraph may be illustrated by the following examples:
Example (1). M, who makes his income tax returns on a calendar year
basis, was ordained as a minister in January 1960. During each of two or
more taxable years ending before 1968 M has net earnings from self-
employment in excess of $400 some part of which is from service
performed in the exercise of his ministry. M has not filed an effective
waiver certificate on Form 2031 (see paragraph (a)(3) of Sec. 1.1402(e)-
2A). If M desires an exemption from the tax on self-employment income
with respect to service performed in the exercise of his ministry, he
must file an application for exemption on or before the due date of his
income tax return for 1969 (his second taxable year ending after 1967),
or any extension thereof.
Example (2). M, who makes his income tax returns on a calendar year
basis, was ordained as a minister in January 1966. M has net earnings of
$350 for the taxable year 1966 and has net earnings in excess of $400
for each of his taxable years 1967 and 1968 (some part or all of which
is derived from service performed in the exercise of his ministry). M
has not filed an effective waiver certificate on Form 2031 (see
paragraph (a)(3) of Sec. 1.1402(e)-2A). If M desires an exemption from
the tax on self-employment income with respect to service performed in
the exercise of his ministry, he must file an application for exemption
on or before the due date of his income tax return for 1969 (his second
taxable year ending after 1967), or any extension thereof.
Example (3). Assume the same facts as in example (2) except that M
has net earnings in excess of $400 for each of his taxable years 1967
and 1969 (but less than $400 in 1968). The application for exemption
must be filed on or before the due date of his income tax return for
1969, or any extension thereof.
Example (4). M was ordained as a minister in May 1973. During each
of the taxable years 1973 and 1975, M, who makes his income tax returns
on a calendar year basis, derives net earnings in excess of $400 from
his activities as a minister. M has net earnings of $350 for the taxable
year 1974, $200 of which is derived from service performed by him in the
exercise of his ministry. If M desires an exemption from the tax on
self-employment income with respect to service performed in the exercise
of his ministry, he must file an application for exemption on or before
the due date of his income tax return for 1975, or any extension
thereof.
Example (5). M, who was ordained a minister in January 1973, is
employed as a toolmaker by the XYZ Corporation for the taxable years
1973 and 1974 and also engages in activities as a minister on weekends.
M makes his income tax returns on the basis of a calendar year. During
each of the taxable years 1973 and 1974 M receives wages of $14,000 from
the XYZ Corporation and derives net earnings of $400 from his activities
as a minister. If M desires an exemption from the tax on self-employment
income with respect to service performed in the exercise of his
ministry, he must file an application for exemption on or before the due
date of his income tax return for 1974, or any extension thereof. It
should be noted that although by
[[Page 47]]
reason of section 1402(b)(1) (G) and (H) no part of the $400 represents
``self-employment income'', nevertheless the entire $400 constitutes
``net earnings from self-employment'' for purposes of fulfilling the
requirements of section 1402(e)(2).
Example (6). M, who files his income tax returns on a calendar year
basis, was ordained as a minister in March 1973. During 1973 he receives
$410 for service performed in the exercise of his ministry. In addition
to his ministerial services, M is engaged during the year 1973 in a
mercantile venture from which he derives net earnings from self-
employment in the amount of $4,000. The expenses incurred by him in
connection with his ministerial services during 1973 and which are
allowable deductions under Chapter 1 of the Internal Revenue Code amount
to $410. During 1974 and 1975, M has net earnings from self-employment
in amounts of $4,600 and $4,800, respectively, and some part of each of
these amounts is from the exercise of his ministry. The deductions
allowed in each of the years 1974 and 1975 by Chapter 1 which are
attributable to the gross income derived by M from the exercise of his
ministry in each of such years, respectively, do not equal or exceed
such gross income in such year. If M desires an exemption from the tax
on self-employment income with respect to service performed in the
exercise of his ministry, he must file an application for exemption on
or before the due date of his income tax return for 1975, or an
extension thereof.
(b) Effect of death. The right of an individual to file an
application for exemption shall cease upon his death. Thus, the
surviving spouse, administrator, or executor of a decedent shall not be
permitted to file an application for exemption for such decedent.
(c) Computation of net earnings--(1) Taxable years ending before
1968. For purposes of this section net earnings from self-employment for
taxable years ending before 1968 shall be determined without regard to
the fact that, without an election under section 1402(e) (as in effect
prior to amendment by section 115(b)(2) of the Social Security
Amendments of 1967, see Sec. 1.1402(e)-1A), the performance of services
by a duly ordained, commissioned, or licensed minister of a church in
the exercise of his ministry, or by a member of a religious order in the
exercise of duties required by such order, or the performance of service
by an individual in the exercise of his profession as a Christian
Science practitioner, does not constitute a trade or business for
purposes of the tax on self-employment income.
(2) Taxable years ending after 1967. For purposes of this section
and Sec. 1.1402(e)-4A net earnings from self-employment for taxable
years ending after 1967 shall be determined without regard to section
1402(c) (4) and (5). See Sec. 1.1402(c)-3(e)(2) and Sec. 1.1402(c)-5
relating to ministers and members of religious orders, and paragraphs
(a)(3)(ii) and (b) of Sec. 1.1402(c)-6 relating to Christian Science
practitioners.
[T.D. 7333, 39 FR 44449, Dec. 24, 1974]
Sec. 1.1402(e)-4A Period for which exemption is effective.
(a) In general. If an application for exemption on Form 4361:
(1) Is filed by a minister, a member of a religious order, or a
Christian Science practitioner eligible to file such an application (see
particularly paragraph (a) (2) and (3) of Sec. 1.1402(e)-2A), and
(2) Is approved (see paragraph (c) of Sec. 1.1402(e)-2A),
the exemption from the tax on self-employment income shall be effective
for the first taxable year ending after 1967 for which such minister,
member, or practitioner has net earnings from self-employment of $400 or
more any part of which was derived from the performance of service in
his capacity as a minister, member, or practitioner, and for all
succeeding taxable years. See, however, paragraphs (b)(1)(ii) and (d)(2)
of Sec. 1.1402(c)-5 relating to ministers and members of religious
orders and paragraph (b)(2) of Sec. 1.1402(c)-6 relating to Christian
Science practitioners.
(b) Exemption irrevocable. An exemption granted to a minister, a
member of a religious order, or a Christian Science practitioner
pursuant to the provisions of section 1402(e) is irrevocable.
[T.D. 7333, 39 FR 44450, Dec. 24, 1974]
Sec. 1.1402(e)-5A Applications for exemption from self-employment taxes filed after December 31, 1986, by ministers, certain members of religious orders, and Christian Science practitioners.
(a) In general. (1) Except as provided in paragraph (a)(2) of this
section, this section applies to any individual who is a duly ordained,
commissioned, or licensed minister of a church, member of
[[Page 48]]
a religious order (other than a member of a religious order who has
taken a vow of poverty as a member of such order), or a Christian
Science practitioner who files an application after December 31, 1986,
for exemption from the tax on self-employment income (see section 1401
and 1.1401-1) with respect to services performed by him or her in his or
her capacity as a minister, member, or practitioner pursuant to
Secs. 1.1402(e)-2A through 1.1402(e)-4A. This section does not apply to
applications for exemption under section 1402(e) that are filed before
January 1, 1987.
(2) Application of this section to Christian Science practitioners.
Paragraph (b) of this section does not apply to Christian Science
practitioners. Thus, Christian Science practitioners filing applications
for exemption from self-employment taxes under section 1402(e) should
follow the procedures set forth in Secs. 1.1402(e)-2A through 1.1402(e)-
4A, and are not required to include the statement described in paragraph
(b)(1)(ii) of this section. However, see paragraph (c) of this section
for verification procedures with respect to applications for exemption
from self-employment taxes filed after December 31, 1986, by Christian
Science practitioners.
(b) Church or order must be informed--(1) In general. Any
individual, other than a Christian Science practitioner, who files an
application for exemption from the tax on self-employment income under
section 1402(e) after December 31, 1986:
(i) Shall file such application in accordance with the procedures
set forth in Secs. 1.1402(e)-2A through 1.1402(e)-4A, and
(ii) Shall include with such application a statement to the effect
that the individual making application for exemption has informed the
ordaining, commissioning, or licensing body of the church or order that
he or she is opposed to the acceptance (for services performed as a
minister or member of a religious order not under a vow of poverty) of
any public insurance that makes payments in the event of death,
disability, old age, or retirement, or that makes payments toward the
cost of, or provides services for, medical care (including the benefits
of any insurance system established by the Social Security Act).
(2) Statement to be filed with form. If the form provided by the
Service for applying for exemption under 1402(e) does not contain the
statement set forth in paragraph (b)(1)(ii) of this section, any
individual required to include this statement with his or her
application under this paragraph (b) shall file such statement with the
individual's application at the time and place prescribed for filing
such application under Secs. 1.1402(e)-2A and 1.1402(e)-3A. The
statement shall contain the information set forth in paragraph
(b)(1)(ii) of this section and shall be signed by such individual under
penalties of perjury.
(c) Verification of application--(1) In general. The Service will
approve an application for an exemption filed by an individual to whom
this section applies only after verifying that the individual applying
for the exemption is aware of the grounds on which the individual may
receive an exemption under section 1402(e) (See Sec. 1.1402(e)-2A) and
that the individual seeks exemption on such grounds in accordance with
the procedures set forth in paragraph (c)(2) of this section.
(2) Verification procedure. Upon receipt of an application for
exemption from self-employment taxes under section 1402(e) and this
section, the Service will mail to the applicant a statement that
describes the grounds on which an individual may receive an exemption
under section 1402(e). The individual filing the application shall
certify that he or she has read the statement and that he or she seeks
exemption from self-employment taxes on the grounds listed in the
statement. The certification shall be made by signing a copy of the
statement under penalties of perjury and mailing the signed copy to the
Service Center from which the statement was issued not later than 90
days after the date on which the statement was mailed to the individual.
If the signed copy of the statement is not mailed to the Service Center
within 90 days of the date on which the statement was mailed to the
individual, that individual's exemption will not be effective until the
date that
[[Page 49]]
the signed copy of the statement is received at the Service Center.
[T.D. 8136, 52 FR 12162, Apr. 15, 1987, redesignated and amended at T.D.
8221, 53 FR 33461, Aug. 31, 1988]
Sec. 1.1402(e)(1)-1 Election by ministers, members of religious orders, and Christian Science practitioners for self-employment coverage.
(a) In general. Any individual who is (1) a duly ordained,
commissioned, or licensed minister of a church or a member of a
religious order (other than a member of a religious order who has taken
a vow of poverty as a member of such order) or (2) a Christian Science
practitioner may elect to have the Federal old-age, survivors, and
disability insurance system established by title II of the Social
Security Act extended to service performed by him in the exercise of his
ministry or in the exercise of duties required by such order, or in the
exercise of his profession as a Christian Science practitioner, as the
case may be. Such an election shall be made by filing a certificate on
Form 2031 in the manner provided in paragraph (b) of this section and
within the time specified in Sec. 1.1402(e)(2)-1. If a minister or
member to whom this section has application, or a Christian Science
practitioner, makes an election by filing Form 2031 such individual
shall, for each taxable year for which the election is effective (see
Sec. 1.1402(e)(3)-1), be considered as carrying on a trade or business
with respect to the performance of service in his capacity as a minister
or member, or as a Christian Science practitioner, as the case may be.
(b) Waiver certificate. The certificate on Form 2031 shall be filed
in triplicate with the district director of internal revenue for the
internal revenue district in which is located the legal residence or
principal place of business of the individual who executes the
certificate. If such individual has no legal residence or principal
place of business in any internal revenue district, the certificate
shall be filed with the Director of International Operations, Internal
Revenue Service, Washington, DC 20225, or at such other address as is
designated in the instructions relating to the certificate. The
certificate must be filed within the time prescribed in
Sec. 1.1402(e)(2)-1. If an individual to whom paragraph (a) of this
section has application submits to a district director of internal
revenue a dated and signed statement indicating that he desires to have
the Federal old-age, survivors, and disability insurance system
established by title II of the Social Security Act extended to his
services, such statement will be treated as a waiver certificate, if
filed within the time specified in Sec. 1.1402(e)(2)-1, provided that
without unnecessary delay such statement is supplemented by a properly
executed Form 2031. An application for a social security account number
filed on Form SS-5 or the filing of an income tax return showing an
amount representing self-employment income or self-employment tax shall
not be construed to constitute an election referred to in
Sec. 1.1402(e)(1)-1.
Sec. 1.1402(e)(2)-1 Time limitation for filing waiver certificate.
(a) General rule. (1) Any individual referred to in
Sec. 1.1402(e)(1)-1 who desires to have the Federal old-age, survivors,
and disability insurance system established by title II of the Social
Security Act extended to his services must file the waiver certificate
(Form 2031) prescribed by Sec. 1.1402(e)(1)-1 on or before whichever of
the following dates is later:
(i) The due date of the income tax return (see section 6072),
including any extension thereof (see section 6081), for his second
taxable year ending after 1963; or
(ii) The due date of the income tax return, including any extension
thereof, for his second taxable year ending after 1954 for which he has
net earnings from self-employment (computed as prescribed in paragraph
(c) of this section) of $400 or more, any part of which:
(a) In the case of a duly ordained, commissioned, or licensed
minister of a church, consists of remuneration for service performed in
the exercise of his ministry,
(b) In the case of a member of a religious order who has not taken a
vow of poverty as a member of such order, consists of remuneration for
service
[[Page 50]]
performed in the exercise of duties required by such order, or
(c) In the case of a Christian Science practitioner, consists of
remuneration for service performed in the exercise of his profession as
a Chrsitian Science practitioner.
(2) If a minister, a member of a religious order, or a Christian
Science practitioner derives gross income in a taxable year both from
service performed in such capacity and from the conduct of another trade
or business, and the deductions allowed by chapter 1 of the Internal
Revenue Code which are attributable to the gross income derived from
service performed in such capacity equal or exceed the gross income
derived from service performed in such capacity, no part of the net
earnings from self-employment (computed as prescribed in paragraph (c)
of this section) for the taxable year shall be considered as derived
from service performed in such capacity.
(3) The application of the rules set forth in subparagraphs (1) and
(2) of this paragraph may be illustrated by the following examples:
Example (1). M was ordained as a minister in May 1963. During each
of the taxable years 1963 and 1966, M, who makes his income tax returns
on a calendar year basis, derives net earnings in excess of $400 from
his activities as a minister. M has net earnings of $350 for each of the
taxable years 1964 and 1965, $200 of which is derived from service
performed by him as a minister. If M wishes to have the Federal old-age,
survivors, and disability insurance system established by title II of
the Social Security Act extended to his service as a minister, he must
file the waiver certificate on or before the due date of his income tax
return for 1966, or any extension thereof.
Example (2). M, who was ordained a minister in January 1965, is
employed as a toolmaker by the XYZ Corporation for the taxable years
1965 and 1966 and also engages in activities as a minister on weekends.
M makes his income tax return on the basis of a calendar year. During
each of the taxable years 1965 and 1966, M receives wages of $4,800 from
the XYZ Corporation and derives $400 (all of which constitutes net
earnings from self-employment computed as prescribed in paragraph (c) of
this section) from his activities as a minister. In such case if M
wishes to have the Federal old-age, survivors, and disability insurance
system established by title II of the Social Security Act extended to
his services as a minister, he must file the waiver certificate on or
before the due date of his income tax return for 1966, or any extension
thereof. A waiver certificate filed after such date will be invalid. It
should be noted that although by reason of section 1402(b)(1)(C) no part
of the $400 for the taxable year 1965 represents ``self-employment
income'', nevertheless the entire $400 constitutes ``net earnings from
self-employment'' for purposes of fulfilling the requirements of section
1402(e)(2).
Example (3). M, who files his income tax returns on a calendar year
basis, was ordained as a minister in June 1964. During 1964 he receives
$410 for services performed in the exercise of his ministry. In addition
to his ministerial services, M is engaged during the year 1964 in a
mercantile venture from which he derives net earnings from self-
employment in the amount of $1,000. The expenses incurred by him in
connection with his ministerial services during 1964 and which are
allowable deductions under Chapter 1 of the Internal Revenue Code amount
to $410. During 1965 and 1966, M has net earnings from self-employment
in amounts of $1,200 and $1,500, respectively, and some part of each of
these amounts is from the exercise of his ministry. The deductions
allowed in each of the years 1965 and 1966 by Chapter 1 which are
attributable to the gross income derived by M from the exercise of his
ministry in each of such years, respectively, do not equal or exceed
such gross income in such year. If M wishes to have the Federal old-age,
survivors, and disability insurance system established by Title II of
the Social Security Act extended to his service as a minister, he must
file a waiver certificate on or before the due date of his income tax
return (including any extension thereof) for 1966.
Example (4). M, a licensed minister who makes his income tax returns
on the basis of a calendar year, derived net earnings of $400 or more
from the exercise of his ministry for two or more of the taxable years
1955 to 1965, inclusive. In such case, if M wishes to have the Federal
old-age, survivors, and disability insurance system established by Title
II of the Social Security Act extended to his services as a minister, he
must file the waiver certificate on or before the due date (April 15,
1966) prescribed for filing his income tax return for 1965, or any
extension thereof. A waiver certificate filed after such date will be
invalid.
(b) Effect of death. Except as provided in Secs. 1.1402(e)(5)-1,
1.1402(e) (5)-2, and 1.1402(e)(6)-1, the right of an individual to file
a waiver certificate shall cease from his death. Thus, except as
provided in such sections, the surviving spouse, administrator, or
executor of a decedent shall not be permitted to file a waiver
certificate for such decedent.
[[Page 51]]
(c) Computation of net earnings without regard to election. For the
purpose of this section net earnings from self-employment shall be
determined without regard to the fact that, without an election under
section 1402(e), the performance of services by a duly ordained,
commissioned, or licensed minister of a church in the exercise of his
ministry, or by a member of a religious order in the exercise of duties
required by such order, or the performance of service by an individual
in the exercise of his profession as a Christian Science practitioner,
does not constitute a trade or business for purposes of the tax on self-
employment income.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR
15938, Oct. 30, 1968]
Sec. 1.1402(e)(3)-1 Effective date of waiver certificate.
(a) Filed before August 31, 1957--(1) In general. A certificate on
Form 2031 filed by an individual before August 31, 1957, in accordance
with the provisions of section 1402(e) in effect at the time the
certificate is filed, shall be effective for the first taxable year with
respect to which it is filed, and all subsequent taxable years. In order
for a certificate filed by an individual before August 31, 1957, to be
effective under section 1402(e), the certificate must be made effective
for either the first or second taxable year ending after 1954 in which
the individual has net earnings from self-employment of $400 or more
(determined as provided in paragraph (c) of Sec. 1.1402(e)(2)-1) some
part of which is derived from service of the character with respect to
which an election may be made. However, a certificate on Form 2031,
filed before August 31, 1957, even though filed within the time
specified in paragraph (a)(1)(ii) of Sec. 1.1402(e)(2)-1, may not be
effective, except as provided in subparagraph (2) of this paragraph, for
any taxable year with respect to which the due date for filing the
individual's income tax return (including any extension thereof) has
expired at the time such certificate is filed. Further, a certificate on
Form 2031 may not be effective for any taxable year ending before 1955.
In order for a certificate filed before August 31, 1957, except for the
filing of a supplemental certificate, to be effective for the first or
second taxable year ending after 1954 in which the individual has net
earnings from self-employment (determined as provided in paragraph (c)
of Sec. 1.1402(e)(2)-1) some part of which is derived from service of
the character with respect to which an election may be made, the
certificate on Form 2031 must be filed on or before the due date for
filing the income tax return of the individual for such first or second
taxable year, respectively, or any extension thereof.
(2) Supplemental certificates--(i) Filed before due date of 1958
return. If under subparagraph (1) of this paragraph the certificate is
effective only for the individual's third or fourth taxable year ending
after 1954 and all succeeding taxable years, the individual may make
such a certificate effective for his first taxable year ending after
1955 and all succeeding taxable years by filing a supplemental
certificate on Form 2031. To be valid the supplemental certificate must
be filed after August 30, 1957, and on or before the due date of the
return (including any extension thereof) for his second taxable year
ending after 1956 and must be otherwise in accordance with
Sec. 1.1402(e)(1)-1.
Example. M, who files his income tax returns on a calendar year
basis, was ordained as a minister in 1956, and his net earnings from
service performed in the exercise of his ministry during such year were
$400 or more. M had no net earnings from the exercise of his ministry
during 1957. On July 15, 1957, M filed a waiver certificate and
indicated thereon that it was to become effective for the taxable year
1958. At the time of filing, the certificate was effective for 1958 and
all succeeding taxable years. Since the certificate was not filed on or
before April 15, 1957 (the due date of M's income tax return for the
taxable year 1956), and since there was no extension of time for filing
his 1956 income tax return, the certificate was not, at the time of
filing, effective for the taxable year 1956. M files a supplemental
certificate on April 15, 1958. By the filing of the supplemental
certificate, the certificate filed by M on July 15, 1957, was made
effective for the year 1956 and all succeeding taxable years.
(ii) Filed after September 13, 1960, and on or before April 16,
1962. If under subparagraph (1) of this paragraph the certificate is
effective only for the individual's first taxable year ending after 1956
and all succeeding taxable years,
[[Page 52]]
the individual may make such certificate effective for his first taxable
year ending after 1955 and all succeeding taxable years by:
(a) Filing a supplemental certificate on Form 2031 after September
13, 1960, and before April 17, 1962;
(b) Paying on or before April 16, 1962, the tax under section 1401
in respect of all the individual's self-employment income (except for
underpayments of tax attributable to errors made in good faith) for his
first taxable year ending after 1955; and
(c) By repaying on or before April 16, 1962, the amount of any
refund (including any interest paid under section 6611) that has been
made of any such tax which (but for section 1402(e)(3)(B)) is an
overpayment.
Any payment or repayment described in section 1402(e)(3)(B) and in this
subparagraph shall not constitute an overpayment within the meaning of
section 6401 which relates to amounts treated as overpayments. See
section 6401 and the regulations thereunder in part 301 of this chapter
(Regulations on Procedure and Administration).
Example. M, who files his income tax returns on a calendar year
basis, was ordained as a minister in 1956, and his net earnings from
service performed in the exercise of his ministry during each of the
years 1956 and 1957 were $400 or more. On July 15, 1957, M filed a
waiver certificate which became effective, at the time of filing, for
1957 and all succeeding taxable years. Since the certificate was not
filed on or before April 15, 1957 (the due date of M's income tax return
for the taxable year 1956), and since there was no extension of time for
filing his 1956 income tax return, the certificate was not, at the time
of filing, effective for the taxable year 1956. M files a supplemental
certificate on April 17, 1961. If, in addition to the filing of the
supplemental certificate, M pays on or before April 16, 1962, the self-
employment tax in respect of all his self-employment income (except for
underpayments of tax attributable to errors made in good faith) for his
taxable year 1956, and repays, on or before April 16, 1962, the amount
of any refund (including any interest paid under section 6611) that has
been made of any such tax which (but for section 1402(e)(3)(B)) is an
overpayment, the certificate filed by M on July 15, 1957, becomes
effective for the year 1956 and all succeeding taxable years.
(b) Filed after August 30, 1957, and before the due date of the 1958
return. A certificate on Form 2031 filed by an individual after August
30, 1957, but on or before the due date of the return (including any
extension thereof) for his second taxable year ending after 1956, in
accordance with the provisions of section 1402(e) in effect at the time
the certificate is filed, shall be effective for his first taxable year
ending after 1955, and all subsequent taxable years.
(c) Filed after due date of 1958 return--(1) In general. Except as
otherwise provided in Sec. 1.1402(e)(5)-1 (applicable to certificates
filed within the period September 14, 1960, to April 16, 1962,
inclusive) and in subparagraphs (2) and (3) of this paragraph, a
certificate on Form 2031 filed by an individual in accordance with the
provisions of Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after
the due date of the return (including any extension thereof) for his
second taxable year ending after 1956 shall be effective for the taxable
year immediately preceding the earliest taxable year for which, at the
time the certificate is filed, the period for filing a return (including
any extension thereof) has not expired, and for all succeeding taxable
years.
Example. M, a duly ordained minister of a church, makes his income
tax returns on the basis of a calendar year. M has not been granted an
extension of time for filing any return. On April 15, 1963, the due date
of his income tax return for 1962, M files a waiver certificate pursuant
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in
Sec. 1.1402(e)(2)-1. On April 15, 1963, the year 1962 is the earliest
taxable year for which the period for filing a return has not expired.
Consequently, M's certificate is effective for 1961 and all succeeding
taxable years. M must report and pay any self-employment tax due for
1961 and 1962. (The tax, if any, for 1962 is due on April 15, 1963.)
Inasmuch as the due date of the tax for 1961 is April 16, 1962, M must
pay interest on any tax due for 1961. For provisions relating to such
interest, see Sec. 301.6601-1 of Part 301 of this chapter (Regulations
on Procedure and Administration).
(2) Filed after October 13, 1964, and on or before the due date of
return for second taxable year ending after 1962. A certificate on Form
2031 filed by an individual in accordance with the provisions of
Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after October 13,
1964, and on or before the due date of the return (including any
extension thereof) for his second taxable year ending after
[[Page 53]]
1962 (April 15, 1965, in the case of a calendar year taxpayer who has
not been granted an extension of time for filing his income tax return
for 1964) shall be effective for his first taxable year ending after
1961 and all succeeding taxable years.
Example. M, a duly ordained minister of a church, makes his income
tax returns on the basis of a calendar year. M has not been granted an
extension of time for filing any return. On April 15, 1965, the due date
of his income tax return for 1964, M files a waiver certificate pursuant
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in
Sec. 1.1402(e)(2)-1. M's certificate is effective for 1962 and all
succeeding taxable years, and he must report and pay any self-employment
tax due for 1962, 1963, and 1964. (The tax, if any, for 1964 is due on
April 15, 1965.) Inasmuch as the due dates of the tax for 1962 and 1963
are April 15, 1963, and April 15, 1964, respectively, M must pay
interest on any tax due for 1962 or 1963. For provisions relating to
such interest, see Sec. 301.6601-1 of Part 301 of this chapter
(Regulations on Procedure and Administration).
(3) Filed after July 30, 1965, and on or before the due date of
return for second taxable year ending after 1963. A certificate on Form
2031 filed by an individual in accordance with the provisions of
Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after July 30, 1965,
and on or before the due date of the return (including any extension
thereof) for his second taxable year ending after 1963 (Apr. 15, 1966,
in the case of a calendar year taxpayer who has not been granted an
extension of time for filing his income tax return for 1965) shall be
effective for his first taxable year ending after 1962 and all
succeeding taxable years.
Example. M, a duly ordained minister of a church, makes his income
tax returns on the basis of a calendar year. M has not been granted an
extension of time for filing any return. On April 15, 1966, the due date
of his income tax return for 1965, M files a waiver certificate pursuant
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in
Sec. 1.1402(e)(2)-1. M's certificate is effective for 1963 and all
succeeding taxable years, and he must report and pay any self-employment
tax due for 1963, 1964, and 1965. (The tax, if any, for 1965 is due on
April 15, 1966.) Inasmuch as the due dates of the tax for 1963 and 1964
are April 15, 1964, and April 15, 1965, respectively, M must pay
interest on any tax due for 1963 or 1964. For provisions relating to
such interest, see Sec. 301.6601-1 of Part 301 of this chapter
(Regulations on Procedure and Administration).
(d) Election irrevocable. An election which has become effective
pursuant to this section is irrevocable. A certificate may not be
withdrawn after June 30, 1961.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR
15939, Oct. 30, 1968]
Sec. 1.1402(e)(4)-1 Treatment of certain remuneration paid in 1955 and 1956 as wages.
If in 1955 or 1956 an individual was paid remuneration for service
described in section 3121(b)(8)(A) which was erroneously treated by the
organization employing him (under a certificate filed by such
organization pursuant to section 3121(k) or the corresponding section of
prior law) as employment, within the meaning of the Federal Insurance
Contributions Act (Chapter 21 of the Internal Revenue Code), and if on
or before August 30, 1957, the taxes imposed by sections 3101 and 3111
were paid (in good faith and upon the assumption that the insurance
system established by title II of the Social Security Act had been
extended to such service) with respect to any part of the remuneration
paid to such individual for such service, then the remuneration with
respect to which such taxes were paid, and with respect to which no
credit or refund of such taxes (other than a credit or refund which
would be allowable if such service had constituted employment) has been
obtained either by the employer or the employee on or before August 30,
1957, shall be deemed, for purposes of the Self-Employment Contributions
Act of 1954 and the Federal Insurance Contributions Act, to constitute
remuneration paid for employment and not net earnings from self-
employment. For regulations relating to section 3121(b)(8)(A) and (k),
see Secs. 31.3121(b)(8)-1 and 31.3121(k)-1 of subpart B of part 31 of
this chapter (Employment Tax Regulations).
Sec. 1.1402(e)(5)-1 Optional provision for certain certificates filed before April 15, 1962.
(a) Certificates. (1) The optional provision contained in section
1402(e)(5)(A) may be applied to a certificate on
[[Page 54]]
Form 2031 filed within the period September 14, 1960, to April 16, 1962,
inclusive, in the case of a duly ordained, commissioned, or licensed
minister of a church, a member of a religious order (other than a member
of a religious order who has taken a vow of poverty as a member of such
order), or a Christian Science practitioner, who has derived net
earnings, in any taxable year ending after 1954 and before 1960, from
the performance of service in the exercise of his ministry, in the
exercise of duties required by his religious order, or in the exercise
of his profession as a Christian Science practitioner, respectively, and
who has reported such earnings as self-employment income on a return
filed before September 14, 1960, and on or before the date prescribed
for filing such return (including any extension thereof). The
certificate may be filed by such minister, member of a religious order,
or Christian Science practitioner or by a fiduciary acting for such
individual or his estate, or by his survivor within the meaning of
section 205(c)(1)(C) of the Social Security Act, and it must be filed
after September 13, 1960, and on or before April 16, 1962. Subject to
the conditions stated in subparagraph (2) of this paragraph, such
certificate may be effective at the election of the person filing it,
for the first taxable year ending after 1954 and before 1960 for which a
return, as described in the first sentence of this subparagraph, was
filed, and for all succeeding taxable years, rather than for the period
prescribed in Sec. 1.1402(e)(3)-1. The election for retroactive
application of the certificate may be made by indicating on the
certificate the first taxable year for which it is to be effective and
that such year is the first taxable year ending after 1954 and before
1960 for which the minister, member of a religious order, or Christian
Science practitioner filed an income tax return on which he reported net
earnings for such year from the exercise of his ministry, the exercise
of duties required by his religious order, or the exercise of his
profession as a Christian Science practitioner, as the case may be, and
by fulfilling the conditions prescribed in subparagraph (2) of this
paragraph.
(2) A certificate to which subparagraph (1) of this paragraph
relates may be effective for a taxable year prior to the taxable year
immediately preceding the earliest taxable year for which, at the time
the certificate is filed, the period for filing a return (including any
extension thereof) has not expired, only if the following conditions are
met:
(i) The tax under section 1401 is paid on or before April 16, 1962,
in respect of all self-employment income (whether or not derived from
the performance of service by the individual in the exercise of his
ministry, in the exercise of duties required by his religious order, or
in the exercise of his profession as a Christian Science practitioner,
as the case may be) for the first taxable year ending after 1954 and
before 1960 for which such individual has filed a return, as described
in subparagraph (1) of this paragraph, and for each succeeding taxable
year ending before 1960; and
(ii) In any case where refund has been made of any such tax which
(but for section 1402(e)(5)) is an overpayment, the amount refunded
(including any interest paid under section 6611) is repaid on or before
April 16, 1962. For regulations under section 6611 (relating to interest
on overpayments), see Sec. 301.6611-1 of part 301 of this chapter
(Regulations on Procedure and Administration).
(b) Supplemental certificates. (1) Subject to the conditions stated
in subparagraph (2) of this paragraph, a certificate on Form 2031 filed
on or before September 13, 1960, by a minister, member of a religious
order, or a Christian Science practitioner described in paragraph (a)(1)
of this section and which (but for section 1402(e)(5)(B)) is ineffective
for the first taxable year ending after 1954 and before 1959 for which
such a return as described in paragraph (a)(1) of this section was filed
by such individual, shall be effective for such first taxable year and
for all succeeding taxable years, provided a supplemental certificate is
filed by such individual or by a fiduciary acting for him or his estate,
or by his survivor (within the meaning of section 205(c)(1)(C) of the
Social Security Act),
[[Page 55]]
after September 13, 1960 and on or before April 16, 1962.
(2) The filing of a supplemental certificate pursuant to
subparagraph (1) of this paragraph will give retroactive effect to a
certificate to which such subparagraph applies only if the following
conditions are met:
(i) The tax under section 1401 is paid on or before April 16, 1962,
in respect of all self-employment income (whether or not attributable to
earnings as a minister, member of a religious order, or Christian
Science practitioner) for the first taxable year for which the
certificate is retroactively effective and for each subsequent year
ending before 1959; and
(ii) In any case where refund has been made of any such tax which
(but for section 1402(d)(5)) is an overpayment, the amount refunded
(including any interest paid under section 6611) is repaid on or before
April 16, 1962.
(c) Underpayment of tax. For purposes of this section, any
underpayment of the tax which is attributable to an error made in good
faith will not invalidate an election which is otherwise valid.
(d) Nonapplicability of section 6401. Any payment or repayment
described in paragraph (a)(2) or paragraph (b)(2) of this section shall
not constitute an overpayment within the meaning of section 6401 which
relates to amounts treated as overpayments. For the provisions of
section 6401 and the regulations thereunder, see section 6401 and
Sec. 301.6401-1 of part 301 of this chapter (Regulations on Procedure
and Administration).
Sec. 1.1402(e)(5)-2 Optional provisions for certain certificates filed on or before April 17, 1967.
(a) In general--(1) General rule. Section 1402(e)(5), as amended by
the Social Security Amendments of 1965, applies only in the case of a
duly ordained, commissioned, or licensed minister of a church, a member
of a religious order (other than a member of a religious order who has
taken a vow of poverty as a member of such order), or a Christian
Science practitioner, who has derived net earnings in any taxable year
ending after 1954 from the performance of service in the exercise of his
ministry, in the exercise of duties required by his religious order, or
in the exercise of his profession as a Christian Science practitioner,
respectively, and who has reported such earnings as self-employment
income on a return filed on or before the date prescribed for filing
such return (including any extension thereof).
(2) Supplemental certificate. Subject to the conditions stated in
subparagraph (4) of this paragraph, a certificate on Form 2031 filed on
or before April 15, 1966, by a minister, member of a religious order, or
a Christian Science practitioner described in subparagraph (1) of this
paragraph and which (but for section 1402(e)(5)(A)) is ineffective for
the first taxable year ending after 1954 for which a return described in
subparagraph (1) of this paragraph was filed by such individual, shall
be effective for such first taxable year and for all succeeding taxable
years, provided a supplemental certificate is filed by such individual
or by a fiduciary acting for him or his estate, or by his survivor
(within the meaning of section 205(c)(1)(C) of the Social Security Act),
after July 30, 1965 (the date of enactment of the Social Security
Amendments of 1965), and on or before April 17, 1967.
(3) Certificate filed by survivor. A survivor (within the meaning of
section 205(c)(1)(C) of the Social Security Act) of an individual who:
(i) Died on or before April 15, 1966,
(ii) Was a minister, member of a religious order, or a Christian
Science practitioner described in subparagraph (1) of this paragraph,
(iii) Has filed a return as described in subparagraph (1) of this
paragraph for a taxable year ending after 1954, and
(iv) Had not filed a valid waiver certificate on Form 2031,
may file a certificate on Form 2031 on behalf of such individual. The
certificate must be filed after July 30, 1965 (the date of enactment of
the Social Security Amendments of 1965), and on or before April 17,
1967. Subject to the conditions stated in subparagraph (4) of this
paragraph, such certificate shall be effective for the first taxable
year ending after 1954 for which a return, as described in subparagraph
(1) of this
[[Page 56]]
paragraph, was filed by such individual and for all succeeding taxable
years.
(4) Applicable conditions. A supplemental certificate referred to in
subparagraph (2) of this paragraph and a certificate referred to in
subparagraph (3) of this paragraph shall be effective only if the
following conditions are met:
(i) The tax under section 1401 is paid on or before April 17, 1967,
in respect of all self-employment income (whether or not attributable to
earnings as a minister, member of a religious order, or Christian
Science practitioner) for the first taxable year ending after 1954 for
which the individual (by or in respect of whom the supplemental
certificate or certificate is filed) has filed a return, as described in
paragraph (1) of this paragraph, and for each succeeding taxable year
ending before January 1, 1966; and
(ii) In any case where refund has been made of any such tax which
(but for section 1402(e)(5)) is an overpayment, the amount refunded
(including any interest paid under section 6611) is repaid on or before
April 17, 1967. For regulations under section 6611 (relating to interest
on overpayments), see Sec. 301.6611-1 of part 301 of this chapter
(Regulations on Procedure and Administration).
(b) Underpayment of tax. For purposes of this section, any
underpayment of the tax which is attributable to an error made in good
faith will not invalidate an election which is otherwise valid.
(c) Nonapplicability of section 6401. Any payment or repayment
described in paragraph (a)(4) of this section shall not constitute an
overpayment within the meaning of section 6401 which relates to amounts
treated as overpayments. For the provisions of section 6401 and the
regulations thereunder, see section 6401 and Sec. 301.6401-1 of part 301
of this chapter (Regulations on Procedure and Administration).
(d) Applicability of Secs. 1.1402(e) (5)-1 and 1.1402(e)(6)-1. The
provisions of section 1402(e) (5) and (6) (in effect prior to July 30,
1965, the date of enactment of the Social Security Amendments of 1965)
and Secs. 1.1402(e) (5)-1 and 1.1402(e)(6)-1 shall apply with respect to
any certificate filed pursuant to such sections if a supplemental
certificate is not filed with respect to such certificate as provided in
this section.
[T.D. 6978, 33 FR 15939, Oct. 30, 1968]
Sec. 1.1402(e)(6)-1 Certificates filed by fiduciaries or survivors on or before April 15, 1962.
In any case in which an individual whose death has occurred after
September 12, 1960, and before April 16, 1962, derived earnings from the
performance of services as a duly ordained, commissioned, or licensed
minister of a church in the exercise of his ministry, as a member of a
religious order (other than a member of a religious order who has taken
a vow of poverty as a member of such order) in the exercise of duties
required by such order, or in the exercise of his profession as a
Christian Science practitioner, a waiver certificate on Form 2031 may be
filed after June 30, 1961 (the date of enactment of the Social Security
Amendments of 1961), and on or before April 16, 1962, by a fiduciary
acting for such individual's estate or by such individual's survivor
within the meaning of section 205(c)(1)(C) of the Social Security Act.
Such certificates shall be effective for the period prescribed in
section 1402(e)(3)(A) (see Sec. 1.1402(e)(3)-1(c)) as if filed by the
individual on the date of his death.
Sec. 1.1402(f)-1 Computation of partner's net earnings from self-employment for taxable year which ends as result of his death.
(a) Taxable years ending after August 28, 1958--(1) In general. The
rules for the computation of a partner's net earnings from self-
employment are set forth in paragraphs (d) to (g), inclusive, of
Sec. 1.1402(a)-2. In addition to the net earnings from self-employment
computed under such rules for the last taxable year of a deceased
partner, if a partner's taxable year ends after August 28, 1958, solely
because of death, and on a day other than the last day of the
partnership's taxable year, the deceased partner's net earnings from
self-employment for such year shall also include so much of the deceased
partner's distributive share of partnership ordinary income or loss (see
subparagraph (3) of this paragraph) for the taxable
[[Page 57]]
year of the partnership in which his death occurs as is attributable to
an interest in the partnership prior to the month following the month of
his death.
(2) Computation. (i) The deceased partner's distributive share of
partnership ordinary income or loss for the partnership taxable year in
which he died shall be determined by applying the rules contained in
paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-2, except that
paragraph (e) shall not apply.
(ii) The portion of such distributive share to be included under
this section in the deceased partner's net earnings from self-employment
for his last taxable year shall be determined by treating the ordinary
income or loss constituting such distributive share as having been
realized or sustained ratably over the period of the partnership taxable
year during which the deceased partner had an interest in the
partnership and during which his estate, or any other person succeeding
by reason of his death to rights with respect to his partnership
interest, held such interest in the partnership or held a right with
respect to such interest. The amount to be included under this section
in the deceased partner's net earnings from self-employment for his last
taxable year will, therefore, be determined by multiplying the deceased
partner's distributive share of partnership ordinary income or loss for
the partnership taxable year in which he died, as determined under
subdivision (i) of this subparagraph, by a fraction, the denominator of
which is the number of calendar months in the partnership taxable year
over which the ordinary income or loss constituting the deceased
partner's distributive share of partnership income or loss for such year
is treated as having been realized or sustained under the preceding
sentence and the numerator of which is the number of calendar months in
such partnership taxable year that precede the month following the month
of his death.
(3) Definition of ``deceased partner's distributive share''. For the
purpose of this section, the term ``deceased partner's distributive
share'' includes the distributive share of his estate or of any other
person succeeding, by reason of his death, to rights with respect to his
partnership interest. It does not include any share attributable to a
partnership interest which was not held by the deceased partner at the
time of his death. Thus, if a deceased partner's estate should acquire
an interest in a partnership additional to the interest to which it
succeeded upon the death of the deceased partner, the amount of the
distributive share attributable to such additional interest acquired by
the estate would not be included in computing the ``deceased partner's
distributive share'' of the partnership's ordinary income or loss for
the partnership taxable year.
(4) Examples. The application of this paragraph may be illustrated
by the following examples:
Example (1). B, an individual who files his income tax returns on
the calendar year basis, is a member of the ABC partnership, the taxable
year of which ends on June 30. B dies on October 17, 1958, and his
estate succeeds to his partnership interest and continues as a partner
in its own right under local law until June 30, 1959. B's distributive
share of the partnership's ordinary income, as determined under
paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-2, for the taxable
year of the partnership ended June 30, 1958 is $2,400. His distributive
share, including the share of his estate, of such partnership's ordinary
income, as determined under paragraphs (d) to (g), inclusive, of
Sec. 1.1402(a)-2 (with the exception of paragraph (e)), for the taxable
year of the partnership ended June 30, 1959 is $4,500. The portion of
such $4,500 attributable to an interest in the partnership prior to the
month following the month in which he died is $4,500 x 4/12 (4 being the
number of months in the partnership taxable year in which B died which
precede the month following the month of his death and 12 being the
number of months in such partnership taxable year in which B and his
estate had an interest in the partnership) or $1,500. The amount to be
included in the deceased partner's net earnings from self-employment for
his last taxable year is $3,900 ($2,400 plus $1,500).
Example (2). If in the preceding example B's estate is entitled to
only $1,000, the amount of B's distributive share of partnership
ordinary income for the period July 1, 1958 through October 17, 1958,
such $1,000 is considered to have been realized ratably over the period
preceding B's death and will be included in B's net earnings from self-
employment for his last taxable year.
Example (3). X, who reports his income on a calendar year basis, is
a member of a partnership which also reports its income on a
[[Page 58]]
calendar year basis. X dies on June 30, 1959, and his estate succeeds to
his partnership interest and continues as a partner in its own right
under local law. On September 15, 1959, X's estate sells the partnership
interest to which it succeeded on the death of X. X's distributive share
of partnership income for 1959 is $5,500. $600 of such amount is X's
share of the gain from the sale of a capital asset which occurs on May
1, 1959, and $400 of such amount is the estate's share of the gain from
the sale of a capital asset which occurs on July 15, 1959. The remainder
of such amount is income from services rendered. X's distributive share
of partnership ordinary income for 1959, as determined under paragraphs
(d) to (g), inclusive, of Sec. 1.1402(a)-2 (with the exception of
paragraph (e)), is $4,500 ($5,500 minus $1,000). The portion of such
share attributable to an interest in the partnership prior to the month
following the month of his death is $4,500 x 6/8.5 (6 being the number
of months in the partnership taxable year in which X died as precede the
month following the month of his death and 8.5 being the number of
months in such partnership taxable year in which X and his estate had an
interest in the partnership) or $3,176.47.
(b) Options available to farmers--(1) Special rule. In determining
whether the optional method available to a member of a farm partnership
in computing his net earnings from self-employment may be applied, and
in applying such method, it is necessary to determine the partner's
distributive share of partnership gross income and the partner's
distributive share of income described in section 702(a)(9). See section
1402(a) and Sec. 1.1402(a)-15. If section 1402(f) and this section
apply, or may be made applicable under section 403(b)(2) of the Social
Security Amendments of 1958 and paragraph (c) of this section, for the
last taxable year of a deceased partner, such partner's distributive
share of income described in section 702(a)(9) for his last taxable year
shall be determined by including therein any amount which is included
under section 1402(f) and this section in his net earnings from self-
employment for such taxable year. Such a partner's distributive share of
partnership gross income for his last taxable year shall be determined
by including therein so much of the deceased partner's distributive
share (see paragraph (a)(3) of this section) of partnership gross
income, as defined in section 1402(a) and paragraph (b) of
Sec. 1.1402(a)-15, for the partnership taxable year in which he died as
is attributable to an interest in the partnership prior to the month
following the month of his death. Such allocation shall be made in the
same manner as is prescribed in paragraph (a)(2) of this section for
determining the portion of a deceased partner's distributive share of
partnership ordinary income or loss to be included under section 1402(f)
and this section in his net earnings from self-employment for his last
taxable year.
(2) Examples. The principles set forth in this paragraph may be
illustrated by the following examples:
Example (1). X, an individual who files his income tax returns on a
calendar year basis, is a member of the XYZ farm partnership, the
taxable year of which ends on March 31. X dies on May 31, 1967, and his
estate succeeds to his partnership interest and continues as a partner
in its own right under local law until March 31, 1968. X's distributive
share of the partnership's ordinary income, determined under paragraphs
(d) to (g), inclusive, of Sec. 1.1402(a)-2, for the taxable year of the
partnership ended March 31, 1967, is $1,600. His distributive share,
including the share of his estate, of such partnership's ordinary loss
as determined under paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-
2 (with the exception of paragraph (e)), for the taxable year of the
partnership ended March 31, 1968, is $1,200. The portion of such $1,200
attributable to an interest in the partnership prior to the month
following the month in which he died is $1,200 x 2/12 (2 being the
number of months in the partnership taxable year in which X died which
precede the month following the month of his death and 12 being the
number of months in such partnership taxable year in which X and his
estate had an interest in the partnership) or $200. X is also a member
of the ABX farm partnership, the taxable year of which ends on May 31.
His distributive share of the partnership loss described in section
702(a)(9) for the partnership taxable year ending May 31, 1967, is $300.
Section 1402(f) and this section do not apply with respect to such $300
since X's last taxable year ends, as a result of his death, with the
taxable year of the ABX partnership. Under this paragraph the $200 loss
must be included in determining X's distributive share of XYZ
partnership income described in section 702(a)(9) for the purpose of
applying the optional method available to farmers for computing net
earnings from self-employment. Further, the resulting $1,400 of income
must be aggregated, pursuant to paragraph (c) of Sec. 1.1402(a)-15, with
the $300 loss, X's distributive share of ABX partnership
[[Page 59]]
loss described in section 702(a)(9), for purposes of applying such
option. The representative of X's estate may exercise the option
described in paragraph (a)(2)(ii) of Sec. 1.1402(a)-15, provided the
portion of X's distributive share of XYZ partnership gross income for
the taxable year ended March 31, 1968, attributable to an interest in
the partnership prior to the month following the month in which he died
(the allocation being made in the manner prescribed for allocating his
$1,200 distributive share of XYZ partnership loss for such year), when
aggregated with his distributive share of XYZ partnership gross income
for the partnership taxable year ended March 31, 1967, and with his
distributive share of ABX partnership gross income for the partnership
taxable year ended May 31, 1967, results in X having more than $2,400 of
gross income from the trade or business of farming. If such aggregate
amount of gross income is not more than $2,400, the option described in
paragraph (a)(2)(i) of Sec. 1.1402(a)-15, is available.
Example (2). A, a sole proprietor engaged in the business of
farming, files his income tax returns on a calendar year basis. A is
also a member of a partnership engaged in an agricultural activity. The
partnership files its returns on the basis of a fiscal year ending March
31. A dies June 29, 1967. A's gross income from farming as a sole
proprietor for the 6-month period comprising his taxable year which ends
because of death is $1,600 and his actual net earnings from self-
employment based thereon are $400. As of March 31, 1967, A's
distributive share of the gross income of the farm partnership is $2,200
and his distributive share of income described in section 702(a)(9)
based thereon is $1,000. The amount of A's distributive share of the
partnership's ordinary income for its taxable year ended March 31, 1968,
which may be included in his net earnings from self-employment under
section 1402(f) and paragraph (a) of this section is $300. The amount of
the deceased partner's distributive share of partnership gross income
attributable to an interest in the partnership prior to the month
following the month of his death as is determined, pursuant to
subparagraph (1) of this paragraph, under paragraph (a) of this section
is $2,000. An aggregation of the above figures produces a gross income
from farming of $5,800 and actual net earnings from self-employment of
$1,700. Under these circumstances none of the options provided by
section 1402(a) may be used. If the actual net earnings from self-
employment had been less than $1,600, the option described in paragraph
(a)(2)(ii) of Sec. 1.1402(a)-15 would have been available.
(c) Taxable years ending after 1955 and on or before August 28,
1958--(1) Requirement of election. If a partner's taxable year ended, as
a result of his death, after 1955 and on or before August 28, 1958, the
rules set forth in paragraph (a) of this section may be made applicable
in computing the deceased partner's net earnings from self-employment
for his last taxable year provided that:
(i) Before January 1, 1960, there is filed, by the person designated
in section 6012(b)(1) and paragraph (b)(1) of Sec. 1.6012-3, a return
(or amended return) of the tax imposed by chapter 2 for the taxable year
ending as a result of death, and
(ii) Such return, if filed solely for the purpose of reporting net
earnings from self-employment resulting from the enactment of section
1402(f), is accompanied by the amount of tax attributable to such net
earnings.
(2) Administrative rule of special application. Notwithstanding the
provisions of sections 6601, 6651, and 6653 (see such sections and the
regulations thereunder) no interest or penalty shall be assessed or
collected on the amount of any self-employment tax due solely by reason
of the operation of section 1402(f) in the case of an individual who
died after 1955 and before August 29, 1958.
[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR
830, Jan. 18, 1969]
Sec. 1.1402(g)-1 Treatment of certain remuneration erroneously reported as net earnings from self-employment.
(a) General rule. If an amount is erroneously paid as self-
employment tax, for any taxable year ending after 1954 and before 1962,
with respect to remuneration for service (other than service described
in section 3121(b)(8)(A)) performed in the employ of an organization
described in section 501(c)(3) and exempt from income tax under section
501(a), and if such remuneration is reported as self-employment income
on a return filed on or before the due date prescribed for filing such
return (including any extension thereof), the individual who paid such
amount (or a fiduciary acting for such individual or his estate, or his
survivor (within the meaning of section 205(c)(1)(C) of the Social
Security Act)), may request that such remuneration be deemed to
[[Page 60]]
constitute net earnings from self-employment. If such request is filed
during the period September 14, 1960, to April 16, 1962, inclusive, and
on or after the date on which the organization which paid such
remuneration to such individual for services performed in its employ has
filed, pursuant to section 3121(k), a certificate waiving exemption from
taxes under the Federal Insurance Contributions Act, and if no credit or
refund of any portion of the amount erroneously paid for such taxable
year as self-employment tax (other than a credit or refund which would
be allowable if such tax were applicable with respect to such
remuneration) has been obtained before the date on which such request is
filed or, if obtained, the amount credited or refunded (including any
interest under section 6611) is repaid on or before such date, then, for
purposes of the Self-Employment Contributions Act of 1954 and the
Federal Insurance Contributions Act, any amount of such remuneration
which is paid to such individual before the calendar quarter in which
such request is filed (or before the succeeding quarter if such
certificate first becomes effective with respect to services performed
by such individual in such succeeding quarter) and with respect to which
no tax (other than an amount erroneously paid as tax) has been paid
under the Federal Insurance Contributions Act, shall be deemed to
constitute net earnings from self-employment and not remuneration for
employment. If the certificate filed by such organization pursuant to
section 3121(k) is not effective with respect to services performed by
such individual on or before the first day of the calendar quarter in
which the request is filed, then, for purposes of section 3121(b)(8)(B)
(ii) and (iii), such individual shall be deemed to have become an
employee of such organization (or to have become a member of a group,
described in section 3121(k)(1)(E), of employees of such organization)
on the first day of the succeeding quarter.
(b) Request for validation. (1) No particular form is prescribed for
making a request under paragraph (a) of this section. The request should
be in writing, should be signed and dated by the person making the
request, and should indicate clearly that it is a request that, pursuant
to section 1402(g) of the Code, remuneration for service described in
section 3121(b)(8) (other than service described in section
3121(b)(8)(A)) erroneously reported as self-employment income for one or
more specified years be deemed to constitute net earnings from self-
employment and not remuneration for employment. In addition, the
following information shall be shown in connection with the request:
(i) The name, address, and social security account number of the
individual with respect to whose remuneration the request is made.
(ii) The taxable year or years (ending after 1954 and before 1962)
to which the request relates.
(iii) A statement that the remuneration was erroneously reported as
self- employment income on the individual's return for each year
specified and that the return was filed on or before its due date
(including any extension thereof).
(iv) Location of the office of the district director with whom each
return was filed.
(v) A statement that no portion of the amount erroneously paid by
the individual as self-employment tax with respect to the remuneration
has been credited or refunded (other than a credit or refund which would
have been allowable if the tax had been applicable with respect to the
remuneration); or, if a credit or refund of any portion of such amount
has been obtained, a statement identifying the credit or refund and
showing how and when the amount credited or refunded, together with any
interest received in connection therewith, was repaid.
(vi) The name and address of the organization which paid the
remuneration to the individual.
(vii) The date on which the organization filed a waiver certificate
on Form SS-15, and the location of the office of the district director
with whom it was filed.
(viii) The date on which the certificate became effective with
respect to services performed by the individual.
(ix) If the request is made by a person other than the individual to
whom the remuneration was paid, the name and address of that person and
evidence
[[Page 61]]
which shows the authority of such person to make the request.
(2) The request should be filed with the district director of
internal revenue with whom the latest of the returns specified in the
request pursuant to subparagraph (1)(iii) of this paragraph was filed.
(c) Cross references. For regulations relating to section 3121
(b)(8) and (k), see Secs. 31.3121(b)(8)-2 and 31.3121(k)-1 of subpart B
of part 31 of this chapter (Employment Tax Regulations). For regulations
relating to exemption from income tax of an organization described in
section 501(c)(3), see Sec. 1.501(c)(3)-1.
Sec. 1.1402(h)-1 Members of certain religious groups opposed to insurance.
(a) In general. An individual--(1) Who is a member of a recognized
religious sect or division thereof and,
(2) Who is an adherent of established tenets or teachings of such
sect or division and by reason thereof is conscientiously opposed to
acceptance of the benefits of any private or public insurance which
makes payments in the event of death, disability, old age, or retirement
or makes payments toward the cost of, or provides services for, medical
care (including the benefits of any insurance system established by the
Social Security Act),
may file an application for exemption from the tax under section 1401.
The form of insurance to which section 1402(h) and this section refer
does not include liability insurance of a kind that provides only for
the protection of other persons, or property of other persons, who may
be injured or damaged by or on property belonging to, or by an action
of, an individual who otherwise meets the requirements of this section.
An application for exemption under section 1402(h) and this section
shall be made in the manner provided in paragraph (b) of this section
and within the time specified in paragraph (c) of this section. For
provisions relating to the filing of an application for exemption by a
fiduciary or survivor, see paragraph (d) of this section.
(b) Application for exemption. The application for exemption shall
be filed on Form 4029 in duplicate with the internal revenue official or
office designated on the form. The filing of a return by a member of a
religious group opposed to insurance showing no self-employment income
or self-employment tax shall not be construed as an application for
exemption referred to in paragraph (a) of this section.
(c) Time limitation for filing application for exemption--(1)
Taxable years ending before December 31, 1967. A member of a religious
group opposed to insurance within the meaning of paragraph (a) of this
section:
(i) Who has self-employment income (determined without regard to
subsections (c)(6) and (h) of section 1402 and this section) for one or
more taxable years ending before December 31, 1967, and
(ii) Who desires to be exempt from the payment of the self-
employment tax under section 1401,
must file the application for exemption on or before December 31, 1968.
(2) Taxable year ending on or after December 31, 1967--(i) General
rule. Except as provided in subdivision (ii) of this subparagraph, a
member of a religious group opposed to insurance within the meaning of
paragraph (a) of this section:
(a) Who has no self-employment income (determined without regard to
subsections (c)(6) and (h) of section 1402 and this section) for any
taxable year ending before December 31, 1967, and
(b) Who desires to be exempt from the payment of the self-employment
tax under section 1401 for any taxable year ending on or after December
31, 1967,
must file the application for exemption on or before the due date of the
income tax return (see section 6072), including any extension thereof
(see section 6081), for the first taxable year ending on or after
December 31, 1967, for which he has self-employment income (determined
without regard to subsections (c)(6) and (h) of section 1402 and this
section.
(ii) Exception to general rule. If an individual to whom subdivision
(i) of this subparagraph applies:
(a) Is notified in writing by a district director of internal
revenue or the Director of International Operations that he has not
filed the application for exemption on or before the date specified in
such subdivision (i), and
[[Page 62]]
(b) Files the application for exemption on or before the last day of
the third calendar month following the calendar month in which he is so
notified,
such application shall be considered a timely filed application for
exemption.
(d) Application by fiduciary or survivor. If an individual who was a
member of a religious group opposed to insurance dies before the
expiration of the time prescribed in section 1402(h)(2) and paragraph
(c) of this section during which an application could have been filed by
him, an application for exemption with respect to such deceased
individual may be filed by a fiduciary acting for such individual's
estate or by such individual's survivor within the meaning of section
205(c)(1)(C) of the Social Security Act. An application for exemption
with respect to a deceased individual executed by a fiduciary or
survivor may be approved only if it could have been approved if the
individual were not deceased and had filed the application on the date
the application was filed by the fiduciary or executor.
(e) Approval of application for exemption--(1) In general. The
filing of an application for exemption on Form 4029 by a member of a
religious group opposed to insurance does not constitute an exemption
from the payment of the tax on self-employment income. An individual who
files such an application is exempt from the payment of the tax only if
the application is approved by the official with whom the application is
required to be filed (see paragraph (b) of this section).
(2) Conditions relating to approval or disapproval of application.
An application for exemption on Form 4029 will not be approved unless
the Secretary of Health, Education, and Welfare finds with respect to
the religious sect or division thereof of which the individual filing
the application is a member:
(i) That the sect or division thereof has the established tenets or
teachings by reason of which the individual applicant is conscientiously
opposed to the benefits of insurance of the type referred to in section
1402(h) (see paragraph (a) of this section),
(ii) That it is the practice, and has been for a period of time
which the Secretary of Health, Education, and Welfare deems to be
substantial, for members of such sect or division thereof to make
provisions for their dependent members which, in the judgment of such
Secretary, is reasonable in view of the general level of living of the
members of the sect or division thereof; and
(iii) That the sect or division thereof has been in existence
continuously since December 31, 1950.
In addition, an application for exemption on Form 4029 will not be
approved if any benefit or other payment under title II of title XVIII
of the Social Security Act became payable (or, but for section 203,
relating to reduction of insurance benefits, or 222(b), relating to
reduction of insurance benefits on account of refusal to accept
rehabilitation services, of the Social Security Act would have been
payable) at or before the time of the filing of the application for
exemption. Any determination required to be made pursuant to the
preceding sentence will be made by the Secretary of Health, Education,
and Welfare.
(f) Period for which exemption is effective--(1) General rule. An
application for exemption shall be in effect (if approved as provided in
paragraph (e) of this section) for all taxable years beginning after
December 31, 1950, except as otherwise provided in subparagraph (2) of
this paragraph.
(2) Exceptions. An application for exemption referred to in
subparagraph (1) of this paragraph shall not be effective for any
taxable year which:
(i) Begins (a) before the taxable year in which the individual
filing the application first met the requirements of subparagraphs (1)
and (2) of paragraph (a) of this section, or (b) before the time as of
which the Secretary of Health, Education, and Welfare finds that the
sect or division thereof of which the individual is a member met the
requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see
subdivisions (i) and (ii) of paragraph (e)(2) of this section), or
(ii) Ends (a) after the time at which the individual filing the
application ceases to meet the requirements of subparagraphs (1) and (2)
of paragraph (a) of this section, or (b) after the time as of which the
Secretary of Health, Education, and Welfare finds that the sect
[[Page 63]]
or division thereof of which the individual is a member ceases to meet
the requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see
subdivisions (i) and (ii) of paragraph (e)(2) of this section).
(g) Refund or credit. An application for exemption on Form 4029
filed on or before December 31, 1968 (if approved as provided in
paragraph (e) of this section), shall constitute a claim for refund or
credit of any tax on self-employment income under section 1401 (or under
section 480 of the Internal Revenue Code of 1939) paid or incurred in
respect of any taxable year beginning after December 31, 1950, and
ending before December 31, 1967, for which an exemption is granted.
Refund or credit of any tax referred to in the preceding sentence may be
made, pursuant to the provisions of section 501(c) of the Social
Security Amendments of 1967 (81 Stat. 933), notwithstanding that the
refund or credit would otherwise be prevented by operation of any law or
rule of law. No interest shall be allowed or paid in respect of any
refund or credit made or allowed in connection with a claim for refund
or credit made on Form 4029.
[T.D. 6993, 34 FR 831, Jan. 18, 1969]
Sec. 1.1403-1 Cross references.
For provisions relating to the requirement for filing returns with
respect to net earnings from self-employment, see Sec. 1.6017-1. For
provisions relating to declarations of estimated tax on self-employment
income, see Secs. 1.6015(a) to 1.6015(j)-1, inclusive. For other
administrative provisions relating to the tax on self-employment income,
see the applicable sections of the regulations in this part
(Sec. 1.6001-1 et seq.) and the applicable sections of the regulations
in part 301 of this chapter (Regulations on Procedure and
Administration).
[T.D. 7427, 41 FR 34026, Aug. 12, 1976]
Withholding of Tax on Nonresident Aliens and Foreign Corporations and
Tax-Free Covenant Bonds
NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
Sec. 1.1441-0 Outline of regulation provisions for section 1441.
This section lists captions contained in Secs. 1.1441-1 through
1.1441-9.
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on
payments to foreign persons.
(a) Purpose and scope.
(b) General rules of withholding.
(1) Requirement to withhold on payments to foreign persons.
(2) Determination of payee and payee's status.
(i) In general.
(ii) Payments to a U.S. agent of a foreign person.
(iii) Payments to wholly-owned entities.
(A) Foreign-owned domestic entity.
(B) Foreign entity.
(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies.
(A) U.S. branch treated as a U.S. person in certain cases.
(B) Consequences to the withholding agent.
(C) Consequences to the U.S. branch.
(D) Definition of payment to a U.S. branch.
(E) Payments to other U.S. branches.
(v) Payments to a foreign intermediary.
(A) Payments treated as made to persons for whom the intermediary
collects the payment.
(B) Payments treated as made to foreign intermediary.
(vi) Other payees.
(vii) Rules for reliably associating a payment with documentation.
(3) Presumptions regarding payee's status in the absence of
documentation.
(i) General rules.
(ii) Presumptions of status as individual, corporation, partnership,
etc.
(iii) Presumption of U.S. or foreign status.
(A) Payments to exempt recipients.
(B) Scholarships and grants.
(C) Pensions, annuities, etc.
(D) Certain payments to offshore accounts.
(iv) Grace period in the case of indicia of a foreign payee.
[[Page 64]]
(v) Special rules applicable to payments to foreign intermediaries.
(A) Reliance on claim of status as foreign intermediary.
(B) Beneficial owner documentation is lacking or unreliable.
(C) Information regarding allocation of payment is lacking or
unreliable.
(D) Certification that the foreign intermediary has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable.
(vi) U.S. branches and foreign flow-through entities.
(vii) Joint payees.
(viii) Rebuttal of presumptions.
(ix) Effect of reliance on presumptions and of actual knowledge or
reason to know otherwise.
(A) General rule.
(B) Actual knowledge or reason to know that amount of withholding is
greater than is required under the presumptions or that
reporting of the payment is required.
(x) Examples.
(4) List of exemptions from, or reduced rates of, withholding under
chapter 3 of the Code.
(5) Establishing foreign status under applicable provisions of chapter
61 of the Code.
(6) Rules of withholding for payments by a foreign intermediary or
certain U.S. branches.
(7) Liability for failure to obtain documentation timely or to act in
accordance with applicable presumptions.
(i) General rule.
(ii) Proof that tax liability has been satisfied.
(iii) Liability for interest and penalties.
(iv) Special effective date.
(v) Examples.
(8) Adjustments, refunds, or credits of overwithheld amounts.
(9) Payments to joint owners.
(c) Definitions.
(1) Withholding.
(2) Foreign and U.S. person.
(3) Individual.
(i) Alien individual.
(ii) Nonresident alien individual.
(4) Certain foreign corporations.
(5) Financial institution and foreign financial institution.
(6) Beneficial owner.
(i) General rule.
(ii) Special rules for flow-through entities and arrangements.
(A) General rule.
(B) Trusts and estates.
(C) Definition of a flow-through entity or arrangement.
(7) Withholding agent.
(8) Person.
(9) Source of income.
(10) Chapter 3 of the Code.
(11) Reduced rate.
(d) Beneficial owner's or payee's claim of U.S. status.
(1) In general.
(2) Payments for which a Form W-9 is otherwise required.
(3) Payments for which a Form W-9 is not otherwise required.
(4) Other payments.
(e) Beneficial owner's claim of foreign status.
(1) Withholding agent's reliance.
(i) In general.
(ii) Payments that a withholding agent may treat as made to a foreign
person that is a beneficial owner.
(A) General rule.
(B) Additional requirements.
(2) Beneficial owner withholding certificate.
(i) In general.
(ii) Requirements for validity of certificate.
(3) Intermediary, flow-through, or U.S. branch withholding certificate.
(i) In general.
(ii) Intermediary withholding certificate from a qualified intermediary.
(iii) Intermediary withholding certificate from an intermediary that is
not a qualified intermediary.
(iv) Information to the withholding agent regarding assets owned by
beneficial owners, etc.
(A) General rule.
(B) Updating the information.
(C) Examples.
(v) Withholding certificate from certain U.S. branches.
(vi) Reportable amounts.
(4) Applicable rules.
(i) Who may sign the certificate.
(ii) Period of validity.
(A) Three-year period.
(B) Indefinite validity period.
(C) Withholding certificate for effectively connected income.
(D) Change in circumstances.
(iii) Retention of withholding certificate.
(iv) Electronic transmission of information.
(v) Electronic confirmation of taxpayer identifying number on
withholding certificate.
(vi) Acceptable substitute form.
(vii) Requirement of taxpayer identifying number.
(viii) Reliance rules.
(A) Classification.
(B) Status of payee as an intermediary or as a person acting for its own
account.
(ix) Certificates to be furnished for each account unless exception
applies.
(A) Coordinated account information system in effect.
(B) Family of mutual funds.
(C) Special rule for brokers.
(5) Qualified intermediaries.
(i) General rule.
(ii) Definition of qualified intermediary.
[[Page 65]]
(iii) Withholding agreement.
(A) In general.
(B) Terms of the withholding agreement.
(iv) Assignment of primary withholding responsibility.
(v) Information to withholding agent regarding applicable withholding
rates.
(A) General rule.
(B) Categories of assets.
(C) Updating the information.
(f) Effective date.
(1) In general.
(2) Transition rules.
(i) Special rules for existing documentation.
(ii) Lack of documentation for past years.
Sec. 1.1441-2 Amounts subject to withholding.
(a) In general.
(b) Fixed or determinable annual or periodical income.
(1) In general.
(i) Definition.
(ii) Manner of payment.
(iii) Determinability of amount.
(2) Exceptions.
(3) Original issue discount.
(i) General rule.
(ii) Amounts actually known to the withholding agent.
(iii) Amounts for which certain documentation is not furnished.
(iv) Exceptions to withholding.
(4) Securities lending transactions and equivalent transactions.
(c) Other income subject to withholding.
(d) Exceptions to withholding where no money or property is paid or lack
of knowledge.
(1) General rule.
(2) Cancellation of debt.
(3) Satisfaction of liability following underwithholding by withholding
agent.
(e) Payment.
(1) General rule.
(2) Income allocated under section 482.
(3) Blocked income.
(4) Special rules for dividends.
(5) Certain interest accrued by a foreign corporation.
(6) Payments other than in U.S. dollars.
(f) Effective date.
Sec. 1.1441-3 Determination of amounts to be withheld.
(a) Withholding on gross amount.
(b) Withholding on payments on certain obligations.
(1) Withholding at time of payment of interest.
(2) No withholding between interest payment dates.
(i) In general.
(ii) Anti-abuse rule.
(c) Corporate distributions.
(1) General rule.
(2) Exception to withholding on distributions.
(i) In general.
(ii) Reasonable estimate of accumulated and current earnings and profits
on the date of payment.
(A) General rule.
(B) Procedures in case of underwithholding.
(C) Reliance by intermediary on reasonable estimate.
(D) Example.
(3) Special rules in the case of distributions from a regulated
investment company.
(i) General rule
(ii) Reliance by intermediary on reasonable estimate.
(4) Coordination with withholding under section 1445.
(i) In general.
(A) Withholding under section 1441.
(B) Withholding under both sections 1441 and 1445.
(C) Coordination with REIT withholding.
(ii) Intermediary reliance rule.
(d) Withholding on payments that include an undetermined amount of
income.
(1) In general.
(2) Withholding on certain gains.
(e) Payments other than in U.S. dollars.
(1) In general.
(2) Payments in foreign currency.
(f) Tax liability of beneficial owner satisfied by withholding agent.
(1) General rule.
(2) Example.
(g) Conduit financing arrangements
(h) Effective date.
Sec. 1.1441-4 Exemptions from withholding for certain effectively
connected income and other amounts.
(a) Certain income connected with a U.S. trade or business.
(1) In general.
(2) Withholding agent's reliance on a claim of effectively connected
income.
(i) In general.
(ii) Special rules for U.S. branches of foreign persons.
(A) U.S. branches of certain foreign banks or foreign insurance
companies.
(B) Other U.S. branches.
(3) Income on notional principal contracts.
(i) General rule.
(ii) Exception for certain payments.
(b) Compensation for personal services of an individual.
(1) Exemption from withholding.
(2) Manner of obtaining withholding exemption under tax treaty.
(i) In general.
(ii) Withholding certificate claiming withholding exemption.
(iii) Review by withholding agent.
(iv) Acceptance by withholding agent.
(v) Copies of Form 8233.
(3) Withholding agreements.
(4) Final payments exemption.
(i) General rule.
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(ii) Final payment of compensation for personal services.
(iii) Manner of applying for final payment exemption.
(iv) Letter to withholding agent.
(5) Requirement of return.
(6) Personal exemption.
(i) In general.
(ii) Multiple exemptions.
(iii) Special rule where both certain scholarship and compensation
income are received.
(c) Special rules for scholarship and fellowship income.
(1) In general.
(2) Alternate withholding election.
(d) Annuities received under qualified plans.
(e) Per diem of certain alien trainees.
(f) Failure to receive withholding certificates timely or to act in
accordance with applicable presumptions.
(g) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-5 Withholding on payments to partnerships, trusts, and
estates.
(a) Rules of withholding applicable to payments to partnerships.
(b) Domestic partnerships.
(1) Exemption from withholding on payment to domestic partnerships.
(2) Withholding by a domestic partnership.
(i) In general.
(ii) Determination by the domestic partnership of partners' status.
(iii) Reliance on a partner's claim for reduced withholding.
(iv) Rules for reliably associating a payment with documentation.
(v) Coordination with chapter 61 of the Internal Revenue Code and
section 3406.
(c) Foreign partnerships.
(1) Determination of payee.
(i) Payments treated as made to partners.
(ii) Payments treated as made to the partnership.
(iii) Rules for reliably associating a payment with documentation.
(iv) Example.
(2) Withholding foreign partnerships.
(i) Reliance on claim of withholding foreign partnership status.
(ii) Withholding agreement.
(A) In general.
(B) Terms of withholding agreement.
(iii) Withholding responsibility.
(iv) Withholding certificate from a withholding foreign partnership.
(3) Other foreign partnerships.
(i) Reliance on claim of foreign partnership status.
(ii) Reliance on claim of reduced withholding by a partnership for its
partners.
(iii) Withholding certificate from a foreign partnership that is not a
withholding foreign partnership.
(iv) Information to withholding agent regarding each partner's
distributive share.
(v) Withholding by a foreign partnership.
(d) Presumptions regarding payee's status in the absence of
documentation.
(1) In general.
(2) Determination of partnership's status as domestic or foreign in the
absence of documentation.
(3) Determination of partners' status in the absence of certain
documentation.
(i) Documentation regarding the status of a partner is lacking or
unreliable.
(ii) Information regarding the allocation of payment is lacking or
unreliable.
(iii) Certification that the foreign partnership has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable.
(iv) Determination by a withholding foreign partnership of the status of
its partners.
(4) Examples.
(e) Trusts and estates. [Reserved]
(f) Failure to receive withholding certificate timely or to act in
accordance with applicable presumptions.
(g) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-6 Claim of reduced withholding under an income tax treaty.
(a) In general.
(b) Reliance on claim of reduced withholding under an income tax treaty.
(1) In general.
(2) Exemption from requirement to furnish a taxpayer identifying number
and special documentary evidence rules for certain income.
(i) General rule.
(ii) Income to which special rules apply.
(3) Competent authority agreements.
(4) Eligibility for reduced withholding under an income tax treaty in
the case of a payment to a person other than an individual.
(i) General rule.
(ii) Withholding certificates.
(A) In general.
(B) Certification by qualified intermediary.
(iii) Multiple claims of treaty benefits.
(iv) Examples.
(5) Claim of benefits under an income tax treaty by a U.S. person.
(c) Proof of tax residence in a treaty country and certification of
entitlement to treaty benefits. (1) In general.
(2) Certification of taxpayer identifying number.
(i) In general.
(ii) IRS-certified TIN.
(iii) Special rules for qualified intermediaries.
(3) Certificate of residence.
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(4) Documentary evidence establishing residence in the treaty country.
(i) Individuals.
(ii) Persons other than individuals.
(5) Certifications regarding entitlement to treaty benefits.
(i) Certification regarding conditions under a Limitation on Benefits
Article.
(ii) Certification regarding whether the taxpayer is deriving the
income.
(d) Joint owners.
(e) Related party dividends under U.S.-Denmark income tax treaty.
(f) Failure to receive withholding certificate timely.
(g) Effective date.
(1) General rule.
(2) Transition rules.
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined.
(b) Standards of knowledge.
(1) In general.
(2) Reason to know.
(i) In general.
(ii) Limits on reason to know in certain cases.
(3) Coordinated account information systems.
(c) Authorized agent.
(1) In general.
(2) Authorized foreign agent.
(3) Notification.
(4) Liability of U.S. withholding agent.
(5) Filing of returns.
(d) United States obligations.
(e) Assumed obligations.
(f) Conduit financing arrangements.
(g) Effective date.
Sec. 1.1441-8 Exemption from withholding for payments to foreign
governments, international organizations, foreign central banks of
issue, and the Bank for International Settlements.
(a) Foreign governments.
(b) Reliance on claim of exemption by foreign government.
(c) Income of a foreign central bank of issue or the Bank for
International
Settlements.
(1) Certain interest income.
(2) Bankers' acceptances.
(d) Exemption for payments to international organizations.
(e) Failure to receive withholding certificate timely and other
applicable procedures.
(f) Effective date.
(1) In general.
(2) Transition rules.
Sec. 1.1441-9 Exemption from withholding on exempt income of a foreign
tax-exempt organization, including foreign private foundations.
(a) Exemption from withholding for exempt income.
(b) Reliance on foreign organization's claim of exemption from
withholding.
(1) General rule.
(2) Withholding certificate.
(3) Presumptions in the absence of documentation.
(4) Reason to know.
(c) Failure to receive withholding certificate timely and other
applicable procedures.
(d) Effective date.
(1) In general.
(2) Transition rules.
[T.D. 8734, 62 FR 53421, Oct. 14, 1997]
Effective Date Note: By T.D. 8734, 62 FR 53421, Oct. 14, 1997,
Sec. 1.1441-0 was added, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-0 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the
effective date of Sec. 1.1441-0 was delayed until Jan. 1, 2001.
Sec. 1.1441-1 Requirement for the deduction and withholding of tax on payments to foreign persons.
(a) Purpose and scope. This section, Secs. 1.1441-2 through 1.1441-
9, and 1.1443-1 provide rules for withholding under sections 1441, 1442,
and 1443 when a payment is made to a foreign person. This section
provides definitions of terms used in chapter 3 of the Internal Revenue
Code (Code) and regulations thereunder. It prescribes procedures to
determine whether an amount must be withheld under chapter 3 of the Code
and documentation that a withholding agent may rely upon to determine
the status of a payee or a beneficial owner as a U.S. person or as a
foreign person and other relevant characteristics of the payee that may
affect a withholding agent's obligation to withhold under chapter 3 of
the Code and the regulations thereunder. Special procedures regarding
payments to foreign persons that act as intermediaries are also
provided. Section 1.1441-2 defines the income subject to withholding
under section 1441, 1442, and 1443 and the regulations under these
sections. Section 1.1441-3 provides rules regarding the amount subject
to withholding. Section 1.1441-4 provides exemptions from withholding
for, among other things, certain income effectively connected with the
conduct of a trade or business in the United States, including certain
compensation for the personal services of an individual. Section 1.1441-
5 provides rules for withholding
[[Page 68]]
on payments made to flow-through entities and other similar
arrangements. Section 1.1441-6 provides rules for claiming a reduced
rate of withholding under an income tax treaty. Section 1.1441-7 defines
the term withholding agent and provides due diligence rules governing a
withholding agent's obligation to withhold. Section 1.1441-8 provides
rules for relying on claims of exemption from withholding for payments
to a foreign government, an international organization, a foreign
central bank of issue, or the Bank for International Settlements.
Sections 1.1441-9 and 1.1443-1 provide rules for relying on claims of
exemption from withholding for payments to foreign tax exempt
organizations and foreign private foundations.
(b) General rules of withholding--(1) Requirement to withhold on
payments to foreign persons. A withholding agent must withhold 30-
percent of any payment of an amount subject to withholding made to a
payee that is a foreign person unless it can reliably associate the
payment with documentation upon which it can rely to treat the payment
as made to a beneficial owner that is a U.S. person or as made to a
beneficial owner that is a foreign person entitled to a reduced rate of
withholding. However, a withholding agent making a payment to a foreign
person need not withhold where the foreign person assumes responsibility
for withholding on the payment under chapter 3 of the Code and the
regulations thereunder as a qualified intermediary (see paragraph (e)(5)
of this section), as a U.S. branch of a foreign person (see paragraph
(b)(2)(iv) of this section), as a withholding foreign partnership (see
Sec. 1.1441-5(c)(2)(i)), or as an authorized foreign agent (see
Sec. 1.1441-7(c)(1)). This section (dealing with general rules of
withholding and claims of foreign or U.S. status by a payee or a
beneficial owner), and Secs. 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-8,
1.1441-9, and 1.1443-1 provide rules for determining whether
documentation is required as a condition for reducing the rate of
withholding on a payment to a foreign beneficial owner or to a U.S.
payee and if so, the nature of the documentation upon which a
withholding agent may rely in order to reduce such rate. Paragraph
(b)(2) of this section prescribes the rules for determining who the
payee is, the extent to which a payment is treated as made to a foreign
payee, and reliable association of a payment with documentation.
Paragraph (b)(3) of this section describes the applicable presumptions
for determining the payee's status as U.S. or foreign and the payee's
other characteristics (i.e., as an owner or intermediary, as an
individual, partnership, corporation, etc.). Paragraph (b)(4) of this
section lists the types of payments for which the 30-percent withholding
rate may be reduced. Because the treatment of a payee as a U.S. or a
foreign person also has consequences for purposes of making an
information return under the provisions of chapter 61 of the Code and
for withholding under other provisions of the Code, such as sections
3402, 3405 or 3406, paragraph (b)(5) of this section lists applicable
provisions outside chapter 3 of the Code that require certain payees to
establish their foreign status (e.g., in order to be exempt from
information reporting). Paragraph (b)(6) of this section describes the
withholding obligations of a foreign person making a payment that it has
received in its capacity as an intermediary. Paragraph (b)(7) of this
section describes the liability of a withholding agent that fails to
withhold at the required 30-percent rate in the absence of
documentation. Paragraph (b)(8) of this section deals with adjustments
and refunds in the case of overwithholding. Paragraph (b)(9) of this
section deals with determining the status of the payee when the payment
is jointly owned. See paragraph (c)(6) of this section for a definition
of beneficial owner. See Sec. 1.1441-7(a) for a definition of
withholding agent. See Sec. 1.1441-2(a) for the determination of an
amount subject to withholding. See Sec. 1.1441-2(e) for the definition
of a payment and when it is considered made. Except as otherwise
provided, the provisions of this section apply only for purposes of
determining a withholding agent's obligation to withhold under chapter 3
of the Code and the regulations thereunder.
(2) Determination of payee and payee's status--(i) In general.
Except as otherwise provided in this paragraph (b)(2), a
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payee is the person to whom a payment is made, regardless of whether
such person is the beneficial owner of the amount (as defined in
paragraph (c)(6) of this section). A foreign payee is a payee who is a
foreign person. A U.S. payee is a payee who is a U.S. person. Generally,
the determination by a withholding agent of the U.S. or foreign status
of a payee and of its other relevant characteristics (e.g., as a
beneficial owner or intermediary, or as an individual, corporation, or
flow-through entity) is made on the basis of a withholding certificate
that is a Form W-8 or a Form 8233 (indicating foreign status of the
payee or beneficial owner) or a Form W-9 (indicating U.S. status of the
payee). The provisions of this paragraph (b)(2), paragraph (b)(3) of
this section, and Sec. 1.1441-5 (c), (d), and (e) dealing with
determinations of payee and applicable presumptions in the absence of
documentation, apply only to payments of amounts subject to withholding
under chapter 3 of the Code (within the meaning of Sec. 1.1441-2(a)).
Similar payee and presumption provisions are set forth under
Sec. 1.6049-5(d) for payments of amounts that are not subject to
withholding under chapter 3 of the Code (or the regulations thereunder)
but that may be reportable under provisions of chapter 61 of the Code
(and the regulations thereunder). See paragraph (d) of this section for
documentation upon which the withholding agent may rely in order to
treat the payee or beneficial owner as a U.S. person. See paragraph (e)
of this section for documentation upon which the withholding agent may
rely in order to treat the payee or beneficial owner as a foreign
person. For applicable presumptions of status in the absence of
documentation, see paragraph (b)(3) of this section and Sec. 1.1441-
5(d). For definitions of a foreign person and U.S. person, see paragraph
(c)(2) of this section.
(ii) Payments to a U.S. agent of a foreign person. A withholding
agent making a payment to a U.S. person (other than to a U.S. branch
that is treated as a U.S. person pursuant to paragraph (b)(2)(iv) of
this section) and who has actual knowledge that the U.S. person receives
the payment as an agent of a foreign person must treat the payment as
made to the foreign person. However, the withholding agent may treat the
payment as made to the U.S. person if the U.S. person is a financial
institution and the withholding agent has no reason to believe that the
financial institution will not comply with its obligation to withhold.
See paragraph (c)(5) of this section for the definition of a financial
institution.
(iii) Payments to wholly-owned entities--(A) Foreign-owned domestic
entity. A payment to a wholly-owned domestic entity that is disregarded
for federal tax purposes under Sec. 301.7701-2(c)(2) of this chapter as
an entity separate from its owner and whose single owner is a foreign
person shall be treated as a payment to the owner of the entity, subject
to the provisions of paragraph (b)(2)(iv) of this section. For purposes
of this paragraph (b)(2)(iii)(A), a domestic entity means a person that
would be treated as a U.S. person if it had an election in effect under
Sec. 301.7701-3(c)(1)(i) of this chapter to be treated as a corporation.
For example, a limited liability company, A, organized under the laws of
the State of Delaware, opens an account at a U.S. bank. Upon opening of
the account, the bank requests A to furnish a Form W-9 as required under
section 6049(a) and the regulations under that section. A does not have
an election in effect under Sec. 301.7701-3(c)(1)(i) of this chapter
and, therefore, is not treated as an organization taxable as a
corporation, including for purposes of the exempt recipient provisions
in Sec. 1.6049-4(c)(1). If A has a single owner and the owner is a
foreign person (as defined in paragraph (c)(2) of this section), then A
may not furnish a Form W-9 because it may not represent that it is a
U.S. person for purposes of the provisions of chapters 3 and 61 of the
Code, and section 3406. Therefore, A must furnish a Form W-8 with the
name, address, and taxpayer identifying number (TIN) (if required) of
the foreign person who is the single owner in the same manner as if the
account were opened directly by the foreign single owner. See
Secs. 1.894-1T(d) and 1.1441-6(b)(4) for special rules where the
entity's owner is claiming a reduced rate of withholding under an income
tax treaty.
[[Page 70]]
(B) Foreign entity. A payment to a wholly-owned foreign entity that
is disregarded under Sec. 301.7701-2(c)(2) of this chapter as an entity
separate from its owner shall be treated as a payment to the single
owner of the entity, subject to the provisions of paragraph (b)(2)(iv)
of this section if the foreign entity has a U.S. branch in the United
States. For purposes of this paragraph (b)(2)(iii)(B), a foreign entity
means a person that would be treated as a foreign person if it had an
election in effect under Sec. 301.7701-3(c)(1)(i) of this chapter to be
treated as a corporation. See Secs. 1.894-1T(d) and 1.1441-6(b)(4) for
special rules where the foreign entity or its owner is claiming a
reduced rate of withholding under an income tax treaty. Thus, for
example, if the foreign entity's single owner is a U.S. person, the
payment shall be treated as a payment to a U.S. person. Therefore, based
on the saving clause in U.S. income tax treaties, such an entity may not
claim benefits under an income tax treaty even if the entity is
organized in a country with which the United States has an income tax
treaty in effect and treats the entity as a non-fiscally transparent
entity. See Sec. 1.894-1T(d)(6), Example 10. Unless it has actual
knowledge or reason to know that the foreign entity to whom the payment
is made is disregarded under Sec. 301.7701-2(c)(2) of this chapter, a
withholding agent may treat a foreign entity as an entity separate from
its owner unless it can reliably associate the payment with a
withholding certificate from the entity's owner.
(iv) Payments to a U.S. branch of certain foreign banks or foreign
insurance companies--(A) U.S. branch treated as a U.S. person in certain
cases. A payment to the U.S. branch of a foreign person is a payment to
the foreign person. However, a U.S. branch described in this paragraph
(b)(2)(iv)(A) and a withholding agent (including another U.S. branch
described in this paragraph (b)(2)(iv)(A)) may agree to treat the branch
as a U.S. person for purposes of withholding on specified payments to
the U.S. branch. Such agreement must be evidenced by a U.S. branch
withholding certificate described in paragraph (e)(3)(v) of this section
furnished by the U.S. branch to the withholding agent. A U.S. branch
described in this paragraph (b)(2)(iv)(A) is any U.S. branch of a
foreign bank subject to regulatory supervision by the Federal Reserve
Board or a U.S. branch of a foreign insurance company required to file
an annual statement on a form approved by the National Association of
Insurance Commissioner with the Insurance Department of a State, a
Territory, or the District of Columbia. The Internal Revenue Service
(IRS) may approve a list of U.S. branches that may qualify for treatment
as a U.S. person under this paragraph (b)(2)(iv)(A) (see
Sec. 601.601(d)(2) of this chapter).
(B) Consequences to the withholding agent. Any person that is
otherwise a withholding agent regarding a payment to a U.S. branch
described in paragraph (b)(2)(iv)(A) of this section shall treat the
payment in one of the following ways--
(1) As a payment to a U.S. person, in which case the withholding
agent is not responsible for withholding on such payment to the extent
it can reliably associate the payment with a withholding certificate
described in paragraph (e)(3)(v) of this section that has been furnished
by the U.S. branch under its agreement with the withholding agent to be
treated as a U.S. person;
(2) As a payment directly to the persons whose names are on
withholding certificates or other appropriate documentation forwarded by
the U.S. branch to the withholding agent when no agreement is in effect
to treat the U.S. branch as a U.S. person for such payment, to the
extent the withholding agent can reliably associate the payment with
such certificates or documentation; or
(3) As a payment to a foreign person of income that is effectively
connected with the conduct by that foreign person of a trade or business
in the United States if the withholding agent cannot reliably associate
the payment with a certificate from the U.S. branch or any other
certificate or other appropriate documentation from another person.
(C) Consequences to the U.S. branch. A U.S. branch that is treated
as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be
treated as a person
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for purposes of section 1441(a) and all other provisions of chapter 3 of
the Code and the regulations thereunder for any payment that it receives
as such. Thus, the U.S. branch shall be responsible for withholding on
the payment in accordance with the provisions under chapter 3 of the
Code and the regulations thereunder and other applicable withholding
provisions of the Code. For this purpose, it shall obtain and retain
documentation from payees or beneficial owners of the payments that it
receives as a U.S. person in the same manner as if it were a separate
entity. For example, if a U.S. branch receives a payment on behalf of
its home office and the home office is a qualified intermediary, the
U.S. branch must obtain a withholding certificate described in paragraph
(e)(3)(ii) of this section from its home office. In addition, a U.S.
branch that has not provided documentation to the withholding agent for
a payment that is, in fact, not effectively connected income is a
withholding agent with respect to that payment. See paragraph (b)(6) of
this section.
(D) Definition of payment to a U.S. branch. A payment is treated as
a payment to a U.S. branch of a foreign bank or foreign insurance
company if the payment is credited to an account maintained in the
United States in the name of a U.S. branch of the foreign person, or the
payment is made to an address in the United States where the U.S. branch
is located and the name of the U.S. branch appears on documents (in
written or electronic form) associated with the payment (e.g., the check
mailed or a letter addressed to the branch).
(E) Payments to other U.S. branches. Similar withholding procedures
may apply to payments to U.S. branches that are not described in
paragraph (b)(2)(iv)(A) of this section to the extent permitted by the
district director or the Assistant Commissioner (International). Any
such branch must establish that its situation is analogous to that of a
U.S. branch described in paragraph (b)(2)(iv)(A) of this section
regarding its registration with, and regulation by, a U.S. governmental
institution, the type and amounts of assets it is required to, or
actually maintains in the United States, and the personnel who carry out
the activities of the branch in the United States. In the alternative,
the branch must establish that the withholding and reporting
requirements under chapter 3 of the Code and the regulations thereunder
impose an undue administrative burden and that the collection of the tax
imposed by section 871(a) or 881(a) on the foreign person (or its
members in the case of a foreign partnership) will not be jeopardized by
the exemption from withholding. Generally, an undue administrative
burden will be found to exist in a case where the person entitled to the
income, such as a foreign insurance company, receives from the
withholding agent income on securities issued by a single corporation,
some of which is, and some of which is not, effectively connected with
conduct of a trade or business within the United States and the criteria
for determining the effective connection are unduly difficult to apply
because of the circumstances under which such securities are held. No
exemption from withholding shall be granted under this paragraph
(b)(2)(iv)(E) unless the person entitled to the income complies with
such other requirements as may be imposed by the district director or
the Assistant Commissioner (International) and unless the district
director or the Assistant Commissioner (International) is satisfied that
the collection of the tax on the income involved will not be jeopardized
by the exemption from withholding. The IRS may prescribe such procedures
as are necessary to make these determinations (see Sec. 601.601(d)(2) of
this chapter).
(v) Payments to a foreign intermediary--(A) Payments treated as made
to persons for whom the intermediary collects the payment. Except as
otherwise provided in paragraph (b)(2)(v)(B) of this section, a payment
to a person that the withholding agent may treat as a foreign
intermediary in accordance with the provisions of paragraph (b)(3)(v)(A)
of this section is treated as a payment made directly to the person or
persons for whom the intermediary collects the payment. Thus, for
example, a payment that the withholding agent can reliably associate
with a
[[Page 72]]
withholding certificate from a qualified intermediary (defined in
paragraph (e)(5)(ii) of this section) and that is allocable to the
category of assets described in paragraph (e)(5)(v)(B)(3) of this
section (i.e., assets allocable to persons for whom the foreign
qualified intermediary does not hold documentation as specified under
its agreement with the IRS) is treated as a payment to the persons
holding assets in that category. See paragraph (b)(3)(v)(B) of this
section for applicable presumptions in such a case. For similar rules
for payments to flow-through entities, see Sec. 1.1441-5 (c)(1)(i) and
(e).
(B) Payments treated as made to foreign intermediary. A payment to a
person that the withholding agent can reliably associate with a
withholding certificate described in paragraph (e)(3)(ii) of this
section from a qualified intermediary that has elected to assume primary
withholding responsibility in accordance with paragraph (e)(5)(iv) of
this section is treated as a payment to the qualified intermediary,
except to the extent of the portion of the payment that the withholding
agent can reliably associate with Forms W-9. See paragraphs (b)(1) and
(e)(5)(iv) of this section for consequences to the withholding agent.
(vi) Other payees. A payment to a person described in Sec. 1.6049-
4(c)(1)(ii) that the withholding agent would treat as a payment to a
foreign person without obtaining documentation for purposes of
information reporting under section 6049 (if the payment were interest)
is treated as a payment to a foreign payee for purposes of chapter 3 of
the Code and the regulations thereunder (or to a foreign beneficial
owner to the extent provided in paragraph (e)(1)(ii)(A) (6) or (7) of
this section). Further, payments that the withholding agent can reliably
associate with documentary evidence described in Sec. 1.6049-5(c)(4)
relating to the payee is treated as a payment to a foreign payee. A
payment that the withholding agent may treat as a payment to an
authorized foreign agent (as defined in Sec. 1.1441-7(c)(2)) is treated
as a payment to the agent and not to the persons for whom the agent
collects the payment. See Sec. 1.1441-5 (b)(1) and (c)(1) for payee
determinations for payments to partnerships. See Sec. 1.1441-5(e) for
payee determinations for payments to foreign trusts or foreign estates.
(vii) Rules for reliably associating a payment with documentation.
Generally, a withholding agent can reliably associate a payment with
documentation if, for that payment, it holds valid documentation to
which the payment relates, it can reliably determine how much of the
payment relates to the valid documentation (e.g., based on information
furnished in accordance with paragraph (e)(3)(iv) or (5)(v) of this
section in the case of a payment to a foreign intermediary or in
accordance with Sec. 1.1441-5(c)(3)(iv) in the case of a payment to a
foreign partnership), and it has no actual knowledge or reason to know
that any of the information or certifications stated in the
documentation are incorrect. The documentation referred to in this
paragraph (b)(2)(vii) is documentation described in paragraph (d) or (e)
of this section upon which a withholding agent may rely in order to
treat the payment as a payment made to a payee or beneficial owner that
is a U.S. or a foreign person, and to ascertain the characteristics of
the payee or beneficial owner, as may be relevant to withholding or
reporting under chapter 3 of the Code and the regulations thereunder
(e.g., beneficial owner or intermediary, corporation or partnership).
For purposes of this paragraph (b)(2)(vii), documentation also includes
a withholding certificate described in paragraph (e)(3)(ii) of this
section from a person representing to be a qualified intermediary that
has assumed primary withholding responsibility, a withholding
certificate described in paragraph (e)(3)(v) of this section from a
person representing to be a U.S. branch described in paragraph
(b)(2)(iv)(A) of this section, a withholding certificate described in
Sec. 1.1441-5(c)(2)(iv) from a person representing to be a withholding
foreign partnership, and the agreement that the withholding agent has in
effect with an authorized foreign agent in accordance with Sec. 1.1441-
7(c)(2)(i). A withholding agent that is not required to obtain
documentation with respect to a payment is considered to lack
documentation for purposes of this paragraph (b)(2)(vii). For
[[Page 73]]
example, a withholding agent paying U.S. source interest to a person
that is an exempt recipient, as defined in Sec. 1.6049-4(c)(1)(ii), is
not required to obtain documentation from that person in order to
determine whether an amount paid to that person is reportable under an
applicable information reporting provision under chapter 61 of the Code.
Therefore, the withholding agent may rely on the provisions of paragraph
(b)(3)(iii)(A) of this section to determine whether the person is
presumed to be a U.S. person (in which case, no withholding is required
under this section), or whether the person is presumed to be a foreign
person (in which case 30-percent withholding is required under this
section). See paragraph (b)(3)(v)(A) of this section for special
reliance rules in the case of a payment to a foreign intermediary and
Sec. 1.1441-5(d)(3) for special reliance rules in the case of a payment
to a foreign partnership.
(3) Presumptions regarding payee's status in the absence of
documentation--(i) General rules. A withholding agent that cannot
reliably associate a payment with documentation may rely on the
presumptions of this paragraph (b)(3) in order to determine the status
of the payee as a U.S. or a foreign person and the payee's other
relevant characteristics (e.g., as an owner or intermediary, as an
individual, trust, partnership, or corporation). The determination of
withholding and reporting requirements applicable to payments to a
person presumed to be a foreign person is governed only by the
provisions of chapter 3 of the Code and the regulations thereunder. For
the determination of withholding and reporting requirements applicable
to payments to a person presumed to be a U.S. person, see chapter 61 of
the Code, section 3402, 3405, or 3406, and the regulations under these
provisions. A presumption that a payee is a foreign payee is not a
presumption that the payee is a foreign beneficial owner. Therefore, the
provisions of this paragraph (b)(3) have no effect for purposes of
reducing the withholding rate if associating the payment with
documentation of foreign beneficial ownership is required as a condition
for such rate reduction. See paragraph (b)(3)(ix) of this section for
consequences to a withholding agent that fails to withhold in accordance
with the presumptions set forth in this paragraph (b)(3) or if the
withholding agent has actual knowledge or reason to know of facts that
are contrary to the presumptions set forth in this paragraph (b)(3). See
paragraph (b)(2)(vii) of this section for rules regarding the extent
which a withholding agent can reliably associate a payment with
documentation.
(ii) Presumptions of status as individual, corporation, partnership,
etc. A withholding agent that cannot reliably associate a payment with
documentation must presume that the payee is an individual, a trust, or
an estate, if the payee appears to be such person (i.e., based on the
payee's name or other indications). In the absence of reliable
indications that the payee is an individual, estate, or trust, the
withholding agent must presume that the payee is a corporation or one of
the persons enumerated under Sec. 1.6049-4(c)(1)(ii) (B) through (Q) if
it can be so treated under Sec. 1.6049-4(c)(1)(ii)(A)(1) or any one of
the paragraphs under Sec. 1.6049-4(c)(1)(ii) (B) through (Q) without the
need to furnish documentation. If the withholding agent cannot treat a
payee as a person described in Sec. 1.6049-4(c)(1)(ii) (A)(1) through
(Q), then the payee shall be presumed to be a partnership. The fact that
a payee is presumed to have a certain status under the provisions of
this paragraph (b)(3)(ii) does not mean that it is excused from
furnishing documentation, if documentation is otherwise required in
order to obtain a reduced rate of withholding under this section. For
example, if, for purposes of this paragraph (b)(3)(ii), a payee is
presumed to be a tax-exempt organization based on Sec. 1.6049-
4(c)(1)(ii)(B), the withholding agent cannot rely on this presumption to
reduce the rate of withholding on payments to such person (if such
person is also presumed to be a foreign person under paragraph
(b)(3)(iii)(A) of this section) because a reduction in the rate of
withholding for payments to a foreign tax-exempt organization generally
requires that a valid Form W-8 described in Sec. 1.1441-9(b)(2) be
furnished to the withholding agent.
[[Page 74]]
(iii) Presumption of U.S. or foreign status. A payment that the
withholding agent cannot reliably associate with documentation is
presumed to be made to a U.S. person, except as otherwise provided in
this paragraph (b)(3)(iii), in paragraphs (b)(3) (iv) and (v) of this
section, or in Sec. 1.1441-5 (d) or (e).
(A) Payments to exempt recipients. If a withholding agent cannot
reliably associate a payment with documentation from the payee and the
payee is an exempt recipient (as determined under the provisions of
Sec. 1.6049-4(c)(1)(ii) in the case of interest, or under similar
provisions under chapter 61 of the Code applicable to the type of
payment involved, but not including a payee that the withholding agent
may treat as a foreign intermediary in accordance with paragraph
(b)(3)(v) of this section), the payee is presumed to be a foreign person
and not a U.S. person--
(1) If the withholding agent has actual knowledge of the payee's
employer identification number and that number begins with the two
digits ``98'';
(2) If the withholding agent's communications with the payee are
mailed to an address in a foreign country;
(3) If the name of the payee indicates that the entity is the type
of entity that is on the per se list of foreign corporations contained
in Sec. 301.7701-2(b)(8)(i) of this chapter; or
(4) If the payment is made outside the United States (as defined in
Sec. 1.6049-5(e)).
(B) Scholarships and grants. A payment representing taxable
scholarship or fellowship grant income that does not represent
compensation for services (but is not excluded from tax under section
117) and that a withholding agent cannot reliably associate with
documentation is presumed to be made to a foreign person if the
withholding agent has a record that the payee has a U.S. visa that is
not an immigrant visa. See section 871(c) and Sec. 1.1441-4(c) for
applicable tax rate and withholding rules.
(C) Pensions, annuities, etc. A payment from a trust described in
section 401(a), an annuity plan described in section 401(a), an annuity
plan described in section 403(a), or a payment with respect to any
annuity, custodial account, or retirement income account described in
section 403(b) that a withholding agent cannot reliably associate with
documentation is presumed to be made to a U.S. person only if the
withholding agent has a record of a Social Security number for the payee
and relies on a mailing address described in the following sentence. A
mailing address is an address used for purposes of information reporting
or otherwise communicating with the payee that is an address in the
United States or in a foreign country with which the United States has
an income tax treaty in effect that provides that the payee, if an
individual resident in that country, would be entitled to an exemption
from U.S. tax on amounts described in this paragraph (b)(3)(iii)(C). Any
payment described in this paragraph (b)(3)(iii)(C) that is not presumed
made to a U.S. person is presumed to be made to a foreign person. A
withholding agent making a payment to a person presumed to be a foreign
person may not reduce the 30-percent amount of withholding required on
such payment unless it receives a withholding certificate described in
paragraph (e)(2)(i) of this section furnished by the beneficial owner.
For basis of reduction in the 30-percent rate, see Sec. 1.1441-4(d) or
Sec. 1.1441-6(b).
(D) Certain payments to offshore accounts. A payment that would be
subject to withholding under section 1441, 1442, or 1443 if made to a
foreign person and is exempt from backup withholding under section 3406
by reason of Sec. 31.3406(g)-1(e) of this chapter (relating to exemption
from backup withholding under section 3406 for certain payments to
offshore accounts) is presumed to be made to a foreign payee.
(iv) Grace period in the case of indicia of a foreign payee. A
withholding agent may choose, in its discretion, to apply the provisions
of Sec. 1.6049-5(d)(2)(ii) regarding a 90-day grace period for purposes
of this paragraph (b)(3) (by substituting the term withholding agent for
the term payor) to amounts described in Sec. 1.1441-6(b)(2)(ii) and to
amounts covered by a Form 8233 described in Sec. 1.1441-4(b)(2)(ii).
Thus, for these amounts, a withholding agent may, in its discretion,
choose to treat an account holder as a foreign person and withhold under
chapter 3 of the Code
[[Page 75]]
(and the regulations thereunder) while awaiting documentation. For
purposes of determining the rate of withholding under this section, the
withholding agent must withhold at the unreduced 30-percent rate at the
time that the amounts are credited to the account. However, a
withholding agent who can reliably associate the payment with a
withholding certificate that is otherwise valid within the meaning of
the applicable provisions except for the fact that it is transmitted by
facsimile may rely on that facsimile form for purposes of withholding at
the claimed reduced rate. For reporting of amounts credited both before
and after the grace period, see Sec. 1.1461-1(c)(7). The following
adjustments shall be made at the expiration of the grace period:
(A) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section and the account
holder is presumed to be a U.S. person who is not an exempt recipient,
then backup withholding applies to amounts credited to the account after
the expiration of the grace period only. Amounts credited to the account
during the grace period shall be treated as owned by a foreign payee and
adjustments must be made to correct any underwithholding on such amounts
in the manner described in Sec. 1.1461-2.
(B) If, at the end of the grace period, the documentation is not
furnished in the manner required under this section and the account
holder is presumed to be a foreign person, or if documentation is
furnished that does not support the claimed rate reduction, then
adjustments must be made to correct the underwithholding on amounts
credited to the account during the grace period, based on adjustment
procedures described in Sec. 1.1461-2.
(v) Special rules applicable to payments to foreign intermediaries--
(A) Reliance on claim of status as foreign intermediary. A withholding
agent that can reliably associate a payment with a withholding
certificate described in paragraph (e)(3) (ii) or (iii) of this section
may treat the payment as made to a foreign intermediary, as represented
in the certificate. For this purpose, a U.S. person's foreign branch
that is a qualified intermediary defined in paragraph (e)(5)(ii) of this
section shall be treated as a foreign intermediary. For purposes of this
section, a payment that the withholding agent can reliably associate
with a withholding certificate described in paragraph (e)(3) (ii) or
(iii) of this section that would be valid except for the fact that some
or all of the withholding certificates or other appropriate
documentation required to be attached are lacking or are unreliable or
that information for allocating the payment among the various persons
for whom the intermediary is acting is lacking or is unreliable shall
nevertheless be treated as a payment to a foreign intermediary and the
rules of this paragraph (b)(3)(v) shall apply accordingly. A payee that
the withholding agent may not reliably treat as a foreign intermediary
under this paragraph (b)(3)(v)(A) is presumed to be an owner whose
status as an individual, trust, estate, etc., must be determined in
accordance with paragraph (b)(3)(ii) of this section, to the extent
relevant. In addition, such payee is presumed to be a U.S. or a foreign
payee based upon the presumptions described in paragraph (b)(3)(iii) of
this section. The provisions of paragraphs (b)(3)(v) (B), (C), and (D)
of this section are not relevant to a withholding agent that can
reliably associate a payment with a withholding certificate from a
person representing to be a qualified intermediary that has assumed
primary withholding responsibility in accordance with paragraph
(e)(5)(iv) of this section.
(B) Beneficial owner documentation is lacking or unreliable. Any
portion of a payment that the withholding agent may treat as made to a
foreign intermediary in accordance with paragraph (b)(3)(v)(A) of this
section but cannot reliably associate with a beneficial owner due to the
lack of a withholding certificate or other appropriate documentation for
that beneficial owner is presumed to be made to a foreign payee for whom
the foreign intermediary collects the payment (see paragraph (b)(2)(v)
of this section). For purposes of this paragraph (b)(2)(v)(B), any
payment that a foreign qualified intermediary represents to be allocable
to the category of assets described in paragraph (e)(5)(v)(B)(3) of this
section
[[Page 76]]
(i.e., assets allocable to persons for whom the qualified intermediary
does not hold documentation as specified under its agreement with the
IRS) is treated as a payment that the withholding agent cannot reliably
associate with beneficial owners. As a result, any payment allocable to
such category of assets is presumed to be made to an unidentified
foreign payee. Under paragraph (b)(1) of this section, a payment to a
foreign payee is subject to withholding at a 30-percent rate.
(C) Information regarding allocation of payment is lacking or
unreliable. If a withholding agent can reliably associate a payment with
a group of beneficial owners or payees but lacks reliable information to
determine how much of the payment is allocable to one or more of the
beneficial owners or payees in the group (because, for example, the
statement described in paragraph (e)(3)(iv) of this section has not been
furnished), the payment, to the extent it cannot reliably be allocated,
is presumed to be allocable entirely to the beneficial owner or payee in
the group with the highest applicable withholding rate or, if the rates
are equal, to the beneficial owner or payee in the group with the
highest U.S. tax liability, as the withholding agent shall estimate,
based on its knowledge and available information. If a withholding
certificate attached to an intermediary certificate is another
intermediary certificate or a certificate from a foreign partnership
described in Sec. 1.1441-5(c)(3)(iii), the rules of this paragraph
(b)(3)(v)(C) apply by treating the share of the payment allocable to the
other intermediary or to the foreign partnership as if the payment were
made directly to the other intermediary or to the foreign partnership.
(D) Certification that the foreign intermediary has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable. If the certification
required under paragraph (e)(3)(iii)(D) of this section (that the
attached withholding certificates and other appropriate documentation
represent all of the persons to whom the intermediary withholding
certificate relates) is lacking or is unreliable and, as a result, the
withholding agent cannot reliably determine how much of the payment is
allocable to each of the persons or group of persons for which the
withholding agent holds a withholding certificate or other appropriate
documentation, then none of the payment can reliably be associated with
any one person and the entire payment is presumed to be made to an
unidentified foreign payee for whom the intermediary collects the
payment and from which a 30-percent amount must be withheld in
accordance with paragraph (b)(1) of this section.
(vi) U.S. branches and foreign flow-through entities. The rules of
paragraphs (b)(3)(v) (B), (C), and (D) of this section shall apply to
payments to a U.S. branch described in paragraph (b)(2)(iv)(A) of this
section that has agreed to assume withholding responsibility in the same
manner that they apply to payments to a foreign intermediary. See
Sec. 1.1441-5(d) for similar rules in the case of payments to foreign
partnerships. See Sec. 1.1441-5(e) for similar rules in the case of
payments to foreign trusts or foreign estates.
(vii) Joint payees. A payment made to joint payees for whom the
withholding agent cannot reliably associate documentation for all joint
payees or can reliably associate the payment with a Form W-9 furnished
in accordance with the procedures described in Secs. 31.3406(d)-1
through 31.3406(d)-5 of this chapter from one of the joint payees is
presumed to be made to U.S. persons. For purposes of applying this
paragraph (b)(3), the grace period rules in paragraph (b)(3)(iv) of this
section shall apply only if each payee qualifies for the conditions
described in paragraph (b)(3)(iv) of this section. However, as provided
in paragraph (b)(3)(iii)(D) of this section, a payment of an amount that
would be subject to withholding under section 1441, 1442, or 1443 if
paid to a foreign person and is exempt from the application of the
provisions of section 3406 by reason of Sec. 31.3406(g)-1(e) of this
chapter (relating to exemption from backup withholding under section
3406 of the Code for certain payments made with respect to offshore
accounts), is presumed to be made to foreign persons.
(viii) Rebuttal of presumptions. A payee or beneficial owner may
rebut
[[Page 77]]
the presumptions described in this paragraph (b)(3) by providing
reliable documentation to the withholding agent or, if applicable, to
the IRS.
(ix) Effect of reliance on presumptions and of actual knowledge or
reason to know otherwise--(A) General rule. Except as otherwise provided
in paragraph (b)(3)(ix)(B) of this section, a withholding agent that
withholds on a payment under section 3402, 3405 or 3406 in accordance
with the presumptions set forth in this paragraph (b)(3) shall not be
liable for withholding under this section even it is later established
that the beneficial owner of the payment is, in fact, a foreign person.
Similarly, a withholding agent that withholds on a payment under this
section in accordance with the presumptions set forth in this paragraph
(b)(3) shall not be liable for withholding under section 3402 or 3405 or
for backup withholding under section 3406 even if it is later
established that the payee or beneficial owner is, in fact, a U.S.
person. A withholding agent that, instead of relying on the presumptions
described in this paragraph (b)(3), relies on its own actual knowledge
to withhold a lesser amount, not withhold, or not report a payment, even
though reporting of the payment or withholding a greater amount would be
required if the withholding agent relied on the presumptions described
in this paragraph (b)(3) shall be liable for tax, interest, and
penalties to the extent provided under section 1461 and the regulations
under that section. See paragraph (b)(7) of this section for provisions
regarding such liability if the withholding agent fails to withhold in
accordance with the presumptions described in this paragraph (b)(3).
(B) Actual knowledge or reason to know that amount of withholding is
greater than is required under the presumptions or that reporting of the
payment is required. Notwithstanding the provisions of paragraph
(b)(3)(ix)(A) of this section, a withholding agent may not rely on the
presumptions described in this paragraph (b)(3) to the extent it has
actual knowledge or reason to know that the status or characteristics of
the payee or of the beneficial owner are other than what is presumed
under this paragraph (b)(3) and, if based on such knowledge or reason to
know, it should withhold (under this section or another withholding
provision of the Code) an amount greater than would be the case if it
relied on the presumptions described in this paragraph (b)(3) or it
should report (under this section or under another provision of the
Code) an amount that would not otherwise be reportable if it relied on
the presumptions described in this paragraph (b)(3). In such a case, the
withholding agent must rely on its actual knowledge or reason to know
rather than on the presumptions set forth in this paragraph (b)(3).
Failure to do so and, as a result, failure to withhold the higher amount
or to report the payment, shall result in liability for tax, interest,
and penalties to the extent provided under sections 1461 and 1463 and
the regulations under those sections.
(x) Examples. The provisions of this paragraph (b)(3) are
illustrated by the following examples:
Example 1. A withholding agent, W, makes a payment of U.S. source
dividends to person X, Inc. at an address outside the United States. W
cannot reliably associate the payment to X with documentation. Under
Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii)(A)(1), W may treat X as
a corporation. Thus, under the presumptions described in paragraph
(b)(3)(iii) of this section, W must presume that X is a foreign person
(because the payment is made outside the United States). However, W
knows that X is a U.S. person who is an exempt recipient. W may not rely
on its actual knowledge to not withhold under this section. If W's
knowledge is, in fact, incorrect, W would be liable for tax, interest,
and, if applicable, penalties, under section 1461. W would be permitted
to reduce or eliminate its liability for the tax by establishing, in
accordance with paragraph (b)(7) of this section, that the tax is not
due or has been satisfied. If W's actual knowledge is, in fact, correct,
W may nevertheless be liable for tax, interest, or penalties under
section 1461 for the amount that W should have withheld based upon the
presumptions. W would be permitted to reduce or eliminate its liability
for the tax by establishing, in accordance with paragraph (b)(7) of this
section, that its actual knowledge was, in fact, correct and that no tax
or a lesser amount of tax was due.
Example 2. A withholding agent, W, makes a payment of U.S. source
dividends to Y who does not qualify as an exempt recipient under
Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii). W cannot reliably
associate the payment to Y with documentation. Under
[[Page 78]]
the presumptions described in paragraph (b)(3)(iii) of this section, W
must presume that Y is a U.S. person who is not an exempt recipient for
purposes of section 6042. However, W knows that Y is a foreign person. W
may not rely on its actual knowledge to withhold under this section
rather than backup withhold under section 3406. If W's knowledge is, in
fact, incorrect, W would be liable for tax, interest, and, if
applicable, penalties, under section 3403. If W's actual knowledge is,
in fact, correct, W may nevertheless be liable for tax, interest, or
penalties under section 3403 for the amount that W should have withheld
based upon the presumptions. Paragraph (b)(7) of this section does not
apply to provide relief from liability under section 3403.
Example 3. A withholding agent, W, makes a payment of U.S. source
dividends to X, Inc. W cannot reliably associate the payment to X, Inc.
with documentation. X, Inc. presents none of the indicia of foreign
status described in paragraph (b)(3)(iii)(A) of this section, but W has
actual knowledge that X, Inc. is a foreign corporation. W may treat X,
Inc. as an exempt recipient under Sec. 1.6042-3(b)(1)(vii). Because
there are no indicia of foreign status, W would, absent actual knowledge
or reason to know otherwise, be permitted to treat X, Inc. as a domestic
corporation in accordance with the presumptions of paragraph (b)(3)(iii)
of this section. However, under paragraph (b)(3)(ix)(B) of this section,
W may not rely on the presumption of U.S. status since reliance on its
actual knowledge requires that it withhold an amount greater than would
be the case under the presumptions.
Example 4. A withholding agent, W, is a plan administrator who makes
pension payments to person X with a mailing address in a foreign country
with which the United States has an income tax treaty in effect. Under
that treaty, the type of pension income paid to X is taxable solely in
the country of residence. The plan administrator has a record of X's
U.S. social security number. W has no actual knowledge or reason to know
that X is a foreign person. W may rely on the presumption of paragraph
(b)(3)(iii)(C) of this section in order to treat X as a U.S. person.
Therefore, any withholding and reporting requirements for the payment
are governed by the provisions of section 3405 and the regulations under
that section.
(4) List of exemptions from, or reduced rates of, withholding under
chapter 3 of the Code. A withholding agent that has determined that the
payee is a foreign person for purposes of paragraph (b)(1) of this
section must determine whether the payee is entitled to a reduced rate
of withholding under section 1441, 1442, or 1443. This paragraph (b)(4)
identifies items for which a reduction in the rate of withholding may
apply and whether the rate reduction is conditioned upon documentation
being furnished to the withholding agent. Documentation required under
this paragraph (b)(4) is documentation that a withholding agent must be
able to associate with a payment upon which it can rely to treat the
payment as made to a foreign person that is the beneficial owner of the
payment in accordance with paragraph (e)(1)(ii) of this section. This
paragraph (b)(4) also cross-references other sections of the Code and
applicable regulations in which some of these exceptions, exemptions, or
reductions are further explained. See, for example, paragraph
(b)(4)(viii) of this section, dealing with effectively connected income,
that cross-references Sec. 1.1441-4(a); see paragraph (b)(4)(xv) of this
section, dealing with exemptions from, or reductions of, withholding
under an income tax treaty, that cross-references Sec. 1.1441-6. This
paragraph (b)(4) is not an exclusive list of items to which a reduction
of the rate of withholding may apply and, thus, does not preclude an
exemption from, or reduction in, the rate of withholding that may
otherwise be allowed under the regulations under the provisions of
chapter 3 of the Code for a particular item of income identified in this
paragraph (b)(4).
(i) Portfolio interest described in section 871(h) or 881(c) and
substitute interest payments described in Sec. 1.871-7(b)(2) or 1.881-
2(b)(2) are exempt from withholding under section 1441(a). See
Sec. 1.871-14 for regulations regarding portfolio interest and section
1441(c)(9) for exemption from withholding. Documentation establishing
foreign status is required for interest on an obligation in registered
form to qualify as portfolio interest. See section 871(h)(2)(B)(ii) and
Sec. 1.871-14(c)(1)(ii)(C). For special documentation rules regarding
foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2), see Sec. 1.871-14(e) (3) and (4) and, in particular,
Sec. 1.871-14(e)(4)(i)(A) and (ii)(A) regarding the time when the
withholding agent must receive the documentation. The documentation
furnished for purposes of qualifying interest as portfolio interest
serves as the basis for the withholding exemption for
[[Page 79]]
purposes of this section and for purposes of establishing foreign status
for purposes of section 6049. See Sec. 1.6049-5(b)(8). Documentation
establishing foreign status is not required for qualifying interest on
an obligation in bearer form described in Sec. 1.871-14(b)(1) as
portfolio interest. However, in certain cases, documentation for
portfolio interest on a bearer obligation may have to be furnished in
order to establish foreign status for purposes of the information
reporting provisions of section 6049 and backup withholding under
section 3406. See Sec. 1.6049-5(b)(7).
(ii) Bank deposit interest and similar types of deposit interest
(including original issue discount) described in section 871(i)(2)(A) or
881(d) that are from sources within the United States are exempt from
withholding under section 1441(a). See section 1441(c)(10).
Documentation establishing foreign status is not required for purposes
of this withholding exemption but may have to be furnished for purposes
of the information reporting provisions of section 6049 and backup
withholding under section 3406. See Sec. 1.6049-5(d)(3)(iii) for
exceptions to the foreign payee and exempt recipient rules regarding
this type of income. See also Sec. 1.6049-5(b)(11) for applicable
documentation exemptions for certain bank deposit interest paid on
obligations in bearer form.
(iii) Bank deposit interest (including original issue discount)
described in section 861(a)(1)(B) is exempt from withholding under
sections 1441(a) as income that is not from U.S. sources. Documentation
establishing foreign status is not required for purposes of this
withholding exemption but may have to be furnished for purposes of the
information reporting provisions of section 6049 and backup withholding
under section 3406. Reporting requirements for payments of such interest
are governed by section 6049 and the regulations under that section. See
Sec. 1.6049-5(b)(12) and alternative documentation rules under
Sec. 1.6049-5(c)(4).
(iv) Interest or original issue discount from sources within the
United States on certain short-term obligations described in section
871(g)(1)(B) or 881(a)(3) is exempt from withholding under sections
1441(a). Documentation establishing foreign status is not required for
purposes of this withholding exemption but may have to be furnished for
purposes of the information reporting provisions of section 6049 and
backup withholding under section 3406. See Sec. 1.6049-5(b)(12) for
applicable documentation for establishing foreign status and
Sec. 1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt
recipient rules regarding this type of income. See also Sec. 1.6049-
5(b)(10) for applicable documentation exemptions for certain obligations
in bearer form.
(v) Income from sources without the United States is exempt from
withholding under sections 1441(a). Documentation establishing foreign
status is not required for purposes of this withholding exemption but
may have to be furnished for purposes of the information reporting
provisions of section 6049 or other applicable provisions of chapter 61
of the Code and backup withholding under section 3406. See, for example,
Sec. 1.6049-5(b) (6) and (12) and alternative documentation rules under
Sec. 1.6049-5(c)(4). See also paragraph (b)(5) of this section for cross
references to other applicable provisions of the regulations under
chapter 61 of the Code.
(vi) Distributions from certain domestic corporations described in
section 871(i)(2)(B) or 881(d) are exempt from withholding under section
1441(a). See section 1441(c)(10). Documentation establishing foreign
status is not required for purposes of this withholding exemption but
may have to be furnished for purposes of the information reporting
provisions of section 6042 and backup withholding under section 3406.
See Sec. 1.6042-3(b)(1) (iii) through (vi).
(vii) Dividends paid by certain foreign corporations that are
treated as income from sources within the United States by reason of
section 861(a)(2)(B) are exempt from withholding under section 884(e)(3)
to the extent that the distributions are paid out of earnings and
profits in any taxable year that the corporation was subject to branch
profits tax for that year. Documentation establishing foreign status is
not required for purposes of this withholding exemption but may have to
be furnished for purposes of the information reporting provisions of
section
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6042 and backup withholding under section 3406. See Sec. 1.6042-3(b)(1)
(iii) through (vii).
(viii) Certain income that is effectively connected with the conduct
of a U.S. trade or business is exempt from withholding under section
1441(a). See section 1441(c)(1). Documentation establishing foreign
status and status of the income as effectively connected must be
furnished for purposes of this withholding exemption to the extent
required under the provisions of Sec. 1.1441-4(a). Documentation
furnished for this purpose also serves as documentation establishing
foreign status for purposes of applicable information reporting
provisions under chapter 61 of the Code and for backup withholding under
section 3406. See, for example, Sec. 1.6041-4(a)(1).
(ix) Certain income with respect to compensation for personal
services of an individual that are performed in the United States is
exempt from withholding under section 1441(a). See section 1441(c)(4)
and Sec. 1.1441-4(b). However, such income may be subject to withholding
as wages under section 3402. Documentation establishing foreign status
must be furnished for purposes of any withholding exemption or reduction
to the extent required under Sec. 1.1441-4(b) or 31.3401(a)(6)-1 (e) and
(f) of this chapter. Documentation furnished for this purpose also
serves as documentation establishing foreign status for purposes of
information reporting under section 6041. See Sec. 1.6041-4(a)(1).
(x) Amounts described in section 871(f) that are received as
annuities from certain qualified plans are exempt from withholding under
section 1441(a). See section 1441(c)(7). Documentation establishing
foreign status must be furnished for purposes of the withholding
exemption as required under Sec. 1.1441-4(d). Documentation furnished
for this purpose also serves as documentation establishing foreign
status for purposes of information reporting under section 6041. See
Sec. 1.6041-4(a)(1).
(xi) Payments to a foreign government (including a foreign central
bank of issue) that are excludable from gross income under section
892(a) are exempt from withholding under section 1442. See Sec. 1.1441-
8(b). Documentation establishing status as a foreign government is
required for purposes of this withholding exemption. Payments to a
foreign government are exempt from information reporting under chapter
61 of the Code (see Sec. 1.6049-4(c)(1)(ii)(F)).
(xii) Payments of certain interest income to a foreign central bank
of issue or the Bank for International Settlements that are exempt from
tax under section 895 are exempt from withholding under section 1442.
Documentation establishing eligibility for such exemption is required to
the extent provided in Sec. 1.1441-8(c)(1). Payments to a foreign
central bank of issue or to the Bank for International Settlements are
exempt from information reporting under chapter 61 of the Code (see
Sec. 1.6049-4(c)(1)(ii) (H) and (M)).
(xiii) Amounts derived by a foreign central bank of issue from
bankers' acceptances described in section 871(i)(2)(C) or 881(d) are
exempt from tax and, therefore, from withholding. See section
1441(c)(10). Documentation establishing foreign status is not required
for purposes of this withholding exemption if the name of the payee and
other facts surrounding the payment reasonably indicate that the
beneficial owner of the payment is a foreign central bank of issue as
defined in Sec. 1.861-2(b)(4). See Sec. 1.1441-8(c)(2) for withholding
procedures. See also Secs. 1.6049-4(c)(1)(ii)(H) and 1.6041-3(q)(8) for
a similar exemption from information reporting.
(xiv) Payments to an international organization from investments in
the United States of stocks, bonds, or other domestic securities or from
interest on deposits in banks in the United States of funds belonging to
such international organization are exempt from tax under section 892(b)
and, thus, from withholding. Documentation establishing status as an
international organization is not required if the name of the payee and
other facts surrounding the payment reasonably indicate that the
beneficial owner of the payment is an international organization within
the meaning of section 7701(a)(18). See Sec. 1.1441-8(d). Payments to an
international organization are exempt from information reporting under
chapter 61 of the Code (see Sec. 1.6049-4(c)(1)(ii)(G)).
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(xv) Amounts may be exempt from, or subject to a reduced rate of,
withholding under an income tax treaty. Documentation establishing
eligibility for benefits under an income tax treaty is required for this
purpose as provided under Secs. 1.1441-6. Documentation furnished for
this purpose also serves as documentation establishing foreign status
for purposes of applicable information reporting provisions under
chapter 61 of the Code and for backup withholding under section 3406.
See, for example, Sec. 1.6041-4(a)(1).
(xvi) Amounts of scholarships and grants paid to certain exchange or
training program participants that do not represent compensation for
services but are not excluded from tax under section 117 are subject to
a reduced rate of withholding of 14-percent under section 1441(b).
Documentation establishing foreign status is required for purposes of
this reduction in rate as provided under Sec. 1.1441-4(c). This income
is not subject to information reporting under chapter 61 of the Code nor
to backup withholding under section 3406. The compensatory portion of a
scholarship or grant is reportable as wage income. See Sec. 1.6041-3(o).
(xvii) Amounts paid to a foreign organization described in section
501(c) are exempt from withholding under section 1441 to the extent that
the amounts are not income includible under section 512 in computing the
organization's unrelated business taxable income and are not subject to
the tax imposed by section 4948(a). Documentation establishing status as
a tax-exempt organization is required for purposes of this exemption to
the extent provided in Sec. 1.1441-9. Amounts includible under section
512 in computing the organization's unrelated business taxable income
are subject to withholding to the extent provided in section 1443(a) and
Sec. 1.1443-1(a). Gross investment income (as defined in section
4940(c)(2)) of a private foundation is subject to withholding at a 4-
percent rate to the extent provided in section 1443(b) and Sec. 1.1443-
1(b). Payments to a tax-exempt organization are exempt from information
reporting under chapter 61 of the Code and the regulations thereunder
(see Sec. 1.6049-4(c)(1)(ii)(B)(1)).
(xviii) Per diem amounts for subsistence paid by the U.S. government
to a nonresident alien individual who is engaged in any program of
training in the United States under the Mutual Security Act of 1954 are
exempt from withholding under section 1441(a). See section 1441(c)(6).
Documentation of foreign status is required under Sec. 1.1441-4(e) for
purposes of establishing eligibility for this exemption. See
Sec. 1.6041-3(p).
(xix) Interest with respect to tax-free covenant bonds issued prior
to 1934 is subject to special withholding procedures set forth in
Sec. 1.1461-1 in effect prior to January 1, 2001 (see Sec. 1.1461-1 as
contained in 26 CFR part 1, revised April 1, 1999).
(xx) Income from certain gambling winnings of a nonresident alien
individual is exempt from tax under section 871(j) and from withholding
under section 1441(a). See section 1441(c)(11). Documentation
establishing foreign status is not required for purposes of this
exemption but may have to be furnished for purposes of the information
reporting provisions of section 6041 and backup withholding under
section 3406. See Secs. 1.6041-1 and 1.6041-4(a)(1).
(xxi) Any payments not otherwise mentioned in this paragraph (b)(4)
shall be subject to withholding at the rate of 30-percent if it is an
amount subject to withholding (as defined in Sec. 1.1441-2(a)) unless
and to the extent the IRS may otherwise prescribe in published guidance
(see Sec. 601.601(d)(2) of this chapter) or unless otherwise provided in
regulations under chapter 3 of the Code.
(5) Establishing foreign status under applicable provisions of
chapter 61 of the Code. This paragraph (b)(5) identifies relevant
provisions of the regulations under chapter 61 of the Code that exempt
payments from information reporting, and therefore, from backup
withholding under section 3406, based on the payee's status as a foreign
person. Many of these exemptions require that the payee's foreign status
be established in order for the exemption to apply. The regulations
under applicable provisions of chapter 61 of the Code generally provide
that the documentation described in this section may be relied upon for
purposes of determining foreign status.
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(i) Payments to a foreign person that are governed by section 6041
(dealing with certain trade or business income) are exempt from
information reporting under Sec. 1.6041-4(a).
(ii) Payments to a foreign person that are governed by section 6041A
(dealing with remuneration for services and certain sales) are exempt
from information reporting under Sec. 1.6041A-1(d)(3).
(iii) Payments to a foreign person that are governed by section 6042
(dealing with dividends) are exempt from information reporting under
Sec. 1.6042-3(b)(1) (iii) through (vi).
(iv) Payments to a foreign person that are governed by section 6044
(dealing with patronage dividends) are exempt from information reporting
under Sec. 1.6044-3(c)(1).
(v) Payments to a foreign person that are governed by section 6045
(dealing with broker proceeds) are exempt from information reporting
under Sec. 1.6045-1(g).
(vi) Payments to a foreign person that are governed by section 6049
(dealing with interest) to a foreign person are exempt from information
reporting under Sec. 1.6049-5(b) (6) through (15).
(vii) Payments to a foreign person that are governed by section
6050N (dealing with royalties) are exempt from information reporting
under Sec. 1.6050N-1(c).
(viii) Payments to a foreign person that are governed by section
6050P (dealing with income from cancellation of debt) are exempt from
information reporting under section 6050P or the regulations under that
section except to the extent provided in Notice 96-61 (1996-2 C.B. 227);
see also Sec. 601.601(b)(2) of this chapter.
(6) Rules of withholding for payments by a foreign intermediary or
certain U.S. branches. A foreign intermediary described in paragraph
(e)(3)(i) of this section or a U.S. branch described in paragraph
(b)(2)(iv) of this section that receives an amount subject to
withholding (as defined in Sec. 1.1441-2(a)) shall be deemed to have
satisfied any obligation it has under chapter 3 of the Code and the
regulations thereunder to withhold and report the amount when it, in
turn, pays such amount to another person (whether or not the beneficial
owner) to the extent that the payment is associated with a valid
withholding certificate described in paragraph (e)(3) (ii), (iii), or
(v) of this section that it has furnished to another withholding agent
and the intermediary does not know and has no reason to know that the
correct amount has not been withheld under chapter 3 of the Code and the
regulations thereunder. See Sec. 1.1441-5(c)(3)(v) for a similar rule
for payments by certain foreign partnerships.
(7) Liability for failure to obtain documentation timely or to act
in accordance with applicable presumptions--(i) General rule. A
withholding agent that cannot reliably associate a payment with
documentation on the date of payment and that does not withhold under
this section, or withholds at less than the 30-percent rate prescribed
under section 1441(a) and paragraph (b)(1) of this section, is liable
under section 1461 for the tax required to be withheld under chapter 3
of the Code and the regulations thereunder, without the benefit of a
reduced rate unless--
(A) The withholding agent has appropriately relied on the
presumptions described in paragraph (b)(3) of this section (including
the grace period described in paragraph (b)(3)(iv) of this section) in
order to treat the payee as a U.S. person or, if applicable, on the
presumptions described in Sec. 1.1441-4(a) (2)(i) or (3) to treat the
payment as effectively connected income; or
(B) The withholding agent can demonstrate to the satisfaction of the
district director or the Assistant Commissioner (International) that the
proper amount of tax, if any, was in fact paid to the IRS; or
(C) No documentation is required under section 1441 or this section
in order for a reduced rate of withholding to apply.
(ii) Proof that tax liability has been satisfied. Proof of payment
of tax may be established for purposes of paragraph (b)(7)(i)(B) of this
section on the basis of a Form 4669 (or such other form as the IRS may
prescribe in published guidance (see Sec. 601.601(d)(2) of this
chapter)), establishing the amount of tax, if any, actually paid by or
for the beneficial owner on the income. Proof that a reduced rate of
withholding was, in
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fact, appropriate under the provisions of chapter 3 of the Code and the
regulations thereunder may also be established after the date of payment
by the withholding agent on the basis of a valid withholding certificate
or other appropriate documentation furnished after that date. However,
in the case of a withholding certificate or other appropriate
documentation received after the date of payment (or after the grace
period specified in paragraph (b)(3)(iv) of this section), the district
director or the Assistant Commissioner (International) may require
additional proof if it is determined that the delays in obtaining the
withholding certificate affect its reliability.
(iii) Liability for interest and penalties. A withholding agent that
has failed to withhold other than based on appropriate reliance on the
presumptions described in paragraph (b)(3) of this section or in
Sec. 1.1441-4(a) (2)(i) or (3) is not relieved from liability for
interest under section 6601. Such liability exists even if there is no
underlying tax liability due. The interest on the amount that should
have been withheld shall be imposed as prescribed under section 6601
beginning on the last date for paying the tax due under section 1461
(which, under section 6601, is the due date for filing the withholding
agent's return of tax). The interest shall stop accruing on the earlier
of the date that the required withholding certificate or other
documentation is provided to the withholding agent and to the extent of
the amount of tax that is determined not to be due based on
documentation provided, or the date, and to the extent, that the unpaid
tax liability under section 871, 881 or under section 1461 is satisfied.
Further, in the event that a tax liability is assessed against the
beneficial owner under section 871, 881, or 882 and interest under
section 6601(a) is assessed against, and collected from, the beneficial
owner, the interest charge imposed on the withholding agent shall be
abated to that extent so as to avoid the imposition of a double interest
charge. However, the withholding agent is not relieved of any applicable
penalties. See section 1464.
(iv) Special effective date. See paragraph (f)(2)(ii) of this
section for the special effective date applicable to this paragraph
(b)(7).
(v) Examples. The provisions of paragraph (b)(7) of this section are
illustrated by the following examples:
Example 1. On June 15, 2001, a withholding agent pays U.S. source
interest on an obligation in registered form (issued after July 18,
1984) to a foreign corporation that it cannot reliably associate with a
Form W-8 or other appropriate documentation upon which to rely to treat
the beneficial owner as a foreign person. The withholding agent does not
withhold from the payment. On September 30, 2003, the withholding agent
receives from the foreign corporation a valid Form W-8 described in
paragraph (e)(2)(ii) of this section. Thus, the interest qualifies as
portfolio interest retroactively to June 15, 2001 (the date of payment).
See Sec. 1.871-14(c)(3). The foreign corporation does not file a U.S.
federal income tax return and does not pay the tax owed. The withholding
agent is not liable under section 1461 for the 30-percent tax on the
interest income because the receipt of the Form W-8 exempts the interest
from tax for purposes of sections 881(a) and 1461. The withholding
agent, however, is liable for interest on the amount of withholding that
should have been deducted from the payment on June 15, 2001 and
deposited. Under paragraph (b)(7)(iii) of this section, the period
during which interest may be assessed against the withholding agent runs
from March 15, 2002 (the due date for the Form 1042 relating to the
payment) until September 30, 2003 (i.e., the date that appropriate
documentation is furnished to the withholding agent).
Example 2. On June 15, 2001, a withholding agent pays U.S. source
dividends to a foreign corporation that it cannot reliably associate
with a Form W-8 or other appropriate documentation upon which to rely to
treat the beneficial owner as a foreign person. The withholding agent
does not withhold from the payment. On September 30, 2003, the
withholding agent receives from the foreign corporation a valid Form W-8
described in paragraph (e)(2)(ii) of this section claiming a reduced 15-
percent rate of withholding under a U.S. income tax treaty. The dividend
qualifies for the reduced treaty rate retroactively to June 15, 2001
(the date of payment). The foreign corporation does not file a U.S.
federal income tax return and does not pay the tax owed. Under section
1461, the withholding agent is liable only for a 15-percent tax on the
dividend income because the receipt of the Form W-8 allows the tax rate
to be reduced for purposes of sections 881(a) and 1461 from 30 percent
to 15 percent. The withholding agent, however, is liable for interest on
the full 30-percent amount that should have been deducted and withheld
from the
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payment on June 15, 2001, and deposited, over a period running from
March 15, 2002 (the due date for the Form 1042 relating to the payment)
until September 30, 2003 (the date that the appropriate documentation is
furnished to the withholding agent supporting a reduction in rate under
a tax treaty). Additional interest may be assessed relating to the
outstanding 15-percent tax liability (i.e., the portion of the 30-
percent total tax liability that is not reduced under the treaty). Such
additional interest runs from March 15, 2002, until such date as that
15-percent tax liability is satisfied by the withholding agent or the
taxpayer (subject to abatement in order to avoid a double interest
charge).
(8) Adjustments, refunds, or credits of overwithheld amounts. If the
amount withheld under section 1441, 1442, or 1443 is greater than the
tax due by the withholding agent or the taxpayer, adjustments may be
made in accordance with the procedures described in Sec. 1.1461-2(a).
Alternatively, refunds or credits may be claimed in accordance with the
procedures described in Sec. 1.1464-1, relating to refunds or credits
claimed by the beneficial owner, or Sec. 1.6414-1, relating to refunds
or credits claimed by the withholding agent. If an amount was withheld
under section 3406 or is subsequently determined to have been paid to a
foreign person, see paragraph (b)(3)(vii) of this section and
Sec. 31.6413(a)-3(a)(1) of this chapter.
(9) Payments to joint owners. A payment to joint owners that
requires documentation in order to reduce the rate of withholding under
chapter 3 of the Code and the regulations thereunder does not qualify
for such reduced rate unless the withholding agent can reliably
associate the payment with documentation from each owner.
Notwithstanding the preceding sentence, a payment to joint owners
qualifies as a payment exempt from withholding under this section if any
one of the owners provides a certificate of U.S. status on a Form W-9 in
accordance with paragraph (d) (2) or (3) of this section or the
withholding agent can associate the payment with a withholding
certificate upon which it can rely to treat the payment as made to a
U.S. beneficial owner under paragraph (d)(4) of this section. See
Sec. 31.3406(h)-2(a)(3)(i)(B) of this chapter.
(c) Definitions--(1) Withholding. The term withholding means the
deduction and withholding of tax at the applicable rate from the
payment.
(2) Foreign and U.S. person. The term foreign person means a
nonresident alien individual, a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, and any other person
that is not a U.S. person described in the next sentence. For purposes
of the regulations under chapter 3 of the Code, the term foreign person
also means, with respect to a payment by a withholding agent, a foreign
branch of a U.S. person that furnishes an intermediary withholding
certificate described in paragraph (e)(3)(ii) of this section. A U.S.
person is a person described in section 7701(a)(30), the U.S. government
(including an agency or instrumentality thereof), a State (including an
agency or instrumentality thereof), or the District of Columbia
(including an agency or instrumentality thereof).
(3) Individual--(i) Alien individual. The term alien individual
means an individual who is not a citizen or a national of the United
States. See Sec. 1.1-1(c).
(ii) Nonresident alien individual. The term nonresident alien
individual means a person described in section 7701(b)(1)(B), an alien
individual who is a resident of a foreign country under the residence
article of an income tax treaty and Sec. 301.7701(b)-7(a)(1) of this
chapter, or an alien individual who is a resident of Puerto Rico, Guam,
the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands,
or American Samoa as determined under Sec. 301.7701(b)-1(d) of this
chapter. An alien individual who has made an election under section 6013
(g) or (h) to be treated as a resident of the United States is
nevertheless treated as a nonresident alien individual for purposes of
withholding under chapter 3 of the Code and the regulations thereunder.
(4) Certain foreign corporations. For purposes of this section, a
corporation created or organized in Guam, the Commonwealth of Northern
Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not
treated as a foreign corporation if the requirements of sections
881(b)(1) (A), (B), and (C) are met for such corporation. Further, a
payment made to a foreign government
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or an international organization shall be treated as a payment made to a
foreign corporation for purposes of withholding under chapter 3 of the
Code and the regulations thereunder.
(5) Financial institution and foreign financial institution. For
purposes of the regulations under chapter 3 of the Code, the term
financial institution means a person described in Sec. 1.165-
12(c)(1)(iv) (not including a person providing pension or other similar
benefits or a regulated investment company or other mutual fund, unless
otherwise indicated) and the term foreign financial institution means a
financial institution that is a foreign person, as defined in paragraph
(c)(2) of this section.
(6) Beneficial owner--(i) General rule. In the case of a payment of
income, the term beneficial owner means the person who is the owner of
the income for tax purposes and who beneficially owns that income. A
person shall be treated as the owner of the income to the extent that it
is required under U.S. tax principles to include the amount paid in
gross income under section 61 (determined without regard to an exclusion
or exemption from gross income under the Code). Beneficial ownership of
income is determined under the provisions of section 7701(l) and the
regulations under that section and any other applicable general U.S. tax
principles, including principles governing the determination of whether
a transaction is a conduit transaction. Thus, a person receiving income
in a capacity as a nominee, agent, custodian for another person is not
the beneficial owner of the income. In the case of a scholarship, the
student receiving the scholarship is the beneficial owner of that
scholarship. In the case of a payment of an amount that is not income,
the beneficial owner determination shall be made under this paragraph
(c)(6) as if the amount was income.
(ii) Special rules for flow-through entities and arrangements--(A)
General rule. The beneficial owners of income paid to a partnership or
other flow-through arrangements described in paragraph (c)(6)(ii)(C) of
this section are those persons who, under U.S. tax principles, are the
owners of the income for tax purposes in their separate or individual
capacities and who beneficially own that income. For example, a
partnership (first tier) that is a partner in another partnership
(second tier) is not the beneficial owner of income paid to the second
tier partnership since the first tier partnership is not the owner of
the income under U.S. tax principles. Rather, the partners of the first
tier partnership are the beneficial owners (to the extent they are not
themselves partnerships and are not conduits within the meaning of
section 7701(l) and the regulations under that section). See
Sec. 1.1441-5(b) for applicable withholding procedures for payments to a
domestic partnership. See also Sec. 1.1441-5(c)(3)(ii) for applicable
withholding procedures for payments to a foreign partnership where one
of the partners (at any level in the chain of tiers) is a domestic
partnership. See Sec. 1.1441-6(b)(4) for rules governing the eligibility
of a payment to an entity or other arrangement for a reduced rate of
withholding under an income tax treaty.
(B) Trusts and estates. The provisions of paragraphs (c)(6)(i) and
(ii)(A) of this section shall not apply to a trust or an estate, whether
domestic or foreign. The beneficial owner of income paid to a trust or
to an estate shall be determined under the provisions of Sec. 1.1441-
3(f) and (g) in effect prior to January 1, 2001 (see Sec. 1.1441-3(f)
and (g) as contained in 26 CFR part 1, revised April 1, 1999).
(C) Definition of a flow-through entity or arrangement. For purposes
of this paragraph (c)(6)(ii), a flow-through entity means a partnership,
estate, or trust. A flow-though arrangement is a contractual arrangement
that does not involve an entity and is treated as a partnership for U.S.
tax purposes or is a wholly-owned entity that is disregarded for federal
tax purposes under Sec. 301.7701-2(c)(2) of this chapter as an entity
separate from its owner. The term partnership means any entity or
arrangement (as defined in Sec. 301.7701-2(c)(1) of this chapter) whose
tax regime is governed by subchapter K of chapter 1 of the Code.
(7) Withholding agent. For a definition of the term withholding
agent and applicable rules, see Sec. 1.1441-7.
(8) Person. For purposes of the regulations under chapter 3 of the
Code, the
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term person shall mean a person described in section 7701(a)(1) and the
regulations under that section and a U.S. branch to the extent treated
as a U.S. person under paragraph (b)(2)(iv) of this section. For
purposes of the regulations under chapter 3 of the Code, the term person
does not include a wholly-owned entity that is disregarded for federal
tax purposes under Sec. 301.7701-2(c)(2) of this chapter as an entity
separate from its owner. See paragraph (b)(2)(iii) of this section for
procedures applicable to payments to such entities.
(9) Source of income. The source of income is determined under the
provisions of part I (section 861 and following) , subchapter N, chapter
1 of the Code and the regulations under those provisions.
(10) Chapter 3 of the Code. For purposes of the regulations under
sections 1441, 1442, and 1443, any reference to chapter 3 of the Code
shall not include references to sections 1445 and 1446, unless the
context indicates otherwise.
(11) Reduced rate. For purposes of regulations under chapter 3 of
the Code, and other withholding provisions of the Code, the term reduced
rate, when used in regulations under chapter 3 of the Code, shall
include an exemption from tax.
(d) Beneficial owner's or payee's claim of U.S. status--(1) In
general. Under paragraph (b)(1) of this section, a withholding agent is
not required to withhold under chapter 3 of the Code on payments to a
U.S. payee, to a person presumed to be a U.S. payee in accordance with
the provisions of paragraph (b)(3) of this section, or to a person that
the withholding agent may treat as a U.S. beneficial owner of the
payment. Absent actual knowledge or reason to know otherwise, a
withholding agent may rely on the provisions of this paragraph (d) in
order to determine whether to treat a payee or beneficial owner as a
U.S. person.
(2) Payments for which a Form W-9 is otherwise required. A
withholding agent may treat as a U.S. person a payee who is required to
furnish a Form W-9 and who furnishes it in accordance with the
procedures described in Secs. 31.3406(d)-1 through 31.3406(d)-5 of this
chapter (including the requirement that the payee furnish its taxpayer
identifying number (TIN)) if the withholding agent meets all the
requirements described in Sec. 31.3406(h)-3(e) of this chapter regarding
reliance by a payor on a Form W-9.
(3) Payments for which a Form W-9 is not otherwise required. In the
case of a payee who is not required to furnish a Form W-9 under section
3406, the withholding agent may rely on a certificate of U.S. status
described in this paragraph (d)(3). A certificate of U.S. status is a
certificate described in Sec. 31.3406(h)-3(c)(2) of this chapter
(relating to forms for exempt recipients) or a Form W-9 (or a substitute
form or such other form as the IRS may prescribe) that is signed under
penalties of perjury by the payee and contains the name, permanent
residence address, and TIN of the payee. The procedures described in
Sec. 31.3406(h)-2(a) of this chapter shall apply to payments to joint
payees. A withholding agent that receives a Form W-9 in order to satisfy
this paragraph (d)(3) must retain the form in accordance with the
provisions of Sec. 31.3406(h)-3(g) of this chapter, if applicable, or of
paragraph (e)(4)(iii) of this section (relating to the retention of
withholding certificates) if Sec. 31.3406(h)-3(g) of this chapter does
not apply. The rules of this paragraph (d)(3) are only intended to
provide a method by which a withholding agent may determine that a payee
is not a foreign person and do not otherwise impose a requirement that
documentation be furnished by a person who is otherwise treated as an
exempt recipient for purposes of the applicable information reporting
provisions under chapter 61 of the Code (e.g., Sec. 1.6049-4(c)(1)(ii)
for payments of interest).
(4) Other payments. This paragraph (d)(4) describes the
documentation upon which a withholding agent may rely in order to treat
a payment as made to a U.S. person that is a beneficial owner for
purposes of paragraph (b)(1) of this section. The withholding agent may
treat the payment as made to a U.S. beneficial owner only if it can
reliably associate the payment with documentation prior to the payment,
if
[[Page 87]]
it complies with the electronic confirmation procedures described in
paragraph (e)(4)(v) of this section, if required, and if it has not been
notified by the IRS that any of the information on the withholding
certificate or other documentation is incorrect or unreliable. In the
case of a Form W-9 that is required to be furnished for a reportable
payment that may be subject to backup withholding, the payor may be
notified in accordance with section 3406(a)(1)(B) and the regulations
under that section. See applicable procedures under that section and the
regulations under that section for payors who have been notified with
regard to such a Form W-9. Payors who have been notified in relation to
other Forms W-9, including under section 6724(b) pursuant to section
6721, may rely on the withholding certificate or other documentation
only to the extent provided under procedures as prescribed by the IRS
(see Sec. 601.601(d)(2) of this chapter). A withholding agent may treat
a payment as made to a U.S. beneficial owner--
(i) To the extent the withholding agent can reliably associate the
payment with a Form W-9 described in paragraph (d) (2) or (3) of this
section attached to a valid intermediary, flow-through, or U.S. branch
withholding certificate described in paragraph (e)(3)(i) of this
section;
(ii) To the extent the withholding agent can reliably associate a
payment to a qualified intermediary with the category of assets
described in paragraph (e)(5)(v)(B)(2) of this section that the
qualified intermediary has represented, in accordance with paragraphs
(e) (3)(ii)(E) and (5)(v) of this section as being allocable to U.S.
persons based on the Forms W-9 that they have furnished; or
(iii) To the extent the withholding agent can reliably associate the
payment with a Form W-8 from a U.S. branch described in paragraph
(e)(3)(v) of this section that evidences an agreement between the U.S.
branch and the withholding agent to treat the U.S. branch as U.S.
person.
(e) Beneficial owner's claim of foreign status--(1) Withholding
agent's reliance--(i) In general. Absent actual knowledge or reason to
know otherwise, a withholding agent may treat a payment as made to a
foreign beneficial owner in accordance with the provisions of paragraph
(e)(1)(ii) of this section. See paragraph (e)(4)(viii) of this section
for applicable reliance rules. See paragraph (b)(4) of this section for
a description of payments for which a claim of foreign status is
relevant for purposes of claiming a reduced rate of withholding for
purposes of section 1441, 1442, or 1443. See paragraph (b)(5) of this
section for a list of payments for which a claim of foreign status is
relevant for other purposes, such as claiming an exemption from
information reporting under chapter 61 of the Code.
(ii) Payments that a withholding agent may treat as made to a
foreign person that is a beneficial owner--(A) General rule. The
withholding agent may treat a payment as made to a foreign person that
is a beneficial owner if it complies with the requirements described in
paragraph (e)(1)(ii)(B) of this section and, then, only to the extent--
(1) That the withholding agent can reliably associate the payment
with a beneficial owner withholding certificate described in paragraph
(e)(2) of this section furnished by the person whose name is on the
certificate or attached to a valid foreign intermediary, flow-through
entity, or U.S. branch withholding certificate described in paragraph
(e)(3)(v) of this section;
(2) That the payment is made outside the United States (within the
meaning of Sec. 1.6049-5(e)) with respect to an offshore account (within
the meaning of Sec. 1.6049-5(c)(1)) and the withholding agent can
reliably associate the payment with documentary evidence described in
Secs. 1.1441-6(c)(3) or (4), or 1.6049-5(c)(1) relating to the
beneficial owner;
(3) That the withholding agent can reliably associate the payment
with the category of assets described in paragraph (e)(5)(v)(B)(1) of
this section that the qualified intermediary has represented, in
accordance with paragraphs (e) (3)(ii)(E) and (5)(v) of this section as
being allocable to foreign persons for whom the qualified intermediary
is holding valid documentation;
[[Page 88]]
(4) That the withholding agent can reliably associate the payment
with a withholding certificate described in Sec. 1.1441-5(c)(3)(iii)
from a foreign partnership claiming that the payment is effectively
connected income;
(5) That the withholding agent identifies the payee as a U.S. branch
described in paragraph (b)(2)(iv) of this section, the payment to which
it treats as effectively connected income in accordance with
Sec. 1.1441-4(a) (2)(ii) or (3);
(6) That the withholding agent identifies the payee as an
international organization (or any wholly-owned agency or
instrumentality thereof) as defined in section 7701(a)(18) that has been
designated as such by executive order (pursuant to 22 U.S.C. 288 through
288(f)); or
(7) That the withholding agent pays interest from bankers'
acceptances and identifies the payee as a foreign central bank of issue
(as defined in Sec. 1.861-2(b)(4)).
(B) Additional requirements. In order for a payment described in
paragraph (e)(1)(ii)(A) of this section to be treated as made to a
foreign beneficial owner, the withholding agent must hold the
documentation (if required) prior to the payment, comply with the
electronic confirmation procedures described in paragraph (e)(4)(v) of
this section (if required), and must not have been notified by the IRS
that any of the information on the withholding certificate or other
documentation is incorrect or unreliable. If the withholding agent has
been so notified, it may rely on the withholding certificate or other
documentation only to the extent provided under procedures prescribed by
the IRS (see Sec. 601.601(d)(2) of this chapter). See paragraph
(b)(2)(vii) of this section for rules regarding reliable association of
a payment with a withholding certificate or other appropriate
documentation.
(2) Beneficial owner withholding certificate--(i) In general. A
beneficial owner withholding certificate is a statement by which the
beneficial owner of the payment represents that it is a foreign person
and, if applicable, claims a reduced rate of withholding under section
1441. A separate withholding certificate must be submitted to each
withholding agent. If the beneficial owner receives more than one type
of payment from a single withholding agent, the beneficial owner may
have to submit more than one withholding certificate to the single
withholding agent for the different types of payments as may be required
by the applicable forms and instructions, or as the withholding agent
may require (such as to facilitate the withholding agent's compliance
with its obligations to determine withholding under this section or the
reporting of the amounts under Sec. 1.1461-1 (b) and (c)). For example,
if a beneficial owner claims that some but not all of the income it
receives is effectively connected with the conduct of a trade or
business in the United States, it may be required to submit two separate
withholding certificates, one for income that is not effectively
connected and one for income that is so connected. See Sec. 1.1441-
6(b)(4)(ii) for special rules for determining who must furnish a
beneficial owner withholding certificate when a benefit is claimed under
an income tax treaty. See paragraph (e)(4)(ix) of this section for
reliance rules in the case of certificates held by another person or at
a different branch location of the same person.
(ii) Requirements for validity of certificate. A beneficial owner
withholding certificate is valid only if it is provided on a Form W-8,
or a Form 8233 in the case of personal services income described in
Sec. 1.1441-4(b) or certain scholarship or grant amounts described in
Sec. 1.1441-4(c) (or a substitute form described in paragraph (e)(4)(vi)
of this section, or such other form as the IRS may prescribe). A Form W-
8 is valid only if its validity period has not expired, it is signed
under penalties of perjury by the beneficial owner, and it contains all
of the information required on the form. The required information is the
beneficial owner's name, permanent residence address, and TIN (if
required), the country under the laws of which the beneficial owner is
created, incorporated, or governed (if a person other than an
individual), the classification of the entity, and such other
information as may be required by the regulations under section 1441 or
by the form or accompanying instructions in addition to, or in lieu of,
the
[[Page 89]]
information described in this paragraph (e)(2)(ii). A person's permanent
residence address is an address in the country where the person claims
to be a resident for purposes of that country's income tax. In the case
of a certificate furnished in order to claim a reduced rate of
withholding under an income tax treaty, the residence must be determined
in the manner prescribed under the applicable treaty. See Sec. 1.1441-
6(b)(4)(i). The address of a financial institution with which the
beneficial owner maintains an account, a post office box, or an address
used solely for mailing purposes is not a residence address for this
purpose. If the beneficial owner is an individual who does not have a
tax residence in any country, the permanent residence address is the
place at which the beneficial owner normally resides. If the beneficial
owner is not an individual and does not have a tax residence in any
country, then the permanent residence address is the place at which the
person maintains its principal office. See paragraph (e)(4)(vii) of this
section for circumstances in which a TIN is required on a beneficial
owner withholding certificate. See paragraph (f)(2)(i) of this section
for continued validity of certificates during a transition period.
(3) Intermediary, flow-through, or U.S. branch withholding
certificate--(i) In general. An intermediary withholding certificate is
a Form W-8 by which a payee represents that it is a foreign person and
that it is an intermediary with respect to a payment and not the
beneficial owner. A flow-through withholding certificate is a Form W-8
furnished by a flow-through entity under Sec. 1.1441-5(c)(2) or (3) for
a partnership or under Sec. 1.1441-5(e) for a foreign estate or trust.
See paragraph (c)(6)(ii)(C) of this section for a definition of a flow-
through entity. A U.S. branch certificate is a Form W-8 by which the
payee represents that it is a U.S. branch described in paragraph
(b)(2)(iv) (A) or (E) of this section and that the payment is not
effectively connected with the conduct of its trade or business in the
United States. An intermediary withholding certificate is used by an
intermediary either to make representations regarding the status of
beneficial owners of the amount paid or to transmit appropriate
documentation to the withholding agent. A flow-through certificate is
used by a flow-through entity to establish its status as a foreign
person or the status of its partners or beneficiaries, if required, and,
if applicable, to claim a reduced rate of withholding. An intermediary
means, with respect to a payment that it receives, a person that, for
that payment, acts as a custodian, broker, nominee, or otherwise as an
agent for another person, regardless of whether such other person is the
beneficial owner of the amount paid, a flow-through entity, or another
intermediary. See paragraph (e)(4)(viii) of this section for applicable
reliance rules.
(ii) Intermediary withholding certificate from a qualified
intermediary. An intermediary withholding certificate from a person
representing to be a qualified intermediary (described in paragraph
(e)(5)(ii) of this section) is valid only if it is furnished on a Form
W-8 (or an acceptable substitute form or such other form as the IRS may
prescribe), it is signed under penalties of perjury by an officer of the
qualified intermediary with authority to sign for the intermediary, its
validity has not expired, and it contains the following information,
statement, and certifications:
(A) The name, permanent residence address (as described in paragraph
(e)(2)(ii) of this section), and the employer identification number of
the intermediary, and the country under the laws of which the
intermediary is created, incorporated, or governed.
(B) A certification that the person whose name is on the Form W-8 is
not acting for its own account and is acting as a qualified intermediary
within the meaning of paragraph (e)(5)(ii) of this section.
(C) A certification that the intermediary has obtained the
appropriate certificates (such as Forms W-8 or W-9) or other appropriate
documentation in the manner required in its withholding agreement with
the IRS for those account holders that are covered by the certificate
and whose assets are identified as being allocable to the categories
described in paragraph (e)(5)(v)(B) (1) or (2) (in accordance with
paragraph (e)(5)(v) of this section or otherwise).
[[Page 90]]
(D) A certification whether the qualified intermediary is assuming
primary withholding responsibility for the amounts to which the
certificate relates.
(E) A statement attached to the certificate that provides such
information as may be required by the form and accompanying
instructions, including sufficient information for the withholding agent
to determine the amount required to be withheld from amounts paid to the
intermediary and reported to the IRS. See paragraph (e)(5)(v) of this
section for requirement of a statement and rules applicable thereto.
(F) Any other information or certification as may be required by the
form or accompanying instructions in addition to, or in lieu of, the
information and certifications described in this paragraph (e)(3)(ii).
(iii) Intermediary withholding certificate from an intermediary that
is not a qualified intermediary. An intermediary withholding certificate
from a person that does not represent to be a qualified intermediary
within the meaning of paragraph (e)(5)(ii) of this section is valid only
if it is furnished on a Form W-8 (or an acceptable substitute form, or
such other form as the IRS may prescribe), it is signed under penalties
of perjury by a person authorized to sign for the intermediary, it
contains the information, statement, and certifications described in
this paragraph (e)(3)(iii), its validity has not expired, and the
withholding certificates and other appropriate documentation for all the
persons to whom the certificate relates are attached to the certificate.
Appropriate documentation consists of beneficial owner withholding
certificates described in paragraph (e)(2)(i) of this section,
intermediary withholding certificates described in paragraph (e)(3)(i)
of this section, flow-through certificates described in Sec. 1.1441-
5(c)(2)(iv), (3)(iii), and (e), documentary evidence described in
Sec. 1.1441-6(b)(2)(i) or in Sec. 1.6049-5(c)(1) related to the
beneficial owner (or documentary evidence described in Sec. 1.6049-
5(c)(4) for purposes of information reporting under chapter 61 of the
Code), and other documentation or certificate applicable under other
provisions of the Code or regulations that certify or establish the
status of the payee or beneficial owner as a U.S. or a foreign person.
If the intermediary is acting on behalf of another intermediary that is
not a qualified intermediary or on behalf of a partnership that is not a
withholding foreign partnership described in Sec. 1.1441-5(c)(2)(i),
then the intermediary must attach to its own withholding certificate the
intermediary withholding certificate or the partnership withholding
certificate to which all the withholding certificates and other
appropriate documentation required to be attached under this paragraph
(e)(3)(iii) or in Sec. 1.1441-5(c)(3)(iii) or (e) are also attached.
Nothing in this paragraph (e)(3)(iii) shall require an intermediary to
furnish original documentation. Copies of certificates or documentary
evidence may be passed up to the U.S. withholding agent, in which case
the intermediary must retain the original documentation for the same
time period that the copy is required to be retained by the withholding
agent under paragraph (e)(4)(iii) of this section and must provide it to
the withholding agent upon request. For purposes of this paragraph
(e)(3)(iii), a valid intermediary withholding certificate also includes
a statement described in Sec. 1.871-14(c)(2)(v) furnished in order for
interest to qualify as portfolio interest for purposes of sections
871(h) and 881(c) or in order for amounts described in Sec. 1.1441-
6(b)(2)(ii) to qualify as amounts paid to a foreign person. The
information and certification required on a Form W-8 described in this
paragraph (e)(3)(iii) (or on an acceptable substitute form or such other
form as the IRS may prescribe) are as follows:
(A) The name and permanent resident address (as described in
paragraph (e)(2)(ii) of this section) of the intermediary, and the
country under the laws of which the intermediary is created,
incorporated, or governed.
(B) A certification that the person whose name is on the Form W-8 is
not acting for its own account and is using the certificate as a form to
transmit withholding certificates and other appropriate documentation
for the payment to which the form relates.
[[Page 91]]
(C) If furnishing an intermediary certificate to transmit
withholding certificates or other appropriate documentation for more
than one person, a statement attached to the Form W-8 that provides such
information as may be required by the form and accompanying
instructions, including sufficient information for the withholding agent
to determine the amount required to be withheld from amounts paid to the
intermediary. See paragraph (e)(3)(iv) of this section for rules
applicable to such a statement.
(D) A certification either that the attached withholding
certificates and other appropriate documentation represent all of the
persons to whom the intermediary withholding certificate relates or that
the amounts allocable to persons covered by the intermediary withholding
certificate and for whom withholding certificates or other appropriate
documentation are lacking or unreliable are separately identified.
(E) Any other information or certification as may be required by the
form or accompanying instructions in addition to, or in lieu of, the
information and certification described in this paragraph (e)(3)(iii).
(iv) Information to the withholding agent regarding assets owned by
beneficial owners, etc.--(A) General rule. An intermediary that has not
represented that it is acting as a qualified intermediary within the
meaning of paragraph (e)(5)(ii) of this section must provide information
sufficient for the withholding agent to determine the proportion of each
payment of reportable amounts (as described in paragraph (e)(3)(vi) of
this section) that is allocable to each person to whom the intermediary
withholding certificate relates, including persons for whom the
intermediary has not attached a withholding certificate or other
appropriate documentation. The withholding agent may rely on such
information in order to determine the amount of withholding on the
payment and how to report this payment under chapter 3 or 61 of the Code
and the regulations thereunder. The sum of all the proportions indicated
by the intermediary, expressed as a percentage, must equal, but not
exceed, one hundred percent of the payment. The information for persons
for whom a withholding certificate or other appropriate documentation is
lacking or unreliable may be provided in the aggregate and need not be
provided separately for each such person. The foreign intermediary is
not required to disclose the names of the persons for whom it collects
the payment, unless it has actual knowledge that any such person is a
U.S. person that is not an exempt recipient. In such a case, the
intermediary must state separately the information for such U.S. person
even though such person has not provided a Form W-9 to the intermediary
in the manner described in paragraph (d)(2) of this section. The
information may be furnished in any manner that the parties choose. For
example, if the withholding agent maintains separate accounts for
different types of income or withholding rates, the intermediary must
provide sufficient information so that the withholding agent may
allocate assets appropriately among the relevant accounts. If the
withholding agent does not maintain separate accounts, it may require
the intermediary to attach a statement to the intermediary withholding
certificate under paragraphs (e)(3)(iii)(C) and (D) of this section
providing the information described in this paragraph (e)(3)(iv).
(B) Updating the information. The intermediary must update the
information furnished to the withholding agent in accordance with
paragraph (e)(3)(iv)(A) of this section as often as is necessary in
order to enable the withholding agent to withhold at the appropriate
rate on each payment and to report such income for purposes of chapter 3
or 61 of the Code and sections 3402, 3405 and 3406 (and the regulations
under those provisions). Any update of the information as required under
this paragraph (e)(3)(iv)(B) shall be treated as an integral part of the
intermediary withholding certificate with which it is associated. See
paragraph (e)(4)(ii)(D) of this section regarding how changes in the
information described in this paragraph (e)(3)(iv) may affect the
validity of withholding certificates. See paragraph (b)(3)(v)(C) of this
section for consequences if the information is not updated as required.
[[Page 92]]
(C) Examples. The rules of paragraph (e)(3)(iii) of this section and
of this paragraph (e)(3)(iv) are illustrated by the following examples:
Example 1. A U.S. withholding agent, W, pays U.S. source dividends
to foreign intermediary X who, in turn, pays to foreign intermediary Y,
who collects on behalf of foreign beneficial owners, A and B. A and B
have each furnished a beneficial owner Form W-8 to Y. Y must furnish to
X an intermediary Form W-8 described in paragraph (e)(3)(iii) of this
section, to which it must attach the original or copies of A's and B's
Forms W-8. X, in turn, must furnish to W its own intermediary Form W-8
described in paragraph (e)(3)(iii) of this section, to which it must
attach the original or copies of the intermediary Form W-8 received from
Y and A's and B's Forms W-8.
Example 2. A foreign bank, X, acts as an intermediary for five
different persons, A, B, C, D, and E, who each own securities from which
they receive U.S. source dividends. The distributions are paid by a U.S.
financial institution, W, as custodian of the securities for X. A's,
B's, C's, D's, and E's respective claimed ownership interest in the
securities is 20-percent each. X has furnished to W an intermediary Form
W-8 described in paragraph (e)(3)(iii) of this section, to which it has
attached a statement described in this paragraph (e)(3)(iv) stating each
of A', B's, and C's interest in the securities with respect to which
distributions are made periodically. The respective ownership interests
of D and E are not stated separately because X has not received a valid
withholding certificate or other appropriate documentation from D or E.
Therefore, on the statement, D's and E's interest in the securities is
stated in the aggregate (i.e., 40-percent attributable to undocumented
owners). X has attached a Form W-8 for A and documentary evidence for B
(who each claim a reduced rate of withholding under an income tax
treaty), and a Form W-9 for C. In determining the amount to be withheld
from the amount paid to X, W may rely on X's intermediary Form W-8, the
allocation statement attached to the Form W-8, and the attached Form W-
8, documentary evidence, and Form W-9 for each of A, B, and C. Based on
paragraphs (b)(1), (b)(2)(v), (b)(2)(vii), (d)(4)(i), and
(e)(1)(ii)(A)(1) of this section, W may withhold as follows on the
payment to X: no withholding on 20-percent of the payment on the basis
of C's Form W-9, withholding at the reduced treaty rate on 40-percent of
the payment on the basis of A's Form W-8 and B's documentary evidence,
and 30-percent on 40-percent of the payment to the undocumented owners
group formed by D and E in accordance with the presumptions described in
paragraph (b)(3)(v)(B) of this section (i.e., due to the lack of
documentation for D and E). Under paragraph (e)(3)(iii) of this section,
X is not required to identify D or E to W. For purposes of making a
return under Sec. 1.1461-1(c), W would prepare a single Form 1042-S for
the group of undocumented owners, D and E (if the names are undisclosed,
the Form 1042-S should be made in the name of X and state that the
return is made for unknown owners (see Sec. 1.1461-1(c)(4)(iv)). Because
X has not furnished required documentation for D and E, X does not
qualify under paragraph (b)(6) of this section for relief from an
obligation to make a report on a Form 1042-S (to the extent D and E are
presumed to be foreign persons under paragraph (b)(3)(iii) of this
section) when X makes the payment to D and E (however, because a full
30-percent amount was withheld under this section, X does not have to
withhold an additional amount under the facts of this example). In
contrast, under paragraph (b)(6) of this section, X is not required to
make a report on Form 1042-S for its payments to A or B. Under
Sec. 1.6042-3(b)(1)(vi), X is not required to report C's share of the
payment on Form 1099 (unless X has actual knowledge that W has not
reported the portion of payment allocable to C in accordance with
Sec. 1.6042-2).
Example 3. The facts are the same as in Example 2, except that D's
name is D Insurance Company whom X knows is a U.S. person. Because of
D's name, X may treat D as an exempt recipient on an eyeball test basis
under Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii)(A)(1). However,
even if those facts are disclosed to W, W must withhold 30-percent of
the portion of the payment allocable to D because W is making a payment
to a foreign person (X). Under paragraph (b)(1) of this section, W may
reduce the rate of withholding only if it can associate the payment with
documentation upon which it can rely to treat the beneficial owner as a
U.S. person or as a foreign person entitled to a reduced rate of
withholding. Because X has not furnished documentation for D, W does not
have the proper documentation with which it can associate the payment
allocable to D. Thus, insofar as W is concerned, the portion of the
payment allocable to D is treated as a payment to an undocumented owner
that W must presume to be a foreign person under paragraph (b)(3)(v)(B)
of this section. Accordingly, under this paragraph (e)(3)(iv), W need
not identify the information for D separately and can aggregate the
portion of the payment allocable to D and E. W's reporting requirements
for the portion of the payment allocable to D and E are the same as
under Example 2. When X makes the payment to D, X does not benefit from
the relief from reporting under Sec. 1.6042-3(b)(1)(vi). However, X is
not required to report the payment to D on Form 1099 under section 6042
because, under Sec. 1.6042-3(b)(1)(vii), X can treat D as an exempt
recipient.
[[Page 93]]
(v) Withholding certificate from certain U.S. branches. A U.S.
branch certificate is a representation by the U.S. branch whose name is
on the certificate that the payment it receives is not effectively
connected with the conduct of a trade or business in the United States
and that it is using the certificate either to transmit the appropriate
documentation for the persons for whom the branch receives the payment
(i.e., as an intermediary) or as evidence of its agreement with the
withholding agent to be treated as a U.S. person with respect to any
payment associated with the certificate. A U.S. branch withholding
certificate is valid only if it is furnished on a Form W-8 (or an
acceptable substitute form, or such other form as the IRS may
prescribe), it is signed under penalties of perjury by a person
authorized to sign for the branch, its validity has not expired, and it
contains the information, statement, and certifications described in
this paragraph (e)(3)(v). If the certificate is furnished to transmit
withholding certificates and other documentation, it must contain the
information and certifications described in paragraphs (e)(3)(v) (A)
through (C) of this section and in paragraphs (e)(3)(iii) (C) and (D) of
this section. If the certificate is furnished pursuant to an agreement
to treat the U.S. branch as a U.S. person, the information and
certification required on the Form W-8 (or an acceptable substitute form
or such other form as the IRS may prescribe) are limited to the
following--
(A) The name of the person of which the branch is a part and the
address of the branch in the United States;
(B) A certification that the payments associated with the
certificate are not effectively connected with the conduct of its trade
or business in the United States; and
(C) Any other information or certification as may be required by the
form or accompanying instructions in addition to, or in lieu of, the
information and certification described in this paragraph (e)(3)(v).
(vi) Reportable amounts. For purposes of this section, the term
reportable amount means an amount subject to withholding within the
meaning of Sec. 1.1441-2(a), bank deposit interest (including original
issue discount) and similar types of deposit interest described in
section 871(i)(2)(A) or 881(d) that are from sources within the United
States, and any amount of interest or original issue discount from
sources within the United States on certain short-term obligations
described in section 871(g)(1)(B) or 881(a)(3). For purposes of this
paragraph (e)(3)(vi), however, reportable amounts do not include
payments with respect to deposits with banks and other financial
institutions that remain on deposit for a period of two weeks or less,
to amounts of original issue discount arising from a sale and repurchase
transaction that is completed within a period of two weeks or less, or
to amounts described in Sec. 1.6049-5(b) (7), (10) or (11) (relating to
certain obligations issued in bearer form). While short-term OID and
bank deposit interest are not subject to withholding under chapter 3 of
the Code, such amounts may be subject to information reporting under
section 6049 if paid to a U.S. person who is not an exempt recipient
described in Sec. 1.6049-4(c)(1)(ii) and to backup withholding under
section 3406 in the absence of documentation. See Sec. 1.6049-
5(d)(3)(iii) for applicable procedures when such amounts are paid to a
foreign intermediary.
(4) Applicable rules. The provisions in this paragraph (e)(4)
describe procedures applicable to withholding certificates on Form W-8
or Form 8233 (or a substitute form) or documentary evidence furnished to
establish foreign status. These provisions do not apply to Forms W-9 (or
their substitutes). For corresponding provisions regrading Form W-9 (or
a substitute form), see section 3406 and the regulations under that
section.
(i) Who may sign the certificate. A withholding certificate (or
other acceptable substitute) may be signed by any person authorized to
sign a declaration under penalties of perjury on behalf of the person
whose name is on the certificate as provided in section 6061 and the
regulations under that section (relating to who may sign generally for
an individual, estate, or trust, which includes certain agents
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who may sign returns and other documents), section 6062 and the
regulations under that section (relating to who may sign corporate
returns), and section 6063 and the regulations under that section
(relating to who may sign partnership returns).
(ii) Period of validity--(A) Three-year period. A withholding
certificate described in paragraph (e)(2)(i) of this section, a
certificate described in Sec. 1.871-14(c)(2)(v) (furnished to qualify
interest as portfolio interest for purposes of sections 871(h) and
881(c) or to qualify amounts paid on certain securities described in
Sec. 1.1441-6(b)(2)(ii) as paid to a foreign person), or documentary
evidence described in Sec. 1.1441-6(b)(2)(i) or in Sec. 1.6049-5(c)(1)
shall remain valid until the earlier of the last day of the third
calendar year following the year in which the certificate is signed or
the documentary evidence is created or the day that a change of
circumstances occurs that makes any information on the certificate or
documentary evidence incorrect. For example, a certificate signed on
September 30, 2001, remains valid through December 31, 2004, unless
circumstances change that make the information on the form no longer
correct.
(B) Indefinite validity period. Notwithstanding paragraph
(e)(4)(ii)(A) of this section, the following certificates or parts of
certificates shall remain valid until the status of the person whose
name is on the certificate is changed in a way relevant to the
certificate or circumstances change that make the information on the
certificate no longer correct:
(1) A beneficial owner withholding certificate described in
paragraph (e)(2)(ii) of this section that is furnished with a TIN if the
income for which such certificate is furnished is required to be
reported under Sec. 1.1461-1(c)(2)(i) or the TIN furnished on the
certificate is reported to the IRS under the procedures described in
Sec. 1.1461-1(d).
(2) A certificate described in paragraph (e)(3)(ii) of this section
(dealing with a certificate from a person representing to be a qualified
intermediary).
(3) A certificate described in paragraph (e)(3)(iii) of this section
(dealing with a certificate from a person representing to be a non-
qualified intermediary), but not including the withholding certificates
or documentary evidence required to be attached to the certificate.
(4) A certificate described in paragraph (e)(3)(v) of this section
(dealing with a certificate from a person representing to be a U.S.
branch), but not the withholding certificates or documentary evidence
required to be attached to the certificate.
(5) A certificate described in Sec. 1.1441-5(c)(2)(iv) (dealing with
a certificate from a person representing to be a withholding foreign
partnership).
(6) A certificate described in Sec. 1.1441-5(c)(3)(iii) (dealing
with a certificate from a person representing to be a foreign
partnership that is not a withholding foreign partnership), but not
including the withholding certificates or documentary evidence required
to be attached to the certificate.
(7) A certificate furnished by a person representing to be an
integral part of a foreign government (within the meaning of Sec. 1.892-
2T(a)(2)) in accordance with Sec. 1.1441-8(b), or by a person
representing to be a foreign central bank of issue (within the meaning
of Sec. 1.861-2(b)(4)) or the Bank for International Settlements in
accordance with Sec. 1.1441-8(c)(1).
(C) Withholding certificate for effectively connected income.
Notwithstanding paragraph (e)(4)(ii)(B)(1) of this section, the period
of validity of a withholding certificate furnished to a withholding
agent to claim a reduced rate of withholding for income that is
effectively connected with the conduct of a trade or business within the
United States shall be limited to the three-year period described in
paragraph (e)(4)(ii)(A) of this section.
(D) Change in circumstances. If a change in circumstances makes any
information on a certificate or other documentation incorrect, then the
person whose name is on the certificate or other documentation must
inform the withholding agent within 30 days of the change and furnish a
new certificate or new documentation. A certificate or documentation
becomes invalid from the date that the withholding agent
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holding the certificate or documentation knows or has reason to know
that circumstances affecting the correctness of the certificate or
documentation have changed. However, a withholding agent may choose to
apply the provisions of paragraph (b)(3)(iv) of this section regarding
the 90-day grace period as of that date while awaiting a new certificate
or documentation or while seeking information regarding changes, or
suspected changes, in the person's circumstances. If an intermediary
(including a U.S. branch described in paragraph (b)(2)(iv)(A) of this
section that passes through certificates to a withholding agent) or a
flow-through entity becomes aware that a certificate or other
appropriate documentation it has furnished to the person from whom it
collects the payment is no longer valid because of a change in the
circumstances of the person who issued the certificate or furnished the
other appropriate documentation, then the intermediary or flow-through
entity must notify the person from whom it collects the payment of the
change of circumstances. It must also obtain a new withholding
certificate or new appropriate documentation to replace the existing
certificate or documentation whose validity has expired due to the
change in circumstances. If a beneficial owner withholding certificate
is used to claim foreign status only (and not, also, residence in a
particular foreign country for purposes of an income tax treaty), a
change of address is a change in circumstances for purposes of this
paragraph (e)(4)(ii)(D) only if it changes to an address in the United
States. Further, a change of address within the same foreign country is
not a change in circumstances for purposes of this paragraph
(e)(4)(ii)(D). A change in the circumstances affecting the withholding
information provided to the withholding agent in accordance with the
provisions in paragraph (e) (3)(iv) or (5)(v) of this section or in
Sec. 1.1441-5(c)(3)(iv) shall terminate the validity of the withholding
certificate with respect to the information that is no longer reliable
unless the information is updated. A withholding agent may rely on a
certificate without having to inquire into possible changes of
circumstances that may affect the validity of the statement, unless it
knows or has reason to know that circumstances have changed. A
withholding agent may require a new certificate at any time prior to a
payment, even though the withholding agent has no actual knowledge or
reason to know that any information stated on the certificate has
changed.
(iii) Retention of withholding certificate. A withholding agent must
retain each withholding certificate and other documentation for as long
as it may be relevant to the determination of the withholding agent's
tax liability under section 1461 and Sec. 1.1461-1.
(iv) Electronic transmission of information. Under procedures issued
by the IRS (see Sec. 601.601(d)(2) of this chapter), a withholding agent
may be permitted to receive in electronic form the information required
to be included on a withholding certificate.
(v) Electronic confirmation of taxpayer identifying number on
withholding certificate. The Commissioner may prescribe procedures in a
revenue procedure (see Sec. 601.601(d)(2) of this chapter) or other
appropriate guidance to require a withholding agent to confirm
electronically with the IRS information concerning any TIN stated on a
withholding certificate.
(vi) Acceptable substitute form. A withholding agent may substitute
its own form instead of an official Form W-8 or 8233 (or such other
official form as the IRS may prescribe). Such a substitute for an
official form will be acceptable if it contains provisions that are
substantially similar to those of the official form, it contains the
same certifications relevant to the transactions as are contained on the
official form and these certifications are clearly set forth, and the
substitute form includes a signature-under-penalties-of-perjury
statement identical to the one stated on the official form. The
substitute form is acceptable even if it does not contain all of the
provisions contained on the official form, so long as it contains those
provisions that are relevant to the transaction for which it is
furnished. For example, a withholding agent that pays no income for
which
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treaty benefits are claimed may develop a substitute form that is
identical to the official form, except that it does not include
information regarding claim of benefits under an income tax treaty. A
withholding agent who uses a substitute form must furnish instructions
relevant to the substitute form only to the extent and in the manner
specified in the instructions to the official form. A withholding agent
may refuse to accept a certificate from a payee or beneficial owner
(including the official Form W-8 or 8233) if the certificate is not
provided on the acceptable substitute form provided by the withholding
agent. However, a withholding agent may refuse to accept a certificate
provided by a payee or beneficial owner only if the withholding agent
furnishes the payee or beneficial owner with an acceptable substitute
form immediately upon receipt of an unacceptable form or within 5
business days of receipt of an unacceptable form from the payee or
beneficial owner. In that case, the substitute form is acceptable only
if it contains a notice that the withholding agent has refused to accept
the form submitted by the payee or beneficial owner and that the payee
or beneficial owner must submit the acceptable form provided by the
withholding agent in order for the payee or beneficial owner to be
treated as having furnished the required withholding certificate.
(vii) Requirement of taxpayer identifying number. A TIN must be
stated on a withholding certificate when required by this paragraph
(e)(4)(vii). A TIN is required to be stated on a beneficial owner
certificate if the beneficial owner is claiming the benefit of a reduced
rate under an income tax treaty (other than for amounts described in
Sec. 1.1441-6(b)(2)(ii)), an exemption from withholding because income
is effectively connected with a U.S. trade or business, an exemption
under section 871(f) for certain annuities received under qualified
plans, or an exemption solely based on a foreign organization's claim of
tax exempt status under section 501(c) or private foundation status.
Thus, a TIN is not required from a foreign private foundation that is
subject to the 4-percent tax under section 4948(a) on income if that
income is otherwise exempt under the Code. In addition, a TIN is
required to be stated on the withholding certificate from a person
representing to be a qualified intermediary described in paragraph
(e)(5)(ii) of this section, on the withholding certificate from a person
representing to be a withholding foreign partnership described in
Sec. 1.1441-5(c)(2)(i)), on the withholding certificate from a person
representing to be a foreign trust or foreign estate, or from a
fiduciary thereof, and on the withholding certificate from a person
representing to be a U.S. branch described in paragraph (e)(3)(v) of
this section. A TIN is an IRS individual taxpayer identification number,
an employer identification number, or a social security number as
described in section 6109 and Sec. 301.6109-1 of this chapter, or any
other identifier that the Commissioner may designate.
(viii) Reliance rules. A withholding agent may rely on the
information and certifications stated on withholding certificates or
other documentation without having to inquire into the truthfulness of
this information or certification, unless it has actual knowledge or
reason to know that the same is untrue. In the case of amounts described
in Sec. 1.1441-6(b)(2)(ii), a withholding agent described in
Sec. 1.1441-7(b)(2)(ii) has reason to know that the information or
certifications on a certificate are untrue only to the extent provided
in Sec. 1.1441-7(b)(2)(ii). See Sec. 1.1441-6(b)(4)(ii) for reliance on
representations regarding eligibility for a reduced rate under an income
tax treaty. Paragraphs (e)(4)(viii) (A) and (B) of this section provide
examples of such reliance.
(A) Classification. A withholding agent may rely on the claim of
entity classification indicated on the withholding certificate that it
receives from or for the beneficial owner, unless it has actual
knowledge or reason to know that the classification claimed is
incorrect. A withholding agent may not rely on a person's claim of
classification other than as a corporation if the name of the
corporation indicates that the person is a per se corporation described
in Sec. 301.7701-2(b)(8)(i) of this chapter unless the certificate
contains
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a statement that the person is a grandfathered per se corporation
described in Sec. 301.7701-2(b)(8) of this chapter and that its
grandfathered status has not been terminated. In the absence of reliable
representation or information regarding the classification of the payee
or beneficial owner, see Sec. 1.1441-1(b)(3)(ii) for applicable
presumptions.
(B) Status of payee as an intermediary or as a person acting for its
own account. A withholding agent may rely on the type of certificate
furnished as indicative of the payee's status as an intermediary or as
an owner, unless the withholding agent has actual knowledge or reason to
know otherwise. For example, a withholding agent that receives a
beneficial owner withholding certificate from a foreign financial
institution may treat the institution as the beneficial owner, unless it
has information in its records that would indicate otherwise or the
certificate contains information that is not consistent with beneficial
owner status (e.g., sub-account numbers or names). If the financial
institution also acts as an intermediary, the withholding agent may
request that the institution furnish two certificates, i.e., a
beneficial owner certificate described in paragraph (e)(2)(i) of this
section for the amounts that it receives as a beneficial owner, and an
intermediary withholding certificate described in paragraph (e)(3)(i) of
this section for the amounts that it receives as an intermediary. In the
absence of reliable representation or information regarding the status
of the payee as an owner or as an intermediary, see paragraph
(b)(3)(v)(A) for applicable presumptions.
(ix) Certificates to be furnished for each account unless exception
applies. Unless otherwise provided in this paragraph (e)(4)(ix), a
withholding agent that is a financial institution with which a customer
may open an account shall obtain withholding certificates or other
appropriate documentation on an account-by-account basis.
(A) Coordinated account information system in effect. A withholding
agent may rely on the withholding certificate or other appropriate
documentation furnished by a customer for a pre-existing account under
any one or more of the circumstances described in this paragraph
(e)(4)(ix)(A).
(1) A withholding agent may rely on documentation furnished by a
customer for another account if all such accounts are held at the same
branch location.
(2) A withholding agent may rely on documentation furnished by a
customer for an account held at another branch location of the same
withholding agent or at a branch location of a person related to the
withholding agent if the withholding agent and the related person are
part of a universal account system that uses a customer identifier that
can be used to retrieve systematically all other accounts of the
customer. See Sec. 31.3406(c)(3)(ii) and (iii)(C) of this chapter for an
identical procedure for purposes of backup withholding. For purposes of
this paragraph (e)(4)(ix)(A), a withholding agent is related to another
person if it is related within the meaning of section 267(b) or 707(b).
(3) A withholding agent may rely on documentation furnished by a
customer for an account held at another branch location of the same
withholding agent or at a branch location of a person related to the
withholding agent if the withholding agent and the related person are
part of an information system other than a universal account system and
the information system is described in this paragraph (e)(4)(ix)(A)(3).
The system must allow the withholding agent to easily access data
regarding the nature of the documentation, the information contained in
the documentation, and its validity status, and must allow the
withholding agent to easily transmit data into the system regarding any
facts of which it becomes aware that may affect the reliability of the
documentation. The withholding agent must be able to establish how and
when it has accessed the data regarding the documentation and, if
applicable, how and when it has transmitted data regarding any facts of
which it became aware that may affect the reliability of the
documentation. In addition, the withholding agent or the related party
must be able to establish that any data it has transmitted to the
information system has been processed and appropriate due diligence has
been
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exercised regarding the validity of the documentation.
(B) Family of mutual funds. An interest in a mutual fund that has a
common investment advisor or common principal underwriter with other
mutual funds (within the same family of funds) may, in the discretion of
the mutual fund, be represented by one single withholding certificate
where shares are acquired or owned in any of the funds. See
Sec. 31.3406(h)-3(a)(2) of this chapter for an identical procedures for
purposes of backup withholding.
(C) Special rule for brokers. A withholding agent may rely on the
certification of a broker acting as the agent of a beneficial owner that
the broker holds a valid beneficial owner withholding certificate
described in paragraph (e)(2)(i) of this section or other documentation
for that beneficial owner. The certification must contain the date of
expiration of the certificate or documentation and be in writing or in
electronic form. For purposes of this paragraph (e)(4)(ix)(C), the term
broker shall have the same meaning as in Sec. 31.3406(h)-3(d) of this
chapter.
(5) Qualified intermediaries--(i) General rule. A qualified
intermediary, as defined in paragraph (e)(5)(ii) of this section, may
furnish an intermediary withholding certificate to a withholding agent.
Such a certificate certifies on behalf of other persons (such as
beneficial owners, intermediaries, flow-through entities described in
Sec. 1.1441-5, or U.S. payees) for the purpose of claiming and verifying
reduced rates of withholding under section 1441 or 1442 and for the
purpose of reporting and withholding under other provisions of the Code,
such as the provisions under chapter 61 of the Code and section 3406
(and the regulations under those provisions). Furnishing such a
certificate is in lieu of transmitting to a withholding agent
withholding certificates or other appropriate documentation for the
persons for whom the qualified intermediary receives the payment or for
its shareholders (in the case of claims of benefits under an income tax
treaty by a reverse hybrid entity). Although the qualified intermediary
is required to obtain withholding certificates or other appropriate
documentation from beneficial owners, payees, or shareholders pursuant
to its agreement with the IRS, it is not required to attach such
documentation to the intermediary withholding certificate. However, the
qualified intermediary must disclose the names of those U.S. persons for
whom the qualified intermediary receives reportable amounts (within the
meaning of paragraph (e)(3)(vi) of this section) and who are not exempt
recipients (as defined in Sec. 1.6049-4(c)(1)(ii) or an applicable
provision under section 6041, 6042, 6045, or 6050N), irrespective of
local secrecy laws. A person may claim qualified intermediary status
before an agreement is executed with the IRS if it has applied for such
status and the IRS authorizes such status on an interim basis under such
procedures as the IRS may prescribe.
(ii) Definition of qualified intermediary. With respect to a payment
to a foreign person, the term qualified intermediary means a person that
is a party to a withholding agreement with the IRS and such person is--
(A) A foreign financial institution or a foreign clearing
organization (as defined in Sec. 1.163-5(c)(2)(i)(D)(8), without regard
to the requirement that the organization hold obligations for members),
other than a U.S. branch or U.S. office of such institution or
organization;
(B) A foreign branch or office of a U.S. financial institution or a
foreign branch or office of a U.S. clearing organization (as defined in
Sec. 1.163-5(c)(2)(i)(D)(8), without regard to the requirement that the
organization hold obligations for members);
(C) A foreign corporation for purposes of presenting claims of
benefits under an income tax treaty on behalf of its shareholders; or
(D) Any other person acceptable to the IRS.
(iii) Withholding agreement--(A) In general. The IRS may, upon
request, enter into a withholding agreement with a foreign person
described in paragraph (e)(5)(ii) of this section pursuant to such
procedures as the IRS may prescribe in published guidance (see
Sec. 1A601.601(d)(2) of this chapter). Under such withholding agreement,
a qualified intermediary shall be generally subject to the applicable
withholding
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and reporting provisions applicable to withholding agents and payors
under chapters 3 and 61 of the Code, and section 3406, and the
regulations under those provisions, and other withholding provisions of
the Code, except to the extent provided under the agreement. A
withholding agreement may apply to the entity as a whole or to certain
specified branches of the institution. The determination of the scope of
the agreement shall be made on a branch-by-branch basis.
(B) Terms of the withholding agreement. Generally, the agreement
shall specify the type of certification and documentation upon which the
qualified intermediary may rely to ascertain the nationality and
residence of beneficial owners and U.S. payees who receive payments
collected by the qualified intermediary and, if necessary, entitlement
to the benefits of a reduced rate under an income tax treaty. It shall
specify if the qualified intermediary may assume primary withholding
responsibility in accordance with paragraph (e)(5)(iv) of this section.
It shall specify the extent to which applicable return filing and
information reporting requirements are modified so that, in appropriate
cases, the qualified intermediary may report payments to the IRS on an
aggregated basis, without having to disclose the identity of individual
customers. However, the qualified intermediary may be required to
provide to the IRS the name and address of those foreign customers who
benefit from a reduced rate under an income tax treaty pursuant to the
qualified intermediary arrangement for purposes of verifying entitlement
to such benefits, particularly under an applicable Limitation on
Benefits provision. Under the agreement, a qualified intermediary may
agree to act as an acceptance agent to perform the duties described in
Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The agreement may specify
the manner in which applicable procedures for adjustments for
underwithholding and overwithholding, including refund procedures apply
in the context of a qualified intermediary arrangement and the extent to
which applicable procedures may be modified. In particular, a
withholding agreement may allow a qualified intermediary to claim
refunds of overwithheld amounts on behalf of its customers. If relevant,
the agreement shall specify the manner in which the qualified
intermediary may deal with payments to other intermediaries. In
addition, the agreement must specify the manner in which the IRS will
verify compliance with the agreement. In appropriate cases, the IRS may
agree to rely on audits performed by an intermediary's approved auditor.
In such a case, the IRS' audit may be limited to the audit of the
auditor's records (including work papers of the auditor and reports
prepared by the auditor indicating the methodology employed to verify
the entity's compliance with the agreement). For this purpose, the
agreement shall specify which auditor or class of auditors is approved.
Generally, an auditor will be approved if it is subject to regulatory
supervision under the laws of the country in which a significant part of
the intermediary activities under the agreement are expected to occur,
its internal procedures require it to verify that the intermediary
complies with the terms of the withholding agreement and to report non-
compliance findings under the agreement in the same manner as it is
required to report other findings of non-compliance with applicable
local laws and regulatory requirements, and its relevant records (i.e.,
work papers and reports) are available to the IRS. The agreement must
include provisions for the assessment and collection of tax in the event
that failure to comply with the terms of the agreement results in the
failure by the withholding agent or the qualified intermediary to
withhold and deposit the required amount of tax. Further, the agreement
shall specify the procedures by which deposits of amounts withheld are
to be deposited, if different from normally applicable deposit
procedures under the Code and applicable regulations. The agreement
shall also specify the assets that the qualified intermediary has in the
United States or alternative means of collection, if necessary. To
determine the terms of any particular withholding agreement, the IRS
will consider appropriate factors including whether or not the foreign
person
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agrees to assume primary responsibility as a withholding agent, the type
of local know-your-customer laws and practices to which it is subject,
the extent and nature of supervisory and regulatory control exercised
under the laws of the foreign country over the foreign person, the
volume of investments in U.S. securities (determined in dollar amounts
and number of account holders), and financial condition of the foreign
person.
(iv) Assignment of primary withholding responsibility. A withholding
agent making a payment to a qualified intermediary must presume that the
withholding agent has full withholding responsibility for that payment,
except as otherwise specified in this paragraph (e)(5)(iv). For this
purpose, withholding responsibility means the obligation to withhold as
required under the provisions of section 1441, 1442, or 1443, and the
regulations under those sections, and the related reporting obligations
under Sec. 1.1461-1(b)(2)(ii) and (c)(4)(ii) for payments identified or
treated as made to foreign persons. Withholding responsibility also
means obligations imposed on payors under chapter 61 of the Code (and
the regulations under those provisions) and, if applicable, under
section 3405 or 3406 (and the regulations under those sections). A
qualified intermediary that assumes primary withholding responsibility
vis-a-vis a withholding agent must assume such responsibility for all
payments made to any one account. Any qualified intermediary may agree
with the withholding agent to assume primary withholding responsibility,
but only if expressly permitted to do so under its agreement with the
IRS. Generally, reporting or withholding liability arising from a
payment to a U.S. person (or treated as or presumed to be made to a U.S.
person) under any provision of the Code or applicable regulations
thereunder may not be assigned to a qualified intermediary except where
the qualified intermediary is a foreign branch of a U.S. financial
institution or except to the extent that the qualified intermediary has
a branch in the United States and establishes to the satisfaction of the
IRS that its U.S. branch can adequately fulfill the qualified
intermediary's obligations on behalf of the qualified intermediary
regarding information reporting under chapter 61 of the Code and the
regulations under the applicable provisions of that chapter and, if
necessary, backup withholding under section 3406 and the regulations
under that section (even though the U.S. branch is not a qualified
intermediary).
(v) Information to withholding agent regarding applicable
withholding rates--(A) General rule. The qualified intermediary must
separate the assets that generate payments of reportable amounts (as
described in paragraph (e)(3)(vi) of this section) that are associated
with its withholding certificate furnished to the withholding agent into
the categories described in paragraph (e)(5)(v)(B) of this section, and
provide that information to the withholding agent so that the
withholding agent may determine the applicable withholding rate
applicable to each category. The information may be furnished in any
manner that the parties choose. For example, if the withholding agent
maintains separate accounts for each category of assets described in
paragraph (e)(5)(v)(B) of this section, the qualified intermediary must
provide information sufficient for the withholding agent to allocate
assets appropriately among the various accounts. If the withholding
agent does not maintain separate accounts, it may require the qualified
intermediary to attach a statement to the intermediary withholding
certificate under paragraph (e)(3)(ii)(E) of this section providing the
information described in this paragraph (e)(5)(v).
(B) Categories of assets. A payment of a reportable amount (as
defined in paragraph (e)(3)(vi) of this section) must be associated with
one of the three categories of assets set forth in paragraphs
(e)(5)(v)(B) (1) through (3) of this section and may be associated with
only one of these three categories. Additional or different categories
of assets may be specified, however, under procedures prescribed by the
IRS (see Sec. 602.602-1(d) of this chapter) or in the qualified
intermediary agreement. No information is required regarding assets that
do not generate a reportable amount described in paragraph
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(e)(3)(vi) of this section. The information provided to the withholding
agent, and any update thereof, shall be considered an integral part of
the intermediary withholding certificate. The three categories of assets
required to be identified to the withholding agent are as follows:
(1) The first category of assets consists of assets that are
associated with non-U.S. payees to which the intermediary certificate
relates, and the applicable withholding rate. If different withholding
rates apply, the qualified intermediary must indicate the applicable
rate for each class of non-U.S. payees to which different withholding
rates apply and the assets associated with each class. In the case of a
qualified intermediary that has assumed primary withholding
responsibility, the intermediary must simply certify the amount of
assets for which it assumes primary withholding responsibility because
they are assets for which it holds the appropriate documentation and are
not described in the other two categories.
(2) The second category of assets consists of assets that are
associated with all U.S. payees to which the certificate relates. The
qualified intermediary must furnish a Form W-9 (or an acceptable
substitute form) for each U.S. payee described in paragraph (d)(2) of
this section or, in the absence of a Form W-9, the name and address of
the U.S. payee or such information it has available regarding the payee.
The identity of U.S. payees described in paragraph (d)(3) of this
section need not be disclosed to the withholding agent.
(3) The third category of assets consists of assets that are
associated with payees for whom the qualified intermediary holds no
documentation, or holds documentation that it knows or has reason to
know is unreliable and for which it has no actual knowledge that the
payees are U.S. persons. A qualified intermediary that has assumed
primary withholding responsibility need not furnish information
regarding this category of assets.
(C) Updating the information. The qualified intermediary must update
the information furnished to the withholding agent in accordance with
this paragraph (e)(5)(v) as often as is necessary in order to enable the
withholding agent to withhold at the appropriate rate on each payment
and to report such income for purposes of chapter 3 or 61 of the Code
and sections 3402, 3405 and 3406 (and the regulations under those
provisions). See paragraph (e)(4)(ii)(D) of this section regarding how
changes in the information affect the validity of a withholding
certificate. See Sec. 1.1441-1(b)(3)(v)(C) for consequences if the
information is not updated as required.
(f) Effective date--(1) In general. This section applies to payments
made after December 31, 2000.
(2) Transition rules--(i) Special rules for existing documentation.
For purposes of paragraphs (d)(3) and (e)(2)(i) of this section, the
validity of a withholding certificate (namely, Form W-8, 8233, 1001,
4224, or 1078 , or a statement described in Sec. 1.1441-5 in effect
prior to January 1, 2001 (see Sec. 1.1441-5 as contained in 26 CFR part
1, revised April 1, 1999)) that was valid on January 1, 1998 under the
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and
35a, revised April 1, 1999) and expired, or will expire, at any time
during 1998, is extended until December 31, 1998. The validity of a
withholding certificate that is valid on or after January 1, 1999,
remains valid until its validity expires under the regulations in effect
prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1,
1999) but in no event will such withholding certificate remain valid
after December 31, 2000. The rule in this paragraph (f)(2)(i), however,
does not apply to extend the validity period of a withholding
certificate that expires solely by reason of changes in the
circumstances of the person whose name is on the certificate.
Notwithstanding the first three sentences of this paragraph (f)(2)(i), a
withholding agent may choose to not take advantage of the transition
rule in this paragraph (f)(2)(i) with respect to one or more withholding
certificates valid under the regulations in effect prior to January 1,
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore,
to require withholding certificates conforming to the requirements
described
[[Page 102]]
in this section (new withholding certificates). For purposes of this
section, a new withholding certificate is deemed to satisfy the
documentation requirement under the regulations in effect prior to
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999).
Further, a new withholding certificate remains valid for the period
specified in paragraph (e)(4)(ii) of this section, regardless of when
the certificate is obtained.
(ii) Lack of documentation for past years. A taxpayer may elect to
apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of this
section, dealing with liability for failure to obtain documentation
timely, to all of its open tax years, including tax years that are
currently under examination by the IRS. The election is made by simply
taking action under those provisions in the same manner as the taxpayer
would take action for payments made after December 31, 2000.
[T.D. 8734, 62 FR 53424, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72184, 72187, Dec. 31, 1998; T.D. 8856, 64 FR 73409, 73412, Dec. 30,
1999]
Effective Date Note 1: By T.D. 8734, 62 FR 53424, Oct. 14, 1997,
Sec. 1.1441-1 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-1 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73409, Dec. 30, 1999, the
effective date of Sec. 1.1441-1 was delayed until Jan. 1, 2001 and
paragraph (f) was revised, effective Jan. 1, 2001. At 65 FR 16320, Mar.
28, 2000, paragraph (f)(2)(i) was corrected by removing ``2001'' and
adding ``2000'' in its place, effective Jan. 1, 2001. For the
convenience of the user, the superseded text is set forth as follows:
Sec. 1.1441-1 Requirement for withholding of tax on nonresident aliens,
foreign partnerships, and foreign corporations.
Except as otherwise provided in Secs. 1.1441-3, 1.1441-4, and
1.1441-6, to the extent that the items specified in Sec. 1.1441-2
constitute gross income from sources within the United States,
withholding of a tax of 30 percent is required in the case of items of
income specified in paragraphs (a) and (b) of Sec. 1.1441-2 when such
income is paid to a nonresident alien individual, a foreign partnership,
or a foreign corporation, except that with respect to payments made
after March 4, 1964, withholding of a tax of 14 percent is required in
the case of items of income specified in paragraph (c) of Sec. 1.1441-2.
The rate of 30 percent or 14 percent shall be reduced as may be provided
by a treaty with any country. See Secs. 1.894-1 and 1.1441-6 relating to
income affected by treaty. For purposes of this section, the term
``nonresident alien individual'' includes an alien resident of Puerto
Rico. In the case of payments occurring after October 31, 1972, the term
``foreign corporation'' does not include a corporation created or
organized in Guam or under the law of Guam. The rules of chapter 3 of
the Code and Secs. 1.1441-1 through 1.1441-6 and Secs. 1.1461-1 through
1.1464-1 apply to a nonresident alien individual even though the
individual has an election in effect under section 6013 (g) or (h) of
the Code.
[T.D. 7385, 40 FR 50263, Oct. 29, 1975, as amended by T.D. 7670, 45 FR
6932, Jan. 31, 1980]
Effective Date Note 2: By T.D. 8856, 64 FR 73412, Dec. 30, 1999,
Sec. 1.1441-1 was amended in paragraphs (b)(4)(xix), (b)(7)(v),
(c)(6)(ii)(B), and (e)(4)(ii)(A), by revising certain dates, effective
Jan. 1, 2001. See Federal Register for superseded dates.
Sec. 1.1441-2 Amounts subject to withholding.
(a) In general. For purposes of the regulations under chapter 3 of
the Internal Revenue Code (Code), the term amounts subject to
withholding means amounts from sources within the United States that
constitute either fixed or determinable annual or periodical income
described in paragraph (b) of this section or other amounts subject to
withholding described in paragraph (c) of this section. For purposes of
this paragraph (a), an amount shall not be treated as not being from
sources within the United States merely because the source of the amount
cannot be determined at the time of payment. See Sec. 1.1441-3(d)(1) for
determining the amount to be withheld from a payment in the absence of
information at the time of payment regarding the source of the amount.
Amounts subject to withholding include amounts that are not fixed or
determinable annual or periodical income and upon which withholding is
specifically required under a provision of this section or another
section of the regulations under chapter 3 of the Code (such as
corporate distributions that do not constitute dividend income upon
which withholding is required under Sec. 1.1441-3(c)(1)). Amounts
subject to withholding do not include amounts
[[Page 103]]
described in Sec. 1.1441-1(b)(4)(i) to the extent they involve interest
on obligations in bearer form or on foreign-targeted registered
obligations (but, in the case of a foreign-targeted registered
obligation, only to the extent of those amounts paid to a registered
owner that is a financial institution within the meaning of section
871(h)(5)(B) or a member of a clearing organization which member is the
beneficial owner of the obligation), amounts described in Sec. 1.1441-
1(b)(4)(ii) (dealing with bank deposit interest and similar types of
interest (including original issue discount) described in section
871(i)(2)(A) or 881(d)), amounts described in Sec. 1.1441-1(b)(4)(iv)
(dealing with interest or original issue discount on certain short-term
obligations described in section 871(g)(1)(B) or 881(a)(3)), and amounts
described in Sec. 1.1441-1(b)(4)(xx) (dealing with income from certain
gambling winnings exempt from tax under section 871(j)).
(b) Fixed or determinable annual or periodical income--(1) In
general--(i) Definition. For purposes of chapter 3 of the Code and the
regulations thereunder, fixed or determinable annual or periodical
income is all income included in gross income under section 61
(including original issue discount), except for the items specified in
paragraph (b)(2) of this section. Therefore, items of U.S. source income
that are excluded from gross income under any provision of law without
regard to the identity of the holder, such as interest excluded from
gross income under section 103(a), are not fixed or determinable annual
or periodical income. See Sec. 1.306-3(h) for treating income from the
disposition of section 306 stock as fixed or determinable annual or
periodical income.
(ii) Manner of payment. The term fixed or determinable annual or
periodical is merely descriptive of the character of a class of income.
If an item of income falls within the class of income contemplated in
the statute and described in paragraph (a) of this section, it is
immaterial whether payment of that item is made in a series of payments
or in a single lump sum. Further, the income need not be paid annually
if it is paid periodically; that is to say, from time to time, whether
or not at regular intervals. The fact that a payment is not made
annually or periodically does not, however, prevent it from being fixed
or determinable annual or periodical income (e.g., a lump sum payment).
In addition, the fact that the length of time during which the payments
are to be made may be increased or diminished in accordance with
someone's will or with the happening of an event does not disqualify the
payment as determinable or periodical. For this purpose, the share of
the fixed or determinable annual or periodical income of an estate or
trust from sources within the United States which is required to be
distributed currently, or which has been paid or credited during the
taxable year, to a nonresident alien beneficiary of such estate or trust
constitutes fixed or determinable annual or periodical income.
(iii) Determinability of amount. An item of income is fixed when it
is to be paid in amounts definitely pre-determined. An item of income is
determinable if the amount to be paid is not known but there is a basis
of calculation by which the amount may be ascertained at a later time.
For example, interest is determinable even if it is contingent in that
its amount cannot be determined at the time of payment of an amount with
respect to a loan because the calculation of the interest portion of the
payment is contingent upon factors that are not fixed at the time of the
payment. For purposes of this section, an amount of income does not have
to be determined at the time that the payment is made in order to be
determinable. An amount of income described in paragraph (a) of this
section which the withholding agent knows is part of a payment it makes
but which it cannot calculate exactly at the time of payment, is
nevertheless determinable if the determination of the exact amount
depends upon events expected to occur at a future date. In contrast, a
payment which may be income in the future based upon events that are not
anticipated at the time the payment is made is not determinable. For
example, loan proceeds may become income to the borrower when and to the
extent the loan is canceled without repayment. While the cancellation of
the debt is income to the borrower when it occurs,
[[Page 104]]
it is not determinable at the time the loan proceeds are disbursed to
the borrower if the lack of repayment leading to the cancellation of
part or all of the debt was not anticipated at the time of disbursement.
The fact that the source of an item of income cannot be determined at
the time that the payment is made does not render a payment not
determinable. See Sec. 1.1441-3(d)(1) for determining the amount to be
withheld from a payment in the absence of information at the time of
payment regarding the source of the amount.
(2) Exceptions. For purposes of chapter 3 of the Code and the
regulations thereunder, the items of income described in this paragraph
(b)(2) are not fixed or determinable annual or periodical income--
(i) Gains derived from the sale of property (including market
discount and option premiums), except for gains described in paragraph
(b)(3) or (c) of this section;
(ii) Insurance premiums within the meaning of section 4372 paid to a
foreign insurer or reinsurer; and
(iii) Any other income that the Internal Revenue Service (IRS) may
determine, in published guidance (see Sec. 601.601(d)(2) of this
chapter), is not fixed or determinable annual or periodical income.
(3) Original issue discount--(i) General rule. An amount
representing original issue discount is fixed or determinable annual or
periodical income that is subject to withholding to the extent provided
in this paragraph (b)(3) if not otherwise excluded under paragraph (a)
of this section. Under sections 871(a)(1)(C) and 881(a)(3), an amount of
original issue discount is subject to tax to a foreign beneficial owner
of an obligation carrying original issue discount upon a taxable sale or
exchange of the obligation or when a payment is made on such obligation.
The amount taxable is the amount of original issue discount that accrued
while the foreign person held the obligation up to the time that the
obligation is sold or exchanged or that a payment is made on the
obligation, reduced by any amount of original issue discount that was
taken into account prior to that time (due to a payment made on the
obligation). In the case of a taxable event due to a payment made on the
obligation, the tax due on the amount of taxable original issue discount
may not exceed the payment less the tax imposed thereon. A person who is
a withholding agent with respect to a payment that, under section
871(a)(1)(C) or 881(a)(3), is taxable to a foreign person holding or
disposing of an original issue discount obligation must withhold to the
extent provided in this paragraph (b)(3).
(ii) Amounts actually known to the withholding agent. A withholding
agent must withhold on the taxable amount of original issue discount to
the extent that it has actual knowledge of the proportion of the payment
that is taxable to the beneficial owner under section 871(a)(1)(C) or
881(a)(3)(A). A withholding agent has actual knowledge if it knows how
long the beneficial owner has held the obligation, the terms of the
obligation, and the extent to which the beneficial owner purchased the
obligation at a premium. A withholding agent is treated as having
knowledge if the information is reasonably available. The information is
not considered reasonably available if the withholding agent does not
have a direct customer relationship with the foreign beneficial owner or
such other person who has actual knowledge of the facts relevant to the
determination of the amount taxable to the foreign beneficial owner, and
has no access to such information in the ordinary course of its business
due to the manner in which the obligation is held (e.g., in street name
or through intermediaries). In the case of a withholding agent
maintaining a direct account relationship with the beneficial owner,
knowledge regarding the beneficial owner's holding period and
acquisition premium is considered to be reasonably available to the
withholding agent. A withholding agent may rely on the most recently
published List of Original Issue Discount Instruments (IRS Publication
1212 (available from the IRS Forms Distribution Centers) or similar
list) published by the IRS in order to determine the amount of taxable
OID in any particular transaction.
(iii) Amounts for which certain documentation is not furnished.
Notwithstanding lack of knowledge (within the meaning of paragraph
(b)(3)(ii) of this
[[Page 105]]
section), withholding is required on the entire amount of stated
interest, if any, and original issue discount on the obligation as
determined as of the date of original issue if the withholding agent,
pursuant to the provisions in Sec. 1.1441-1(b)(3), treats the payment as
made to a foreign payee because it cannot reliably associate the payment
with documentation and the amount would qualify as portfolio interest if
the withholding agent held documentation described in Sec. 1.871-
14(c)(2). A withholding agent may rely on the most recently published
List of Original Issue Discount Instruments (IRS Publication 1212
(available from the IRS Forms Distribution Centers) or similar list)
published by the IRS in order to determine the amount of taxable OID in
any particular transaction. See Sec. 1.1441-1(b)(8) for adjustments to
any amount that has been overwithheld.
(iv) Exceptions to withholding. The obligation to withhold under
this paragraph (b)(3) shall apply only to obligations issued after
December 31, 2000, and payable more than 183 days from the date of
original issue. Any exemption from withholding pursuant to this
paragraph (b)(3) applies without a requirement that documentation be
furnished to the withholding agent. However, documentation may have to
be furnished for purposes of the information reporting provisions under
section 6049 and backup withholding under section 3406. See Sec. 1.6049-
5(b) (7) through (15).
(4) Securities lending transactions and equivalent transactions. See
Secs. 1.871-7(b)(2) and 1.881-2(b)(2) regarding the character of
substitute payments as fixed and determinable annual or periodical
income. Such amounts constitute income subject to withholding to the
extent they are from sources within the United States, as determined
under section Secs. 1.861-2(a)(7) and 1.861-3(a)(6). See Secs. 1.6042-
3(a)(2) and 1.6049-5(a)(5) for reporting requirements applicable to
substitute dividend and interest payments, respectively.
(c) Other income subject to withholding. Withholding is also
required on the following items of income--
(1) Gains described in sections 631 (b) or (c), relating to
treatment of gain on disposal of timber, coal, or domestic iron ore with
a retained economic interest; and
(2) Gains subject to the 30-percent tax under section 871(a)(1)(D)
or 881(a)(4), relating to contingent payments received from the sale or
exchange of patents, copyrights, and similar intangible property.
(d) Exceptions to withholding where no money or property is paid or
lack of knowledge--(1) General rule. A withholding agent who is not
related to the recipient or beneficial owner has an obligation to
withhold under section 1441 only to the extent that, at any time between
the date that the obligation to withhold would arise (but for the
provisions of this paragraph (d)) and the due date for the filing of
return on Form 1042 (including extensions) for the year in which the
payment occurs, it has control over, or custody of money or property
owned by the recipient or beneficial owner from which to withhold an
amount and has knowledge of the facts that give rise to the payment. The
exemption from the obligation to withhold under this paragraph (d) shall
not apply, however, to distributions with respect to stock or if the
lack of control or custody of money or property from which to withhold
is part of a pre-arranged plan known to the withholding agent to avoid
withholding under section 1441, 1442, or 1443. For purposes of this
paragraph (d), a withholding agent is related to the recipient or
beneficial owner if it is related within the meaning of section 482. Any
exemption from withholding pursuant to this paragraph (d) applies
without a requirement that documentation be furnished to the withholding
agent. However, documentation may have to be furnished for purposes of
the information reporting provisions under chapter 61 of the Code and
backup withholding under section 3406. The exemption from withholding
under this paragraph (d) is not a determination that the amounts are not
fixed or determinable annual or periodical income, nor does it
constitute an exemption from reporting the amount under Sec. 1.1461-1
(b) and (c).
(2) Cancellation of debt. A lender of funds who forgives any portion
of the loan is deemed to have made a payment of income to the borrower
under
[[Page 106]]
Sec. 1.61-12 at the time the event of forgiveness occurs. However, based
on the rules of paragraph (d)(1) of this section, the lender shall have
no obligation to withhold on such amount to the extent that it does not
have custody or control over money or property of the borrower at any
time between the time that the loan is forgiven and the due date
(including extensions) of the Form 1042 for the year in which the
payment is deemed to occur. A payment received by the lender from the
borrower in partial settlement of the debt obligation does not, for this
purpose, constitute an amount of money or property belonging to the
borrower from which the withholding tax liability can be satisfied.
(3) Satisfaction of liability following underwithholding by
withholding agent. A withholding agent who, after failing to withhold
the proper amount from a payment, satisfies the underwithheld amount out
of its own funds may cause the beneficial owner to realize income to the
extent of such satisfaction or may be considered to have advanced funds
to the beneficial owner. Such determination depends upon the contractual
arrangements governing the satisfaction of such tax liability (e.g.,
arrangements in which the withholding agent agrees to pay the amount due
under section 1441 for the beneficial owner) or applicable laws
governing the transaction. If the satisfaction of the tax liability is
considered to constitute an advance of funds by the withholding agent to
the beneficial owner and the withholding agent fails to collect the
amount from the beneficial owner, a cancellation of indebtedness may
result, giving rise to income to the beneficial owner under Sec. 1.61-
12. While such income is annual or periodical fixed or determinable, the
withholding agent shall have no liability to withhold on such income to
the extent the conditions set forth in paragraphs (d) (1) and (2) of
this section are satisfied with respect to this income. Contrast the
rules of this paragraph (d)(3) with the rules in Sec. 1.1441-3(f)(1)
dealing with a situation in which the satisfaction of the beneficial
owner's tax liability itself constitutes additional income to the
beneficial owner. See, also, Sec. 1.1441-3(c)(2)(ii)(B) for a special
rule regarding underwithholding on corporate distributions due to
underestimating an amount of earnings and profits.
(e) Payment--(1) General rule. A payment is considered made to a
person if that person realizes income whether or not such income results
from an actual transfer of cash or other property. For example,
realization of income from cancellation of debt results in a deemed
payment. A payment is considered made when the amount would be
includible in the income of the beneficial owner under the U.S. tax
principles governing the cash basis method of accounting. A payment is
considered made whether it is made directly to the beneficial owner or
to another person for the benefit of the beneficial owner (e.g., to the
agent of the beneficial owner). Thus, a payment of income is considered
made to a beneficial owner if it is paid in complete or partial
satisfaction of the beneficial owner's debt to a creditor. In the event
of a conflict between the rules of this paragraph (e)(1) governing
whether a payment has occurred and its timing and the rules of
Sec. 31.3406(a)-4 of this chapter, the rules in Sec. 31.3406(a)-4 of
this chapter shall apply to the extent that the application of section
3406 is relevant to the transaction at issue.
(2) Income allocated under section 482. A payment is considered made
to the extent income subject to withholding is allocated under section
482. Further, income arising as a result of a secondary adjustment made
in conjunction with a reallocation of income under section 482 from a
foreign person to a related U.S. person is considered paid to a foreign
person unless the taxpayer to whom the income is reallocated has entered
into a repatriation agreement with the IRS and the agreement eliminates
the liability for withholding under this section. For purposes of
determining the liability for withholding, the payment of income is
deemed to have occurred on the last day of the taxable year in which the
transactions that give rise to the allocation of income and the
secondary adjustments, if any, took place.
[[Page 107]]
(3) Blocked income. Income is not considered paid if it is blocked
under executive authority, such as the President's exercise of emergency
power under the Trading with the Enemy Act (50 U.S.C. App. 5), or the
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq).
However, on the date that the blocking restrictions are removed, the
income that was blocked is considered constructively received by the
beneficial owner (and therefore paid for purposes of this section) and
subject to withholding under Sec. 1.1441-1. Any exemption from
withholding pursuant to this paragraph (e)(3) applies without a
requirement that documentation be furnished to the withholding agent.
However, documentation may have to be furnished for purposes of the
information reporting provisions under chapter 61 of the Code and backup
withholding under section 3406. The exemption from withholding granted
by this paragraph (e)(3) is not a determination that the amounts are not
fixed or determinable annual or periodical income.
(4) Special rules for dividends. For purposes of sections 1441 and
6042, in the case of stock for which the record date is earlier than the
payment date, dividends are considered paid on the payment date. In the
case of a corporate reorganization, if a beneficial owner is required to
exchange stock held in a former corporation for stock in a new
corporation before dividends that are to be paid with respect to the
stock in the new corporation will be paid on such stock, the dividend is
considered paid on the date that the payee or beneficial owner actually
exchanges the stock and receives the dividend. See Sec. 31.3406(a)-
4(a)(2) of this chapter.
(5) Certain interest accrued by a foreign corporation. For purposes
of sections 1441 and 6049, a foreign corporation shall be treated as
having made a payment of interest as of the last day of the taxable year
if it has made an election under Sec. 1.884-4(c)(1) to treat accrued
interest as if it were paid in that taxable year.
(6) Payments other than in U.S. dollars. For purposes of section
1441, a payment includes amounts paid in a medium other than U.S.
dollars. See Sec. 1.1441-3(e) for rules regarding the amount subject to
withholding in the case of such payments.
(f) Effective date. This section applies to payments made after
December 31, 2000.
[T.D. 8734, 62 FR 53444, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72187, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]
Effective Date Note 1: By T.D. 8734, 62 FR 53444, Oct. 14, 1997,
Sec. 1.1441-2 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-2 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the
effective date was further delayed until Jan. 1, 2001. For the
convenience of the user, the superseded text is set forth as follows:
Sec. 1.1441-2 Income subject to withholding.
(a) Fixed or determinable annual or periodical income. (1) The gross
amount of fixed or determinable annual or periodical income is subject
to withholding. Section 1441(b) specifically includes in such income
interest, dividends, rent, salaries, wages, premiums, annuities,
compensations, remunerations, and emoluments; but other kinds of income
are included, as, for instance, royalties. For purposes of the preceding
sentence, the term ``interest'' includes interest on certain deferred
payments, as provided in section 483 and the regulations thereunder. The
term ``fixed or determinable annual or periodical'' income is merely
descriptive of the character of a class of income. If an item of income
falls within the class of income contemplated by the statute, it is
immaterial whether payment of that item is made in a series of repeated
payments or in a single lump sum. Thus, $5,000 in royalty income would
come within the meaning of the term, whether paid in 10 payments of $500
each or in one payment of $5,000.
(2) Income is fixed when it is to be paid in amounts definitely
predetermined. Income is determinable whenever there is a basis of
calculation by which the amount to be paid may be ascertained. The
income need not be paid annually if it is paid periodically; that is to
say, from time to time, whether or not at regular intervals. The fact
that a payment is not made annually or periodically does not, however,
necessarily prevent its being fixed or determinable annual or periodical
income. That the length of time during which the payments are to be made
may be increased or diminished in accordance with someone's will or with
the happening of an event does not make the payments any the less
determinable or periodical. A salesman working by the month for a
commission on sales which is paid or credited monthly receives
determinable periodical income. The share of the fixed or determinable
annual or periodical income of an estate or trust from
[[Page 108]]
sources within the United States which is required to be distributed
currently, or which has been paid or credited during the taxable year,
to a nonresident alien beneficiary of such estate or trust constitutes
fixed or determinable annual or periodical income. Such items as taxes,
interest on mortgages, or premiums on insurance paid to or for the
account of a nonresident alien landlord by a tenant, pursuant to the
terms of the lease, constitute fixed or determinable annual or
periodical income.
(3) Income derived from the sale in the United States of property,
whether real or personal, is not fixed or determinable annual or
periodical income.
(b) Other income subject to withholding--(1) Payments in taxable
years of recipients beginning before January 1, 1967. For payments made
in taxable years of recipients beginning before January 1, 1967,
withholding at 30 percent is also required on the gross amount of the
items described in section 402(a)(2), relating to treatment of total
distributions from certain employees' trusts; in sections 631 (b) and
(c), relating to treatment of gain on disposal of timber, coal, or
domestic iron ore with a retained economic interest; in section 1235,
relating to treatment of gain on sale or exchange of patents; and, after
September 2, 1958, in section 403(a)(2), relating to treatment of
payments under certain employee annuities, each of which items is
considered to be gain from the sale or exchange of a capital asset.
(2) Payments in taxable years of recipients beginning after December
31, 1966. For payments made in taxable years of recipients beginning
after December 31, 1966, withholding at 30 percent is also required on
the gross amount of the following items:
(i) Gains described in section 402(a)(2), relating to the treatment
of total distributions from certain employees' trusts; section
403(a)(2), relating to treatment of payments under certain employee
annuities; and section 631 (b) or (c), relating to treatment of gain on
disposal of timber, coal, or domestic iron ore with a retained economic
interest;
(ii) [Reserved]
(iii) Gains subject to the 30-percent tax under section 871(a)(1)(D)
or section 881(a)(4), relating to contingent payments received from the
sale or exchange after October 4, 1966, of patents, copyrights, and
similar intangible property; and
(iv) Gains on transfers described in section 1235, relating to
treatment of gain on sale or exchange of patents, if the transfers are
made on or before October 4, 1966.
(c) Amounts received by participants in certain exchange or training
programs--(1) Scholarship or fellowship grants. Withholding of tax shall
be at the rate of 14 percent (rather than 30 percent) on that portion of
a scholarship or fellowship grant paid after March 4, 1964, to a
nonresident alien individual who is temporarily present in the United
States as a nonimmigrant under subparagraph (F) or (J) of section
101(a)(15) of the Immigration and Nationality Act, as amended (8 U.S.C.
1101(a)(15)(F) or (J)), which is not excludible from such nonresident
alien's gross income under section 117(a)(1) and paragraph (a) of
Sec. 1.117-1 because it exceeds the limitations set forth in section
117(b)(2)(B) and paragraph (b)(2) of Sec. 1.117-2. Thus, if a
nonresident alien scientist who was admitted to the United States under
subparagraph (J) of section 101(a)(15) of the Immigration and
Nationality Act, as amended, to engage in post-doctoral scientific
studies received a fellowship grant from a grantor specified in section
117(b)(2)(A) which exceeded the $300-per-month-for-36- months limitation
determined under paragraph (b) (2) and (3) of Sec. 1.117-2, a tax at the
rate of 14 percent rather than 30 percent must be withheld from the
amount of the grant includible in the scientist's gross income.
(2) Expenses for travel, research, etc. Withholding shall also be at
the rate of 14 percent on amounts paid after March 4, 1964, to
nonresident alien individuals described in subparagraph (1) of this
paragraph to cover expenses for travel, research, clerical help, or
equipment which are incident to a scholarship or fellowship grant to
which section 117(a)(1) applies, but only to the extent that such
amounts are not excludible from gross income under paragraph (b)(1) of
Sec. 1.117-1 because they pertain to a portion of a scholarship or
fellowship grant which is not excludible, or because the amount received
is not specifically designated to cover such expenses under paragraph
(b)(2)(i) of Sec. 1.117-1.
(3) Exchange visitors. A nonresident alien individual who is
temporarily present in the United States as a nonimmigrant under
subparagraph (J) of section 101(a)(15) of the Immigration and
Nationality Act, as amended, includes a nonresident alien individual
admitted to the United States as an ``exchange visitor'' under section
201 of the U.S. Information and Educational Exchange Act of 1948, as
amended (22 U.S.C. 1446), which section was repealed by section 111 of
the Mutual Educational and Cultural Exchange Act of 1961 (Pub. L. 87-
256, 75 Stat. 538).
(Approved by the Office of Management and Budget under control number
1545-0795)
(Sec. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
[T.D. 6500, 25 FR 12073, Nov. 26, 1960, as amended by T.D. 6908, 31 FR
16770, Dec. 31, 1966; T.D. 7977, 49 FR 36831, Sept. 20, 1984]
Effective Date Note 2: By T.D. 8856, Sec. 1.1441-2 was amended in
paragraphs (b)(3)(iv) and (f) by removing ``December 31,
[[Page 109]]
1999'', and adding in its place ``December 31, 2000'', effective Jan. 1,
2001.
Sec. 1.1441-3 Determination of amounts to be withheld.
(a) Withholding on gross amount. Except as otherwise provided in
regulations under section 1441, the amount subject to withholding under
Sec. 1.1441-1 is the gross amount of income subject to withholding that
is paid to a foreign person. The gross amount of income subject to
withholding may not be reduced by any deductions, except to the extent
that one or more personal exemptions are allowed as provided under
Sec. 1.1441-4(b)(6).
(b) Withholding on payments on certain obligations--(1) Withholding
at time of payment of interest. When making a payment on an interest-
bearing obligation, a withholding agent must withhold under Sec. 1.1441-
1 upon the gross amount of stated interest payable on the interest
payment date, regardless of whether the payment constitutes a return of
capital or the payment of income within the meaning of section 61. To
the extent an amount was withheld on an amount of capital rather than
interest, see the rules for adjustments, refunds, or credits under
Sec. 1.1441-1(b)(8).
(2) No withholding between interest payment dates--(i) In general. A
withholding agent is not required to withhold under Sec. 1.1441-1 upon
interest accrued on the date of a sale of debt obligations when that
sale occurs between two interest payment dates (even though the amount
is treated as interest under Sec. 1.61-7 (c) or (d) and is subject to
tax under section 871 or 881). See Sec. 1.6045-1(c) for reporting
requirements by brokers with respect to sale proceeds. See Sec. 1.61-
7(c) regarding the character of payments received by the acquirer of an
obligation subsequent to such acquisition (that is, as a return of
capital or interest accrued after the acquisition). Any exemption from
withholding pursuant to this paragraph (b)(2)(i) applies without a
requirement that documentation be furnished to the withholding agent.
However, documentation may have to be furnished for purposes of the
information reporting provisions under section 6045 or 6049 and backup
withholding under section 3406. The exemption from withholding granted
by this paragraph (b)(2) is not a determination that the accrued
interest is not fixed or determinable annual or periodical income under
section 871(a) or 881(a) nor does it constitute an exemption from
reporting under Sec. 1.1461-1 (b) and (c) the amount of accrued interest
paid.
(ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this
section does not apply if the sale of securities is part of a plan the
principal purpose of which is to avoid tax by selling and repurchasing
securities and the withholding agent has actual knowledge or reason to
know of such plan.
(c) Corporate distributions--(1) General rule. A corporation making
a distribution with respect to its stock or any intermediary (described
in Sec. 1.1441-1(e)(3)(i)) making a payment of such a distribution is
required to withhold under section 1441, 1442, or 1443 on the entire
amount of the distribution, unless it elects to reduce the amount of
withholding under the provisions of paragraph (c)(2) of this section.
The exemption from withholding provided by this paragraph (c) applies
without any requirement to furnish documentation to the withholding
agent. However, documentation may have to be furnished for purposes of
the information reporting provisions under section 6042 or 6045 and
backup withholding under section 3406. The exemption from withholding
granted by this paragraph (c) does not constitute a determination that
the exempted amounts are not fixed or determinable annual or periodical
income under sections 871(a) or 881(a) nor does it constitute an
exemption from reporting under Sec. 1.1461-1 (b) and (c) the amount of
the distribution.
(2) Exception to withholding on distributions--(i) In general. An
election described in paragraph (c)(1) of this section is made by
actually reducing the amount of withholding at the time that the payment
is made. An intermediary that makes a payment of a distribution is not
required to reduce the withholding based on the distributing
corporation's estimate of earnings and profits, even if the distributing
corporation itself elects to reduce the withholding on payments of
distributions that it itself makes to
[[Page 110]]
foreign persons. Conversely, an intermediary may elect to reduce the
amount of withholding with respect to the payment of a distribution even
if the distributing corporation does not so elect for the payments of
distributions that it itself makes of distributions to foreign persons.
The amounts with respect to which a distributing corporation or
intermediary may elect to reduce the withholding are as follows:
(A) A distributing corporation or intermediary may elect to not
withhold on a distribution to the extent it represents a nontaxable
distribution payable in stock or stock rights.
(B) A distributing corporation or intermediary may elect to not
withhold on a distribution to the extent it represents a distribution in
part or full payment in exchange for stock.
(C) A distributing corporation or intermediary may elect to not
withhold on a distribution (actual or deemed) to the extent it is not
paid out of accumulated earnings and profits or current earnings and
profits, based on a reasonable estimate determined under paragraph
(c)(2)(ii) of this section.
(D) A regulated investment company or intermediary may elect to not
withhold on a distribution representing a capital gain dividend (as
defined in section 852(b)(3)(C)) or an exempt interest dividend (as
defined in section 852(b)(5)(A)) based on the applicable procedures
described under paragraph (c)(3) of this section.
(E) A U.S. Real Property Holding Corporation (defined in section
897(c)(2)) or a real estate investment trust (defined in section 856) or
intermediary may elect to not withhold on a distribution to the extent
it is subject to withholding under section 1445 and the regulations
under that section. See paragraph (c)(4) of this section for applicable
procedures.
(ii) Reasonable estimate of accumulated and current earnings and
profits on the date of payment--(A) General rule. A reasonable estimate
for purposes of paragraph (c)(2)(i)(C) of this section is a
determination made by the distributing corporation at a time reasonably
close to the date of payment of the extent to which the distribution
will constitute a dividend, as defined in section 316. The determination
is based upon the anticipated amount of accumulated earnings and profits
and current earnings and profits for the taxable year in which the
distribution is made, the distributions made prior to the distribution
for which the estimate is made and all other relevant facts and
circumstances. A reasonable estimate may be made based on the procedures
described in Sec. 31.3406(b)(2)-4(c)(2) of this chapter.
(B) Procedures in case of underwithholding. A distributing
corporation or intermediary that is a withholding agent with respect to
a distribution and that determines at the end of the taxable year in
which the distribution is made that it underwithheld under section 1441
on the distribution shall be liable for the amount underwithheld as a
withholding agent under section 1461. However, for purposes of this
section and Sec. 1.1461-1, any amount underwithheld paid by a
distributing corporation, its paying agent, or an intermediary shall not
be treated as income subject to additional withholding even if that
amount is treated as additional income to the shareholders unless the
additional amount is income to the shareholder as a result of a
contractual arrangement between the parties regarding the satisfaction
of the shareholder's tax liabilities. In addition, no penalties shall be
imposed for failure to withhold and deposit the tax if--
(1) The distributing corporation made a reasonable estimate as
provided in paragraph (c)(2)(ii)(A) of this section; and
(2) Either--
(i) The corporation or intermediary pays over the underwithheld
amount on or before the due date for filing a Form 1042 for the calendar
year in which the distribution is made, pursuant to Sec. 1.1461-2(b); or
(ii) The corporation or intermediary is not a calendar year taxpayer
and it files an amended return on Form 1042X (or such other form as the
Commissioner may prescribe) for the calendar year in which the
distribution is made and pays the underwithheld amount and interest
within 60 days after the close of the taxable year in which the
distribution is made.
[[Page 111]]
(C) Reliance by intermediary on reasonable estimate. For purposes of
determining whether the payment of a corporate distribution is a
dividend, a withholding agent that is not the distributing corporation
may, absent actual knowledge or reason to know otherwise, rely on
representations made by the distributing corporation regarding the
reasonable estimate of the anticipated accumulated and current earnings
and profits made in accordance with paragraph (c)(2)(ii)(A) of this
section. Failure by the withholding agent to withhold the required
amount due to a failure by the distributing corporation to reasonably
estimate the portion of the distribution treated as a dividend or to
properly communicate the information to the withholding agent shall be
imputed to the distributing corporation. In such a case, the Internal
Revenue Service (IRS) may collect from the distributing corporation any
underwithheld amount and subject the distributing corporation to
applicable interest and penalties as a withholding agent.
(D) Example. The rules of this paragraph (c)(2) are illustrated by
the following example:
Example. (i) Facts. Corporation X, a publicly traded corporation
with both U.S. and foreign shareholders and a calendar year taxpayer,
has an accumulated deficit in earnings and profits at the close of 2000.
In 2001, Corporation X generates $1 million of current earnings and
profits each month and makes an $18 million distribution, resulting in a
$12 million dividend. Corporation X plans to make an additional $18
million distribution on October 1, 2002. Approximately one month before
that date, Corporation X's management receives an internal report from
its legal and accounting department concerning Corporation X's estimated
current earnings and profits. The report states that Corporation X
should generate only $5.1 million of current earnings and profits by the
close of the third quarter due to costs relating to substantial
organizational and product changes, but these changes will enable
Corporation X to generate $1.3 million of earnings and profits monthly
for the last quarter of the 2002 fiscal year. Thus, the total amount of
current and earnings and profits for 2002 is estimated to be $9 million.
(ii) Analysis. Based on the facts in paragraph (i) of this Example,
including the fact that earnings and profits estimate was made within a
reasonable time before the distribution, Corporation X can rely on the
estimate under paragraph (c)(2)(ii)(A) of this section. Therefore,
Corporation X may treat $9 million of the $18 million of the October 1,
2002, distribution to foreign shareholders as a non-dividend
distribution.
(3) Special rules in the case of distributions from a regulated
investment company--(i) General rule. If the amount of any distributions
designated as being subject to section 852(b)(3)(C) or (5)(A) exceeds
the amount that may be designated under those sections for the taxable
year, then no penalties will be asserted for any resulting
underwithholding if the designations were based on a reasonable estimate
(made pursuant to the same procedures as are described in paragraph
(c)(2)(ii)(A) of this section) and the adjustments to the amount
withheld are made within the time period described in paragraph
(c)(2)(ii)(B) of this section. Any adjustment to the amount of tax due
and paid to the IRS by the withholding agent as a result of
underwithholding shall not be treated as a distribution for purposes of
section 562(c) and the regulations thereunder. Any amount of U.S. tax
that a foreign shareholder is treated as having paid on the
undistributed capital gain of a regulated investment company under
section 852(b)(3)(D) may be claimed by the foreign shareholder as a
credit or refund under Sec. 1.1464-1.
(ii) Reliance by intermediary on reasonable estimate. For purposes
of determining whether a payment is a distribution designated as subject
to section 852(b) (3)(C) or (5)(A), a withholding agent that is not the
distributing regulated investment company may, absent actual knowledge
or reason to know otherwise, rely on the designations that the
distributing company represents have been made in accordance with
paragraph (c)(3)(i) of this section. Failure by the withholding agent to
withhold the required amount due to a failure by the regulated
investment company to reasonably estimate the required amounts or to
properly communicate the relevant information to the withholding agent
shall be imputed to the distributing company. In such a case, the IRS
may collect from the distributing company any underwithheld amount and
subject
[[Page 112]]
the company to applicable interest and penalties as a withholding agent.
(4) Coordination with withholding under section 1445--(i) In
general. A distribution from a U.S. Real Property Holding Corporation
(USRPHC) (or from a corporation that was a USRPHC at any time during the
five-year period ending on the date of distribution) with respect to
stock that is a U.S. real property interest under section 897(c) or from
a Real Estate Investment Trust (REIT) with respect to its stock is
subject to the withholding provisions under section 1441 (or section
1442 or 1443) and section 1445. A USRPHC making a distribution shall be
treated as satisfying its withholding obligations under both sections if
it withholds in accordance with one of the procedures described in
either paragraph (c)(4)(i) (A) or (B) of this section. A USRPHC must
apply the same withholding procedure to all the distributions made
during the taxable year. However, the USRPHC may change the applicable
withholding procedure from year to year. For rules regarding
distributions by REITs, see paragraph (c)(4)(i)(C) of this section.
(A) Withholding under section 1441. The USRPHC may choose to
withhold on a distribution only under section 1441 (or 1442 or 1443) and
not under section 1445. In such a case, the USRPHC must withhold under
section 1441 (or 1442 or 1443) on the full amount of the distribution,
whether or not any portion of the distribution represents a return of
basis or capital gain. If a reduced tax rate under an income tax treaty
applies to the distribution by the USRPHC, then the applicable rate of
withholding on the distribution shall be no less than 10-percent, unless
the applicable treaty specifies an applicable lower rate for
distributions from a USRPHC, in which case the lower rate may apply.
(B) Withholding under both sections 1441 and 1445. As an alternative
to the procedure described in paragraph (c)(4)(i)(A) of this section, a
USRPHC may choose to withhold under both sections 1441 (or 1442 or 1443)
and 1445 under the procedures set forth in this paragraph (c)(4)(i)(B).
The USRPHC must make a reasonable estimate of the portion of the
distribution that is a dividend under paragraph (c)(2)(ii)(A) of this
section, and must--
(1) Withhold under section 1441 (or 1442 or 1443) on the portion of
the distribution that is estimated to be a dividend under paragraph
(c)(2)(ii)(A) of this section; and
(2) Withhold under section 1445(e)(3) and Sec. 1.1445-5(e) on the
remainder of the distribution or on such smaller portion based on a
withholding certificate obtained in accordance with Sec. 1.1445-
5(e)(2)(iv).
(C) Coordination with REIT withholding. Withholding is required
under section 1441 (or 1442 or 1443) on the portion of a distribution
from a REIT that is not designated as a capital gain dividend or return
of basis. Withholding is required under section 1445 on the portion of
the distribution designated by a REIT as a capital gain dividend. See
Sec. 1.1445-8.
(ii) Intermediary reliance rule. A withholding agent that is not the
distributing USRPHC must withhold under paragraph (c)(4)(i) of this
section, but may, absent actual knowledge or reason to know otherwise,
rely on representations made by the USRPHC regarding the determinations
required under paragraph (c)(4)(i) of this section. Failure by the
withholding agent to withhold the required amount due to a failure by
the distributing USRPHC to make these determinations in a reasonable
manner or to properly communicate the determinations to the withholding
agent shall be imputed to the distributing USRPHC. In such a case, the
IRS may collect from the distributing USRPHC any underwithheld amount
and subject the distributing USRPHC to applicable interest and penalties
as a withholding agent.
(d) Withholding on payments that include an undetermined amount of
income--(1) In general. Where the withholding agent makes a payment and
does not know at the time of payment the amount that is subject to
withholding because the determination of the source of the income or the
calculation of the amount of income subject to tax depends upon facts
that are not known at the time of payment, then the withholding agent
must withhold an amount under Sec. 1.1441-1 based
[[Page 113]]
on the entire amount paid that is necessary to assure that the tax
withheld is not less than 30 percent (or other applicable percentage) of
the amount that will subsequently be determined to be from sources
within the United States or to be income subject to tax. The amount so
withheld shall not exceed 30 percent of the amount paid. In the
alternative, the withholding agent may make a reasonable estimate of the
amount from U.S. sources or of the taxable amount and set aside a
corresponding portion of the amount due under the transaction and hold
such portion in escrow until the amount from U.S. sources or the taxable
amount can be determined, at which point withholding becomes due under
Sec. 1.1441-1. See Sec. 1.1441-1(b)(8) regarding adjustments in the case
of overwithholding. The provisions of this paragraph (d)(1) shall not
apply to the extent that other provisions of the regulations under
chapter 3 of the Internal Revenue Code (Code) specify the amount to be
withheld, if any, when the withholding agent lacks knowledge at the time
of payment (e.g., lack of reliable knowledge regarding the status of the
payee or beneficial owner, addressed in Sec. 1.1441-1(b)(3), or lack of
knowledge regarding the amount of original issue discount under
Sec. 1.1441-2(b)(3)).
(2) Withholding on certain gains. Absent actual knowledge or reason
to know otherwise, a withholding agent may rely on a claim regarding the
amount of gain described in Sec. 1.1441-2(c) if the beneficial owner
withholding certificate, or other appropriate withholding certificate,
states the beneficial owner's basis in the property giving rise to the
gain. In the absence of a reliable representation on a withholding
certificate, the withholding agent must withhold an amount under
Sec. 1.1441-1 that is necessary to assure that the tax withheld is not
less than 30 percent (or other applicable percentage) of the recognized
gain. For this purpose, the recognized gain is determined without regard
to any deduction allowed by the Code from the gains. The amount so
withheld shall not exceed 30 percent of the amount payable by reason of
the transaction giving rise to the recognized gain. See Sec. 1.1441-
1(b)(8) regarding adjustments in the case of overwithholding.
(e) Payments other than in U.S. dollars--(1) In general. The amount
of a payment made in a medium other than U.S. dollars is measured by the
fair market value of the property or services provided in lieu of U.S.
dollars. The withholding agent may liquidate the property prior to
payment in order to withhold the required amount of tax under section
1441 or obtain payment of the tax from an alternative source. However,
the obligation to withhold under section 1441 is not deferred even if no
alternative source can be located. Thus, for purposes of withholding
under chapter 3 of the Code, the provisions of Sec. 31.3406(h)-
2(b)(2)(ii) of this chapter (relating to backup withholding from another
source) shall not apply. If the withholding agent satisfies the tax
liability related to such payments, the rules of paragraph (f) of this
section apply.
(2) Payments in foreign currency. If the amount subject to
withholding tax is paid in a currency other than the U.S. dollar, the
amount of withholding under section 1441 shall be determined by applying
the applicable rate of withholding to the foreign currency amount and
converting the amount withheld into U.S. dollars on the date of payment
at the spot rate (as defined in Sec. 1.988-1(d)(1)) in effect on that
date. A withholding agent making regular or frequent payments in foreign
currency may use a month-end spot rate or a monthly average spot rate. A
spot rate convention must be used consistently for all non-dollar
amounts withheld and from year to year. Such convention cannot be
changed without the consent of the Commissioner. The U.S. dollar amount
so determined shall be treated by the beneficial owner as the amount of
tax paid on the income for purposes of determining the final U.S. tax
liability and, if applicable, claiming a refund or credit of tax.
(f) Tax liability of beneficial owner satisfied by withholding
agent--(1) General rule. In the event that the satisfaction of a tax
liability of a beneficial owner by a withholding agent constitutes
income to the beneficial owner and such income is of a type that is
subject to
[[Page 114]]
withholding, the amount of the payment deemed made by the withholding
agent for purposes of this paragraph (f) shall be determined under the
gross-up formula provided in this paragraph (f)(1). Whether the payment
of the tax by the withholding agent constitutes a satisfaction of the
beneficial owner's tax liability and whether, as such, it constitutes
additional income to the beneficial owner, must be determined under all
the facts and circumstances surrounding the transaction, including any
agreements between the parties and applicable law. The formula described
in this paragraph (f)(1) is as follows:
[GRAPHIC] [TIFF OMITTED] TR14OC97.000
(2) Example. The following example illustrates the provisions of
this paragraph (f):
Example. College X awards a qualified scholarship within the meaning
of section 117(b) to foreign student, FS, who is in the United States on
an F visa. FS is a resident of a country that does not have an income
tax treaty with the United States. The scholarship is $20,000 to be
applied to tuition, mandatory fees and books, plus benefits in kind
consisting of room and board and roundtrip air transportation. College X
agrees to pay any U.S. income tax owed by FS with respect to the
scholarship. The fair market value of the room and board measured by the
amount College X charges non-scholarship students is $6,000. The cost of
the roundtrip air transportation is $2,600. Therefore, the total fair
market value of the scholarship received by FS is $28,600. However, the
amount taxable is limited to the fair market value of the benefits in
kind ($8,600) because the portion of the scholarship amount for tuition,
fees, and books is not included in gross income under section 117. The
applicable rate of withholding is 14 percent under section 1441(b).
Therefore, under the gross-up formula, College X is deemed to make a
payment of $10,000 ($8,600 divided by (1-.14). The U.S. tax that must be
deducted and withheld from the payment under section 1441(b) is $1,400
(.14 x $10,000). College X reports scholarship income of $30,000 and
$1,400 of U.S. tax withheld on Forms 1042 and 1042-S.
(g) Conduit financing arrangements--(1) Duty to withhold. A financed
entity or other person required to withhold tax under section 1441 with
respect to a financing arrangement that is a conduit financing
arrangement within the meaning of Sec. 1.881-3(a)(2)(iv) shall be
required to withhold under section 1441 as if the district director had
determined, pursuant to Sec. 1.881-3(a)(3), that all conduit entities
that are parties to the conduit financing arrangement should be
disregarded. The amount of tax required to be withheld shall be
determined under Sec. 1.881-3(d). The withholding agent may withhold tax
at a reduced rate if the financing entity establishes that it is
entitled to the benefit of a treaty that provides a reduced rate of tax
on a payment of the type deemed to have been paid to the financing
entity. Section 1.881-3(a)(3)(ii)(E) shall not apply for purposes of
determining whether any person is required to deduct and withhold tax
pursuant to this paragraph (g), or whether any party to a financing
arrangement is liable for failure to withhold or entitled to a refund of
tax under sections 1441 or 1461 to 1464 (except to the extent the amount
withheld exceeds the tax liability determined under Sec. 1.881-3(d)).
See Sec. 1.1441-7(f) relating to withholding tax liability of the
withholding agent in conduit financing arrangements subject to
Sec. 1.881-3.
(2) Effective date. This paragraph (g) is effective for payments
made by financed entities on or after September 11, 1995. This paragraph
shall not apply to interest payments covered by section 127(g)(3) of the
Tax Reform Act of 1984, and to interest payments with respect to other
debt obligations issued prior to October 15, 1984 (whether or not such
debt was issued by a Netherlands Antilles corporation).
(h) Effective date. Except as otherwise provided in paragraph (g) of
this section, this section applies to payments made after December 31,
2000.
[T.D. 6500, 25 FR 12074, Nov. 26, 1960, as amended by T.D. 6908, 31 FR
16771, Dec. 31, 1966; T.D. 7378, 40 FR 45436, Oct. 2, 1975; T.D. 7977,
49 FR 36831, Sept. 20, 1984; T.D. 8611, 60 FR 41014, Aug. 11, 1995; T.D.
8734, 62 FR 53446, Oct. 14, 1997; T.D. 8804, 63 FR 72187, Dec. 31, 1998;
T.D. 8856, 64 FR 73412, Dec. 30, 1999]
Effective Date Note 1: By T.D. 8734, 62 FR 53446, Oct. 14, 1997,
Sec. 1.1441-3 was amended by revising the section heading, and
paragraphs (a) through (f) and (h); by removing paragraphs (g) and (i);
by redesignating paragraph (j) as paragraph (g); by removing ``(j)'' and
inserting ``(g)'' in its place in the fourth sentence of newly
designated paragraph
[[Page 115]]
(g)(1) and in the first sentence of newly designated paragraph (g)(2);
by removing ``Sec. 1.1441-7(d)'' in the last sentence of newly
designated paragraph (g)(1) and inserting ``1.1441-7(f)'' in its place;
and by removing the authority citation at the end of the section,
effective Jan. 1, 1999. By T.D. 8804, 63 FR 72183, Dec. 31, 1998, the
effective date of Sec. 1.1441-3 was delayed until Jan. 1, 2000. By T.D.
8856, 64 FR 73408, Dec. 30, 1999, the effective date was further delayed
until Jan. 1, 2001. For the convenience of the user, the superseded text
is set forth as follows:
Sec. 1.1441-3 Exceptions and rules of special application.
(a) Income from sources without the United States. To the extent
that items of income constitute gross income from sources without the
United States, they are not subject to withholding under Sec. 1.1441-1.
For rules governing the determination of the sources of income, see part
I (section 861 and following), subchapter N, chapter 1 of the Code, and
the regulations thereunder.
(b) Corporate distributions--(1) Nontaxable portion. The tax shall
be withheld at the source under Sec. 1.1441-1 on the gross amount of any
distribution made by a corporation other than:
(i) A nontaxable distribution payable in stock or stock rights, and
(ii) A distribution which is treated as a distribution in part or
full payment in exchange for stock.
This rule shall apply without regard to any claim that all or a portion
of the distribution is not taxable under section 871 or 881. The tax
shall be withheld on the gross amount of the distribution even though
the payee may be entitled to the benefits of section 116, relating to
partial exclusion of dividends received by individuals. Appropriate
adjustment, if any, will be made upon the payee's filing of a claim for
refund, together with appropriate supporting evidence, in accordance
with paragraph (h) of this section.
(2) Dividends paid by a foreign corporation--(i) Payments in taxable
years of recipients beginning before January 1, 1967. In the case of
dividends paid in taxable years of recipients beginning before January
1, 1967, no withholding under Sec. 1.1441-1 is required in the case of
dividends paid by a foreign corporation unless (a) the corporation is
engaged in trade or business within the United States and (b) more than
85 percent of the gross income of the corporation for the 3-year period
ending with the close of its taxable year preceding the declaration of
the dividends (or for such part of such period as the corporation has
been in existence) was derived from sources within the United States as
determined under the provisions of Part I (section 861 and following),
Subchapter N, Chapter 1 of the Code, and the regulations thereunder.
(ii) Payments in taxable years of recipients beginning after
December 31, 1966. In the case of dividends paid in taxable years of
recipients beginning after December 31, 1966, all dividends paid by a
foreign corporation which are treated as income from sources within the
United States are subject to withholding under Sec. 1.1441-1.
(3) Dividends paid to shareholder whose status is not definite. When
a payer corporation or any other person, including a nominee, having the
control, receipt, custody, disposal, or payment of dividends has no
definite knowledge of the status of a shareholder, the tax shall be
withheld under Sec. 1.1441-1 if the shareholder's address is outside the
United States. If the shareholder's address is within the United States,
it may be assumed for the purpose of withholding on dividends that, in
the case of an individual, the shareholder is a citizen or resident of
the United States; and, in the case of a partnership or corporation, the
shareholder is a domestic partnership or a domestic corporation, as the
case may be. Unless the facts and circumstances indicate clearly that
the shareholder is a nonresident alien individual, foreign partnership,
or foreign corporation, an address in care of another person in the
United States does not of itself warrant treating the shareholder as a
person who is subject to withholding upon dividends under Sec. 1.1441-1.
If a shareholder changes his address from a place outside the United
States to a place within the United States, the tax shall be withheld on
dividends unless (i) proof is furnished showing that, in the case of an
individual, he is a citizen or resident of the United States or, in the
case of a partnership or corporation, it is a domestic partnership or
corporation, or (ii) the withholding agent is otherwise satisfied that
the shareholder is not a person who is subject to withholding under
Sec. 1.1441-1. For general provisions for claiming to be a person not
subject to withholding under Sec. 1.1441-1, see Sec. 1.1441-5.
(c) Interest--(1) Government obligations. Withholding is required
under Sec. 1.1441-1 in the case of interest paid on obligations issued
on or after March 1, 1941, by the United States or any agency or
instrumentality thereof. See section 103 and the regulations thereunder,
relating to the taxation of such interest, and Sec. 1.1461-1, relating
to ownership certificates.
(2) Assumed obligations. If, in connection with the sale of a
corporation's property, payment of the bonds or other obligations of the
corporation is assumed by the assignee, the assignee, whether an
individual, partnership, or corporation, shall deduct and withhold such
taxes under Sec. 1.1441-1 as would be required to be withheld by the
assignor had no such sale or transfer been made.
(3) Defaulted interest coupons. The tax shall be withheld at the
source under Sec. 1.1441-1 on
[[Page 116]]
the gross amount of interest without regard to whether or not the
payment constitutes a return of capital or the payment of income within
the meaning of section 61. Thus, for example, the tax shall be withheld
in accordance with Sec. 1.1441-1 from defaulted interest payments upon
bonds which were purchased flat at quotations representing the price of
both the bonds and the defaulted matured interest coupons. Appropriate
adjustments, if any, will be made upon the payee's filing of a claim for
refund, together with appropriate supporting evidence, in accordance
with paragraph (h) of this section.
(4) Unknown owner. Withholding is required under Sec. 1.1441-1 in
the case of interest upon all bonds or securities the owners of which
are not known to the withholding agent unless such bonds or securities
were issued by a corporation before January 1, 1934, contain a tax-free
covenant, and do not have a maturity date which was extended on or after
that date. For withholding under section 1451 in the case of unknown
owners, see paragraph (a)(2) of Sec. 1.1451-1.
(5) Tax-free covenant bonds--(i) Issued on or after January 1, 1934.
Withholding is required under Sec. 1.1441-1 in the case of interest upon
bonds or other corporate obligations issued on or after January 1, 1934,
and containing a tax-free covenant.
(ii) Issued before January 1, 1934. Withholding is not required
under Sec. 1.1441-1 in the case of interest upon bonds or other
corporate obligations issued before January 1, 1934, containing a tax-
free covenant, and not having a maturity date which was extended on or
after that date. A domestic or resident fiduciary is required, however,
to withhold tax under Sec. 1.1441-1 in the case of so much of such
interest as is properly allocable under section 652 or 662 to a
nonresident alien beneficiary. See paragraph (f) of this section and of
Sec. 1.1451-1. For general rules respecting the withholding of tax under
section 1451 in the case of such interest, see Sec. 1.1451-1.
(iii) Extended maturity date. Withholding is required under
Sec. 1.1441-1 in the case of interest upon bonds or other corporate
obligations issued before January 1, 1934, and containing a tax-free
covenant, if the maturity date of the bonds or obligations has been
extended on or after that date. See paragraph (c) of Sec. 1.1451-1.
(iv) Special rate of 27\1/2\ percent. The rate of tax to be withheld
at the source under Sec. 1.1441-1 shall not exceed 27\1/2\ percent in
the case of interest on bonds, mortgages, or deeds of trust, or other
similar obligations of a corporation if:
(a) The liability assumed by the debtor exceeds 27\1/2\ percent of
the interest, and
(b) The interest would be subject to withholding under the
provisions of subsections (a), (b), and (c) of section 1451 except for
the fact that the maturity date of the obligations has been extended on
or after January 1, 1934. See paragraph (c) of Sec. 1.1451-1.
(d) Special rules applicable to certain income--(1) Determination of
amount to be withheld. If in the case of amounts described in paragraph
(b) of Sec. 1.1441-2, other than amounts described in subparagraph
(2)(ii) of such paragraph, the withholding agent does not know the
amount of recognized gain, he is required to deduct and withhold such
amount under Sec. 1.1441-1 as may be necessary to assure that the tax
withheld will not be less than 30 percent of the recognized gain. For
this purpose, the recognized gain shall be determined without regard to
the deduction allowed by section 1202 with respect to capital gains. The
amount so withheld shall not exceed 30 percent of the amount payable by
reason of the transaction giving rise to the recognized gain, except
that the amount payable may be determined by excluding the net
unrealized appreciation described in section 402(a)(2). Appropriate
adjustment, if any, will be made by the payee's filing of a claim for
refund, together with appropriate supporting evidence, in accordance
with paragraph (h) of this section.
(2) Statement showing recognized gain. The withholding agent may,
unless he has reason to believe to the contrary, rely on the statement
of the person entitled to the gain described in subparagraph (1) of this
paragraph as to the amount of gain which is recognized on the
transaction involved and subject to withholding under Sec. 1.1441-1.
This statement shall be filed with the withholding agent in duplicate.
It shall show the computation of the amount of gain subject to
withholding, shall be dated, shall be signed by the person entitled to
the income, shall contain the taxpayer's identifying number, if any, and
shall contain, or be verified by, a written declaration that it is made
under the penalties of perjury. No particular form is prescribed for
this statement. The duplicate copy of each statement filed during any
calendar year pursuant to this subparagraph shall be forwarded by the
withholding agent with, and attached to, the Form 1042S required by
paragraph (c) of Sec. 1.1461-2 with respect to such gain for such
calendar year.
(e) Personal exemption--(1) The taxation of nonresident alien
individuals is provided for in part II (section 871 and following),
subchapter N, chapter 1 of the Code. Section 874(a) makes the filing of
a return a prerequisite to the allowance of deductions, including
deductions of personal exemptions. Except in the circumstances described
in subparagraph (2) of this paragraph, personal exemptions do not serve
to reduce the amount of tax to be withheld under Sec. 1.1441-1.
(2) In the determination of the tax to be withheld at the source
under Sec. 1.1441-1 from remuneration paid for labor or personal
services performed within the United States by a
[[Page 117]]
nonresident alien individual, the benefit of the deduction for personal
exemptions provided in section 151, to the extent allowable under
section 873(b)(3) and the regulations thereunder, shall be allowed,
prorated upon a daily basis for the period during which labor or
personal services are performed within the United States by the alien
individual. The benefit of the deduction for such personal exemptions
shall also be allowed in the determination of the tax of 14 percent to
be withheld at the source under Sec. 1.1441-1 and paragraph (c) of
Sec. 1.1441-2 from amounts paid after March 4, 1964, to nonresident
alien individuals who are temporarily present in the United States as
nonimmigrants under subparagraph (F) or (J) of the Immigration and
Nationality Act, as amended, and such personal exemptions shall be
prorated upon a daily basis for the period during which the described
nonresident alien student or scholar receives the payments. The
proration is on a basis of $1.70 per day for each exemption to which the
nonresident alien individual is entitled. Thus, if A, a married
nonresident alien individual without dependents is paid remuneration
subject to withholding under Sec. 1.1441-1 for performing personal
services during a stay of 100 days in the United States, the amount of
$170 will be allocated as the portion of the deduction to be allowed
against the remuneration for personal services performed within the
United States during that period; and withholding at 30 percent shall be
applied against the balance, if any, of the remuneration. If, for
example, the total remuneration paid to A for that period is $2,000, a
total tax in the amount of $549 [($2,000-$170) x 0.30] is required to be
withheld under Sec. 1.1441-1. However, if A is a resident of Canada or
Mexico, and his spouse has no gross income from sources within the
United States, which is subject to income tax under chapter 1 of the
Code, and is not the dependent of another taxpayer subject to such tax,
an amount of $340 will be allocated as the portion of the deduction to
be allowed against the remuneration for personal services performed
within the United States. Thus, in such case, a total tax in the amount
of $498 [($2,000-$340) x 0.30] is required to be withheld under
Sec. 1.1441-1. As to what constitutes remuneration for labor or personal
services performed within the United States see section 861(a)(3) and
the regulations thereunder.
(f) Partnerships and fiduciaries. Domestic partnerships are required
to withhold the tax at source under Sec. 1.1441.1 on items of income
described in paragraphs (a) and (b) of Sec. 1.1441-2 that are included
in the distributive share (including amounts that are not actually
distributed) of a member of such partnership who is a nonresident alien
individual, nonresident alien or foreign fiduciary of a trust or estate,
foreign partnership, or foreign corporation. Resident or domestic
fiduciaries of trusts and estates are required to withhold the tax at
source under Sec. 1.1441-1 on all items of income described in
paragraphs (a) and (b) of Sec. 1.1441-2 that constitute gross income
from sources within the United States (including amounts that are not
actually distributed) of beneficiaries who are nonresident alien
individuals, foreign partnerships, or foreign corporations. Because the
gross income allocable to a partner and the income includable in the
gross income of the beneficiary cannot be determined until the end of a
taxable year of the partnership, trust, or estate, the partnership and
the fiduciary of a trust or estate shall withhold under this section on
all distributions to such partners and beneficiaries during the taxable
years to the extent such distributions include items of income described
in paragraphs (a) and (b) of Sec. 1.1441-2. If the tax on actual
distributions exceeds the tax on amounts includable in the gross income
of the partner or beneficiary, the partner or beneficiary may file a
claim for refund together with appropriate supporting evidence in
accordance with paragraph (h) of this section. If a partnership or a
fiduciary withholds under this section on a distributive partnership
share or distributable net income of a trust or estate before the income
is actually distributed to a partner or beneficiary, then withholding is
not required when such income is subsequently distributed. Income
described in paragraphs (a) and (b) of Sec. 1.1441-2 that is paid to a
foreign partnership or to a nonresident alien or foreign fiduciary is
subject to withholding under Sec. 1.1441-1 even though the members of
the partnership or the beneficiaries of the trust or estate are
individuals who are citizens or residents of the United States or are
domestic corporations.
(g) Trust income taxable to grantor. The income of a trust created
by a nonresident alien individual and taxable to the grantor under the
provisions of subpart E, part I, subchapter J, chapter 1 of the Code, is
subject to withholding under Sec. 1.1441-1, even though the fiduciary or
beneficiaries of the trust are citizens or residents of the United
States and regardless of whether the beneficiaries are exempt from
income tax.
(h) Claims for refund. A claim for refund referred to in paragraph
(b) (1), (c) (3), (d) (1), or (f) of this section shall be made in
accordance with the provisions of Secs. 301.6402-2 and 301.6402-3 of
this chapter (Regulations on Procedure and Administration).
(i) Rents paid to foreign tax-exempt organizations. For the rule for
withholding on rents paid to foreign tax- exempt organizations, see
Sec. 1.1443-1.
* * * * *
[[Page 118]]
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
Effective Date Note 2: By T.D. 8856, 64 FR 73412, Dec. 30, 1999,
Sec. 1.1441-3 was amended in paragraph (h) by removing December 31, 1999
and adding in its place December 31, 2000, effective Jan. 1, 2001.
Sec. 1.1441-4 Exemptions from withholding for certain effectively connected income and other amounts.
(a) Certain income connected with a U.S. trade or business--(1) In
general. No withholding is required under section 1441 on income
otherwise subject to withholding if the income is (or is deemed to be)
effectively connected with the conduct of a trade or business within the
United States and is includible in the beneficial owner's gross income
for the taxable year. For purposes of this paragraph (a), an amount is
not deemed to be includible in gross income if the amount is (or is
deemed to be) effectively connected with the conduct of a trade or
business within the United States and the beneficial owner claims an
exemption from tax under an income tax treaty because the income is not
attributable to a permanent establishment in the United States. To claim
a reduced rate of withholding because the income is not attributable to
a permanent establishment, see Sec. 1.1441-6(b)(1). This paragraph (a)
does not apply to income of a foreign corporation to which section
543(a)(7) applies for the taxable year or to compensation for personal
services performed by an individual. See paragraph (b) of this section
for compensation for personal services performed by an individual.
(2) Withholding agent's reliance on a claim of effectively connected
income--(i) In general. Absent actual knowledge or reason to know
otherwise, a withholding agent may rely on a claim of exemption based
upon paragraph (a)(1) of this section if, prior to the payment to the
foreign person, the withholding agent can reliably associate the payment
with a Form W-8 upon which it can rely to treat the payment as made to a
foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii). For
purposes of this paragraph (a), a withholding certificate is valid only
if, in addition to other applicable requirements, it includes the
taxpayer identifying number of the person whose name is on the Form W-8
and represents, under penalties of perjury, that the amounts for which
the certificate is furnished are effectively connected with the conduct
of a trade or business in the United States and is includable in the
beneficial owner's gross income for the taxable year. In the absence of
a reliable claim that the income is effectively connected with the
conduct of a trade or business in the United States, the income is
presumed not to be effectively connected, except as otherwise provided
in paragraph (a) (2)(ii) or (3) of this section. See Sec. 1.1441-
1(e)(4)(ii)(C) for the period of validity applicable to a certificate
provided under this section and Sec. 1.1441-1(e)(4)(ii)(D) for changes
in circumstances arising during the taxable year indicating that the
income to which the certificate relates is not, or is no longer expected
to be, effectively connected with the conduct of a trade or business
within the United States. A withholding certificate shall be effective
only for the item or items of income specified therein. The provisions
of Sec. 1.1441-1(b)(3)(iv) dealing with a 90-day grace period shall
apply for purposes of this section.
(ii) Special rules for U.S. branches of foreign persons--(A) U.S.
branches of certain foreign banks or foreign insurance companies. A
payment to a U.S. branch described in Sec. 1.1441-1(b)(2)(iv)(A) is
presumed to be effectively connected with the conduct of a trade or
business in the United States without the need to furnish a certificate,
unless the U.S. branch provides a U.S. branch withholding certificate
described in Sec. 1.1441-1(e)(3)(v) that represents otherwise. If no
certificate is furnished but the income is not, in fact, effectively
connected income, then the branch must withhold whether the payment is
collected on behalf of other persons or on behalf of another branch of
the same entity. See Sec. 1.1441-1(b) (2)(iv) and (6) for general rules
applicable to payments to U.S. branches of foreign persons.
(B) Other U.S. branches. See Sec. 1.1441-1(b)(2)(iv)(E) for similar
procedures for
[[Page 119]]
other U.S. branches to the extent provided in a determination letter
from the district director or the Assistant Commissioner
(International).
(3) Income on notional principal contracts--(i) General rule. A
withholding agent that pays amounts attributable to a notional principal
contract described in Sec. 1.863-7(a) or 1.988-2(e) shall have no
obligation to withhold on the amounts paid under the terms of the
notional principal contract regardless of whether a withholding
certificate is provided. However, a withholding agent must file returns
under Sec. 1.1461-1(b) and (c) reporting the income that it must treat
as paid to a foreign person and as effectively connected with the
conduct of a trade or business in the United States under the provisions
of this paragraph (a)(3). Except as otherwise provided in paragraph
(a)(3)(ii) of this section, a withholding agent must so treat the income
unless it can reliably associate the payment with a withholding
certificate upon which it can rely to treat the payment as an amount
that is not effectively connected. Income on a notional principal
contract does not include the amount characterized as interest under the
provisions of Sec. 1.446-3(g)(4).
(ii) Exception for certain payments. A payment to a foreign
financial institution (within the meaning of Sec. 1.165-12(c)(1)(iv))
shall not be treated as effectively connected with the conduct of a
trade or business within the United States for purposes of paragraph
(a)(3)(i) of this section even if no withholding certificate is
furnished if the payee provides a representation in a master agreement
that governs the transactions in notional principal contracts between
the parties (for example an International Swaps and Derivatives
Association (ISDA) Agreement, including the Schedule thereto) or in the
confirmation on the particular notional principal contract transaction
that the counterparty is a U.S. person or a non-U.S. branch of a foreign
person.
(b) Compensation for personal services of an individual--(1)
Exemption from withholding. Withholding is not required under
Sec. 1.1441-1 from salaries, wages, remuneration, or any other
compensation for personal services of a nonresident alien individual if
such compensation is effectively connected with the conduct of a trade
or business within the United States and--
(i) Such compensation is subject to withholding under section 3402
(relating to withholding on wages) and the regulations under that
section;
(ii) Such compensation would be subject to withholding under section
3402 but for the provisions of section 3401(a) (not including paragraph
(a)(6) of that section) and the regulations under that section. This
paragraph (b)(1)(ii) does not apply to payments to a nonresident alien
individual from any trust described in section 401(a), any annuity plan
described in section 403(a), or any annuity, custodial account, or
retirement income account described in section 403(b). Instead, these
payments are subject to withholding under this section to the extent
they are exempted from the definition of wages under section 3401(a)(12)
or to the extent they are from an annuity, custodial account, or
retirement income account described in section 403(b). Thus, for
example, payments to a nonresident alien individual from a trust
described in section 401(a) are subject to withholding under section
1441 and not under section 3405 or 3406;
(iii) Such compensation is for services performed by a nonresident
alien individual who is a resident of Canada or Mexico and who enters
and leaves the United States at frequent intervals;
(iv) Such compensation is, or will be, exempt from the income tax
imposed by chapter 1 of the Code by reason of a provision of the
Internal Revenue Code or a tax treaty to which the United States is a
party;
(v) Such compensation is paid after January 3, 1979 as a commission
or rebate paid by a ship supplier to a nonresident alien individual, who
is employed by a nonresident alien individual, foreign partnership, or
foreign corporation in the operation of a ship or ships of foreign
registry, for placing orders for supplies to be used in the operation of
such ship or ships with the supplier. See section 162(c) and the
regulations thereunder for denial of deductions for illegal bribes,
kickbacks, and other payments; or
[[Page 120]]
(vi) Compensation that is exempt from withholding under section 3402
by reason of section 3402(e), provided that the employee and his
employer enter into an agreement under section 3402(p) to provide for
the withholding of income tax upon payments of amounts described in
Sec. 31.3401(a)-3(b)(1) of this chapter. An employee who desires to
enter into such an agreement should furnish his employer with Form W-4
(withholding exemption certificate) (or such other form as the Internal
Revenue Service (IRS) may prescribe). See section 3402(f) and the
regulations thereunder and Sec. 31.3402(p)-1 of this chapter.
(2) Manner of obtaining withholding exemption under tax treaty--(i)
In general. In order to obtain the exemption from withholding by reason
of a tax treaty, provided by paragraph (b)(1)(iv) of this section, a
nonresident alien individual must submit a withholding certificate
(described in paragraph (b)(2)(ii) of this section) to each withholding
agent from whom amounts are to be received. A separate withholding
certificate must be filed for each taxable year of the alien individual.
If the withholding agent is satisfied that an exemption from withholding
is warranted (see paragraph (b)(2)(iii) of this section), the
withholding certificate shall be accepted in the manner set forth in
paragraph (b)(2)(iv) of this section. The exemption from withholding
becomes effective for payments made at least ten days after a copy of
the accepted withholding certificate is forwarded to the Assistant
Commissioner (International). The withholding agent may rely on an
accepted withholding certificate only if the IRS has not objected to the
certificate. For purposes of this paragraph (b)(2)(i), the IRS will be
considered to have not objected to the certificate if it has not
notified the withholding agent within a 10-day period beginning from the
date that the withholding certificate is forwarded to the IRS pursuant
to paragraph (b)(2)(v) of this section. After expiration of the 10-day
period, the withholding agent may rely on the withholding certificate
retroactive to the date of the first payment covered by the certificate.
The fact that the IRS does not object to the withholding certificate
within the 10-day period provided in this paragraph (b)(2)(i) shall not
preclude the IRS from examining the withholding agent at a later date in
light of facts that the withholding agent knew or had reason to know
regarding the payment and eligibility for a reduced rate and that were
not disclosed to the IRS as part of the 10-day review process.
(ii) Withholding certificate claiming withholding exemption. The
statement claiming an exemption from withholding shall be made on Form
8233 (or an acceptable substitute or such other form as the IRS may
prescribe). Form 8233 shall be dated, signed by the beneficial owner
under penalties of perjury, and contain the following information--
(A) The individual's name, permanent residence address, taxpayer
identifying number (or a copy of a completed Form W-7 or SS-5 showing
that a number has been applied for), and the U.S. visa number, if any;
(B) The individual's current immigration status and visa type;
(C) The individual's original date of entry into the United States;
(D) The country that issued the individual's passport and the number
of such passport, or the individual's permanent address if a citizen of
Canada or Mexico;
(E) The taxable year for which the statement is to apply, the
compensation to which it relates, and the amount (or estimated amount if
exact amount not known) of such compensation;
(F) A statement that the individual is not a citizen or resident of
the United States;
(G) The number of personal exemptions claimed by the individual;
(H) A statement as to whether the compensation to be paid to him or
her during the taxable year is or will be exempt from income tax and the
reason why the compensation is exempt;
(I) If the compensation is exempt from withholding by reason of an
income tax treaty to which the United States is a party, the tax treaty
and provision under which the exemption from withholding is claimed and
the country of which the individual is a resident;
[[Page 121]]
(J) Sufficient facts to justify the claim in exemption from
withholding; and
(K) Any other information as may be required by the form or
accompanying instructions in addition to, or in lieu of, the information
described in this paragraph (b)(2)(ii).
(iii) Review by withholding agent. The exemption from withholding
provided by paragraph (b)(1)(iv) of this section shall not apply unless
the withholding agent accepts (in the manner provided in paragraph
(b)(2)(iv) of this section) the statement on Form 8233 supplied by the
nonresident alien individual. Before accepting the statement the
withholding agent must examine the statement. If the withholding agent
knows or has reason to know that any of the facts or assertions on Form
8233 may be false or that the eligibility of the individual's
compensation for the exemption cannot be readily determined, the
withholding agent may not accept the statement on Form 8233 and is
required to withhold under this section. If the withholding agent
accepts the statement and subsequently finds that any of the facts or
assertions contained on Form 8233 may be false or that the eligibility
of the individual's compensation for the exemption can no longer be
readily determined, then the withholding agent shall promptly so notify
the Assistant Commissioner (International) by letter, and the
withholding agent is not relieved of liability to withhold on any
amounts still to be paid. If the withholding agent is notified by the
Assistant Commissioner (International) that the eligibility of the
individual's compensation for the exemption is in doubt or that such
compensation is not eligible for the exemption, the withholding agent is
required to withhold under this section. The rules of this paragraph are
illustrated by the following examples.
Example 1. C, a nonresident alien individual, submits Form 8233 to
W, a withholding agent. The statement on Form 8233 does not include all
the information required by paragraph (b)(2)(ii) of this section.
Therefore, W has reason to know that he or she cannot readily determine
whether C's compensation for personal services is eligible for an
exemption from withholding and, therefore, W must withhold.
Example 2. D, a nonresident alien, is performing services for W, a
withholding agent. W has accepted a statement on Form 8233 submitted by
D, according to the provisions of this section. W receives notice from
the Internal Revenue Service that the eligibility of D's compensation
for a withholding exemption is in doubt. Therefore, W has reason to know
that the eligibility of the compensation for a withholding exemption
cannot be readily determined, as of the date W receives the
notification, and W must withhold tax under section 1441 on amounts paid
after receipt of the notification.
Example 3. E, a nonresident alien individual, submits Form 8233 to
W, a withholding agent for whom E is to perform personal services. The
statement contains all the information requested on Form 8233. E claims
an exemption from withholding based on a personal exemption amount
computed on the number of days E will perform personal services for W in
the United States. If W does not know or have reason to know that any
statement on the Form 8233 is false or that the eligibility of E's
compensation for the withholding exemption cannot be readily determined,
W can accept the statement on Form 8233 and exempt from withholding the
appropriate amount of E's income.
(iv) Acceptance by withholding agent. If after the review described
in paragraph (b)(2)(iii) of this section the withholding agent is
satisfied that an exemption from withholding is warranted, the
withholding agent may accept the statement by making a certification,
verified by a declaration
that it is made under the penalties of perjury, on Form 8233. The
certification shall be--
(A) That the withholding agent has examined the statement,
(B) That the withholding agent is satisfied that an exemption from
withholding is warranted, and
(C) That the withholding agent does not know or have reason to know
that the individual's compensation is not entitled to the exemption or
that the eligibility of the individual's compensation for the exemption
cannot be readily determined.
(v) Copies of Form 8233. The withholding agent shall forward one
copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of
this section to the Assistant Commissioner (International), within five
days of such acceptance. The withholding agent shall retain a copy of
Form 8233.
[[Page 122]]
(3) Withholding agreements. Compensation for personal services of a
nonresident alien individual who is engaged during the taxable year in
the conduct of a trade or business within the United States may be
wholly or partially exempted from the withholding required by
Sec. 1.1441-1 if an agreement is reached between the Assistant
Commissioner (International) and the alien individual with respect to
the amount of withholding required. Such agreement shall be available in
the circumstances and in the manner set forth by the Internal Revenue
Service, and shall be effective for payments covered by the agreement
that are made after the agreement is executed by all parties. The alien
individual must agree to timely file an income tax return for the
current taxable year.
(4) Final payment exemption--(i) General rule. Compensation for
independent personal services of a nonresident alien individual who is
engaged during the taxable year in the conduct of a trade or business
within the United States may be wholly or partially exempted from the
withholding required by Sec. 1.1441-1 from the final payment of
compensation for independent personal services. This exemption does not
apply to wages. This exemption from withholding is available only once
during an alien individual's taxable year and is obtained by the alien
individual presenting to the withholding agent a letter in duplicate
from a district director stating the amount of compensation subject to
the exemption and the amount that would otherwise be withheld from such
final payment under section 1441 that shall be paid to the alien
individual due to the exemption. The alien individual shall attach a
copy of the letter to his or her income tax return for the taxable year
for which the exemption is effective.
(ii) Final payment of compensation for personal services. For
purposes of this paragraph, final payment of compensation for personal
services means the last payment of compensation, other than wages, for
personal services rendered within the United States that the individual
expects to receive from any withholding agent during the taxable year.
(iii) Manner of applying for final payment exemption. In order to
obtain the final payment exemption provided by paragraph (b)(4)(i) of
this section, the nonresident alien individual (or his or her agent)
must file the forms and provide the information required by the district
director. Ordinary and necessary business expenses may be taken into
account if substantiated to the satisfaction of the district director.
The alien individual must submit a statement, signed by him or her and
verified by a declaration that it is made under the penalties of
perjury, that all the information provided is true and that to his or
her knowledge no relevant information has been omitted. The information
required to be submitted includes, but is not limited to--
(A) A statement by each withholding agent from whom amounts of gross
income effectively connected with the conduct of a trade or business
within the United States have been received by the alien individual
during the taxable year, of the amount of such income paid and the
amount of tax withheld, signed and verified by a declaration that it is
made under penalties of perjury;
(B) A statement by the withholding agent from whom the final payment
of compensation for personal services will be received, of the amount of
such final payment and the amount which would be withheld under
Sec. 1.1441-1 if a final payment exemption under paragraph (b)(4)(i) of
this section is not granted, signed and verified by a declaration that
it is made under penalties of perjury;
(C) A statement by the individual that he or she does not intend to
receive any other amounts of gross income effectively connected with the
conduct of a trade or business within the United States during the
current taxable year;
(D) The amount of tax which has been withheld (or paid) under any
other provision of the Code or regulations with respect to any income
effectively connected with the conduct of a trade or business within the
United States during the current taxable year;
[[Page 123]]
(E) The amount of any outstanding tax liabilities (and interest and
penalties relating thereto) from the current taxable year or prior
taxable periods; and
(F) The provision of any income tax treaty under which a partial or
complete exemption from withholding may be claimed, the country of the
individual's residence, and a statement of sufficient facts to justify
an exemption pursuant to such treaty.
(iv) Letter to withholding agent. If the district director is
satisfied that the information provided under paragraph (b)(4)(iii) of
this section is sufficient, the district director will, after
coordination with the Director of the Foreign Operations District,
ascertain the amount of the alien individual's tentative income tax for
the taxable year with respect to gross income that is effectively
connected with the conduct of a trade or business within the United
States. After the tentative tax has been ascertained, the district
director will provide the alien individual with a letter to the
withholding agent stating the amount of the final payment of
compensation for personal services that is exempt from withholding, and
the amount that would otherwise be withheld under section 1441 that
shall be paid to the alien individual due to the exemption. The amount
of compensation for personal services exempt from withholding under this
paragraph (b)(4) shall not exceed $5,000.
Example 1. On July 15, 1983, B, a non-resident alien individual,
appears before a district director with the information required by
paragraph (b)(4)(iii) of this section. B has received personal service
income in 1983 from which $3,000 has been withheld under section 1441.
On August 1, 1983, B will receive $5,000 in personal service income from
W. B does not intend to receive any other income subject to U.S. tax
during 1983. Taking into account B's substantiated deductible business
expenses, the district director computes the tentative tax liability on
B's income effectively connected with the conduct of a trade or business
in the United States during 1983 (including the $5,000 payment to be
made on August 1, 1983) to be $3,300. B does not owe U.S. tax for any
other taxable periods. The amount of B's final payment exemption is
determined as follows:
(1) The amount of total withholding is $4,500 ($3,000 previously
withheld plus $1,500, 30% of the $5,000 final payment);
(2) The amount of tentative excess withholding is $1,200 (total
withholding of $4,500 minus B's tentative tax liability of $3,300); and
(3) To allow B to receive $1,200 of the amount which would otherwise
have been withheld from the final payment, the district director allows
a withholding exemption for $4,000 of B's final payment. W must withhold
$300 from the final payment.
Example 2. The facts are the same as in Example 1 except B will
receive a final payment of compensation on August 1, 1983, in the amount
of $10,000 and B's tentative tax liability is $3,900. The amount of B's
final payment exemption is determined as follows:
(1) The amount of total withholding is $6,000 ($3,000 previously
withheld plus $3,000, 30% of the $10,000 final payment);
(2) The amount of tentative excess withholding is $2,100 (total
withholding of $6,000 minus B's tentative tax liability of $3,900); and
(3) To allow B to receive $2,100 of the amount which would otherwise
be withheld from the final payment, $7,000 of the final payment would
have to be exempt from withholding; however, as no more than $5,000 of
the final payment can be exempt from withholding under this paragraph
(b)(4), the district director allows a withholding exemption for $5,000
of B's final payment. B must file a claim for refund at the end of the
taxable year to obtain a refund of $600. W must withhold $1,500 from the
final payment.
(5) Requirement of return. The tentative tax determined by the
district director under paragraph (b)(4)(iv) of this section or by the
Director of the Foreign Operations District under the withholding
agreement procedure of paragraph (b)(3) of this section shall not
constitute a final determination of the income tax liability of the
nonresident alien individual, nor shall such determination constitute a
tax return of the nonresident alien individual for any taxable period.
An alien individual who applies for or obtains an exemption from
withholding under the procedures of paragraphs (b) (2), (3), or (4) of
this section is not relieved of the obligation to file a return of
income under section 6012.
(6) Personal exemption--(i) In general. To determine the tax to be
withheld at source under Sec. 1.1441-1 from remuneration paid for
personal services performed within the United States by a nonresident
alien individual and from scholarship and fellowship income described in
paragraph (c) of this section,
[[Page 124]]
a withholding agent may take into account one personal exemption
pursuant to sections 873(b)(3) and 151 regardless of whether the income
is effectively connected. For purposes of withholding under section 1441
on remuneration for personal services, the exemption must be prorated
upon a daily basis for the period during which the personal services are
performed within the United States by the nonresident alien individual
by dividing by 365 the number of days in the period during which the
individual is present in the United States for the purpose of performing
the services and multiplying the result by the amount of the personal
exemption in effect for the taxable year. See Sec. 31.3402(f)(6)-1 of
this chapter.
(ii) Multiple exemptions. More than one personal exemption may be
claimed in the case of a resident of a contiguous country or a national
of the United States under section 873(b)(3). In addition, residents of
a country with which the United States has an income tax treaty in
effect may be eligible to claim more than one personal exemption if the
treaty so provides. Claims for more than one personal exemption shall be
made on the withholding certificate furnished to the withholding agent.
The exemption must be prorated on a daily basis in the same manner as
described in paragraph (b)(6)(i) of this section.
(iii) Special rule where both certain scholarship and compensation
income are received. The fact that both non-compensatory scholarship
income and compensation income (including compensatory scholarship
income) are received during the taxable year does not entitle the
taxpayer to claim more than one personal exemption amount (or more than
the additional amounts permitted under paragraph (b)(6)(ii) of this
section). Thus, if a nonresident alien student receives non-compensatory
taxable scholarship income from one withholding agent and compensation
income from another withholding agent, no more than the total personal
exemption amount permitted under the Internal Revenue Code or under an
income tax treaty may be taken into account by both withholding agents.
For this purpose, the withholding agent may rely on a representation
from the beneficial owner that the exemption amount claimed does not
exceed the amount permissible under this section.
(c) Special rules for scholarship and fellowship income--(1) In
general. Under section 871(c), certain amounts paid as a scholarship or
fellowship for study, training, or research in the United States to a
nonresident alien individual temporarily present in the United States as
a nonimmigrant under section 101(a)(15) (F), (J), (M), or (Q) of the
Immigration and Nationality Act are treated as income effectively
connected with the conduct of a trade or business within the United
States. The amounts described in the preceding sentence are those
amounts that do not represent compensation for services. Such amounts
(as described in the second sentence of section 1441(b)) are subject to
withholding under section 1441, but at the lower rate of 14 percent.
That rate may be reduced under the provisions of an income tax treaty.
Claims of a reduced rate under an income tax treaty shall be made under
the procedures described in Sec. 1.1441-6(b)(1). Therefore, claims for
reduction in withholding under an income tax treaty on amounts described
in this paragraph (c)(1) may not be made on a Form 8233. However, if the
payee is receiving both compensation for personal services (including
compensatory scholarship income) and non-compensatory scholarship income
described in this paragraph (c)(1) from the same withholding agent,
claims for reduction of withholding on both types of income may be made
on Form 8233.
(2) Alternate withholding election. A withholding agent may elect to
withhold on the amounts described in paragraph (c)(1) of this section at
the rates applicable under section 3402, as if the income were wages.
Such election shall be made by obtaining a Form W-4 (or an acceptable
substitute or such other form as the IRS may prescribe) from the
beneficial owner. The fact that the withholding agent asks the
beneficial owner to furnish a Form W-4 for such fellowship or
scholarship income or to take such income into account in preparing such
Form W-4 shall serve as notice to the beneficial owner that the income
is being treated as wages for
[[Page 125]]
purposes of withholding tax under section 1441.
(d) Annuities received under qualified plans. Withholding is not
required under section Sec. 1.1441-1 in the case of any amount received
as an annuity if the amount is exempt from tax under section 871(f) and
the regulations under that section. The withholding agent may exempt the
payment from withholding if, prior to payment, it can reliably associate
the payment with documentation upon which it can rely to treat the
payment as made to a beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii). A beneficial owner withholding certificate furnished for
purposes of claiming the benefits of the exemption under this paragraph
(d) is valid only if, in addition to other applicable requirements, it
contains a taxpayer identifying number.
(e) Per diem of certain alien trainees. Withholding is not required
under section 1441(a) and Sec. 1.1441-1 on per diem amounts paid for
subsistence by the United States Government (directly or by contract) to
any nonresident alien individual who is engaged in any program of
training in the United States under the Mutual Security Act of 1954, as
amended (22 U.S.C. chapter 24). This rule shall apply even though such
amounts are subject to tax under section 871. Any exemption from
withholding pursuant to this paragraph (e) applies without a requirement
that documentation be furnished to the withholding agent. However,
documentation may have to be furnished for purposes of the information
reporting provisions under section 6041 and backup withholding under
section 3406. The exemption from withholding granted by this paragraph
(e) is not a determination that the amounts are not fixed or
determinable annual or periodical income.
(f) Failure to receive withholding certificates timely or to act in
accordance with applicable presumptions. See applicable procedures
described in Sec. 1.1441-1(b)(7) in the event the withholding agent does
not hold an appropriate withholding certificate or other appropriate
documentation at the time of payment or does not act in accordance with
applicable presumptions described in paragraph (a) (2)(i), (2)(ii), or
(3) of this section.
(g) Effective date--(1) General rule. This section applies to
payments made after December 31, 2000.
(2) Transition rules. The validity of a Form 4224 or 8233 that was
valid on January 1, 1998, under the regulations in effect prior to
January 1, 2001 (see 26 CFR part 1, revised April 1, 1999) and expired,
or will expire, at any time during 1998, is extended until December 31,
1998. The validity of a Form 4224 or 8233 that is valid on or after
January 1, 1999, remains valid until its validity expires under the
regulations in effect prior to January 1, 2001 (see 26 CFR part 1,
revised April 1, 1999) but in no event will such form remain valid after
December 31, 2000. The rule in this paragraph (g)(2), however, does not
apply to extend the validity period of a Form 4224 or 8223 that expires
solely by reason of changes in the circumstances of the person whose
name is on the certificate. Notwithstanding the first three sentences of
this paragraph (g)(2), a withholding agent may choose to not take
advantage of the transition rule in this paragraph (g)(2) with respect
to one or more withholding certificates valid under the regulations in
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1,
1999) and, therefore, to require withholding certificates conforming to
the requirements described in this section (new withholding
certificates). For purposes of this section, a new withholding
certificate is deemed to satisfy the documentation requirement under the
regulations in effect prior to January 1, 2001 (see 26 CFR part 1,
revised April 1, 1999). Further, a new withholding certificate remains
valid for the period specified in Sec. 1.1441-1(e)(4)(ii), regardless of
when the certificate is obtained.
[T.D. 6500, 25 FR 12075, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting
Sec. 1.1441-4, see the List of Sections Affected in the Finding Aids
section of this volume.
Effective Date Note 1: By T.D. 8734, 62 FR 53450, Oct. 14, 1997,
Sec. 1.1441-4 was amended by revising the section heading and paragraph
(a); by revising paragraphs (b)(1) (i) and (ii); by removing the period
at the end of paragraph (b)(1)(iii) and adding a semicolon in its place;
by removing the language ``or''
[[Page 126]]
at the end of paragraph (b)(1)(iv) and adding a semicolon in its place;
by removing the period at the end of paragraph (b)(1)(v) and adding ``
or'' in its place; by adding paragraph (b)(1)(vi); by adding four
sentences at the end of pargraph (b)(2)(i); by revising paragraph
(b)(2)(ii) heading and introductory text, and paragraph (b)(2)(ii)(A);
by redesignating paragraph (b)(2)(ii)(H) as paragraph (b)(2)(ii)(J) and
amending newly designated paragraph (b)(2)(ii)(J) by removing the period
at the end of the paragraph and adding ``; and'' in its place; by
redesignating pargraphs (b)(2)(ii) (B), (C), (D), (E), (F), and (G) as
paragraphs (b)(2)(ii) (D), (E), (F), (G), (H), and (I), respectively; by
adding new paragraphs (b)(2)(ii) (B), (C), and (K); by removing the
period at the end of newly designated paragraph (b)(2)(ii)(D) and the
comma at the end of newly designated paragaphs (b)(2)(ii) (E), (F), (G),
and (H) and adding a semicolon in each place; by removing ``, and'' and
adding a semicolon in its place in newly designated paragraph
(b)(2)(ii)(I); by removing the concluding text immediately following
paragraph (b)(2)(iv)(C); by revising paragraph (b)(2)(v); by removing
the word ``statement'' and inserting the words ``withholding
certificate'' in each place in paragraph (b)(2)(i); by removing the
words ``Director of the Foreign Operations District'' and inserting in
their place the words ``Assistant Commissioner (International)'' in the
fourth sentence of paragraph (b)(2)(i), in the fourth and fifth
sentences of paragraph (b)(2)(iii), and in the first sentence of
paragraph (b)(3); by adding paragraph (b)(6); by revising paragraphs
(c), (d), (e), (f), and (g); by removing paragraphs (h) and (i); and by
removing the OMB parenthetical and the authority citation at the end of
the section, effective Jan. 1, 1999. By T.D. 8804, 63 FR 72183, Dec. 31,
1998, the effective date of Sec. 1.1441-4 was delayed until Jan. 1,
2000. By T.D. 8856, 64 FR 73408, 73409, Dec. 30, 1999, the effective
date of Sec. 1.1441-4 was delayed until Jan. 1, 2001 and paragraph (g)
was revised, effective Jan. 1, 2001. For the convenience of the user,
the superseded text is set forth as follows:
Sec. 1.1441-4 Exemptions from withholding.
(a) Income connected with a U.S. business--(1) In general. No
withholding is required under Sec. 1.1441-1 in the case of any item of
income if such income is effectively connected with the conduct of a
trade or business within the United States by the person entitled to
such income and is includible in the person's gross income under section
871(b)(2), section 842, or section 882(a)(2) for the taxable year and if
the person has filed the statement prescribed by paragraph (a)(2) of
this section. This paragraph (a)(1) shall apply to income for services
performed by a foreign partnership or a foreign corporation (other than
a foreign corporation which has income to which section 543(a)(7)
applies for the taxable year) but shall not apply to compensation for
personal services performed by an individual. In determining whether
services are performed by a foreign corporation or by an individual, see
Revenue Ruling 74-330, 1974-2 C.B. 278, and Revenue Ruling 74-331, 1974-
2 C.B. 282. For rules with respect to compensation for personal services
performed by an individual, see paragraph (b) of this section. In
determining whether an item of income from sources within the United
States is, or is deemed to be, effectively connected with the conduct of
a trade or business within the United States by the person entitled to
the income, see section 864(c)(2), section 871(d), and sections 882 (d)
and (e), and the regulations thereunder.
(2) Statement claiming exemption. In order for the exemption
provided by paragraph (a)(1) of this section to apply for any taxable
year, the person entitled to the income must file with the withholding
agent a statement in duplicate that the income described in the
statement is, or is expected to be, effectively connected with the
conduct of a trade or business within the United States and that such
income is includible in his gross income for the taxable year. This
statement shall show (i) the name and address of the withholding agent
and of the person entitled to the income, (ii) the taxpayer's
identifying number, (iii) the nature of the item or items of income with
respect to which the statement is filed, (iv) the trade or business with
which such income is, or is expected to be, effectively connected, and
(v) the taxable year in respect of which the statement is made. This
statement shall be filed with the withholding agent for each taxable
year of the person entitled to the income, and before payment of the
income in respect of which it applies. Any statement so filed shall be
effective only with respect to the item or items of income specified
therein and shall constitute authorization to the withholding agent to
pay such income during the taxable year without deduction of the tax at
source under Sec. 1.1441-1. The statement shall be amended by the person
entitled to the income if subsequent circumstances arising during the
taxable year indicate that the income is not, or is not expected to be,
effectively connected with the conduct of a trade or business within the
United States. Any statement required by this subparagraph may be made
on a properly executed Form 4224, which shall be filed in duplicate with
the withholding agent. The duplicate copy of each statement or form
filed during any calendar year pursuant to this subparagraph shall be
forwarded by the withholding agent
[[Page 127]]
with, and attached to, any Form 1042S required by paragraph (c) of
Sec. 1.1461-2 with respect to such income for such calendar year.
* * * * *
(b) * * * (1) * * *
(i) Such compensation is subject to withholding under section 3402,
relating to withholding of tax at source on wages, and the regulations
thereunder.
(ii) [Reserved] For guidance, see Sec. 1.1441-4T(b)(1)(ii).
* * * * *
(2) * * * (i) * * * (ii) Statement claiming withholding exemption.
The statement claiming an exemption from withholding shall be made on
Form 8233. Form 8233 may be used for claiming exemption from withholding
under tax treaties to which the United States is a party or with respect
to the personal exemption amount described in Sec. 1.1441-3(e)(2). Form
8233 shall be dated, signed by the person claiming the exemption from
withholding, and verified by a declaration that the statements are made
under the penalties of perjury. Form 8233 shall contain--
(A) The individual's name, address, United States taxpayer
identification number, and United States visa number, if any,
* * * * *
(iv) * * * (C) * * *
The exemption from withholding becomes effective for payments made at
least ten days after a copy of the accepted statement is mailed in a
proper manner by the withholding agent to the Director of the Foreign
Operations District, pursuant to paragraph (b)(2)(v) of this section.
(v) Copies of Form 8233. The withholding agent shall forward one
copy of each Form 8233 that is accepted by him or her to the Director of
the Foreign Operations District, Internal Revenue Service, Washington,
DC 20225, within five days of his or her acceptance. The Director of the
Foreign Operations District may review the forms so submitted. The
withholding agent shall retain a copy of Form 8233.
* * * * *
(c) Dividends paid by China Trade Act corporations. Withholding is
not required under Sec. 1.1441-1 upon dividends distributed by a
corporation organized under the China Trade Act of 1922 (15 U.S.C.,
chapter 4) to or for the benefit of a resident of Formosa or Hong Kong
and which are exempt from taxation by section 943.
(d) Inhabitants of the Virgin Islands--(1) Allowance of exemption.
This paragraph shall not apply after June 22, 1981. No withholding is
required under Sec. 1.1441-1 upon any item of income paid to any person
who at the time of payment reasonably expects to satisfy his income tax
obligations with respect to that item under section 28(a) of the Revised
Organic Act of the Virgin Islands. That section provides that all
persons whose permanent residence is in the Virgin Islands ``shall
satisfy their income tax obligations under applicable taxing statutes of
the United States by paying their tax on income derived from all sources
both within and outside the Virgin Islands into the Treasury of the
Virgin Islands.'' For the purpose of this paragraph, the term ``person''
shall include an individual, partnership, and corporation.
(2) Claiming exemption. To avoid withholding of tax at source under
Sec. 1.1441-1, the payee of the income shall notify the withholding
agent by letter in duplicate that he expects to satisfy his income tax
obligations under section 28(a) of the Revised Organic Act of the Virgin
Islands with respect to all income to be paid to him by the withholding
agent during the current calendar year. This letter of notification
shall constitute authorization to the payer of the income to pay income
to the payee during that year without deduction of the tax at source
under Sec. 1.1441-1.
(3) Disposition of letter. The duplicate copy of each letter of
notification filed pursuant to subparagraph (2) of this paragraph shall
be forwarded with a letter of transmittal to the Director of
International Operations, Internal Revenue Service, Washington, DC
20225.
(e) Per diem of certain alien trainees. Effective with respect to
payments made on and after July 18, 1956, withholding is not required
under section 1441(a) or Sec. 1.1441-1 in the case of amounts of per
diem for subsistence paid by the United States Government (directly or
by contract) to any nonresident alien individual who is engaged in any
program of training in the United States under the Mutual Security Act
of 1954, as amended (22 U.S.C. chapter 24). This rule shall apply even
though such amounts are subject to tax under section 871.
(f) Exemption of certain foreign partnerships and foreign
corporations--(1) In general. No withholding is required under
Sec. 1.1441-1 upon any item of income paid to a foreign partnership, or
foreign corporation, engaged in trade or business in the United States
at any time during the taxable year, if it is established to the
satisfaction of the district director in whose district the related
books and records are kept that the requirements of section 1441(a), or
1442(a), and Sec. 1.1441-1 impose an undue administrative burden for
such taxable year and that the collection of the tax imposed by section
871(a) or section 881 on the members of such partnership, or by section
881 on such corporation, as the case may be, will not be jeopardized by
the exemption
[[Page 128]]
from withholding. As a general rule, the requirements of section
1441(a), or 1442(a), and Sec. 1.1441-1 will be considered to impose an
undue administrative burden only in a case where (i) the person entitled
to the income, such as a foreign insurance company, receives from the
withholding agent income on securities issued by a single corporation,
some of which is, and some of which is not, effectively connected with
the conduct of a trade or business within the United States and (ii) the
criteria for determining the effective connection are unduly difficult
to apply because of the circumstances under which such securities are
held. Thus, for example, if a foreign corporation carrying on a life
insurance business in the United States finds that, because of the
requirements of State law which cause its U.S. reserves to fluctuate
frequently, it is unduly difficult with respect to any class of income
to identify the income which is, and the income which is not,
effectively connected with its conduct of business in the United States
during the taxable year, the corporation will be considered to have
satisfied the requirements of subdivision (ii) of this subparagraph. No
exemption from withholding shall be granted under this paragraph unless
the person entitled to the income complies with such other requirements
as may be imposed by the district director and unless the district
director is satisfied that the collection of the tax on the income
involved will not be jeopardized by the exemption from withholding.
(2) Claiming exemption--(i) Statement required. In order for the
exemption provided by paragraph (f)(1) of this section to apply for any
taxable year the foreign partnership or the foreign corporation must
file with the district director in whose district the related books and
records are kept a statement indicating the reasons why specific classes
of income should be exempted from the withholding requirements of
Sec. 1.1441-1 for such year. This statement shall show the name and
address of the withholding agent and of the person entitled to the
income, the taxpayer's identifying number, the class or classes of
income to be exempted from withholding, the trade or business with which
such income is in part effectively connected, the taxable year during
which such exemption is to apply, and, in such form and to such extent
as shall satisfy the district director, the identity of the securities
or other underlying property involved.
(ii) Notification of determination. The district director shall
notify the partnership or corporation by letter in duplicate of his or
her determination in respect of the application for exemption. If the
exemption from withholding is granted, the duplicate copy of the notice
from the district director shall be filed with the withholding agent and
shall constitute authorization to pay the specified class or classes of
income during the specified taxable year without deduction of the tax at
source under Sec. 1.1441-1.
(iii) Bond requirement. The district director may, as a condition
precedent to the allowance of the exemption from withholding for the
taxable year, require a bond in such sum as the Commissioner may
prescribe, conditioned upon the payment of the tax on the income
involved and such further conditions as the district director may
require. This bond shall be executed by the foreign partnership or
foreign corporation and shall conform to the requirements of
Sec. 301.7101-1 as to form of bond and surety required. No bond shall be
required pursuant to this subparagraph from a foreign corporation which
is required to file a declaration of estimated income tax under section
6016 for the taxable year in respect of which the exemption from
withholding applies.
(g) Annuities received under qualified plans. Withholding is not
required under Sec. 1.1441-1 in the case of any amount received as an
annuity if such amount is exempt under section 871(f) and the
regulations thereunder from the tax imposed by section 871(a). In order
for the exemption provided by this paragraph to apply for any taxable
year in those cases where the withholding agent is not the employer by
whom the annuity plan or qualified trust under or from which such
annuity is paid was established, the person entitled to the annuity must
file with the withholding agent a statement in duplicate setting forth
his or her name, address, and taxpayer identifying number, if any, and
certifying that he or she is not a citizen or resident of the United
States and that the annuity in respect of which the statement is filed
is excluded from gross income by reason of section 871(f). This
statement shall be dated, shall identify the taxable year to which it
relates, shall be signed by the person entitled to the annuity, and
shall contain, or be verified by, a written declaration that it is made
under the penalties of perjury. No particular form is prescribed for the
statement. The duplicate copy of each statement filed during any
calendar year pursuant to this paragraph shall be forwarded by the
withholding agent with, and attached to, the Form 1042S required by
paragraph (c) of Sec. 1.1461-2 with respect to such annuity for such
calendar year.
(h) Interest on bonds sold between interest dates. Except as
provided by paragraph (b)(2)(ii) of Sec. 1.1441-2, the tax is not
required to be withheld under Sec. 1.1441-1 on accrued interest paid by
the buyer in connection with the sale of bonds between interest dates,
even though the interest is subject to tax under section 871 or section
881. The exemption from withholding granted by this paragraph is not a
determination that the accrued interest is not fixed or determinable
annual or periodical income.
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(i) Income of foreign central bank of issue or Bank for
International Settlements. (1) Section 895 provides for the exclusion
from gross income of certain income derived by a foreign central bank of
issue, or by the Bank for International Settlements, from obligations of
the United States or of any agency or instrumentality thereof or from
bank deposits. In the absence of knowledge that a foreign central bank
of issue, or the Bank for International Settlements, is operating
without the scope of the exclusion granted by section 895, the
withholding agent is not required to withhold under Sec. 1.1441-1 upon
income derived by such bank from obligations of the United States or of
any agency or instrumentality thereof, or upon interest derived from
deposits with persons carrying on the banking business, if the
withholding agent receives from the bank a statement certifying that the
bank--
(i) Is a foreign central bank of issue, or the Bank for
International Settlements, as the case may be,
(ii) Is the owner of the obligations of the United States or of any
agency or instrumentality thereof, or the owner of such bank deposits,
as the case may be, and
(iii) Does not, and will not, hold such obligations or such bank
deposits for, or use them in connection with, the conduct of a
commercial banking function or other commercial activity.
(2) A copy of the statement filed pursuant to paragraph (i)(1) of
this section shall be forwarded by the withholding agent with, and
attached to, the Form 1042S required by paragraph (c) of Sec. 1.1461-2
with respect to payments of income made on such obligations or bank
deposits during the calendar year.
(Approved by the Office of Management and Budget under control number
1545-0795)
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805), Internal Revenue Code of 1954; secs. 1441, 1442, and 7805,
Internal Revenue Code (80 Stat. 1553, 26 U.S.C. 1441; 80 Stat. 1558, 26
U.S.C. 1442; 68A Stat. 917, 26 U.S.C. 7805))
Sec. 1.1441-4T Exemption from withholding (temporary).
(a) [Reserved]
(b) Compensation for personal services of an individual--(1)
Exemption from withholding.
(i) [Reserved]
(ii) Withholding is not required under Sec. 1.1441-1 from salaries,
wages, remuneration, or any other compensation for personal services of
a nonresident alien individual if such compensation is effectively
connected with the conduct of a trade or business within the United
States and such compensation would be subject to withholding under
section 3402 but for the provisions of section 3401(a) (other than
paragraph (a)(6) thereof) and the regulations under that section,
provided that an election of no withholding under section 3405 (a)(2) or
(b)(3) is not in effect.
(b) (1)(iii)-(5) [Reserved]
(c)-(i) [Reserved]
[T.D. 8288, 55 FR 3716, Feb. 5, 1990]
Effective Date Note: By T.D. 8734, 62 FR 53452, Oct. 14, 1997,
Sec. 1.1441-4T was removed, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of the removal of Sec. 1.1441-
4T was delayed until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30,
1999, the effective date was delayed until Jan. 1, 2001.
Sec. 1.1441-5 Withholding on payments to partnerships, trusts, and estates.
(a) Rules of withholding applicable to payments to partnerships.
This paragraph (a) describes the determinations that a withholding agent
must make when making a payment to a person that may be a partnership
(as defined in Sec. 1.1441-1(c)(6)(ii)(C)). Such determinations are made
in order to determine a withholding agent's obligations under chapters 3
and 61 of the Internal Revenue Code (Code) and sections 3402, 3405, and
3406 (and applicable regulations under those provisions) to withhold and
report payments of amounts subject to withholding under chapter 3 of the
Code and the regulations thereunder. The reliance provisions stated in
this paragraph (a) are subject to the presumptions described in
Sec. 1.1441-1(b)(3) and paragraph (d) of this section, including
Sec. 1.1441-1(b)(3)(ix) regarding the withholding agent's actual
knowledge or reason to know that the presumptions are not correct. For
similar presumptions for reporting and withholding on amounts not
subject to withholding under chapter 3 of the Code (e.g., foreign source
income, broker proceeds) that may be paid to a foreign partnership, see
Sec. 1.6049-5(d) (2) through (5).
(1) The withholding agent must determine whether the payee is a U.S.
or a foreign person. For this purpose, the
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withholding agent may treat the payee as U.S. or foreign if it can
reliably associate the payment with a Form W-9 described in Sec. 1.1441-
1(d) or a Form W-8 described in Sec. 1.1441-1(e)(2)(i) or (3)(i). In the
absence of documentation, see Sec. 1.1441-1(b)(3) and paragraph (d) of
this section for applicable presumptions of foreign or U.S. status and
other relevant characteristics.
(2) If the payee is determined to be a foreign person, the
withholding agent must determine whether the foreign payee is acting for
its own account or for the account of others (i.e., as an intermediary,
as defined in Sec. 1.1441-1(e)(3)(i)). The withholding agent may treat
the payee as a foreign intermediary if it can reliably associate the
payment with a Form W-8 described in Sec. 1.1441-1(e)(3) (ii), (iii), or
(v), within the meaning of Sec. 1.1441-1(b)(3)(v)(A).
(3) If the foreign payee is determined to act as an intermediary
described in Sec. 1.1441-1(e)(3)(i), the withholding agent must
determine whether or not the payee is a qualified intermediary. The
withholding agent may treat the payee as a qualified intermediary only
if it can reliably associate the payment with a Form W-8 described in
Sec. 1.1441-1(e)(3)(ii). A foreign payee that is treated as an
intermediary with respect to a payment is subject to the provisions
applicable to intermediaries in Sec. 1.1441-1(e) (3) or (5). In such a
case, the provisions of paragraph (c) of this section do not apply to
the payment.
(4) If the foreign payee is determined to act for its own account
(or is so presumed), the withholding agent must determine the status of
the payee as a partnership. The withholding agent may treat the payee as
a domestic or as a foreign partnership if it can reliably associate the
payment with a Form W-9 furnished in accordance with Sec. 1.1441-1(d)
(2) or (4) (for a domestic partnership) or a Form W-8 described in
paragraph (c) (2)(iv) or (3)(iii) of this section (for a foreign
partnership). See Sec. 1.1441-1(e)(4)(viii) for reliance on the payee's
representations on a Form W-8. In the absence of documentation, see
Sec. 1.1441-1(b)(3)(ii) and paragraph (d)(2) of this section for
applicable presumptions of status.
(5) If the foreign payee is determined to be a foreign partnership
and the withholding agent has determined (or presumes) that the
partnership is acting for the account of its partners, then the
withholding agent must determine whether the payment represents income
effectively connected with the partnership's conduct of a U.S. trade or
business. The withholding agent may treat the payment as effectively
connected if it can reliably associate the payment with a Form W-8
described in paragraph (c)(3)(iii) of this section representing that the
income is effectively connected or if it so presumes in accordance with
the provisions in Sec. 1.1441-4(a) (2)(ii) or (3). In the absence of
documentation, the payment is generally presumed to be non-effectively
connected. See Sec. 1.1441-4(a)(2)(i). See Secs. 1.1461-1(c)(2)(ii)(A),
1.6031-1 and 1.6031(b)-1T for reporting requirements applicable to the
withholding agent and to the partnership.
(6) If the withholding agent cannot reliably treat the payment as
effectively connected income nor presume that it is so connected, then
the withholding agent must determine whether the partnership is a
withholding foreign partnership described in paragraph (c)(2)(i) of this
section. The withholding agent may treat the foreign partnership as a
withholding foreign partnership if it can reliably associate the payment
with a Form W-8 described in paragraph (c)(2)(iv) of this section. In
the absence of a reliable Form W-8, the foreign partnership is presumed
to be a non-withholding foreign partnership described in paragraph
(c)(3)(i) of this section. In such a case, under paragraph (c)(1)(i) of
this section, the withholding agent must treat the partners, rather than
the partnership, as payees. See paragraph (d) of this section for
determining the status of the partners as U.S. or foreign persons in the
absence of documentation. See Sec. 1.1461-1(c)(2)(ii)(A), 1.6031-1 and
1.6031(b)-1T for reporting requirements applicable to the withholding
agent and to the partnership.
(7) If the withholding agent determines that the payee is a U.S.
partnership, or so presumes in accordance with paragraph (d)(2) of this
section in the
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absence of documentation, the withholding agent is not required to
withhold under paragraph (b)(1) of this section because the partnership
is treated as a U.S. payee. See paragraph (b)(2) of this section for
withholding requirements applicable to a domestic partnership with
foreign partners. See Secs. 1.1461-1(c)(2)(ii)(A), 1.6031-1 and
1.6031(b)-1T for reporting requirements applicable to the withholding
agent and to the partnership.
(8) In order to determine whether to rely on a claim for a reduced
rate under a tax treaty by a person that the withholding agent treats as
a partnership or as a partner in a partnership, the withholding agent
must apply the provisions of Sec. 1.894-1T(d). For applicable procedures
regarding reliance by a withholding agent on a claim for benefits under
a tax treaty in such a situation, see Sec. 1.1441-6(b)(4).
(b) Domestic partnerships--(1) Exemption from withholding on payment
to domestic partnerships. A payment to a person that the withholding
agent may treat as a domestic partnership is treated as a payment to a
U.S. payee. Therefore, a payment to a domestic partnership is not
subject to withholding under section 1441 even though it may have
partners that are foreign persons. A withholding agent may treat the
person to whom the payment is made as a domestic partnership if it can
reliably associate the payment with a Form W-9 furnished by the
partnership in accordance with the procedures under Sec. 1.1441-1(d) (2)
or (4) or based upon the presumptions described in paragraph (d)(2) of
this section.
(2) Withholding by a domestic partnership--(i) In general. A
domestic partnership is required to withhold under Sec. 1.1441-1 as a
withholding agent on the gross amount of items of income subject to
withholding that are includible in the distributive share of income of a
partner that is a foreign person. Pursuant to the authority provided
under section 702(a), each partner shall take into account separately
its distributive share of amounts subject to withholding, and thus the
partnership, pursuant to section 703(a)(1), shall separately state these
amounts when computing its taxable income. A partnership shall withhold
when any distributions that include amounts subject to withholding are
made or when guaranteed payments are made. To the extent a foreign
partner's distributive share of an amount subject to withholding has not
been actually distributed, the partnership is required to withhold on
the partner's distributive share of that amount on the earlier of the
date that the statement required under section 6031(b) and
Sec. 1.6031(b)-1T to be provided to that partner is mailed or otherwise
furnished to the partner or the due date for furnishing that statement
as provided under Sec. 1.6031(b)-1T. If a partnership withholds on a
distributive share before the amount is actually distributed to the
partner, then withholding is not required when the amount is
subsequently distributed. Withholding on items of income that are
effectively connected income in the hands of the partners who are
foreign persons is governed by section 1446 and not by this section. In
such a case, partners in a domestic partnership are not required to
furnish a withholding certificate in order to claim an exemption from
withholding under section 1441(c)(1) and Sec. 1.1441-4.
(ii) Determination by the domestic partnership of the partners'
status. For purposes of determining whether the partners or some other
persons are the payees of the partners' distributive shares of any
payment made to the partnership and the status of the partners, the
partnership shall apply the rules of Sec. 1.1441-1(b) (2) and (3), and
of paragraphs (c)(1) and (d) of this section (in the case of a partner
that is a foreign partnership) and of paragraph (e) of this section (in
the case of a partner that is a foreign estate or a foreign trust) in
the same manner as if the partnership were making a payment directly to
the partners other than in their capacity as partners.
(iii) Reliance on a partner's claim for reduced withholding. Absent
actual knowledge or reason to know otherwise, a domestic partnership may
rely on a claim for reduced withholding under chapter 3 of the Code by a
partner, if prior to the time the partnership is required to withhold,
the partnership can reliably associate the partner's distributive share
of the partnership items with documentation upon which
[[Page 132]]
it may rely to treat the partner or another person as a U.S. person
under Sec. 1.1441-1(d) (2) or (3), as a U.S. beneficial owner under
Sec. 1.1441-1(d)(4), or as a foreign beneficial owner under Sec. 1.1441-
1(e)(1)(ii).
(iv) Rules for reliably associating a payment with documentation.
For rules regarding the reliable association of a payment with
documentation, see Sec. 1.1441-1(b)(2)(vii).
(v) Coordination with chapter 61 of the Internal Revenue Code and
section 3406. A domestic partnership is not a payor for purposes of
chapter 61 of the Code or section 3406 with respect to payments to its
partners in their capacity as partners. Thus, it is not required to make
an information return on Form 1099 nor to backup withhold with respect
to its partners' distributive share of partnership items. However, it
must file returns under section 6031. Such returns are in lieu of making
returns under Sec. 1.1461-1 (b) and (c). See Sec. 1.1461-1(c)(2)(ii)(A).
(c) Foreign partnerships--(1) Determination of payee--(i) Payments
treated as made to partners. Except as otherwise provided in paragraph
(c)(1)(ii) of this section, a payment to a person that the withholding
agent may treat as a foreign partnership in accordance with paragraph
(c)(2)(i), (3)(i), or (d)(2) of this section is treated as a payment to
the partners (looking through partners that are foreign flow-through
entities) as follows--
(A) If the withholding agent can reliably associate the partner's
distributive share of the payment with a Form W-9, a Form W-8, or other
appropriate documentation upon which it can rely to treat the payment as
made to a U.S. or foreign beneficial owner under Sec. 1.1441-1 (d)(4) or
(e)(1)(ii), then the beneficial owner so identified is treated as the
payee;
(B) If the withholding agent can reliably associate the partner's
distributive share with an intermediary certificate described in
Sec. 1.1441-1(e)(3) (ii), (iii), or (v), then the rules of Sec. 1.1441-
1(b)(2)(v) shall apply to determine who the payee is in the same manner
as if the partner's distributive share of the payment had been paid
directly to such intermediary;
(C) If the withholding agent can reliably associate the partner's
distributive share with a partnership certificate described in paragraph
(c)(2)(iv) or (3)(iii) of this section, then the rules of paragraph
(c)(1) (i) or (ii) of this section shall apply to determine whether the
payment is treated as made to the partners of the higher-tier
partnership under this paragraph (c)(1)(i) or to the higher tier
partnership (under the rules of paragraph (c)(1)(ii) of this section),
in the same manner as if the partner's distributive share of the payment
had been paid directly to such foreign partnership;
(D) If the withholding agent can reliably associate the partner's
distributive share with a withholding certificate described in
Sec. 1.1441-1(e)(3)(i) regarding a foreign trust or estate, then the
rules of paragraph (e) of this section shall apply to determine who the
payees are; and
(E) If the withholding agent cannot reliably associate the partner's
distributive share with a withholding certificate or other appropriate
documentation, the partners are considered to be the payees and the
presumptions described in paragraph (d)(3) of this section shall apply
to determine the status of the partners.
(ii) Payments treated as made to the partnership. A payment to a
person that the withholding agent may treat as a foreign partnership in
accordance with paragraph (c) (2)(i), (3)(i), or (d)(2) of this section
is treated as a payment to the foreign partnership and not to its
partners only if--
(A) The withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(2)(iv) of this
section (dealing with a certificate from a person representing to be a
withholding foreign partnership); or
(B) The withholding agent can reliably associate the payment with a
withholding certificate described in paragraph (c)(3)(iii) of this
section certifying that the payment is income that is effectively
connected with the conduct of a trade or business in the United States.
(iii) Rules for reliably associating a payment with documentation.
For rules regarding the reliable association of a
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payment with documentation, see Sec. 1.1441-1(b)(2)(vii). In the absence
of documentation, see Sec. 1.1441-1(b)(3) and paragraph (d) of this
section for applicable presumptions.
(iv) Example. The rules of paragraphs (c)(1) (i) and (ii) of this
section are illustrated by the following example:
Example. (i) Facts. A foreign partnership, P, has two partners, a
corporation, C, and a partnership, P1, both organized in country X. P1
has three partners, a foreign pension fund, a domestic partnership, P2,
and a foreign partnership, P3, organized in country Y. P2's partners are
foreign pension funds. P holds U.S. Treasury obligations in registered
form, on which it receives interest from U.S. custodian, Z. P1 is not a
withholding foreign partnership and it does not certify that the
interest is effectively connected with the conduct of a U.S. trade or
business. P3 is a withholding foreign partnership. P has furnished a
valid withholding certificate described in paragraph (c)(3)(iii) of this
section to which it has attached valid withholding certificates for C
(beneficial owner Form W-8 described in Sec. 1.1441-1(e)(2)(i)), P1, and
P1's three partners (a Form W-9 for P2, a withholding certificate
described in paragraph (c)(2)(iv) of this section for P3 and a
beneficial owner Form W-8 described in Sec. 1.1441-1(e)(2)(i) for the
foreign pension fund). P has furnished appropriate information in
accordance with paragraph (c)(3)(iv) of this section upon which the
withholding agent can rely to determine which portion of the payment is
associated with each withholding certificate.
(ii) Analysis. The payment to P is treated as a payment to its
partners because none of the conditions described in paragraph
(c)(1)(ii) exist under the facts to treat P as the payee (i.e., it is
not a withholding foreign partnership and, although it has furnished a
withholding certificate described under paragraph (c)(3)(iii) of this
section, it is not claiming that the interest is effectively connected
with the conduct of a U.S. trade or business). Under paragraph
(c)(1)(i)(A) of this section, C, as a partner of P, is treated as a
payee because it is not a flow-through entity or an intermediary (based
on the documentation furnished for C). Under paragraph (c)(1)(i)(C) of
this section, P1 is not treated as a payee because it is a foreign
partnership and none of the conditions described under paragraph
(c)(1)(ii) of this section exist under the facts to treat P as the
payee. Instead, P2 (under paragraph (c)(1)(i)(A) of this section), P3
(under paragraph (c)(1)(ii)(A) of this section), and the foreign pension
fund that is a partner of P1 (under paragraph (c)(1)(i)(A) of this
section), are treated as the payees of P1's distributive share of the
payment to P. P2 is a payee because, although a flow-through entity, it
is a domestic partnership (see paragraph (b)(1) of this section). P3 is
treated as a payee under paragraph (c)(1)(ii)(A) of this section,
irrespective of who its partners are, because it has furnished a valid
withholding certificate as a withholding foreign partnership. The
foreign pension fund is treated as a payee under paragraph (c)(1)(i)(A)
of this section because it has furnished a beneficial owner Form W-8
described in Sec. 1.1441-1(e)(2)(i).
(2) Withholding foreign partnerships--(i) Reliance on claim of
withholding foreign partnership status. A withholding foreign
partnership is a foreign partnership that has entered into an agreement
with the Internal Revenue Service (IRS), as described in paragraph
(c)(2)(ii) of this section. A withholding agent that can reliably
associate a payment with a certificate described in paragraph (c)(2)(iv)
of this section may treat the person to whom it makes the payment as a
withholding foreign partnership for purposes of withholding under
chapter 3 of the Code, information reporting under chapter 61 of the
Code, backup withholding under section 3406, and withholding under other
provisions of the Internal Revenue Code. Furnishing such a certificate
is in lieu of transmitting to a withholding agent withholding
certificates or other appropriate documentation for its partners.
Although the withholding foreign partnership generally will be required
to obtain withholding certificates or other appropriate documentation
from its partners pursuant to its agreement with the IRS, it is not
required to attach such documentation to the partnership withholding
certificate.
(ii) Withholding agreement--(A) In general. A foreign partnership
may claim withholding foreign partnership status before an agreement is
executed with the IRS if it has applied for such status and the IRS
authorizes such status on an interim basis under such procedures as the
IRS may issue. A withholding foreign partnership must file a partnership
return under section 6031(a) to the extent required under the
regulations under that section and furnish statements on Form K-1 to its
partners under section 6031(b) to the extent required under the
regulations under that section. See Secs. 1.6031-1 and 1.6031(b)-1T. See
Sec. 1.1461-1(c)(2)(ii)(A)
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for an exemption from filing Forms 1042 and 1042-S. A foreign
withholding partnership that wishes to also be a qualified intermediary
under Sec. 1.1441-1(e)(5) for payments it receives for persons other
than its partners may combine both agreements into one single agreement.
(B) Terms of withholding agreement. The IRS may, upon request, enter
into a withholding agreement with a foreign partnership pursuant to such
procedures as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). Under such withholding agreement, a
foreign partnership shall generally be subject to the applicable
withholding and reporting provisions applicable to withholding agents
and payors under chapters 3 and 61 of the Code, and section 3406, and
the regulations under those provisions, and other withholding provisions
of the Code, except to the extent provided under the agreement. In
particular, the agreement must include provisions for reporting of
information on Form 1065 and furnishing K-1 statements to the partners
in the manner required under section 6031 and the regulations under that
section. Under the agreement, a foreign partnership may agree to act as
an acceptance agent to perform the duties described in Sec. 301.6109-
1(d)(3)(iv)(A) of this chapter. The agreement may specify the manner in
which applicable procedures for adjustments for underwithholding and
overwithholding, including refund procedures apply to the foreign
partnership and its partners and the extent to which applicable
procedures may be modified. In particular, a withholding agreement may
allow a withholding foreign partnership to claim refunds of overwithheld
amounts on behalf of its partners. In addition, the agreement must
specify the manner in which the IRS will audit the foreign partnership's
books and records in order to verify the accuracy of the Forms 1065
filed by the partnership and K-1 statements furnished to the partners as
required under section 6031 and the regulations under that section. The
agreement shall also specify the assets that the foreign partnership has
in the United States or alternative means of collection, if necessary.
(iii) Withholding responsibility. A withholding foreign partnership
must assume primary withholding responsibility for all payments that are
made to it and, therefore, is not required to provide information to the
withholding agent regarding each partner's distributive share of the
payment (see paragraph (c)(3)(iv) of this section for the requirement to
provide distributive share information to the withholding agent in the
case of other foreign partnerships). The partnership shall be a
withholding agent with respect to each of its partner's distributive
share of income subject to withholding that is paid to the partnership.
Therefore, the withholding agent is not required to withhold any amount
under chapter 3 of the Code on a payment to a foreign partnership that
has furnished a withholding certificate representing that it is a
withholding foreign partnership, unless it has actual knowledge or
reason to know that the certificate is incorrect. The foreign
partnership shall withhold the payments under the same procedures and at
the same time as is prescribed for withholding by a domestic partnership
under paragraph (b)(2) of this section, except that, for purposes of
determining the partner's status, the provisions of paragraph (d)(4)(iv)
of this section shall apply and paragraph (b)(2)(ii) of this section
shall not apply.
(iv) Withholding certificate from a withholding foreign partnership.
The rules of Sec. 1.1441-1(e)(4) shall apply to withholding certificates
described in this paragraph (c)(2)(iv). A withholding certificate
furnished by a withholding foreign partnership is valid with regard to
any partner on whose behalf the certificate is furnished only if it is
furnished on a Form W-8 (or an acceptable substitute form or such other
form as the IRS may prescribe), it is signed under penalties of perjury
by a partner with authority to sign for the partnership, its validity
has not expired, and it contains the information, statement, and
certifications described in this paragraph (c)(2)(iv) as follows--
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the
partnership, and
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the country under the laws of which the partnership is created or
governed;
(B) A certification that the partnership is a withholding foreign
partnership within the meaning of paragraph (c)(2)(i) of this section;
and
(C) Any other information or certification as may be required by the
form or accompanying instructions in addition to, or in lieu of, the
information and certifications described in this paragraph (c)(2)(iv).
(3) Other foreign partnerships--(i) Reliance on claim of foreign
partnership status. A withholding agent that can reliably associate a
payment with a certificate described in paragraph (c)(3)(iii) of this
section may treat the person to whom it makes the payment as a foreign
partnership that is not a withholding foreign partnership. Such reliance
is permitted for purposes of withholding under chapter 3 of the Code,
information reporting under chapter 61 of the Code, backup withholding
under section 3406, and withholding under other provisions of the
Internal Revenue Code. For purposes of this paragraph (c)(3)(i), a
payment that the withholding agent can reliably associate with a
withholding certificate described in paragraph (c)(3)(iii) of this
section that would be valid except for the fact that some or all of the
withholding certificates or other appropriate documentation required to
be attached are lacking or are unreliable, or that information for
allocating the payment among the partners is lacking or is unreliable,
shall nevertheless be treated as a payment to a foreign partnership.
(ii) Reliance on claim of reduced withholding by a partnership for
its partners. This paragraph (c)(3)(ii) describes the manner in which a
withholding agent may rely on a claim of reduced withholding when making
a payment to a foreign partnership that is not a withholding foreign
partnership. To the extent that a withholding agent treats a payment to
a foreign partnership as a payment to its partners in accordance with
paragraph (c)(1) of this section, it may rely on a claim for reduced
withholding by a partner if, prior to the payment, the withholding agent
can reliably associate the payment with a withholding certificate
described in paragraph (c)(3)(iii) of this section pertaining to the
partner unless the withholding agent has actual knowledge or reason to
know that the withholding certificate is unreliable. The certificate
will be considered to pertain to the partner if the appropriate
withholding certificate for the partner is attached to the partnership's
withholding certificate. An appropriate withholding certificate for a
partner includes a beneficial owner withholding certificate described in
Sec. 1.1441-1(e)(2)(i) or, if applicable, documentary evidence described
in Sec. 1.1441-6(b)(2)(i) or in Sec. 1.6049-5(c)(1) (for a partner
claiming to be a foreign person and a beneficial owner, determined under
the provisions of Sec. 1.1441-1(c)(6)), the applicable certificates
described in Sec. 1.1441-1(d)(2) or (3) (for a partner claiming to be a
U.S. payee), an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(ii) or (iii), a U.S. branch withholding certificate
described in Sec. 1.1441-1(e)(3)(v), or a partnership withholding
certificate described in paragraph (c)(2)(iv) or (3)(iii) of this
section. Except where the partnership certificate is provided for income
claimed to be effectively connected with the conduct of a trade or
business in the United States, a claim must be presented for each
portion of the payment that represents an item of income includible in
the distributive share of the partner as required under paragraph
(c)(3)(iii)(C) of this section. When making a claim for several
partners, the partnership may present a single partnership withholding
certificate to which the partners' certificates are attached. Where the
partnership certificate is provided for income claimed to be effectively
connected with the conduct of a trade or business in the United States,
the claim may be presented without having to identify the partner's
distributive share of the payment if the certificate contains the
certification described in paragraph (c)(3)(iii)(E) of this section.
(iii) Withholding certificate from a foreign partnership that is not
a withholding foreign partnership. A withholding certificate furnished
by a foreign partnership that is not a withholding foreign partnership
is valid only if it is furnished on a Form W-8 (or an acceptable
substitute form or such other form as
[[Page 136]]
the IRS may prescribe), it is signed under penalties of perjury by a
partner with authority to sign for the partnership, its validity has not
expired, it contains the information, statement, and certifications
described in this paragraph (c)(3)(iii), and the withholding
certificates or other appropriate documentation for all of the partners
are attached (except that certificates for partners are not required to
be attached for a certificate furnished solely for income claimed to be
effectively connected with the conduct of a trade or business in the
United States, regardless of any partner's status as a U.S. person). The
rules of Sec. 1.1441-1(e)(4) shall apply to withholding certificates
described in this paragraph (c)(3)(iii). The information, statement, and
certifications required on the withholding certificate are as follows:
(A) The name, permanent residence address (as described in
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the
partnership, and the country under the laws of which the partnership is
created or governed.
(B) A representation that the person whose name is on the
certificate is a foreign partnership.
(C) A statement attached to the certificate that provides such
information as may be required by the form and accompanying
instructions, including sufficient information to the withholding agent
to determine the amount required to be withheld from amounts paid to the
partnership, such as each partner's distributive share of amounts to
which the certificate relates, prepared in the manner described in
paragraph (c)(3)(iv) of this section. No statement is required for a
certificate furnished for income claimed to be effectively connected
with the conduct of a trade or business in the United States.
(D) If the withholding certificates are required to be attached to
the partnership's withholding certificate, a statement either that the
attached withholding certificates represent all of the partners or that
the amounts allocatable to the partners for whom withholding
certificates are lacking are separately identified in the statement
required under paragraph (c)(3)(iv) of this section.
(E) A certification that the income is effectively connected with
the conduct of a trade or business in the United States, if applicable.
(F) Any other information or certification as may be required by the
form or accompanying instructions in addition to, or in lieu of, the
information and certifications described in this paragraph (c)(3)(iii).
(iv) Information to the withholding agent regarding each partner's
distributive share. The partnership must furnish information sufficient
for the withholding agent to determine each partner's distributive share
of reportable amounts (described in Sec. 1.1441-1(e)(3)(vi)). The sum of
all partners' distributive shares, expressed as a percentage, must
equal, but not exceed one hundred percent. For purposes of this
paragraph (c)(3)(iv), the rules of Sec. 1.1441-1(e)(3)(iv) regarding the
information to furnish to the withholding agent shall apply.
(v) Withholding by a foreign partnership. A foreign partnership
described in this paragraph (c)(3) that receives an amount subject to
withholding under chapter 3 of the Code shall be deemed to have
satisfied any obligation under such chapter to withhold on the amount
with respect to any partner to the extent that the partner's
distributive share of the payment can be reliably associated with a
withholding certificate described in paragraph (c)(3)(iii) of this
section pertaining to the partner that the partnership has furnished to
a withholding agent and the partnership does not know and has no reason
to know that the correct amount has not been withheld under chapter 3 of
the Code and the regulations under such chapter.
(d) Presumptions regarding payee's status in the absence of
documentation--(1) In general. This paragraph (d) contains the
applicable presumptions for determining the status of the partnership
and its partners in the absence of documentation. The provisions of
Sec. 1.1441-1(b)(3)(iv) (regarding the 90-day grace period) and
Sec. 1.1441-1(b)(3) (vii) through (ix) shall apply for purposes of this
paragraph (d).
[[Page 137]]
(2) Determination of partnership status as domestic or foreign in
the absence of documentation. In the absence of a valid representation
of domestic partnership status in accordance with paragraph (b)(1) of
this section and of foreign partnership status in accordance with
paragraph (c)(2)(i) or (3)(i) of this section, the withholding agent
shall determine the status of the payee as a corporation, a partnership
or otherwise, based upon the presumptions set forth in Sec. 1.1441-
1(b)(3)(ii). If, based upon these presumptions, the withholding agent
treats the payee as a partnership, the partnership shall be presumed to
be a foreign partnership if the withholding agent has actual knowledge
of the payee's employer identification number and that number begins
with the two digits ``98,'' if the withholding agent's communications
with the payee are mailed to an address in a foreign country, or if the
payment is made outside the United States (as defined in Sec. 1.6049-
5(e)). For rules regarding reliable association with a withholding
certificate from a domestic or a foreign partnership, see Sec. 1.1441-
1(b)(2)(vii).
(3) Determination of partners' status in the absence of certain
documentation. If the withholding agent treats the payee as a foreign
partnership in accordance with paragraph (c)(2)(i), (3)(i), or (d)(2) of
this section, the presumptions described in this paragraph (d)(3) shall
apply when the withholding agent cannot reliably associate a payment
with partner documentation. The provisions of paragraphs (d) (3)(i),
(ii), and (iii) of this section are not relevant to a payment that a
withholding agent can reliably associate with a withholding certificate
described in paragraph (c)(2)(iv) of this section.
(i) Documentation regarding the status of a partner is lacking or
unreliable. Any portion of a payment that the withholding agent cannot
reliably associate with a partner because a withholding certificate or
other appropriate documentation for that partner is lacking or
unreliable is presumed to be made to foreign payee. Therefore, under
Sec. 1.1441-1(b)(1), the withholding agent must withhold 30 percent from
payments to the partnership of amounts subject to withholding that are
allocable to such partner or group of partners.
(ii) Information regarding the allocation of payment is lacking or
unreliable. If a withholding agent can reliably associate a payment with
a group of partners but lacks reliable information to determine how much
of the payment is allocable to each partner in the group, the payment,
to the extent it cannot reliably be allocated, is presumed to be
allocable entirely to the partner in the group with the highest
applicable withholding rate or, if the rates are equal, to the partner
in the group with the highest U.S. tax liability, as the withholding
agent shall estimate, based on its knowledge and available information.
If a withholding certificate attached to the partnership certificate is
another partnership certificate or an intermediary certificate described
in Sec. 1.1441-1(e)(3)(iii), the rules of this paragraph (d)(3)(ii)
apply by treating the share of the payment allocable to the other
partnership or the intermediary certificate as if the payment were made
directly to the foreign partnership or intermediary.
(iii) Certification that the foreign partnership has furnished
documentation for all of the persons to whom the intermediary
certificate relates is lacking or unreliable. If the certification
required under paragraph (c)(3)(iii)(D) of this section (that the
attached withholding certificates and other appropriate documentation
represent all of the partners in the partnership) is lacking or is
unreliable and, as a result, the withholding agent cannot reliably
determine how much of the payment is allocable to each of the partners
or group of partners for which the withholding agent holds a withholding
certificate or other appropriate documentation, then none of the payment
can reliably be associated with any one partner and the entire payment
is presumed to be made to a foreign payee.
(iv) Determination by a withholding foreign partnership of the
status of its partners. For purposes of determining whether the partners
or some other persons are the payees of the partners' distributive
shares of any payment made to a withholding foreign partnership, the
partnership shall apply the
[[Page 138]]
rules of Sec. 1.1441-1(b)(2), and of paragraph (c)(1) of this section
(in the case of a partner that is a foreign partnership) and of
paragraph (e) (in the case of a partner that is a foreign estate or a
foreign trust), in the same manner as if the partnership were making a
payment directly to the partners other than in their capacity as
partners. Further, the provisions of paragraphs (d)(3) (i), (ii), and
(iii) of this section shall apply to determine the status of partners
and the applicable withholding rates to the extent that, at the time the
foreign partnership is required to withhold on the amount, it cannot
reliably associate the amount with documentation for any one or more of
its partners. See Secs. 1.6031-1 and 1.6031-1T for reporting and filing
requirements applicable to a withholding foreign partnership.
(4) Examples. The rules of this paragraph (d) may be illustrated by
the following examples:
Example 1. (i) Facts. FP is a foreign partnership receiving U.S.
source interest that would qualify as portfolio interest described in
section 871(h)(2)(B) if the statement described in section 871(h)(5)
were furnished. FP has three partners, A, B, and C. FP furnishes to the
withholding agent a partnership withholding certificate described in
paragraph (c)(3)(iii) of this section to which it attaches a Form W-9
for A and a beneficial owner Form W-8 for B. Nothing on A's Form W-9
indicates that A is an exempt recipient within the meaning of
Sec. 1.6049-4(c)(1)(i). No documentation is attached for C. The
partnership has one single account with the withholding agent. It
furnishes a statement to the withholding agent under paragraph
(c)(3)(iv) of this section indicating that A's, B's, and C's respective
distributive shares of the payments are 40%, 40%, and 20% and
represents, in accordance with paragraph (c)(3)(iii)(D) of this section,
that there are only three partners.
(ii) Analysis. Absent actual knowledge or reason to know otherwise,
the withholding agent may rely on FP's withholding certificate and A's
Form W-9 to treat A as a U.S. beneficial owner under Sec. 1.1441-
1(d)(4)(i) and as a U.S. payee under paragraph (c)(1)(i)(A) of this
section to the extent of 40 percent of the payment. Under Sec. 1.1441-
1(b)(1), the withholding agent is not required to withhold on A's share
of the payment. Under Sec. 1.6049-4(a), the withholding agent must
comply with information reporting obligations (i.e., file a Form 1099)
with respect to A who is treated as a U.S. payee under paragraph
(c)(1)(i)(A) of this section and Sec. 1.6049-5(d)(1) for purposes of the
information reporting provisions of chapter 61 of the Code and the
regulations thereunder. Absent actual knowledge or reason to know
otherwise, the withholding agent may also rely on FP's withholding
certificate and B's Form W-8 to treat B as a foreign beneficial owner
under Sec. 1.1441-1(e)(1)(ii)(A)(1) and paragraph (c)(1)(i)(A) of this
section. Thus, under Sec. 1.1441-1(b)(1), the withholding agent may rely
on B's claim for portfolio interest treatment for B's share of the
payment. Under Sec. 1.1461-1(b)(1) and (c)(1), the withholding agent
must report the payment to B on Forms 1042 and 1042-S unless, under
section 6031 and the regulations under that section, the partnership is
required to file a return. Because the withholding agent cannot
associate the documentation (as defined in Sec. 1.1441-1(b)(3)(vii)) for
C's share of the interest income, the withholding agent must, under
paragraph (d)(3)(i) of this section, treat that amount as a payment made
to an unidentified foreign partner and withhold 30 percent under section
1441 in accordance with Sec. 1.1441-1(b)(1).
Example 2. The facts are the same as in Example 1, but the
partnership has furnished no information under paragraph (c)(3)(iv) of
this section regarding how much of the payment to the foreign
partnership is attributable to A and C. Under paragraph (d)(3)(ii) of
this section, the payment allocable to group A-C is presumed made
entirely to A or to C, depending on who of A or C is subject to the
highest withholding rate. A is not subject to withholding because it has
furnished a valid Form W-9. C is subject to a 30-percent withholding
rate under Sec. 1.1441-1(b)(1) because it is presumed to be an
unidentified foreign partner under paragraph (d)(3)(i) of this section.
Therefore, under paragraph (d)(3)(ii) of this section, the portion of
the payment that the withholding agent can associate with A and C is
subject to withholding at a 30-percent rate. The withholding agent may
ignore the fact that A has furnished a valid Form W-9 supporting his
claim of exemption from withholding as a U.S. person because it has no
reliable information on how much of the payment is allocable to A.
Because the withholding agent has a Form W-9 for the U.S. individual
partner, it must also report A's distributive share on a Form 1099. To
the extent that A's exact share is not known, the entire amount should
be reported on the Form 1099.
(e) Trusts and estates. [Reserved]
(f) Failure to receive withholding certificate timely or to act in
accordance with applicable presumptions. See applicable procedures
described in Sec. 1.1441-1(b)(7) in the event the withholding agent does
not hold an appropriate withholding certificate or other appropriate
documentation at the time of
[[Page 139]]
payment or fails to rely on the presumptions set forth in Sec. 1.1441-
1(b)(3) or in paragraph (d) or (e) of this section.
(g) Effective date--(1) General rule. This section applies to
payments made after December 31, 2000.
(2) Transition rules. The validity of a withholding certificate that
was valid on January 1, 1998, under the regulations in effect prior to
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and
expired, or will expire, at any time during 1998, is extended until
December 31, 1998. The validity of a withholding certificate that is
valid on or after January 1, 1999, remains valid until its validity
expires under the regulations in effect prior to January 1, 2001 (see 26
CFR parts 1 and 35a, revised April 1, 1999) but in no event will such a
withholding certificate remain valid after December 31, 2000. The rule
in this paragraph (g)(2), however, does not apply to extend the validity
period of a withholding certificate that expires solely by reason of
changes in the circumstances of the person whose name is on the
certificate. Notwithstanding the first three sentences of this paragraph
(g)(2), a withholding agent may choose to not take advantage of the
transition rule in this paragraph (g)(2) with respect to one or more
withholding certificates valid under the regulations in effect prior to
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and,
therefore, to require withholding certificates conforming to the
requirements described in this section (new withholding certificates).
For purposes of this section, a new withholding certificate is deemed to
satisfy the documentation requirement under the regulations in effect
prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1,
1999). Further, a new withholding certificate remains valid for the
period specified in Sec. 1.1441-1(e)(4)(ii), regardless of when the
certificate is obtained.
[T.D. 8734, 62 FR 53452, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72185, 72188, Dec. 31, 1998; 64 FR 73410, Dec. 30, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53452, Oct. 14, 1997,
Sec. 1.1441-5 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-5 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73410, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001 and paragraph (g) was
revised effective Jan. 1, 2001. For the convenience of the user, the
superseded text is set forth as follows:
Sec. 1.1441-5 Claiming to be a person not subject to withholding.
(a) Individuals. For purposes of chapter 3 of the Code, an
individual's written statement that he or she is a citizen or resident
of the United States may be relied upon by the payer of the income as
proof that such individual is a citizen or resident of the United
States. This statement shall be furnished to the withholding agent in
duplicate. An alien may claim residence in the United States by filing
Form 1078 with the withholding agent in duplicate in lieu of the above
statement.
(b) Partnerships and corporations. For purposes of chapter 3 of the
Code a written statement from a partnership or corporation claiming that
it is not a foreign partnership or foreign corporation may be relied
upon by the withholding agent as proof that such partnership or
corporation is domestic. This statement shall be furnished to the
withholding agent in duplicate. It shall contain the address of the
taxpayer's office or place of business in the United States and shall be
signed by a member of the partnership or by an officer of the
corporation. The official title of the corporate officer shall also be
given.
(c) Disposition of statement and form. The duplicate copy of each
statement and form filed pursuant to this section shall be forwarded
with a letter of transmittal to Internal Revenue Service Center,
Philadelphia, PA 19255. The original statement shall be retained by the
withholding agent.
(d) Definitions. For determining whether an alien individual is a
resident of the United States see Secs. 301.7701(b)-1 through
301.7701(b)-9 of this chapter. An individual with respect to whom an
election to be treated as a resident under section 6013(g) is in effect
is not, in accordance with Sec. 1.1441-1, a resident for purposes of
this section. For definition of the terms ``foreign partnership'' and
``foreign corporation'' see section 7701(a) (4) and (5) and
Sec. 301.7701-5 of this chapter. For definition of the term ``United
States'' and for other geographical definitions relating to the
Continental Shelf see section 638 and Sec. 1.638-1.
(Approved by the Office of Management and Budget under control number
1545-0795)
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
[T.D. 6500, 25 FR 12076, Nov. 26, 1960, as amended by T.D. 6908, 31 FR
16773, Dec. 31, 1966; T.D. 7277, 38 FR 12742, May 15, 1973; T.D. 7842,
47 FR 49842, Nov. 3, 1982; T.D. 7977, 49 FR
[[Page 140]]
36834, Sept. 20, 1984; T.D. 8160, 52 FR 33933, Sept. 9, 1987; T.D. 8411,
57 FR 15241, Apr. 27, 1992]
Sec. 1.1441-6 Claim of reduced withholding under an income tax treaty.
(a) In general. The rate of withholding on a payment of income
subject to withholding may be reduced to the extent provided under an
income tax treaty in effect between the United States and a foreign
country. Most benefits under income tax treaties are to foreign persons
who reside in the treaty country. In some cases, benefits are available
under an income tax treaty to U.S. citizens or U.S. residents or to
residents of a third country.
See paragraph (b)(5) of this section for claims of benefits by U.S.
persons. If the requirements of this section are met, the amount
withheld from the payment may be reduced at source to account for the
treaty benefit. See also Sec. 1.1441-4(b)(2) for rules regarding claims
of reduced rate of withholding under an income tax treaty in the case of
compensation from personal services.
(b) Reliance on claim of reduced withholding under an income tax
treaty--(1) In general. Absent actual knowledge or reason to know
otherwise, a withholding agent may rely on a claim that a beneficial
owner is entitled to a reduced rate of withholding based upon an income
tax treaty if, prior to the payment, the withholding agent can reliably
associate the payment with documentation upon which it can rely to treat
the payment as made to a foreign beneficial owner in accordance with
Sec. 1.1441-1(e)(1)(ii) (not including 1.1441-1(e)(1)(ii)(A)(2) relating
to documentary evidence). Except as otherwise provided in paragraph
(b)(2) or (3) of this section, for purposes of this paragraph (b)(1), a
beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) is valid only if it includes the beneficial owner's taxpayer
identifying number and certifies that the taxpayer has complied with the
advance ruling requirements described in paragraph (e) of this section
(if applicable), and, if the beneficial owner is a person related to the
withholding agent within the meaning of section 482, that the beneficial
owner will file the statement required under Sec. 301.6114-1(d) of this
chapter (if applicable). The requirement to file an information
statement under section 6114 for income subject to withholding applies
only to amounts received during the calendar year that, in the
aggregate, exceed $500,000. See Sec. 301.6114-1(d) of this chapter. The
Internal Revenue Service (IRS) may apply the provisions of Sec. 1.1441-
1(e)(1)(ii)(B) to notify the withholding agent that the certificate
cannot be relied upon to grant benefits under an income tax treaty. A
beneficial owner's taxpayer identifying number on a withholding
certificate is valid for purposes of establishing proof of residence in
a treaty country only if the taxpayer identifying number is certified by
the IRS in accordance with the procedures set forth in paragraph (c) of
this section. However, absent actual knowledge or reason to know
otherwise, a withholding agent may rely on a taxpayer identifying number
without having to inquire as to whether the taxpayer identifying number
is certified, if the number appears correct on its face and the
permanent residence address on the certificate is in the country whose
tax treaty with the United States is invoked. See 1.1441-1(e)(4)(viii)
regarding reliance on a withholding certificate by a withholding agent.
The provisions of Sec. 1.1441-1(b)(3)(iv) dealing with a 90-day grace
period shall apply for purposes of this section.
(2) Exemption from requirement to furnish a taxpayer identifying
number and special documentary evidence rules for certain income--(i)
General rule. In the case of income described in paragraph (b)(2)(ii) of
this section, a withholding agent may rely on a beneficial owner
withholding certificate described in paragraph (b)(1) of this section
even if the person whose name is on the certificate has not provided a
taxpayer identifying number. In the case of payments made outside the
United States (as defined in Sec. 1.6049-5(e)) with respect to an
offshore account (as defined in Sec. 1.6049-5(c)(1)), a withholding
agent may, as an alternative to a withholding certificate described in
paragraph (b)(1) of this section, rely on a certificate of residence
described in
[[Page 141]]
paragraph (c)(3) of this section or documentary evidence described in
paragraph (c)(4) of this section, relating to the beneficial owner, that
the withholding agent has reviewed and maintains in its records in
accordance with Sec. 1.1441-1(e)(4)(iii). In the case of a payment to a
person other than an individual, the certificate of residence or
documentary evidence must be accompanied by the certifications described
in paragraphs (c)(5) (i) and (ii) of this section regarding limitation
on benefits and whether the amount paid is derived by such person or by
one of its interest holders. The withholding agent maintains the
reviewed documents by retaining either the documents viewed or a
photocopy thereof and noting in its records the date on which, and by
whom, the documents were received and reviewed. This paragraph (b)(2)(i)
shall not apply to amounts that are exempt from withholding based on a
claim that the income is effectively connected with the conduct of a
trade or business in the United States.
(ii) Income to which special rules apply. The income to which
paragraph (b)(2)(i) of this section applies is dividends and interest
from stocks and debt obligations that are actively traded, dividends
from any redeemable security issued by an investment company registered
under the Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends,
interest, or royalties from units of beneficial interest in a unit
investment trust that are (or were, upon issuance) publicly offered and
are registered with the Securities and Exchange Commission under the
Securities Act of 1933 (15 U.S.C. 77a) and amounts paid with respect to
loans of securities described in this paragraph (b)(2)(ii). For purposes
of this paragraph (b)(2)(ii), a stock or debt obligation is actively
traded if it is actively traded within the meaning of section 1092(d)
and Sec. 1.1092(d)-1 when documentation is provided.
(3) Competent authority agreements. The procedures described in this
section may be modified to the extent the U.S. competent authority may
agree with the competent authority of a country with which the United
States has an income tax treaty in effect.
(4) Eligibility for reduced withholding under an income tax treaty
in the case of a payment to a person other than an individual--(i)
General rule. The withholding imposed under section 1441, 1442, or 1443
on any payment to a foreign person is eligible for reduction under the
terms of an income tax treaty only to the extent that such payment is
treated as derived by a resident of an applicable treaty jurisdiction,
such resident is a beneficial owner of the payment, and all other
applicable requirements for benefits under the treaty are satisfied. A
payment received by an entity is treated as derived by a resident of an
applicable treaty jurisdiction to the extent that the payment is subject
to tax in the hands of a resident of that jurisdiction. For this
purpose, a payment received directly by an entity that is treated as
fiscally transparent by the applicable treaty jurisdiction shall be
considered a payment subject to tax in the hands of a resident of the
jurisdiction to the extent that the interest holders in the entity are
residents of the jurisdiction. For purposes of the preceding sentence,
interest holders do not include any direct or indirect interest holders
that are themselves treated as fiscally transparent entities by the
applicable treaty jurisdiction. A payment received by an entity that is
not treated as fiscally transparent by the applicable treaty
jurisdiction shall be considered a payment subject to tax in the hands
of a resident of such jurisdiction only if the entity is itself a
resident of that jurisdiction. If the entity is a wholly-owned entity
that is disregarded for federal tax purposes under Sec. 301.7701-2(c)(2)
of this chapter as an entity separate from its owner and whose single
member is a foreign person, amounts paid to such entity may nevertheless
be treated as derived by a resident of a treaty country if the entity is
treated by the applicable treaty country as deriving the income as a
resident of that country. The provisions of Sec. 1.894-1T(d) (1) through
(4) shall apply for purposes of determinations made under this paragraph
(b)(4).
(ii) Withholding certificates--(A) In general. The type of
withholding certificate or other appropriate documentation that must be
furnished by a
[[Page 142]]
person claiming a reduced rate of withholding under an income tax treaty
depends upon the status of the entity under the laws of the applicable
treaty jurisdiction. For example, if the person receiving the payment is
a foreign entity but the persons eligible for benefits under the
applicable income tax treaty are the entity's interest holders in the
foreign entity receiving the payment, rather than the entity itself,
then the entity shall be treated as a foreign partnership for purposes
of determining which withholding certificate is appropriate irrespective
of the fact that the entity may be treated as a corporation for U.S. tax
purposes. If, conversely, the person eligible for benefits under an
income tax treaty is the entity rather than the interest holders, then
the entity shall be treated as a corporation for purposes of determining
which withholding certificate is appropriate irrespective of the fact
that the entity may be treated as a partnership for U.S. tax purposes.
In the event of a claim for dual treatment described in paragraph
(b)(4)(iii) of this section, multiple withholding certificates may have
to be furnished. Multiple withholding certificates may also have to be
furnished if the entity receives income for which a reduction of
withholding is claimed under a provision of the Internal Revenue Code
(e.g., portfolio interest) and income for which a reduction of
withholding is claimed under an income tax treaty. Absent actual
knowledge or reason to know otherwise, a withholding agent may rely on
the representations on the certificate that the beneficial owner derives
the income and is a resident of the applicable treaty country, within
the meaning of Sec. 1.894-1T(d) and the applicable income tax treaty,
without having to inquire into the truthfulness of these representations
or to research foreign law.
(B) Certification by qualified intermediary. A foreign corporation
that is a qualified intermediary described in Sec. 1.1441-1(e)(5)(ii)(C)
for purposes of claiming reduced rates of withholding under an income
tax treaty for its shareholders (who are treated as deriving the income
paid to the corporation as resident of an applicable treaty
jurisdiction) may furnish a single Form W-8 for its shareholders for
amounts for which it claims the benefit of a reduced rate of withholding
under an applicable income tax treaty. The Form W-8 shall be one
described under Sec. 1.1441-1(e)(3)(ii).
(iii) Multiple claims of treaty benefits. A withholding agent may
make a payment to a foreign entity that is simultaneously claiming a
reduced rate of tax on its own behalf for a portion of the payment and a
reduced rate on behalf of persons in their capacity as interest holders
in that entity for the same or for another portion of the payment. In
the case of concurrent and inconsistent claims of treaty benefits for
the same amount, the withholding agent may choose to reject the claim
and request that a consistent claim be submitted or it may choose which
reduction to apply. In the case of concurrent and consistent claims
(e.g., the entity that is paid the amount claims a reduced rate for a
portion of the payment and an interest holder claims a different reduced
rate for the balance of the payment), the withholding agent may, at its
option, accept such dual claim based, as appropriate, on withholding
certificates furnished by such persons with respect to their respective
shares of such payment, even though the withholding agent holds
different withholding certificates that requires it to treat the entity
inconsistently with respect to different payments or with respect to
different portions of the same payment. See paragraph (b)(4)(iv) Example
2 of this section. If the withholding agent does not accept claims of
reduced rate presented by any one or more of the interest holders, or by
the entity, any interest holder or the entity may subsequently claim a
refund or credit of any amount so withheld to the extent the holder's or
entity's share of such withholding exceeds the amount of tax due under
section 894 (in the case of a foreign person) or under section 1 or 11
(in the case of a U.S. person).
(iv) Examples. This paragraph (b)(4) is illustrated by the following
examples:
Example 1. (i) Facts. Entity A is a business organization formed
under the laws of country Y that has an income tax treaty with the
United States. A receives U.S. source royalties from withholding agent R
and claims a
[[Page 143]]
reduced rate of withholding under the U.S.-Y tax treaty on its own
behalf (rather than on behalf of its interest holders). A furnishes a
beneficial owner withholding certificate described in paragraph (b)(1)
of this section that represents that A is a resident of country Y
(within the meaning of the U.S.-Y tax treaty) and the beneficial owner
of the royalties (within the meaning of the U.S.-Y tax treaty).
(ii) Analysis. Absent actual knowledge or reason to know otherwise,
R may rely on the representation that A is a resident of country Y and a
beneficial owner of the royalty income within the meaning of the U.S.-Y
tax treaty.
Example 2. (i) Facts. The facts are the same as under Example 1,
except that one of A's interest holders, T, is an entity organized in
country Z. The U.S.-Z tax treaty reduces the rate on royalties to zero
whereas the rate on royalties under the U.S.-Y tax treaty is only
reduced to 5 percent. T furnishes a beneficial owner withholding
certificate to A that represents that T is deriving its distributive
share of the royalty income paid to A as a resident of country Z (within
the meaning of Sec. 1.894-1T(d)(1) and the U.S.-Z tax treaty) and is the
beneficial owner of the royalty income (within the meaning of the U.S.-Z
tax treaty). A furnishes to R an intermediary withholding certificate
described in Sec. 1.1441-1(e)(3)(iii) to which it attaches T's
beneficial owner withholding certificate for the portion of the payment
that T claims as its distributive share of the royalty income. A also
furnishes to R a beneficial owner withholding certificate for itself for
the portion of the payment that T does not claim as its distributive
share.
(ii) Analysis. Absent actual knowledge or reason to know otherwise,
R may rely on the documentation furnished by A in order to treat the
royalty payment to a single foreign entity (A) as derived by different
residents of tax treaty countries as a result of concurrent and
consistent claims presented under different treaties. R may, at its
option, grant dual treatment, that is, a reduced rate of zero percent
under the U.S.-Z treaty on the portion of the royalty payment that T
claims to derive as a resident of country Z and a reduced rate of 5
percent under the U.S.-Y treaty for the balance. However, under
paragraph (b)(4)(iii) of this section, R may, at its option, treat A as
the only relevant person deriving the royalty and grant benefits under
the U.S.-Y treaty only.
Example 3. (i) Facts. Entity A is a business organization formed
under the laws of the United States and is classified as a partnership
for U.S. tax purposes. A's partners are S and T. S is an entity
organized in country Z. T is an entity organized in country X. Under the
laws of country Z, A is treated as an entity taxable at the entity
level. Therefore, S is treated as a shareholder for purposes of the laws
of country Z and is not required to take A's income into account for
purposes of determining its tax liability under those laws.
Distributions from A are treated as distributions from a corporate
entity for purposes of the tax laws of Country Z. Under the laws of
country X, A is treated as a fiscally transparent entity and T is
required to take into account its distributive share of A's income for
purposes of determining its tax liability under those laws. A receives
U.S. source royalties that are not connected with a trade or business.
The United States has a tax treaty with countries Z and X under which
the rate on royalties is reduced to zero. Both S and T furnish a
beneficial owner certificate to A representing that they are resident of
their respective countries and a beneficial owner of their respective
distributive share of royalty income. A has actual knowledge of the tax
treatment of S and T in their respective countries.
(ii) Analysis. Because A is a partnership for U.S. tax purposes, S
and T are each taxable on their respective distributive share of the
royalty income under section 881(a). However, under Sec. 1.1441-5(b)(1),
the payment of royalty to A is not a payment subject to withholding.
Instead, under Sec. 1.1441-5(b)(2), A must withhold on each partner's
distributive share of U.S. source royalty income and may apply the rules
of this section to determine the extent to which the 30-percent
withholding rate under section 1442 should be reduced under the income
tax treaties with countries Z and X. Because A has actual knowledge of
the tax treatment of S in country Z as a shareholder of A and not as a
partner (or owner of a fiscally transparent entity), A may not rely on
the certificate furnished by S in order to reduce the rate of
withholding under the U.S.-Z tax treaty. Therefore, it withholds 30
percent of S's distributive share of royalty income. A may rely on T's
certificate to treat T as deriving its distributive share of A's royalty
income as a resident of country X and as a beneficial owner. Therefore,
A withholds on T's distributive share of royalty income at the reduced
rate under the U.S.-X tax treaty.
Example 4. (i) Facts. Entity A is a business organization formed
under the laws of country Y. A receives from withholding agent R U.S.
source royalties and U.S. source interest income that is potentially
eligible for the portfolio interest exemption under section 871(h) and
881(c). A's interest holders are S, an individual who resides in country
Y, T, an individual who resides in country Z, and U, an individual
resident in the United States. The United States has a tax treaty with
both country Y and country Z. The U.S.-Y tax treaty reduces the rate on
royalties to 5 percent, and the U.S.-Z tax treaty reduces the rate to
zero. A is classified as a partnership under U.S. tax principles. Under
the tax laws
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of country Y, A is treated as a fiscally transparent entity and S is
required to include in income his distributive share of A's income. A
furnishes to R an intermediary withholding certificate described in
Sec. 1.1441-5(c)(3)(iii) to which it attaches--
(A) A Form W-9 for U; and
(B) Beneficial owner withholding certificates for S and T that
represent that S and T are foreign persons. For purposes of claiming the
reduced rate under each applicable tax treaty, each of S's and T's
certificates represents that S and T are deriving their distributive
share of the royalty income as a resident of their respective countries
(within the meaning of Sec. 1.894-1T(d)(1) and of the applicable tax
treaty) and as a beneficial owner (within the meaning of the applicable
tax treaty).
(ii) Analysis. Absent actual knowledge or reason to know otherwise,
R may rely on the representations that S and T derive a distributive
share of the royalty income as resident of their respective countries
and are the beneficial owners of the income. Therefore, R may withhold
on S's distributive share of the royalty income paid to A at the 5-
percent rate under the U.S.-Y tax treaty. R may withhold on T's
distributive share of the royalty income paid to A at the zero rate
under the U.S.-Z tax treaty, even though A is not organized in, or a
resident of, country Z. R may rely on U's Form W-9 to treat U as a U.S.
person. Therefore, R does not withhold on U's share of the royalty
payment. R also does not withhold on any portion of the interest paid to
A because S and T have furnished beneficial owner certificates and U has
furnished a Form W-9.
Example 5. (i) Facts. The facts are the same as in Example 4, except
that A represents that it derives the royalty income it receives from R
as a resident of country Y (within the meaning of Sec. 1.894-1T(d)(1)
and the U.S.-Y tax treaty) and as a beneficial owner of the income
(within the meaning of the U.S.-Y tax treaty). Neither T nor S represent
to derive the royalty income as resident of their respective country. A
furnishes an intermediary withholding certificate described in
Sec. 1.1441-1(e)(3)(iii) to which it attaches a Form W-9 for U and
beneficial owner withholding certificates for S and T. No claims of
reduced rate under a tax treaty are made on S's or T's certificates. A
also furnishes to R its own beneficial withholding certificate in order
to claim the reduced rate under the U.S.-Y tax treaty for the royalty
income.
(ii) Analysis. Absent actual knowledge or reason to know otherwise,
R may rely on A's intermediary certificate and the certificates attached
thereto in order to treat S and T as foreign beneficial owners for
purposes of treating the interest as portfolio interest and to treat U
as a U.S. payee. Therefore, R does not withhold on the payment of
interest to A. In addition, absent actual knowledge or reason to know
otherwise, R may rely on A's beneficial owner certificate in order to
reduce the rate of withholding on the royalty income under the U.S.-Y
tax treaty.
(5) Claim of benefits under an income tax treaty by a U.S. person.
In certain cases, a U.S. person may claim the benefit of an income tax
treaty. For example, under certain treaties, a U.S. citizen residing in
the treaty country may claim a reduced rate of U.S. tax on certain
amounts representing a pension or an annuity from U.S. sources. Claims
of treaty benefits by a U.S. person may be made by furnishing a Form W-9
to the withholding agent or such other form as the IRS may prescribe in
published guidance (see Sec. 601.601(d)(2) of this chapter).
(c) Proof of tax residence in a treaty country and certification of
entitlement to treaty benefits--(1) In general. A beneficial owner
establishes proof of its tax residence in a treaty country for purposes
of its claim to the withholding agent that a reduced rate of tax applies
under an income tax treaty by complying with the procedures described in
this paragraph (c) or with such other procedures as the IRS may
prescribe in published guidance (see Sec. 601.601(d)(2) of this
chapter). For purposes of this section, the residence of a beneficial
owner must be determined in accordance with the provisions of the
applicable U.S. income tax treaty as may be clarified by any applicable
regulations thereunder, or technical explanations thereof, or other
published guidance.
(2) Certification of taxpayer identifying number--(i) In general. A
taxpayer may certify its taxpayer identifying number as required under
paragraph (b)(1) of this section by having the number certified by the
IRS either directly as provided under paragraph (c)(2)(ii) of this
section or through a qualified intermediary as provided in paragraph
(c)(2)(iii) of this section.
(ii) IRS-certified TIN. The IRS shall certify a taxpayer identifying
number (TIN) upon receipt of a certificate of residence described in
paragraph (c)(3) of this section to which it shall attach the
certifications described in paragraphs (c)(5) (i) and (ii) of this
section, if applicable. The taxpayer may provide documentary evidence
described
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in paragraph (c)(4) of this section instead of a certificate of
residence. However, a taxpayer (other than a person organized as a
corporate body in the applicable treaty jurisdiction) may furnish
documentary evidence instead of a certificate of residence only if a
certificate of residence is not available to the taxpayer. A certificate
of residence is not available for purposes of this paragraph (c)(2)(ii)
if the tax administration of the country where the taxpayer claims to be
a resident does not have a procedure in effect by which such
certificates are routinely issued or the taxpayer establishes that
obtaining such certificate would require an unreasonable amount of time
or costs relative to the taxpayer's circumstances (e.g., amount of
investments in the United States). A person organized as a corporate
body in the applicable treaty jurisdiction may, instead of a certificate
of residence, furnish a certificate of incorporation, articles of
incorporation, or other official document reflecting the taxpayer's
status as a corporate body in that jurisdiction, regardless of whether a
certificate of residence described in paragraph (c)(3) of this section
is otherwise available. The certificate or documentary evidence must be
furnished to the IRS by, or on behalf of, the beneficial owner upon
application for the taxpayer identifying number or at any other time, as
permitted under such procedures as the IRS may prescribe in published
guidance (see Sec. 601.601(d)(2) of this chapter). If the tax residence
of the beneficial owner changes, the beneficial owner shall notify the
IRS of that change within 30 days thereof. This requirement is in
addition to the notification requirements described in Sec. 1.1441-
1(e)(4)(ii)(D) regarding notification to a withholding agent in the
event of changes in the beneficial owner s circumstances. The IRS may,
under the exchange of information provisions of an applicable income tax
treaty, exchange information with the relevant foreign competent
authority for the purpose of confirming with appropriate tax officials
of the other country that the beneficial owner continues to be a tax
resident of that country. The IRS may from time to time, in its
discretion, request that the beneficial owner reconfirm its residence in
the treaty country.
(iii) Special rules for qualified intermediaries. The IRS may
certify a taxpayer identifying number based upon the certification of a
qualified intermediary described in Sec. 1.1441-1(e)(5)(ii) regarding
the tax residence of any of its account holders, under procedures agreed
upon with the IRS. If a new account holder has a TIN at the time it
opens an account, the qualified intermediary may rely on a statement by
the account or interest holder that appropriate proof of tax residence
in the treaty jurisdiction was previously provided to the IRS. In such
case, the qualified intermediary must notify the IRS each time that the
account or interest holder's address changes to another country or when
the account or interest holder terminates its relationship with the
qualified intermediary within 30 days of that change.
(3) Certificate of residence. A certificate of residence referred to
in paragraph (b)(2)(i) or (c)(2)(ii) of this section is a certification
issued by the competent authority (or another appropriate tax official)
of the treaty country of which the taxpayer claims to be a resident that
the taxpayer has filed its most recent income tax return as a resident
of that country (within the meaning of the applicable tax treaty). A
certificate of residence is valid for a period of three years or such
longer period as the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter). The competent authorities may agree
to a different procedure for certifying residence, in which case such
procedure shall govern for payments made to a person claiming to be a
resident of the country with which such an agreement is in effect.
(4) Documentary evidence establishing residence in the treaty
country--(i) Individuals. For purposes of this paragraph (c)(4),
documentary evidence establishes the residence of an individual in a
treaty country if it includes the name, address, and photograph of the
person seeking to prove residence, is an official document issued by an
authorized governmental body (i.e., a government or agency thereof, or a
municipality), and has been issued no more than three years prior to
presentation
[[Page 146]]
to the IRS or the withholding agent. A document older than three years
may be relied upon as proof of residence only if it is accompanied by
additional evidence of the person's residence in the treaty country
(e.g., a bank statement, utility bills, or medical bills). Documentary
evidence must be in the form of original documents or certified copies
thereof. Documentary evidence must be accompanied by an affidavit of the
taxpayer signed under penalties of perjury that the documentary evidence
submitted is true and complete.
(ii) Persons other than individuals. For purposes of this paragraph
(c)(4), documentary evidence establishes the residence in a treaty
country of a person other than an individual if it includes the name of
the entity and the address of its principal office in the treaty
country, and is an official document issued by an authorized
governmental body (e.g., a government or agency thereof, or a
municipality).
(5) Certifications regarding entitlement to treaty benefits--(i)
Certification regarding conditions under a Limitation on Benefits
Article. A taxpayer that is not an individual must certify to the IRS by
way of an affidavit attached to its request for certification of its
employer identification number that it meets one or more of the
conditions set forth in the Limitation on Benefits Article (if any, or
in a similar provision) contained in the applicable tax treaty. The
affidavit must describe sufficient facts for the IRS to determine which
condition the taxpayer claims to satisfy. The affidavit must be signed
by the taxpayer under penalties of perjury.
(ii) Certification regarding whether the taxpayer derives the
income. A taxpayer that is not an individual shall certify to the IRS by
way of an affidavit attached to its request for certification of its
employer identification number that any income for which it intends to
claim benefits under an applicable income tax treaty is income that will
properly be treated as derived by itself as a resident of the applicable
treaty jurisdiction within the meaning of Sec. 1.894-1T(d)(1). The
affidavit must be signed under penalties of perjury. This requirement
does not apply if the taxpayer furnishes a certificate of residence that
certifies that fact.
(d) Joint owners. In the case of a payment to joint owners, each
owner must furnish a withholding certificate or, if applicable,
documentary evidence or a certificate of residence. The applicable rate
of withholding on a payment of income to joint owners shall be the
highest applicable rate.
(e) Related party dividends under U.S.-Denmark income tax treaty.
Article VI(3) of the income tax treaty between the United States and
Denmark (see 1950-1 C.B. 77; see also Sec. 601.601(d)(2) of this
chapter) reduces the rate of tax on dividends between related
corporations to 5 percent subject to the condition that the relationship
between the domestic and foreign corporations was not arranged or
maintained for the purpose of securing the reduced rate. A domestic
corporation that makes a distribution derived by a resident of Denmark
may treat this condition as satisfied if, prior to the payment, a
request has been made to the IRS for a private letter ruling determining
that the relationship between the corporation and the Danish resident
was not arranged or maintained for such purpose and the IRS has either
issued a favorable ruling (and the ruling has not been revoked) or is
considering the ruling request.
(f) Failure to receive withholding certificate timely. See
applicable procedures described in Sec. 1.1441-1(b)(7) in the event the
withholding agent does not hold an appropriate withholding certificate
or other appropriate documentation at the time of payment.
(g) Effective date--(1) General rule. This section applies to
payments made after December 31, 2000.
(2) Transition rules. For purposes of this section, the validity of
a Form 1001 or 8233 that was valid on January 1, 1998, under the
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and
35a, revised April 1, 1999) and expired, or will expire, at any time
during 1998, is extended until December 31, 1998. The validity of a Form
1001 or 8233 that is valid on or after January 1, 1999, remains valid
until its validity expires under the regulations in effect prior to
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) but
in no event will such a form remain
[[Page 147]]
valid after December 31, 2000. The rule in this paragraph (g)(2),
however, does not apply to extend the validity period of a Form 1001 or
8233 that expires solely by reason of changes in the circumstances of
the person whose name is on the certificate or in interpretation of the
law under the regulations under Sec. 1.894-1T(d). Notwithstanding the
first three sentences of this paragraph (g)(2), a withholding agent may
choose to not take advantage of the transition rule in this paragraph
(g)(2) with respect to one or more withholding certificates valid under
the regulations in effect prior to January 1, 2001 (see 26 CFR parts 1
and 35a, revised April 1, 1999) and, therefore, to require withholding
certificates conforming to the requirements described in this section
(new withholding certificates). For purposes of this section, a new
withholding certificate is deemed to satisfy the documentation
requirement under the regulations in effect prior to January 1, 2001
(see 26 CFR parts 1 and 35a, revised April 1, 1999). Further, a new
withholding certificate remains valid for the period specified in
Sec. 1.1441-1(e)(4)(ii), regardless of when the certificate is obtained.
[T.D. 8734, 62 FR 53458, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72185, 72188, Dec. 31, 1998; T.D. 8856, 64 FR 73410, Dec. 30, 1999; 65
FR 16320, Mar. 28, 2000]
Effective Date Note: By T.D. 8734, 62 FR 53458, Oct. 14, 1997,
Sec. 1.1441-6 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-6 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73410, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001, and paragraph (g) was
revised effective Jan. 1, 2001. At 65 FR 16320, Mar. 28, 2000, paragraph
(g)(2) was corrected in the second sentence by adding the word ``that''
following ``8233'', effective Jan. 1, 2001. For the convenience of the
user, the superseded text is set forth as follows:
Sec. 1.1441-6 Withholding pursuant to the application of a tax treaty
which confers a reduced rate of, or an exemption from, United
States income tax.
(a) In general. The rate of 30 percent or 14 percent shall be
reduced as may be provided by a treaty with any country. In case of
payments of any of the items specified in Sec. 1.1441-2 (other than
dividends) made on or before December 31, 1971, and in the case of
payments of dividends made at any time, the withholding agent shall
determine the applicable rate pursuant to the appropriate tax treaty and
the regulations issued thereunder. In case of payments on or after
January 1, 1972, of any of the items specified in Sec. 1.1441-2 (other
than dividends), the requirements of paragraphs (b) and (c) of this
section shall apply in lieu of the ownership certificate or the
exemption (or reduced rate) certificate (or corresponding letter)
required by the regulations under the various income tax conventions in
effect to which the United States is a party.
(b) Coupon bond interest. To secure the reduced rate of, or
exemption from, U.S. income tax at source in the case of coupon bond
interest, the recipient shall, if entitled to such treatment pursuant to
a tax convention, for each issue of bonds file Form 1001 (Ownership,
Exemption, or Reduced Rate Certificate) with the withholding agent when
presenting the interest coupons for payment. This form shall be
completed and signed by either the owner of the interest, his trustee,
or his agent, and shall include such information as is required by the
form and accompanying instructions. The form shall contain a statement
that the owner of the income is entitled to a reduced rate of, or an
exemption from, tax pursuant to a tax convention. The Form 1001 shall be
retained by the withholding agent for at least 4 years after the close
of the calendar year in which the interest is paid.
(c) Income other than coupon bond interest or dividends. (1) To
secure the reduced rate of, or exemption from, U.S. income tax at source
in case of items of income specified in Sec. 1.1441-2 other than coupon
bond interest and dividends, the recipient shall, if entitled to such
treatment pursuant to a tax convention, file Form 1001 (Ownership,
Exemption, or Reduced Rate Certificate) with the withholding agent. This
form shall be completed and signed by either the owner of the income,
his trustee, or his agent, and shall include such information as is
required by the form and accompanying instructions. A separate Form 1001
shall be used for each type of income. For this purpose, all income from
a trust, estate, or investment account shall be considered as a single
type of income. Each form shall also contain a statement that the owner
of the income is entitled to a reduced rate of, or exemption from, tax
pursuant to a tax convention. If, after filing such form, the owner
ceases to be eligible for the benefits of the tax convention for such
income, he shall promptly notify the withholding agent by letter. Form
1001 shall not be used to secure a reduced rate of, or exemption from,
withholding on independent personal services income. See Sec. 1.1441-
4(b)(2).
(2) Form 1001 shall be effective for the successive 3-calendar-year
period during which the income to which the form applies is paid. Each
such form filed with any withholding agent shall be filed as soon as
practicable.
[[Page 148]]
Once a form has been filed for a type of income (other than coupon bond
interest) with respect to such a 3-year period, no additional Form 1001
for such income need be filed with respect to such period unless the
Commissioner of Internal Revenue notifies the withholding agent that the
taxpayer shall file another form. If any change occurs in the ownership
of income subject to a Form 1001 recorded on the books of the
withholding agent, the Form 1001 shall no longer be effective. The Form
1001 shall be retained by the withholding agent for at least 4 years
after the end of the last calendar year in which income subject to the
form is paid.
(3) Form 1001 need not be filed with respect to payments (other than
payments of coupon bond interest) made prior to December 31, 1974, if an
exemption (or reduced rate) certificate (or corresponding letter)
required by the regulations under the applicable income tax convention
has been filed with respect to such payments prior to December 31, 1971.
(d) Section 6013(g) election. A nonresident alien individual with
respect to whom a section 6013(g) election to be treated as a resident
is in effect may not, in accordance with Sec. 1.6013-6(a)(2)(v), claim a
reduced rate of, or exemption from, United States income tax under an
income tax treaty.
(Approved by the Office of Management and Budget under control number
1545-0795)
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
[T.D. 7157, 36 FR 25227, Dec. 30, 1971, as amended by T.D. 7842, 47 FR
49842, Nov. 3, 1982; T.D. 7977, 49 FR 36834, Sept. 20, 1984]
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined. For purposes of chapter 3 of the
Internal Revenue Code (Code) and the regulations under such chapter, the
term withholding agent means any person, U.S. or foreign, that has the
control, receipt, custody, disposal, or payment of an item of income of
a foreign person subject to withholding, including (but not limited to)
a foreign intermediary described in Sec. 1.1441-1(e)(3)(i), a foreign
partnership, or a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) (A)
or (E). See Sec. 1.1441-1(b) (1) and (2) for determining whether a
payment is considered made to a foreign person. Any person who meets the
definition of a withholding agent is required to deposit any tax
withheld under Sec. 1.1461-1(a) and to make the returns prescribed by
Sec. 1.1461-1 (b) and (c), as modified by the terms of an agreement with
a qualified intermediary (in the case of a qualified intermediary) or,
in the case of a foreign partnership, to make the returns prescribed
under section 6031 and the regulations thereunder. When several persons
qualify as withholding agents with respect to a single payment, only one
tax is required to be withheld and, generally, only one return (on Form
1042, as required under Sec. 1.1461-1(b)), is required to be made. See
Sec. 1.1461-1(b)(2) and (c)(4) for filing procedures when multiple
withholding agents are involved. In the case of a withholding agent
paying to partners of a withholding foreign partnership described in
Sec. 1.1441-5(c)(2)(i), the withholding agent may arrange with the
partnership to withhold if it is provided the information by the
partnership, in which case the partnership does not have to withhold.
However, the partnership must still file a partnership return under
section 6031(a) and the regulations under that section. The withholding
agent does not have to file Forms 1042-S (but does have to file a Form
1042) since the withholding foreign partnership furnishes Forms K-1 to
its partners pursuant to section 6031(b) and Sec. 1.6031(b)-1T. For
purposes of this section and any requirement to withhold under chapter 3
of the Code and the regulations thereunder, a person who, as a nominee
described in Sec. 1.6031(c)-1T, has furnished to a partnership all of
the information required to be furnished under Sec. 1.6031(c)-1T(a)
shall not be treated as a withholding agent if it has notified the
partnership that it is treating the provision of information to the
partnership as a discharge of its obligations as a withholding agent.
(b) Standards of knowledge--(1) In general. A withholding agent must
withhold at the full 30-percent rate under section 1441, 1442, or
1443(a) or at the full 4-percent rate under section 1443(b) if it has
actual knowledge or reason to know that a claim of U.S. status or of a
reduced rate of withholding under section 1441, 1442, or 1443 is
incorrect. A withholding agent shall be liable for tax, interest, and
penalties to the extent provided under sections 1461 and 1463 and the
regulations under those
[[Page 149]]
sections if it fails to withhold the correct amount despite its actual
knowledge or reason to know the amount required to be withheld. For
purposes of the regulations under sections 1441, 1442, and 1443, a
withholding agent may rely on information or certifications contained
in, or attached to, a withholding certificate or other documentation
furnished by or for a beneficial owner or payee unless the withholding
agent has actual knowledge or reason to know that the information or
certifications are not correct and, if based on such knowledge or reason
to know, it should withhold (under chapter 3 of the Code or another
withholding provision of the Code) an amount greater than would be the
case if it relied on the information or certifications, or it should
report (under chapter 3 of the Code or under another provision of the
Code) an amount that would not otherwise be reportable if it relied on
the information or certifications. See Sec. 1.1441-1(e)(4)(viii) for
applicable reliance rules. A withholding agent that has received
notification by the Internal Revenue Service (IRS) that a claim of U.S.
status or of a reduced rate is incorrect has actual knowledge beginning
on the date that is 30 calendar days after the date the notice is
received. A withholding agent that fails to act in accordance with the
presumptions set forth in Secs. 1.1441-1(b)(3), 1.1441-4(a), 1.1441-5
(d) and (e), or 1.1441-9(b)(3) may also be liable for tax, interest, and
penalties. See Sec. 1.1441-1(b)(3)(ix) and (7).
(2) Reason to know--(i) In general. A withholding agent shall be
considered to have reason to know if its knowledge of relevant facts or
statements contained in the withholding certificates or other
documentation is such that a reasonably prudent person in the position
of the withholding agent would question the claims made.
(ii) Limits on reason to know in certain cases. Except as otherwise
provided in paragraph (b)(3) of this section, a withholding agent that
is a financial institution (including a regulated investment company)
with which a customer may open an account has a reason to know with
respect to payments of amounts described in Sec. 1.1441-6(b)(2)(ii) that
a beneficial owner withholding certificate or documentary evidence for a
beneficial owner is not reliable only if any one or more of the
circumstances described in this paragraph (b)(2)(ii) exist for a
withholding certificate. In such a case, the withholding agent may
require a new withholding certificate. In the absence of a new
certificate, a withholding agent may rely on the withholding certificate
only after documentation is provided in support of the claim of foreign
status, classification, or reduced rate of tax under a tax treaty.
(A) The permanent residence address on the withholding certificate
is an address in the United States. In the case of an individual, trust,
or estate, the withholding agent may rely on information in its files
that is less than three years old and that supports the beneficial
owner's claim of foreign status, despite a U.S. address (for example, a
bank has evidence of the diplomatic status of a customer). In the
absence of evidence in the withholding agent's files, the agent meets
its due diligence obligation for purposes of this paragraph
(b)(2)(ii)(A) if it contacts the beneficial owner or its agent in the
United States and obtains an explanation in writing supporting the
foreign status of the beneficial owner (for example, the beneficial
owner is a nonresident alien individual temporarily present in the
United States as a teacher; see Sec. 301.7701(b)-3(b)(3) of this
chapter) and documentation supporting the claim of foreign status is
attached to the beneficial owner's statement (for example, in the case
of a nonresident alien individual teacher, a copy of the relevant pages
of the beneficial owner's passport showing the individual's U.S. visa
status or a copy of relevant INS documents). In the case of a beneficial
owner other than an individual, trust, or estate, the withholding agent
must inquire as to whether the person whose name is on the certificate
is actually organized or created under the laws of a foreign country.
(B) The payment is directed to a P.O. Box, an in-care-of address, or
a U.S. address. In the case of an individual, the withholding agent may
rely, for example, on documentary evidence of a type described in
Sec. 1.1441-6(c) (3) or (4) supporting the beneficial owner's claim of
[[Page 150]]
residence in a foreign country to ascertain that the individual is a
nonresident alien individual. In the case of a person other than an
individual, the withholding agent may rely on other evidence to
ascertain that the person whose name is on the certificate is not a U.S.
person.
(C) In the case of income for which benefits are claimed under an
income tax treaty, the permanent residence address or mailing address is
not in the corresponding treaty country. In such a case, the withholding
agent may rely, for example, on documentary evidence of a type described
in Sec. 1.1441-6(c) (3) or (4) supporting the beneficial owner's claim
of residence in the country whose benefits under an income tax treaty
with the United States are invoked.
(D) The mailing address on the withholding certificate is in the
United States or the beneficial owner notifies the withholding agent of
a new address for mailing or residential purposes that is in the United
States, a P.O. box, or an in-care-address, or, in the case of income for
which benefits are claimed under an income tax treaty, the mailing
address on the certificate or the new mailing or residential address
notified to the withholding agent is not in the treaty country. The
withholding agent may, however, rely on documentary evidence of a type
described in Sec. 1.1441-6(c) (3) or (4) supporting the beneficial
owner's claim of residence in a foreign country.
(E) The name of the person on the withholding certificate or
documentary evidence indicates that the person's status is a
corporation, partnership, trust, estate, or an individual, and the
person's claim of status is not consistent with such indication. For
example, a person whose name indicates that it is a per se corporation
described in Sec. 301.7701-2(b)(8)(i) of this chapter represents on a
Form W-8 that it is a partnership.
(F) Such other circumstances as the IRS may prescribe in published
guidance (see Sec. 601.601(d)(2) of this chapter).
(3) Coordinated account information systems. See Sec. 1.1441-
1(e)(4)(ix) for application of these rules other than on an account-by-
account basis so that a withholding agent that relies on a coordinated
account information system for documentation is considered to know or
have reason to know the facts recorded in the system.
(c) Authorized agent--(1) In general. The acts of an agent of a
withholding agent (including the receipt of withholding certificates,
the payment of amounts of income subject to withholding, and the deposit
of tax withheld) are imputed to the withholding agent on whose behalf it
is acting. However, if the agent is a foreign person, a withholding
agent that is a U.S. person may treat the acts of the foreign agent as
its own for purposes of determining whether it has complied with the
provisions of this section, but only if the agent is an authorized
foreign agent, as defined in paragraph (c)(2) of this section. An
authorized foreign agent cannot apply the provisions of this paragraph
(c) to appoint another person its authorized foreign agent with respect
to the payments it receives from the withholding agent.
(2) Authorized foreign agent. An agent is an authorized foreign
agent only if--
(i) There is a written agreement between the withholding agent and
the foreign person acting as agent;
(ii) The notification procedures described in paragraph (c)(3) of
this section have been complied with;
(iii) Books and records and relevant personnel of the foreign agent
are available (on a continuous basis, including after termination of the
relationship) for examination by the IRS in order to evaluate the
withholding agent's compliance with the provisions of chapters 3 and 61
of the Code, section 3406, and the regulations under those provisions;
and
(iv) The U.S. withholding agent remains fully liable for the acts of
its agent and does not assert any of the defenses that may otherwise be
available, including under common law principles of agency in order to
avoid tax liability under the Internal Revenue Code.
(3) Notification. A withholding agent that appoints an authorized
agent to act on its behalf for purposes of Sec. 1.871-14(c)(2), the
withholding provisions of chapter 3 of the Code, section 3406 or other
withholding provisions of the Internal Revenue Code, or the reporting
[[Page 151]]
provisions of chapter 61 of the Code, is required to file notice of such
appointment with the Office of the Assistant Commissioner
(International). Such notice shall be filed before the first payment for
which the authorized agent acts as such. Such notice shall acknowledge
the withholding agent liability as provided in paragraph (c)(2)(iv) of
this section.
(4) Liability of U.S. withholding agent. An authorized foreign agent
is subject to the same withholding and reporting obligations that apply
to any withholding agent under the provisions of chapter 3 of the Code
and the regulations thereunder. In particular, an authorized foreign
agent does not benefit from the special procedures or exceptions that
may apply to a qualified intermediary. A withholding agent acting
through an authorized foreign agent is liable for any failure of the
agent, such as failure to withhold an amount or make payment of tax, in
the same manner and to the same extent as if the agent's failure had
been the failure of the U.S. withholding agent. For this purpose, the
foreign agent's actual knowledge or reason to know shall be imputed to
the U.S. withholding agent. The U.S. withholding agent's liability shall
exist irrespective of the fact that the authorized foreign agent is also
a withholding agent and is itself separately liable for failure to
comply with the provisions of the regulations under section 1441, 1442,
or 1443. However, the same tax, interest, or penalties shall not be
collected more than once.
(5) Filing of returns. See Sec. 1.1461-1(b)(2)(iii) and (c)(4)(iii)
regarding returns required to be made where a U.S. withholding agent
acts through an authorized foreign agent.
(d) United States obligations. If the United States is a withholding
agent for an item of interest, including original issue discount, on
obligations of the United States or of any agency or instrumentality
thereof, the withholding obligation of the United States is assumed and
discharged by--
(1) The Commissioner of the Public Debt, for interest paid by checks
issued through the Bureau of the Public Debt;
(2) The Treasurer of the United States, for interest paid by him or
her, whether by check or otherwise;
(3) Each Federal Reserve Bank, for interest paid by it, whether by
check or otherwise; or
(4) Such other person as may be designated by the IRS.
(e) Assumed obligations. If, in connection with the sale of a
corporation's property, payment on the bonds or other obligations of the
corporation is assumed by a person, then that person shall be a
withholding agent to the extent amounts subject to withholding are paid
to a foreign person. Thus, the person shall withhold such amounts under
Sec. 1.1441-1 as would be required to be withheld by the seller or
corporation had no such sale or assumption been made.
(f) Conduit financing arrangements--(1) Liability of withholding
agent. Subject to paragraph (f)(2) of this section, any person that is
required to deduct and withhold tax under Sec. 1.1441-3(g) is made
liable for that tax by section 1461. A person that is required to deduct
and withhold tax but fails to do so is liable for the payment of the tax
and any applicable penalties and interest.
(2) Exception for withholding agents that do not know of conduit
financing arrangement--(i) In general. A withholding agent will not be
liable under paragraph (f)(1) of this section for failing to deduct and
withhold with respect to a conduit financing arrangement unless the
person knows or has reason to know that the financing arrangement is a
conduit financing arrangement. This standard shall be satisfied if the
withholding agent knows or has reason to know of facts sufficient to
establish that the financing arrangement is a conduit financing
arrangement, including facts sufficient to establish that the
participation of the intermediate entity in the financing arrangement is
pursuant to a tax avoidance plan. A withholding agent that knows only of
the financing transactions that comprise the financing arrangement will
not be considered to know or have reason to know of facts sufficient to
establish that the financing arrangement is a conduit financing
arrangement.
(ii) Examples. The following examples illustrate the operation of
paragraph (d)(2) of this section.
[[Page 152]]
Example 1. (i) DS is a U.S. subsidiary of FP, a corporation
organized in Country N, a country that does not have an income tax
treaty with the United States. FS is a special purpose subsidiary of FP
that is incorporated in Country T, a country that has an income tax
treaty with the United States that prohibits the imposition of
withholding tax on payments of interest. FS is capitalized with
$10,000,000 in debt from BK, a Country N bank, and $1,000,000 in capital
from FS.
(ii) On May 1, 1995, C, a U.S. person, purchases an automobile from
DS in return for an installment note. On July 1, 1995, DS sells a number
of installment notes, including C's, to FS in exchange for $10,000,000.
DS continues to service the installment notes for FS and C is not
notified of the sale of its obligation and continues to make payments to
DS. But for the withholding tax on payments of interest by DS to BK, DS
would have borrowed directly from BK, pledging the installment notes as
collateral.
(iii) The C installment note is a financing transaction, whether
held by DS or by FS, and the FS note held by BK also is a financing
transaction. After FS purchases the installment note, and during the
time the installment note is held by FS, the transactions constitute a
financing arrangement, within the meaning of Sec. 1.881-3(a)(2)(i). BK
is the financing entity, FS is the intermediate entity, and C is the
financed entity. Because the participation of FS in the financing
arrangement reduces the tax imposed by section 881 and because there was
a tax avoidance plan, FS is a conduit entity.
(iv) Because C does not know or have reason to know of the tax
avoidance plan (and by extension that the financing arrangement is a
conduit financing arrangement), C is not required to withhold tax under
section 1441. However, DS, who knows that FS's participation in the
financing arrangement is pursuant to a tax avoidance plan and is a
withholding agent for purposes of section 1441, is not relieved of its
withholding responsibilities.
Example 2. Assume the same facts as in Example, 1 except that C
receives a new payment booklet on which DS is described as ``agent''.
Although C may deduce that its installment note has been sold, without
more C has no reason to know of the existence of a financing
arrangement. Accordingly, C is not liable for failure to withhold,
although DS still is not relieved of its withholding responsibilities.
Example 3. (i) DC is a U.S. corporation that is in the process of
negotiating a loan of $10,000,000 from BK1, a bank located in Country N,
a country that does not have an income tax treaty with the United
States. Before the loan agreement is signed, DC's tax lawyers point out
that interest on the loan would not be subject to withholding tax if the
loan were made by BK2, a subsidiary of BK1 that is incorporated in
Country T, a country that has an income tax treaty with the United
States that prohibits the imposition of withholding tax on payments of
interest. BK1 makes a loan to BK2 to enable BK2 to make the loan to DC.
Without the loan from BK1 to BK2, BK2 would not have been able to make
the loan to DC.
(ii) The loan from BK1 to BK2 and the loan from BK2 to DC are both
financing transactions and together constitute a financing arrangement
within the meaning of Sec. 1.881-3(a)(2)(i). BK1 is the financing
entity, BK2 is the intermediate entity, and DC is the financed entity.
Because the participation of BK2 in the financing arrangement reduces
the tax imposed by section 881 and because there is a tax avoidance
plan, BK2 is a conduit entity.
(iii) Because DC is a party to the tax avoidance plan (and
accordingly knows of its existence), DC must withhold tax under section
1441. If DC does not withhold tax on its payment of interest, BK2, a
party to the plan and a withholding agent for purposes of section 1441,
must withhold tax as required by section 1441.
Example 4. (i) DC is a U.S. corporation that has a long-standing
banking relationship with BK2, a U.S. subsidiary of BK1, a bank
incorporated in Country N, a country that does not have an income tax
treaty with the United States. DC has borrowed amounts of as much as
$75,000,000 from BK2 in the past. On January 1, 1995, DC asks to borrow
$50,000,000 from BK2. BK2 does not have the funds available to make a
loan of that size. BK2 considers asking BK1 to enter into a loan with DC
but rejects this possibility because of the additional withholding tax
that would be incurred. Accordingly, BK2 borrows the necessary amount
from BK1 with the intention of on-lending to DC. BK1 does not make the
loan directly to DC because of the withholding tax that would apply to
payments of interest from DC to BK1. DC does not negotiate with BK1 and
has no reason to know that BK1 was the source of the loan.
(ii) The loan from BK2 to DC and the loan from BK1 to BK2 are both
financing transactions and together constitute a financing arrangement
within the meaning of Sec. 1.881-3(a)(2)(i). BK1 is the financing
entity, BK2 is the intermediate entity, and DC is the financed entity.
The participation of BK2 in the financing arrangement reduces the tax
imposed by section 881. Because the participation of BK2 in the
financing arrangement reduces the tax imposed by section 881 and because
there was a tax avoidance plan, BK2 is a conduit entity.
(iii) Because DC does not know or have reason to know of the tax
avoidance plan (and by extension that the financing arrangement is a
conduit financing arrangement), DC is not required to withhold tax under
section
[[Page 153]]
1441. However, BK2, who is also a withholding agent under section 1441
and who knows that the financing arrangement is a conduit financing
arrangement, is not relieved of its withholding responsibilities.
(3) Effective date. This paragraph (f) is effective for payments
made by financed entities on or after September 11, 1995. This paragraph
shall not apply to interest payments covered by section 127(g)(3) of the
Tax Reform Act of 1984, and to interest payments with respect to other
debt obligations issued prior to October 15, 1984 (whether or not such
debt was issued by a Netherlands Antilles corporation).
(g) Effective date. Except as otherwise provided in paragraph (f)(3)
of this section, this section applies to payments made after December
31, 2000.
[T.D. 7977, 49 FR 36834, Sept. 20, 1984, as amended by T.D. 8611, 60 FR
41014, Aug. 11, 1995; 60 FR 55312, Oct. 31, 1995; T.D. 8734, 62 FR
53462, Oct. 14, 1997; T.D. 8804, 63 FR 72188, Dec. 31, 1998; T.D. 8856,
64 FR 73412, Dec. 30, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53462, Oct. 14, 1997,
Sec. 1.1441-7 was amended by revising paragraphs (a) through (c); by
redesignating paragraph (d) as paragraph (f); by adding new paragraphs
(d), (e), and (g); by removing the language ``(j)'' and inserting
``(g)'' in the first sentence of newly designated paragraph (f)(1); by
removing the language ``(d)'' and inserting ''(f)'' in the first
sentence of newly designated paragraph (f)(1), in the first sentence of
newly designated paragraph (f)(2)(i), and in the first sentence of newly
designated paragraph (f)(3); and by removing the authority citation at
the end of the section, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-7 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73412, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001, and paragraph (g) was
amended by removing ``December 31, 1999'' and adding in its place
``December 31, 2000'', effective Jan. 1, 2001. For the convenience of
the user, the superseded text is set forth as follows:
Sec. 1.1441-7 General provisions relating to withholding agents.
(a) Withholding agent defined--(1) In general. For purposes of
Chapter 3 of the Code, the term ``withholding agent'' means any person
who pays or causes to be paid an item of income specified in
Sec. 1.1441-2 to (or to the agent of) a nonresident alien individual, a
foreign partnership, a nonresident alien or foreign fiduciary of a trust
or estate, or a foreign corporation, and who is required to withhold tax
under sections 1441, 1442, 1443, or 1451 from such item of income. Any
person who meets the definition of a withholding agent is required to
file the returns prescribed by Sec. 1.1461-1. For example, an employer
(as defined in Sec. 31.3401(d)-1 of this chapter), to the extent the
employer pays remuneration for services performed by a nonresident alien
individual in the United States and such remuneration is excepted from
the term ``wages'' under Sec. 31.3401(a)(6)-(1) (c) or (e) of this
chapter, must file a return as required by Sec. 1.1461-2(c)(1).
(2) United States obligations. If the United States is a withholding
agent for an item of interest, including original issue discount, on
obligations of the United States or of any agency or instrumentality
thereof, the withholding obligation of the United States shall be
assumed and discharged by:
(i) The Commissioner of the Public Debt, for interest paid by checks
issued through the Bureau of the Public Debt.
(ii) The Treasurer of the United States, for interest paid by him or
her, whether by check or otherwise,
(iii) Each Federal Reserve Bank, for interest paid by it, whether by
check or otherwise, or
(iv) Such other person as may be designated by the Commissioner.
(b) Person designated to act for withholding agent--(1) Notice of
duly authorized agent. A withholding agent (including a state or
possession of the United States or any agency or instrumentality
thereof) that appoints a duly authorized agent to act on its behalf
under the withholding provisions of chapter 3 of the Code is required to
file a notice of such appointment with the Director of the Foreign
Operations District, Internal Revenue Service, Washington, DC 20225.
Such notice must be filed before the first payment with respect to which
the authorized agent acts as such.
(2) In general--liability of withholding agent. If a duly authorized
agent has become insolvent or for any other reason fails to make payment
of money deposited with it by the withholding agent to pay tax required
to be withheld under Chapter 3 of the Code, or of money withheld under
such chapter, the withholding agent is not discharged of its liability
under such chapter since the authorized agent is merely the agent of the
withholding agent.
(3) Tax-free covenant bonds--liability of withholding agent. If the
duly authorized agent designated by a withholding agent to act for it
has not withheld any tax from the income nor received any funds from the
withholding agent to pay the tax which the withholding agent assumed in
connection with its tax-free covenant bonds, then that authorized agent
cannot be held liable for the tax assumed by the withholding agent
merely by
[[Page 154]]
reason of the appointment as duly authorized agent. The withholding
agent remains liable under chapter 3 of the Code since the duly
authorized agent is merely the agent of the withholding agent.
(c) Payments other than money. In any case where income is payable
in any medium other than money the withholding agent shall not release
the property so received until the property has been converted into
funds sufficient to enable the withholding agent to pay over in money
the tax required to be withheld under chapter 3 of the Code with respect
to such income.
* * * * *
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
Sec. 1.1441-8 Exemption from withholding for payments to foreign governments, international organizations, foreign central banks of issue, and the Bank for
International Settlements.
(a) Foreign governments. Under section 892, certain specific types
of income received by foreign governments are excluded from gross income
and are exempt from taxation, unless derived from the conduct of a
commercial activity or received from or by a controlled commercial
entity. Accordingly, withholding is not required under Sec. 1.1441.1
with regard to any item of income which is exempt from taxation under
section 892.
(b) Reliance on claim of exemption by foreign government. Absent
actual knowledge or reason to know otherwise, the withholding agent may
rely upon a claim of exemption made by the foreign government if, prior
to the payment, the withholding agent can reliably associate the payment
with documentation upon which it can rely to treat the payment as made
to a beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii). A Form
W-8 furnished by a foreign government for purposes of claiming an
exemption under this paragraph (b) is valid only if, in addition to
other applicable requirements, it certifies that the income is, or will
be, exempt from taxation under section 892 and the regulations under
that section and whether the person whose name is on the certificate is
an integral part of a foreign government (as defined in Sec. 1.892-
2T(a)(2)) or a controlled entity (as defined in Sec. 1.892-2T(a)(3)).
(c) Income of a foreign central bank of issue or the Bank for
International Settlements--(1) Certain interest income. Section 895
provides for the exclusion from gross income of certain income derived
by a foreign central bank of issue, or by the Bank for International
Settlements, from obligations of the United States or of any agency or
instrumentality thereof or from interest on deposits with persons
carrying on the banking business if the bank is the owner of the
obligations or deposits and does not hold the obligations or deposits
for, or use them in connection with, the conduct of a commercial banking
function or other commercial activity by such bank. See Sec. 1.895-1.
Absent actual knowledge or reason to know that a foreign central bank of
issue, or the Bank for International Settlements, is operating outside
the scope of the exclusion granted by section 895 and the regulations
under that section, the withholding agent may rely on a claim of
exemption if, prior to the payment, the withholding agent can reliably
associate the payment with documentation upon which it can rely to treat
the foreign central bank of issue or the Bank for International
Settlements as the beneficial owner of the payment in accordance with
Sec. 1.1441-1(e)(1)(ii). A Form W-8 furnished by a foreign central bank
of issue or the Bank for International Settlements for purposes of
claiming an exemption under this paragraph (c)(1) is valid only if, in
addition to other applicable requirements, it certifies that the person
whose name is on the certificate is a foreign central bank of issue, or
the Bank for International Settlements, and that the bank does not, and
will not, hold the obligations or the bank deposits covered by the Form
W-8 for, or use them in connection with, the conduct of a commercial
banking function or other commercial activity.
(2) Bankers acceptances. Interest derived by a foreign central bank
of issue from bankers acceptances is exempt from tax under sections
871(i)(2)(C) and 881(d) and Sec. 1.861-2(b)(4). With respect to bankers'
acceptances, a withholding
[[Page 155]]
agent may treat a payee as a foreign central bank of issue without
requiring a withholding certificate if the name of the payee and other
facts surrounding the payment reasonably indicate that the payee or
beneficial owner is a foreign central bank of issue, as defined in
Sec. 1.861-2(b)(4).
(d) Exemption for payments to international organizations. A payment
to an international organization (within the meaning of section
7701(a)(18)) is exempt from withholding on any payment. A withholding
agent may treat a payee as an international organization without
requiring a withholding certificate if the name of the payee is one that
is designated as an international organization by executive order
(pursuant to 22 U.S.C. 288 through 288(f)) and other facts surrounding
the transaction reasonably indicate that the international organization
is the beneficial owner of the payment.
(e) Failure to receive withholding certificate timely and other
applicable procedures. See applicable procedures described in
Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a
valid withholding certificate described in paragraph (b) or (c)(1) of
this section or other appropriate documentation at the time of payment.
Further, the provisions of Sec. 1.1441-1(e)(4) shall apply to
withholding certificates and other documents related thereto furnished
under the provisions of this section.
(f) Effective date--(1) In general. This section applies to payments
made after December 31, 2000.
(2) Transition rules. For purposes of this section, the validity of
a Form 8709 that was valid on January 1, 1998, under the regulations in
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1,
1999) and expired, or will expire, at any time during 1998, is extended
until December 31, 1998. The validity of a Form 8709 that is valid on or
after January 1, 1999, remains valid until its validity expires under
the regulations in effect prior to January 1, 2001 (see 26 CFR part 1,
revised April 1, 1999) but in no event shall such a form remain valid
after December 31, 2000. The rule in this paragraph (f)(2), however,
does not apply to extend the validity period of a Form 8709 that expires
solely by reason of changes in the circumstances of the person whose
name is on the certificate. Notwithstanding the first three sentences of
this paragraph (f)(2), a withholding agent may choose to not take
advantage of the transition rule in this paragraph (f)(2) with respect
to one or more withholding certificates valid under the regulations in
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1,
1999) and, therefore, to require withholding certificates conforming to
the requirements described in this section (new withholding
certificates). For purposes of this section, a new withholding
certificate is deemed to satisfy the documentation requirement under the
regulations in effect prior to January 1, 2001 (see 26 CFR part 1,
revised April 1, 1999). Further, a new withholding certificate remains
valid for the period specified in Sec. 1.1441-1(e)(4)(ii), regardless of
when the certificate is obtained.
[T.D. 8211, 53 FR 24066, June 27, 1988, as amended at T.D. 8211, 53 FR
27595, July 21, 1988; Redesignated and amended by T.D. 8734, 62 FR
53464, Oct. 14, 1997; T.D. 8804, 63 FR 72185, Dec. 31, 1998; 64 FR
73410, Dec. 30, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53464, Oct. 14, 1997,
Sec. 1.1441-8T was redesignated as Sec. 1.1441-8; the section heading
and paragraph (b) were revised; and paragraphs (c), (d), (e), and (f),
were added, effective Jan. 1, 1999. By T.D. 8804, 63 FR 72183, Dec. 31,
1998, the effective date of Sec. 1.1441-8T was delayed until Jan. 1,
2000. By T.D. 8856, 64 FR 73408, 73410, paragraph (f) was revised and
the effective date was delayed until Jan. 1, 2001. For the convenience
of the user, the superseded text is set forth as follows:
Sec. 1.1441-8T Foreign government exemption from withholding
(temporary).
* * * * *
(b) Statement claiming exemption. To avoid withholding of tax at
source under Sec. 1.1441-1, a foreign government which is entitled to
the income must file with each withholding agent from whom amounts of
income are to be received, a statement under penalties of perjury (in
duplicate) indicating the extent to which such income described in the
statement is exempt from taxation under section 892. This statement
should contain (i) the name and address of the foreign government
entitled to the income, (ii) the items of income and their amount with
respect to which the statement is filed, (iii) an explanation indicating
why the specific items of
[[Page 156]]
income are exempt from taxation under section 892, and (iv) the taxable
year during which such exemption is to apply. This statement shall be
filed with the withholding agent for each taxable year the foreign
government is entitled to the income, and before payment of the income
in respect of which it applies. Any statement so filed shall be
effective only with respect to the item or items of income specified
therein and only with respect to the types of income specified in
Sec. 1.892-3T(a)(1) (i), (ii) or (iii). The statement shall constitute
authorization to the withholding agent to pay such income during the
taxable year without deduction of the tax at source under Sec. 1.1441-1.
Any statement required by this subparagraph may be made on a form
prescribed by the Internal Revenue Service.
* * * * *
Sec. 1.1441-9 Exemption from withholding on exempt income of a foreign tax-exempt organization, including foreign private foundations.
(a) Exemption from withholding for exempt income. No withholding is
required under section 1441(a) or 1442, and the regulations under those
sections, on amounts paid to a foreign organization that is described in
section 501(c) to the extent that the amounts are not income includable
under section 512 in computing the organization's unrelated business
taxable income. See, however, Sec. 1.1443-1 for withholding on payments
of unrelated business income to foreign tax-exempt organizations and on
payments subject to tax under section 4948. For a foreign organization
to claim an exemption from withholding under section 1441(a) or 1442
based on its status as an organization described in section 501(c), it
must furnish the withholding agent with a withholding certificate
described in paragraph (b)(2) of this section. A foreign organization
described in section 501(c) may choose to claim a reduced rate of
withholding under the procedures described in other sections of the
regulations under section 1441 and not under this section. In
particular, if an organization chooses to claim benefits under an income
tax treaty, the withholding procedures applicable to claims of such a
reduced rate are governed solely by the provisions of Sec. 1.1441-6 and
not of this section.
(b) Reliance on foreign organization's claim of exemption from
withholding--(1) General rule. A withholding agent may rely on a claim
of exemption under this section only if, prior to the payment, the
withholding agent can reliably associate the payment with a valid
withholding certificate described in paragraph (b)(2) of this section.
(2) Withholding certificate. A withholding certificate under this
paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition
to other applicable requirements, the Form W-8 includes the taxpayer
identifying number of the organization whose name is on the certificate,
and it certifies that the Internal Revenue Service (IRS) has issued a
favorable determination letter (and the date thereof) that is currently
in effect, what portion, if any, of the amounts paid constitute income
includable under section 512 in computing the organization's unrelated
business taxable income, and, if the organization is described in
section 501(c)(3), whether it is a private foundation described in
section 509. Notwithstanding the preceding sentence, if the organization
cannot certify that it has been issued a favorable determination letter
that is still in effect, its withholding certificate is nevertheless
valid under this paragraph (b)(2) if the organization attaches to the
withholding certificate an opinion that is acceptable to the withholding
agent from a U.S. counsel concluding that the organization is described
in section 501(c). If the determination letter or opinion of counsel to
which the withholding certificate refers concludes that the organization
is described in section 501(c)(3), and the certificate further certifies
that the organization is not a private foundation described in section
509, an affidavit of the organization setting forth sufficient facts
concerning the operations and support of the organization for the
Internal Revenue Service (IRS) to determine that such organization would
be likely to qualify as an organization described in section 509(a) (1),
(2), (3), or (4) must be attached to the withholding certificate. An
organization that provides an opinion of U.S. counsel or an affidavit
may provide the same opinion or affidavit to more than one withholding
[[Page 157]]
agent provided that the opinion is acceptable to each withholding agent
who receives it in conjunction with a withholding certificate. Any such
opinion of counsel or affidavit must be renewed whenever the certificate
to which it is attached is required to be renewed.
(3) Presumptions in the absence of documentation. Notwithstanding
paragraph (b)(1) of this section, if the organization's certification
with respect to whether amounts paid constitute income includable under
section 512 in computing the organization's unrelated business taxable
income is not reliable or is lacking but all other certifications are
reliable, the withholding agent may rely on the certificate but the
amounts paid are presumed to be income includable under section 512 in
computing the organization's unrelated business taxable income. If the
certification regarding private foundation status is not reliable, the
withholding agent may rely on the certificate but the amounts paid are
presumed to be paid to a foreign beneficial owner that is a private
foundation.
(4) Reason to know. Reliance by a withholding agent on the
information and certifications stated on a withholding certificate is
subject to the agent's actual knowledge or reason to know that such
information or certification is incorrect as provided in Sec. 1.1441-
7(b). For example, a withholding agent must cease to treat a foreign
organization's claim for exemption from withholding based on the
organization's tax-exempt status as valid beginning on the earlier of
the date on which such agent knows that the IRS has given notice to such
foreign organization that it is not an organization described in section
501(c) or the date on which the IRS gives notice to the public that such
foreign organization is not an organization described in section 501(c).
Similarly, a withholding agent may no longer rely on a certification
that an amount is not subject to tax under section 4948 beginning on the
earlier of the date on which such agent knows that the IRS has given
notice to such foreign organization that it is subject to tax under
section 4948 or the date on which the IRS gives notice that such foreign
organization is a private foundation within the meaning of section
509(a).
(c) Failure to receive withholding certificate timely and other
applicable procedures. See applicable procedures described in
Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a
valid withholding certificate or other appropriate documentation at the
time of payment. Further, the provisions of Sec. 1.1441-1(e)(4) shall
apply to withholding certificates and other documents related thereto
furnished under the provisions of this section.
(d) Effective date--(1) In general. This section applies to payments
made after December 31, 2000.
(2) Transition rules. For purposes of this section, the validity of
a Form W-8, 1001, or 4224 or a statement that was valid on January 1,
1998, under the regulations in effect prior to January 1, 2001 (see 26
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire,
at any time during 1998, is extended until December 31, 1998. The
validity of a Form W-8, 1001, or 4224 or a statement that is valid on or
after January 1, 1999 remains valid until its validity expires under the
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and
35a, revised April 1, 1999) but in no event shall such form or statement
remain valid after December 31, 2000. The rule in this paragraph (d)(2),
however, does not apply to extend the validity period of a Form W-8,
1001, or 4224 or a statement that expires solely by reason of changes in
the circumstances of the person whose name is on the certificate.
Notwithstanding the first three sentences of this paragraph (d)(2), a
withholding agent may choose to not take advantage of the transition
rule in this paragraph (d)(2) with respect to one or more withholding
certificates valid under the regulations in effect prior to January 1,
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore,
to require withholding certificates conforming to the requirements
described in this section (new withholding certificates). For purposes
of this section, a new withholding certificate is deemed to satisfy the
documentation requirement under the regulations in effect prior to
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1,
[[Page 158]]
1999). Further, a new withholding certificate remains valid for the
period specified in Sec. 1.1441-1(e)(4)(ii), regardless of when the
certificate is obtained.
[T.D. 8734, 62 FR 53465, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72185, Dec. 31, 1998; T.D. 8856, 64 FR 73410, Dec. 10, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53465, Oct. 14, 1997,
Sec. 1.1441-9 was added, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1441-9 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73410, Dec. 30, 1999, the
effective date was delayed and paragraph (d) was revised, effective Jan.
1, 2001.
Sec. 1.1441-10 Withholding agents with respect to fast-pay arrangements.
(a) In general. A corporation that issues fast-pay stock in a fast-
pay arrangement described in Sec. 1.7701(l)-3(b)(1) is a withholding
agent with respect to payments made on the fast-pay stock and payments
deemed made under the recharacterization rules of Sec. 1.7701(l)-3.
Except as provided in this paragraph (a) or in paragraph (b) of this
section, the withholding tax rules under section 1441 and section 1442
apply with respect to a fast-pay arrangement described in
Sec. 1.7701(l)-3(c)(1)(i) in accordance with the recharacterization
rules provided in Sec. 1.7701(l)-3(c). In all cases, notwithstanding
paragraph (b) of this section, if at any time the withholding agent
knows or has reason to know that the Commissioner has exercised the
discretion under either Sec. 1.7701(l)-3(c)(1)(ii) to apply the
recharacterization rules of Sec. 1.7701(l)-3(c), or Sec. 1.7701(l)-3(d)
to depart from the recharacterization rules of Sec. 1.7701(l)-3(c) for a
taxpayer, the withholding agent must withhold on payments made (or
deemed made) to that taxpayer in accordance with the characterization of
the fast-pay arrangement imposed by the Commissioner under
Sec. 1.7701(l)-3.
(b) Exception. If at any time the withholding agent knows or has
reason to know that any taxpayer entered into a fast-pay arrangement
with a principal purpose of applying the recharacterization rules of
Sec. 1.7701(l)-3(c) to avoid tax under section 871(a) or section 881,
then for each payment made or deemed made to such taxpayer under the
arrangement, the withholding agent must withhold, under section 1441 or
section 1442, the higher of--
(1) The amount of withholding that would apply to such payment
determined under the form of the arrangement; or
(2) The amount of withholding that would apply to deemed payments
determined under the recharacterization rules of Sec. 1.7701(l)-3(c).
(c) Liability. Any person required to deduct and withhold tax under
this section is made liable for that tax by section 1461, and is also
liable for applicable penalties and interest for failing to comply with
section 1461.
(d) Examples. The following examples illustrate the rules of this
section:
Example 1. REIT W issues shares of fast-pay stock to foreign
individual A, a resident of Country C. United States source dividends
paid to residents of C are subject to a 30 percent withholding tax. W
issues all shares of benefited stock to foreign individuals who are
residents of Country D. D's income tax convention with the United States
reduces the United States withholding tax on dividends to 15 percent.
Under Sec. 1.7701(l)-3(c), the dividends paid by W to A are deemed to be
paid by W to the benefited shareholders. W has reason to know that A
entered into the fast-pay arrangement with a principal purpose of using
the recharacterization rules of Sec. 1.7701(l)-3(c) to reduce United
States withholding tax. W must withhold at the 30 percent rate because
the amount of withholding that applies to the payments determined under
the form of the arrangement is higher than the amount of withholding
that applies to the payments determined under Sec. 1.7701(l)-3(c).
Example 2. The facts are the same as in Example 1 of this paragraph
(d) except that W does not know, or have reason to know, that A entered
into the arrangement with a principal purpose of using the
recharacterization rules of Sec. 1.7701(l)-3(c) to reduce United States
withholding tax. Further, the Commissioner has not exercised the
discretion under Sec. 1.7701(l)-3(d) to depart from the
recharacterization rules of Sec. 1.7701(l)-3(c). Accordingly, W must
withhold tax at a 15 percent rate on the dividends deemed paid to the
benefited shareholders.
(e) Effective date. This section applies to payments made (or deemed
made) on or after January 6, 1999.
[T.D. 8853, 65 FR 1312, Jan. 10, 2000]
[[Page 159]]
Sec. 1.1442-1 Withholding of tax on foreign corporations.
For regulations concerning the withholding of tax at source under
section 1442 in the case of foreign corporations, foreign governments,
international organizations, foreign tax-exempt corporations, or foreign
private foundations, see Secs. 1.1441-1 through 1.1441-9.
[T.D. 8734, 62 FR 53466, Oct. 14, 1997]
Effective Date Note: By T.D. 8734, 62 FR 53466, Oct. 14, 1997,
Sec. 1.1442-1 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1442-1 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001. For the convenience of
the user, the superseded text is set forth as follows:
Sec. 1.1442-1 Withholding of tax on foreign corporations.
For regulations respecting the withholding of tax at source under
section 1442 in the case of foreign corporations, see Secs. 1.1441-1 and
1.1451-1.
[T.D. 6908, 31 FR 16773, Dec. 31, 1966]
Sec. 1.1442-2 Exemption under a tax treaty.
For regulations providing for a claim of reduced withholding tax
under section 1442 by certain foreign corporations pursuant to the
provisions of an income tax treaty, see Sec. 1.1441-6.
[T.D. 8734, 62 FR 53466, Oct. 14, 1997]
Effective Date Note: By T.D. 8734, 62 FR 53466, Oct. 14, 1997,
Sec. 1.1442-2 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1442-2 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001. For the convenience of
the user, the superseded text is set forth as follows:
Sec. 1.1442-2 Exemption from withholding of tax on foreign
corporations.
For regulations exempting certain foreign corporations from the
withholding requirements of section 1442 in a case where an undue
administrative burden is imposed, see paragraph (f) of Sec. 1.1441-4.
[T.D. 6908, 31 FR 16773, Dec. 31, 1966]
Sec. 1.1442-3 Tax exempt income of a foreign tax-exempt corporations.
For regulations providing for a claim of exemption for income exempt
from tax under section 501(a) of a foreign tax-exempt corporation, see
Sec. 1.1441-9. See Sec. 1.1443-1 for withholding rules applicable to
foreign private foundations and to the unrelated business income of
foreign tax-exempt organizations.
[T.D. 8734, 62 FR 53466, Oct. 14, 1997]
Effective Date Note: By T.D. 8734, 62 FR 53466, Oct. 14, 1997,
Sec. 1.1442-3 was added, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1442-3 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001.
Sec. 1.1443-1 Foreign tax-exempt organizations.
(a) Income includible under section 512 in computing unrelated
business taxable income. In the case of a foreign organization that is
described in section 501(c), amounts paid to the organization includible
under section 512 in computing the organization's unrelated business
taxable income are subject to withholding under Secs. 1.1441-1, 1.1441-
4, and 1.1441-6 in the same manner as payments of the same amounts to
any foreign person that is not a tax-exempt organization. Therefore, a
foreign organization receiving amounts includible under section 512 in
computing the organization's unrelated business taxable income may claim
an exemption from withholding or a reduced rate of withholding with
respect to that income in the same manner as a foreign person that is
not a tax-exempt organization. See Sec. 1.1441-9(b)(3) for presumption
that amounts are includible under section 512 in computing the
organization's unrelated business taxable income in the absence of a
reliable certification.
(b) Income subject to tax under section 4948--(1) In general. The
gross investment income (as defined in section 4940(c)(2)) of a foreign
private foundation is subject to withholding under section 1443(b) at
the rate of 4 percent to the extent that the income is from sources
within the United States and is subject to the tax imposed by section
4948(a) and the regulations under that section. Withholding under this
paragraph (b) is required irrespective of the fact that the income may
be effectively connected with the conduct of a trade or business in the
United States by the foreign organization. See Sec. 1.1441-9(b)(3) for
applicable presumptions that
[[Page 160]]
amounts are subject to tax under section 4948. The withholding imposed
under this paragraph (b)(1) does not obviate a private foundation's
obligation to file any return required by law with respect to such
organization, such as the form that the foundation is required to file
under section 6033 for the taxable year.
(2) Reliance on a foreign organization's claim of foreign private
foundation status. For reliance by a withholding agent on a foreign
organization's claim of foreign private foundation status, see
Sec. 1.1441-9 (b) and (c).
(3) Applicable procedures. A withholding agent withholding the 4-
percent amount pursuant to paragraph (b)(1) of this section shall treat
such withholding as withholding under section 1441(a) or 1442(a) for all
purposes, including reporting of the payment on a Form 1042 and a Form
1042-S pursuant to Sec. 1.1461-1 (b) and (c). Similarly, the foreign
private foundation shall treat the 4-percent withholding as withholding
under section 1441(a) or 1442(a), including for purposes of claims for
refunds and credits.
(4) Claim of benefits under an income tax treaty. The withholding
procedures applicable to claims of a reduced rate under an income tax
treaty are governed solely by the provisions of Sec. 1.1441-6 and not by
this section.
(c) Effective date--(1) In general. This section applies to payments
made after December 31, 2000.
(2) Transition rules. For purposes of this section, the validity of
an affidavit or opinion of counsel described in Sec. 1.1443-1(b)(4)(i)
in effect prior to January 1, 2001 (see Sec. 1.1443-1(b)(4)(i) as
contained in 26 CFR part 1, revised April 1, 1999) is extended until
December 31, 2000. However, a withholding agent may choose to not take
advantage of the transition rule in this paragraph (c)(2) with respect
to one or more withholding certificates valid under the regulations in
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1,
1999) and, therefore, to require withholding certificates conforming to
the requirements described in this section (new withholding
certificates). For purposes of this section, a new withholding
certificate is deemed to satisfy the documentation requirement under the
regulations in effect prior to January 1, 2001 ( see 26 CFR part 1,
revised April 1, 1999). Further, a new withholding certificate remains
valid for the period specified in Sec. 1.1441-1(e)(4)(ii), regardless of
when the certificate is obtained.
[T.D. 8734, 62 FR 53466, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72186, Dec. 31, 1998; T.D. 8856, 64 FR 73411, Dec. 30, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53466, Oct. 14, 1997,
Sec. 1.1443-1 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1443-1 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73411, Dec. 30, 1999,
paragraph (c) was revised and the effective date was delayed until Jan.
1, 2001. For the convenience of the user, the superseded text is set
forth as follows:
Sec. 1.1443-1 Foreign tax-exempt organizations.
(a) Income subject to section 511--(1) Taxable years beginning after
December 31, 1966, and before January 1, 1970. In the case of a foreign
tax-exempt organization which is subject to the tax imposed by section
511, any rents paid to such organization in a taxable year beginning
after December 31, 1966, and before January 1, 1970, which are
includible under section 512 in determining its unrelated business
taxable income, shall not be subject to withholding under Sec. 1.1441-1.
See paragraph (a)(2) of Sec. 1.1441-4 for rules for claiming the
exemption from withholding in the case of such rents.
(2) Taxable years beginning after December 31, 1969. In the case of
a foreign tax-exempt organization which is subject to the tax imposed by
section 511, any income received by such organization in a taxable year
beginning after December 31, 1969, which is includible under section 512
in determining its unrelated business taxable income, shall be subject
to withholding under Sec. 1.1441-1 unless such income is, or may be
expected to be, effectively connected with the conduct of a trade or
business within the United States. See paragraph (a)(2) of Sec. 1.1441-4
for rules for claiming the exemption from withholding in the case of
such income.
(b) Income subject to section 4948-- (1) In general--(i) Application
of withholding provisions. Except as provided in subdivision (ii) of
this subparagraph, in the case of a foreign private foundation which is
subject to the tax imposed by section 4948(a) and the regulations
thereunder, the withholding provisions of chapter 3 of the Code and the
regulations thereunder shall apply with respect to the gross investment
income (as defined in section 4940(c)(2)) of such foundation from
sources within the United States (within the meaning of section 861 and
the regulations thereunder) as if the excise tax imposed by
[[Page 161]]
section 4948(a) were a tax imposed by chapter 3 of the Code, except that
the deduction and withholding shall be at the rate of 4 percent. The
withholding requirements imposed by this paragraph are in addition to
the requirements otherwise applicable to a withholding agent, such as
the depositary requirements of section 6302 and the regulations
thereunder. Similarly, the requirements of this paragraph do not obviate
a private foundation's obligation to file any return required by law
with respect to such an organization, such as the form the foundation is
required to file under section 6033 for the taxable year.
(ii) Special rule with respect to certain tax treaties. Whenever
there exists a tax treaty between the United States and a foreign
country, and a foreign private foundation which is subject to the tax
imposed by section 4948(a) and the regulations thereunder is a resident
of such country or is otherwise entitled to the benefits of such treaty
(whether or not such benefits are available to all residents), if the
treaty provides that any item or items (or all items with respect to an
organization exempt from income taxation) of gross investment income
(within the meaning of section 4940(c)(2)) shall be exempt from income
tax, the withholding provisions of chapter 3 of the Code and the
regulations thereunder shall not apply to such item or items.
(2) Return on Form 1042. Every withholding agent required to deduct
and withhold any amount by virtue of the provisions of this paragraph
shall make a return of the amount required to be deducted and withheld
by completing and filing a Form 1042 with the Internal Revenue Service
in accordance with the instructions accompanying that form and
submitting the balance due (if any). In addition, in any case in which
any amount is so withheld, the withholding agent shall prepare and
submit to the foreign private foundation one of the copies of the Form
1042S showing the tax withheld under this paragraph in addition to any
tax otherwise shown on such form.
(3) Claims for refund and credits. Claims for refund of or credit
for amounts overpaid shall be made on a Form 843 or 1042 or other
appropriate form, which shall be filed with the Mid-Atlantic Service
Center on or after January 1, 1973. Claims filed prior to January 1,
1973, shall be filed with the Director of International Operations. In
determining whether a claim for refund is appropriate and, if
appropriate, who should make the claim, the provisions of section 1464
and the regulations thereunder shall apply.
(4) Identification of foreign private foundations; general rule. (i)
Except as provided in subparagraph (6) of this paragraph, where a
foreign organization does not have a ruling or determination letter that
it is an organization described in section 509(a) (1), (2), (3), or (4),
any person required under section 1443(b) and this paragraph to deduct
and withhold any tax imposed by section 4948(a) on such foreign
organization (if it were a private foundation) shall not be liable for
such tax if prior to the day on which the person deposits or pays to the
Internal Revenue Service any amount required to be withheld, such person
has made a good faith determination that the foreign organization is an
organization described in section 509(a) (1), (2), (3), or (4). For
purposes of this subdivision, such a ``good faith determination''
ordinarily will be considered as made where the determination is based
on an affidavit of the foreign organization or an opinion of counsel (of
the withholding agent or the foreign organization) that the foreign
organization is an organization described in section 509(a) (1), (2),
(3), or (4). Such an affidavit or opinion must set forth sufficient
facts concerning the operations and support of the foreign organization
for the Internal Revenue Service to determine that such organization
would be likely to qualify as an organization described in section
509(a) (1), (2), (3), or (4).
(ii) For special transitional rules relating to the identification
of foreign private foundations, see subparagraph (5) of this paragraph.
(iii) Nothing in this paragraph relieves any foreign private
foundation of the liability for the tax (including interest and
penalties) imposed by section 4948(a).
(5) Special transitional rules relating to identification of foreign
private foundations. (i) Any person required under section 1443(b) and
this paragraph to deduct and withhold any tax imposed by section 4948(a)
on any foreign organization for any period after December 31, 1969, and
before the 90th day after publication of final regulations under section
508 in the Federal Register shall not be liable for such tax if such
person receives a certified statement from the foreign organization
prior to the day on which the person deposits or pays to the Internal
Revenue Service any amount required to be withheld stating that either:
(a) Such foreign organization has properly filed the notice
described in section 508(b) and the regulations thereunder and has not
been notified by the Commissioner or his delegate by the 30th day after
the day on which the notice is filed that such notice has failed to
establish that such foreign organization is not a private foundation, or
(b) The presumption contained in section 508(b) does not apply to
such foreign organization by reason of section 508(c) and the
regulations thereunder.
(ii) If a certified statement described in subdivision (i) of this
subparagraph is not received prior to the day on which a deposit or
payment of any amount withheld in accordance with the provisions of this
paragraph
[[Page 162]]
must be made by any person required to deduct and withhold any tax
imposed by section 4948(a) with respect to any foreign organization,
except as provided in subparagraph (4) of this paragraph such person
shall be liable for all such tax imposed (including interest and
penalties) for the period being returned by such person on Form 1042, to
the extent that such person incurs liability to the foreign organization
for gross investment income, as defined in section 4940(c)(2).
(iii) Any foreign organization to which section 508 by reason of
section 4948(b) does not apply because such organization has received
substantially all of its support (other than gross investment income, as
defined in section 4940(c)(2)) from sources outside the United States
may nevertheless receive the benefits of subdivision (i) of this
subparagraph by following the procedure set forth in such subdivision.
(6) Effect of notice by Internal Revenue Service concerning
organization's statement. Subparagraphs (4) and (5) of this paragraph
shall have no effect with respect to a withholding agent as to a
particular foreign organization on or after the earlier (i) the date on
which such agent acquires knowledge that the Internal Revenue Service
has given notice to such foreign organization that its notice or
statement has failed to establish that it is not a private foundation,
(ii) the date on which the Internal Revenue Service makes notice to the
public that such foreign organization has failed to establish that it is
not a private foundation, or (iii) the date on which the Internal
Revenue Service makes notice to the public that such foreign
organization is a private foundation.
[T.D. 7229, 37 FR 28157, Dec. 21, 1972, as amended by T.D. 7247, 38 FR
767, Jan. 4, 1973]
Sec. 1.1445-1 Withholding on dispositions of U.S. real property interests by foreign persons: In general.
(a) Purpose and scope of regulations. These regulations set forth
rules relating to the withholding requirements of section 1445. In
general, section 1445(a) provides that any person who acquires a U.S.
real property interest from a foreign person must withhold a tax of 10
percent from the amount realized by the transferor foreign person (or a
lesser amount established by agreement with the Internal Revenue
Service). Section 1445(e) provides special rules requiring withholding
on distributions and certain other transactions by corporations,
partnerships, trusts, and estates. This Sec. 1.1445-1 provides general
rules concerning the withholding requirement of sections 1445(a), as
well as definitions applicable under both section 1445(a) and 1445(e).
Section 1.1445-2 provides for various situations in which withholding is
not required under section 1445(a). Section 1.1445-3 provides for
adjustments to the amount required to be withheld by transferees under
section 1445(a). Section 1.1445-4 prescribes the duties of agents in
transactions subject to withholding under either section 1445(a) or
1445(e). Section 1.1445-5 provides rules concerning the withholding
required under section 1445(e), while Sec. 1.1445-6 provides for
adjustments to the amount required to be withheld under section 1445(e).
Finally, Sec. 1.1445-7 provides rules concerning the treatment of a
foreign corporation that has made an election under section 897(i) to be
treated as a domestic corporation.
(b) Duty to withhold--(1) In general. Transferees of U.S. real
property interests are required to deduct and withhold a tax equal to 10
percent of the amount realized by the transferor, if the transferor is a
foreign person and the disposition takes place on or after January 1,
1985. Neither the transferee's duty to withhold nor the amount required
to be withheld is affected by the amount of cash to be paid by the
transferee. Amounts withheld must be reported and paid over in
accordance with the requirements of paragraph (c) of this section.
Failures to withhold and pay over are subject to the liabilities set
forth in paragraph (e) of this section. If two or more persons are joint
transferees of a U.S. real property interest, each such person is
subject to the obligation to withhold. That obligation is fulfilled with
respect to each such person if any one of them withholds and pays over
the required amount in accordance with the rules of this section. If the
amount realized (as defined in paragraph (g)(5) of this section) by the
transferor is zero, then no withholding is required. For example, if a
real property interest is transferred as a gift (i.e, the recipient does
not assume any liabilities or furnish any other consideration to the
transferor) then no withholding is required. Withholding is not required
with respect to dispositions that takes place before January 1, 1985,
even if the first
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payment of consideration is made after December 31, 1984.
(2) U.S. real property interest owned jointly by foreign and non-
foreign transferors. The amount subject to withholding under paragraph
(b)(1) of this section with respect to the transfer of a U.S. real
property interest owned by one or more foreign persons (as defined in
Sec. 1.897-1(k)) and one or more non-foreign persons shall be determined
by allocating the amount realized from the transfer between (or among)
such transferors based upon the capital contribution of each transferor
with respect to the property and by aggregating the amounts allocated to
any foreign person (or persons). For this purpose, a husband and wife
will each be deemed to have contributed 50 percent of the aggregate
capital contributed by such husband and wife. See Sec. 1.1445-
1(f)(3)(iv) with respect to the crediting of the amount withheld between
or among joint foreign transferors.
(3) Options to acquire a U.S. real property interest--(i) No
withholding on grant of option. No withholding is required under section
1445 with respect to any amount realized by the grantor on the grant of
an option to acquire a U.S. real property interest.
(ii) No withholding upon lapse of option. No withholding is required
under section 1445 with respect to any amount realized by the grantor
upon the lapse of an option to acquire a U.S. real property interest.
(iii) Withholding required upon the sale or exchange of option. A
transferee of an option to acquire a U.S. real property interest must
deduct and withhold a tax equal to 10 percent of the amount realized by
the transferor upon the disposition. This Sec. 1.1445-1(b)(3)(iii) does
not apply to require withholding upon the initial grant of an option.
(iv) Withholding required on exercise of option. If the holder
exercises an option to purchase a U.S. real property interest, the
amount paid for the option shall be considered an amount realized by the
grantor/transferor upon the transfer of the property with respect to
which the option was granted, and shall thus be subject to withholding
on the day that such underlying property is transferred. The preceding
sentence applies regardless of whether or not the terms of the option
specifically provide that the option price is applied to the purchase
price.
(4) Exceptions and modifications. The duty to withhold under section
1445(a) is subject to the exceptions and modifications contained in
Secs. 1.1445-2 and 1.1445-3. Generally, Sec. 1.1445-2 provides rules for
determining that withholding is not required because either the
transferor is not a foreign person or the interest transferred is not a
U.S. real property interest. In addition, Sec. 1.1445-2 provides
exceptions to the withholding requirement, including a rule that exempts
from withholding any person who acquires a U.S. real property interest
for use as a residence for a contract price of $300,000 or less. If
withholding is required under section 1445(a), Sec. 1.1445-3 allows the
amount withheld to be modified pursuant to a withholding certificate
issued by the Internal Revenue Service. If a transferee cannot withhold
the full amount required because the first payment of consideration for
the transfer does not involve sufficient cash (or other liquid assets
convertible into cash, such as foreign currency), then a withholding
certificate must be obtained pursuant to Sec. 1.1445-3.
(c) Reporting and paying over of withheld amounts--(1) In general. A
transferee must report and pay over any tax withheld by the 20th day
after the date of the transfer. Forms 8288 and 8288-A are used for this
purpose, and must be filed with the Internal Revenue Service Center,
Philadelphia, PA, 19255. Pursuant to section 7502 and regulations
thereunder, the timely mailing of Forms 8288 and 8228-A will be treated
as their timely filing. Form 8288-A will be stamped by the IRS to show
receipt, and a stamped copy will be mailed by the IRS to the transferor
(at the address reported on the form) for the transferor's use. See
Secs. 1.1445-1(f) and 1.1445-3(f).
(2) Pending application for withholding certificate--(i) In general.
(A) Delayed reporting and payment with respect to application submitted
by transferee. If an application for a withholding certificate with
respect to a transfer of a U.S. real property interest is submitted to
the Internal Revenue Service by the
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transferee on the day of or at any time prior to the transfer, the
transferee must withhold 10 percent of the amount realized as required
by paragraph (b) of this section. However, the amount withheld, or a
lesser amount as determined by the Service, need not be reported and
paid over to the Service until the 20th day following the Service's
final determination with respect to the application for a withholding
certificate. For this purpose, the Service's final determination occurs
on the day when the withholding certificate is mailed to the transferee
by the Service or when a notification denying the request for a
withholding certificate is mailed to the transferee by the Service. An
application is submitted to the Service on the day it is actually
received by the Service at the address provided in Sec. 1.1445-1(g)(10)
or, under the rules of section 7502, on the day it is mailed to the
Service at the address provided in Sec. 1.1445-1(g)(10).
(B) Delayed reporting and payment with respect to application
submitted by transferor. If an application for a withholding certificate
with respect to a transfer of a U.S. real property interest is submitted
to the Internal Revenue Service by the Transferor on the day of or any
time prior to the transfer, such transferor must provide notice to the
transferee prior to the transfer. No particular form is required but the
notice must set forth the name, address, and taxpayer identification
number, if any, of the transferor, a brief description of the property
which is the subject of the application, and the date the application
was submitted to the Service. The transferee must withhold 10 percent of
the amount realized as required in paragraph (b) of this section but
need not report or pay over to the Service such amount (or a lesser
amount as determined by the Service) until the 20th day following the
Service's final determination with respect to the application. The
Service will send a copy of the withholding certificate or copy of the
notification denying the request for a withholding certificate to the
transferee. For this purpose, the Service's final determination will be
deemed to occur on the day when the copy of the withholding certificate
or the copy of the notification denying the request for a withholding
certificate is mailed by the Service to the transferee (or transferees).
An application is submitted to the Service on the day it is actually
received by the Service at the address provided in Sec. 1.1445-1(g)(10)
or, under the rules of Sec. 7502, on the day it is mailed to the Service
at the address provided in Sec. 1.1445-1(g)(10).
(ii) Anti-abuse rule--(A) In general. A transferee that in reliance
upon the rules of this paragraph (c)(2) fails to report and pay over
amounts withheld by the 20th day following the date of the transfer,
shall be subject to the payment of interest and penalties if the
relevant application for a withholding certificate (or an amendment to
the application for a withholding certificate) was submitted for a
principal purpose of delaying the transferee's payment to the IRS of the
amount withheld. Interest and penalties shall be assessed on the amount
that is ultimately paid over (or collected pursuant to the agreement)
with respect to the period between the 20th day after the date of the
transfer and the date on which payment is made (or collected).
(B) Presumption. A principal purpose of delaying payment of the
amount withheld shall be presumed if--
(1) The transferee applies for a withholding certificate pursuant to
Sec. 1.1445-3(c) based on a determination of the transferor's maximum
tax liability, and
(2) Such liability is ultimately determined to be equal to 90
percent or more of the amount that was otherwise required to be withheld
and paid over. However, the presumption created by the previous sentence
may be rebutted by evidence establishing that delaying payment of the
amount withheld was not a principal purpose of the transaction.
(d) Contents of Forms 8288 and 8288-A--(1) Transactions subject to
section 1445(a). Any person that is required to file Forms 8288 and
8288-A pursuant to section 1445(a) and the rules of this section must
set forth thereon the following information:
(i) The name, identifying number (if any), and home address (in the
case of an individual) or office address (in the case of any entity) of
the transferee(s) filing the return;
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(ii) The name, identifying number (if any), and home address (in the
case of an individual) or office address (in the case of any entity) of
the transferor(s);
(iii) A brief description of the U.S. real property interest
transferred, including its location and the nature of any substantial
improvements in the case of real property, and the class or type and
amount of interests transferred in the case of interests in a
corporation that constitute U.S. real property interests;
(iv) The date of the transfer;
(v) The amount realized by the transferor, as defined in paragraph
(g)(5) of this section;
(vi) The amount withheld by the transferee and whether withholding
is at the statutory or reduced rate; and
(vii) Such other information as the Commissioner may require.
For purposes of paragraph (d)(1) (i) and (ii), mailing addresses may
be provided in addition to, but not in lieu of, home addresses or office
addresses.
(2) Transactions subject to section 1445(e). Any person that is
required to file Forms 8288 and 8288-A pursuant to the rules of
Sec. 1.1445-5 must set forth thereon the following information:
(i) The name, identifying number (if any), and office address of the
entity or fiduciary filing the return;
(ii) The amount withheld by the entity or fiduciary;
(iii) The date of the transfer;
(iv) In the case of a transaction subject to withholding pursuant to
section 1445(e)(1) and Sec. 1.1445-5(c):
(A) A brief description of the U.S. real property interest
transferred, as described in paragraph (d)(1)(iii) of this section;
(B) The name, identifying number (if any), and home address (in the
case of an individual) or office address (in the case of an entity) of
each holder of an interest in the entity that is a foreign person; and
(C) Each such interest-holder's pro rata share of the amount
withheld;
(v) In the case of a distribution subject to withholding pursuant to
section 1445(e)(2) and Sec. 1.1445-5(d):
(A) A brief description of the U.S. real property interest
transferred, as described in paragraph (d)(1)(iii) of this section; and
(B) The amount of gain recognized upon the distribution by the
corporation.
(vi) In the case of a distribution subject to withholding pursuant
to section 1445(e)(3) and Sec. 1.1445-5(e):
(A) A brief description of the property distributed by the
corporation;
(B) The name, identifying number (if any), and home address (in case
of an individual) or office address (in the case of an entity) of each
holder of an interest in the entity that is a foreign person;
(C) The amount realized upon the distribution by each such foreign
interest holder; and
(D) Each foreign interest-holder's pro rata share of the amount
withheld; and
(vii) Such other information as the Commissioner may require.
(e) Liability of transferee upon failure to withhold--(1) In
general. Every person required to deduct and withhold tax under section
1445 is made liable for that tax by section 1461. Therefore, a person
that is required to deduct and withhold tax but fails to do so may be
held liable for the payment of the tax and any applicable penalties and
interest.
(2) Transferor's liability not otherwise satisfied--(i) Tax and
penalties. Except as provided in paragraph (e)(3) of this section, if a
transferee is required to deduct and withhold tax under section 1445 but
fails to do so, then the tax shall be assessed against and collected
from that transferee. Such person may also be subject to any of the
civil and criminal penalties that apply. Corporate officers or other
responsible persons may be subject to a civil penalty under section 6672
equal to the amount that should have been withheld and paid over.
(ii) Interest. If a transferee is required to deduct and withhold
tax under section 1445 but fails to do so, then such transferee shall be
liable for the payment of interest pursuant to section 6601 and the
regulations thereunder. Interest shall be payable with respect to the
period between--
(A) The last date on which the tax imposed under section 1445 was
required to be paid over by the transferee, and
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(B) The date on which such tax is actually paid. Interest shall be
payable with respect to the entire amount that is required to be
deducted and withheld. However, if the Service issues a withholding
certificate providing for withholding of a reduced amount, then, for the
period after the issuance of the certificate, interest shall be payable
with respect to that reduced amount.
(3) Transferor's liability otherwise satisfied--(i) Tax and
penalties. If a transferee is required to deduct and withhold tax under
section 1445 but fails to do so, and the transferor's tax liability with
respect to the transfer was satisfied (or was established to be zero)
by--
(A) The transferor's filing of an income tax return (and payment of
any tax due) with respect to the transfer, or
(B) The issuance of a withholding certificate by the Internal
Revenue Service establishing that the transferor's maximum tax liability
is zero,
then the tax required to be withheld under section 1445 shall not be
collected from the transferee. Such transferee's liability for tax, and
the requirement that such person file Forms 8288 and 8288-A, shall be
deemed to have been satisfied as of the date on which the transferor's
income tax return was filed or the withholding certificate was issued.
No penalty shall be imposed on or collected from such person for failure
to return or pay the tax, unless such failure was fraudulent and for the
purpose of evading payment. A transferee that seeks to avoid liability
for tax and penalties pursuant to the rule of paragraph (e)(3)(i) must
provide sufficient information for the Service to determine whether the
transferor's tax liability was satisfied (or was established to be
zero).
(ii) Interest. If a transferee is required to deduct and withhold
tax under section 1445 but fails to do so, then such person shall be
liable for the payment of interest under section 6601 and regulations
thereunder. Such transferee's liability for the payment of interest
shall not be excused by reason of the deemed satisfaction, pursuant to
subdivision (i) of this paragraph (e)(3), of the transferee's liability
under section 1445, because the deemed satisfaction of that liability is
the equivalent of the late payment of a liability, on which interest
must be paid. Interest shall be payable with respect to the period
between--
(A) The last date on which the tax imposed under section 1445 was
required to be paid over, and
(B) The date (established from information supplied to the Service
by the transferee) on which any tax due is paid with respect to the
transferor's relevant income tax return, or the date the withholding
certificate is issued establishing that the transferor's maximum tax
liability is zero.
Interest shall be payable with respect to the entire amount that is
required to be deducted and withheld. However, if the Service issues a
withholding certificate providing for withholding of a reduced amount,
then for the period after the issuance of the certificate interest shall
be payable with respect to that reduced amount.
(4) Coordination with entity with holding rules. For purposes of
section 1445(e) and Secs. 1.1445-5, 1.1445-6, 1.1445-7, and 1.1445-8T,
the rules of this paragraph (e) shall be applied by--
(i) Substituting the words ``person required to withhold'' for the
word ``transferee'' each place it appears in this paragraph (e), and
(ii) Substituting the words ``person subject to withholding'' for
the word ``transferor'' each place it appears in this paragraph (e).
(f) Effect of withholding on transferor--(1) In general. The
withholding of tax under section 1445(a) does not excuse a foreign
person that disposes of a U.S. real property interest from filing a U.S.
tax return with respect to the income arising from the disposition. Form
1040NR, 1041, or 1120F, as appropriate, must be filed, and any tax due
must be paid, by the filing deadline generally applicable to such
person. (The return may be filed by such later date as is provided in an
extension granted by the Internal Revenue Service.) Any tax withheld
under section 1445(a) shall be credited against the amount of income tax
as computed in such return.
(2) Manner of obtaining credit or refund. A stamped copy of Form
8288-A will be provided to the transferor by the Service (under
paragraph (c) of this
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section), and must be attached to the transferor's return to establish
the amount withheld that is available as a credit. If the amount
withheld under section 1445(a) constitutes less than the full amount of
the transferor's U.S. tax liability for that taxable year, then a
payment of estimated tax may be required to be made pursuant to section
6154 or 6654 prior to the filing of the income tax return for that year.
Alternatively, if the amount withheld under section 1445(a) exceeds the
transferor's maximum tax liability with respect to the disposition (as
determined by the IRS), then the transferor may seek an early refund of
the excess pursuant to Sec. 1.1445-3(g), or a normal refund upon the
filing of a tax return.
(3) Special rules--(i) Failure to receive Form 8288-A. If a stamped
copy of Form 8288-A has not been provided to the transferor by the
Service, the transferor may establish the amount of tax withheld by the
transferee by attaching to its return substantial evidence (e.g.,
closing documents) of such amount. Such a transferor must attach to its
return a statement which supplies all of the information required by
Sec. 1.1445-1(d) (except such information that was not obtained after a
diligent effort).
(ii) U.S. persons subjected to withholding. If a transferee
withholds tax under section 1445(a) with respect to a person who is not
a foreign person, such person may credit the amount of any tax withheld
against his income tax liability in accordance with the provisions of
this Sec. 1.1145-1(f) or apply for an early refund under Sec. 1.1445-
3(g).
(iii) Refund in case of installment sale. A transferor that takes
gain into account in accordance with the provisions of section 453 shall
not be entitled to a refund of the amount withheld, unless a withholding
certificate providing for such a refund is obtained from the Internal
Revenue Service pursuant to the provisions of Sec. 1.1445-3.
(iv) Joint foreign transferors. If two or more foreign persons
jointly transfer a U.S. real property interest, each transferor shall be
credited with such portion of the amount withheld as such transferors
mutually agree. Such transferors must request that the transferee
reflect the agreed-upon crediting of the amount withheld on the Forms
8288-A filed by the transferee. If the foreign transferors fail to
request that the transferee reflect the agreed-upon crediting of the
amount withheld by the 10th day after the date of transfer, the
transferee must credit the amount withheld equally between (or among)
the foreign transferors. In such case, the transferee is indemnified
pursuant to section 1461 against any claim by a transferor objecting to
the resulting division of credits. For rules regarding the amount
realized allocated to joint foreign and non-foreign transferors, see
Sec. 1.1445-1(b)(2).
(g) Definitions--(1) In general. Unless otherwise specified, the
definitions of terms provided in Sec. 1.897-1 shall apply for purposes
of this section and Secs. 1.1445-2 through 1.1445-7. For purposes of
section 1445 and the regulations thereunder, definitions of other
relevant terms are provided in this paragraph (g). In addition, the term
``residence'' is defined in 1.1445-2(d)(1), the terms ``transferor's
agent'' and ``transferee's agent'' are defined in 1.1445-4(f), and the
term ``relevant taxpayer'' is defined in 1.1445-6(a)(2).
(2) Transfer. The term ``transfer'' means any transaction that would
constitute a disposition for any purpose, of the Internal Revenue Code
and regulations thereunder. For purposes of Secs. 1.1445-5 and 1.1445-6,
the term includes distribution to shareholders of a corporation,
partners of a partnership and beneficiaries of a trust or estate.
(3) Transferor. The term ``transferor'' means any person, foreign or
domestic, that disposes of a U.S. real property interest by sale,
exchange, gift, or any other transfer. The term ``U.S. real property
interest'' is defined in Sec. 1.897-1(c).
(4) Transferee. The term ``transferee'' means any person, foreign or
domestic, that acquires a U.S. real property interest by purchase,
exchange, gift, or any other transfer.
(5) Amount realized. The amount realized by the transferor for the
transfer of a U.S. real property interest is the sum of.
(i) The cash paid, or to be paid.
(ii) The fair market value of other property transferred, or to be
transferred, and
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(iii) The outstanding amount of any liability assumed by the
transferee or to which the U.S. real property interest is subject
immediately before and after the transfer.
The term ``cash paid or to be paid'' does not include stated or unstated
interest or original issue discount (as determined under the rules of
sections 1271 through 1275).
(6) Contract price. The contract price of a U.S. real property
interest is the sum that is agreed to by the transferee and transferor
as the total amount of consideration to be paid for the property. That
amount will generally be equal to the amount realized by the transferor,
as defined in paragraph (b)(5) of this section.
(7) Fair market value. The fair market value of property means the
price at which the property would change hands between an unrelated
willing buyer and willing seller, neither being under any compulsion to
buy or to sell and both having reasonable knowledge of all relevant
facts.
(8) Date of transfer. The date of transfer of a U.S. real property
interest is the first date on which consideration is paid (or a
liability assumed) by the transferee. However, for purposes of section
1445(e) (2), (3), and (4) and Secs. 1.1445-5(c)(1)(iii) and 1.1445-
5(c)(3) only, the date of transfer is the date of the distribution that
gives rise to the obligation to withhold. For purposes of this paragraph
(g)(8), the payment of consideration does not include the payment, prior
to the passage of legal or equitable title (other than pursuant to an
initial contract for purchase), of earnest money, a good-faith deposit,
or any similar sum that is primarily intended to bind the transferee or
transferor to the entering or performance of a contract. Such a payment
will not constitute a payment of consideration solely because it may
ultimately be applied against the amount owed to the transferor by the
transferee. Such a payment is presumed to be earnest money, a good faith
deposit, or a similar sum if it is subject to forfeiture in the event of
a failure to enter into a contract or a breach of contract. However, a
payment that is not forefeitable may nevertheless be found to constitute
earnest money, a good faith deposit, or a similar sum.
(9) Identifying number. Pursuant to Sec. 1.897-1(p), an individual's
identifying number is the social security number (or the identification
numbers assigned by the Internal Revenue Service). The identifying
number of any other person is its United States employer identification
number.
(10) Address of the Assistant Commissioner International. Any
written communication directed to the Assistant Commissioner
(International) is to be addressed as follows: Director, Philadelphia
Service Center; 11601 Roosevelt Blvd.; Philadelphia, PA 19255; ATTN:
Drop Point 543X.
[T.D. 8113, 51 FR 46629, Dec. 24, 1986; 52 FR 3796, 3916, Feb. 6, 1987,
as amended by T.D. 8647, 60 FR 66076, Dec. 21, 1995]
Sec. 1.1445-2 Situations in which withholding is not required under section 1445(a).
(a) Purpose and scope of section. This section provides rules
concerning various situations in which withhold is not required under
section 1445(a). In general, a transferee has a duty to withhold under
section 1445(a) only if both of the following are true:
(1) The transferor is a foreign person; and
(2) The transferee is acquiring a U.S. real property interest.
Thus, paragraphs (b) and (c) of this section provide rules under which a
transferee of property can ascertain that he has no duty to withhold
because one or the other of the two key elements is missing. Under
paragraph (b), a transferee may determine that no withholding is
required because the transferor is not a foreign person. Under paragraph
(c), a transferee may determine that no withholding is required because
the property acquired is not a U.S. real property interest. Finally,
paragraph (d) of this section provides rules concerning exceptions to
the withholding requirement.
(b) Transferor not a foreign person--(1) In general. No withholding
is required under section 1445 if the transferor of a U.S. real property
interest is not a foreign person. Therefore, paragraph (b)(2) of this
section provides rules pursuant to which the transferor can provide a
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certification of non-foreign status to inform the transferee that
withholding is not required. A transferee that obtains such a
certification must retain that document for five years, as provided in
paragraph (b)(3) of this section. Except to the extent provided in
paragraph (b)(4) of this section, the obtaining of this certification
excuses the transferee from any liability otherwise imposed by section
1445 and Sec. 1.1445-1(e). However, section 1445 and the rules of this
section do not impose any obligation upon a transferee to obtain a
certification from the transferor, thus, a transferee may instead rely
upon other means to ascertain the non-foreign status of the transferor.
If, however, the transferee relies upon other means and the transferor
was, in fact, a foreign person, then the transferee is subject to the
liability imposed by section 1445 and Sec. 1.1445-1(e).
A transferee is in no event required to rely upon other means to
ascertain the non-foreign status of the transferor and may demand a
certification of non-foreign status. If the certification is not
provided, the transferee may withhold tax under section 1445 and will be
considered, for purposes of sections 1461 through 1463, to have been
required to withhold such tax.
(2) Transferor's certification of non-foreign status--(i) In
general. A transferee of a U.S. real property interest is not required
to withhold under section 1445(a) if, prior to or at the time of the
transfer, the transferor furnishes to the transferee a certification
that--
(A) States that the transferor is not a foreign person.
(B) Sets forth the transferor's name, identifying number and home
address (in the case of an individual) or office address (in the case of
an entity), and
(C) Is signed under penalties of perjury.
In general, a foreign person is a nonresident alien individual, foreign
corporation, foreign partnership, foreign trust, or foreign estate, but
not a resident alien individual. In this regard, see Sec. 1.897-1(k).
However, a foreign corporation that has made a valid election under
section 897(i) is generally not treated as a foreign person for purposes
of section 1445. In this regard, see Sec. 1.1445-7. Pursuant to
Sec. 1.897-1(p), an individual's identifying number is the individual's
Social Security number and any other person's identifying number is its
U.S. employer identification number. A certification pursuant to this
paragraph (b) must be vertified as true and signed under penalties of
perjury by a responsible officer in the case of a corporation, by a
general partner in the case of a partnership, and by a trustee,
executor, or equivalent fiduciary in the case of a trust or estate. No
particular form is needed for a certification pursuant to this paragraph
(b), nor is any particular language required, so long as the document
meets the requirements of this paragraph (b)(2)(i). Samples of
acceptable certifications are provided in paragraph(b)(2)(iii) of this
section.
(ii) Foreign corporation that ``has made election under section
897(i). A foreign corporation that has made a valid election under
section 897(i) to be treated as a domestic corporation for purposes of
section 897 may provide a certification of non-foreign status pursuant
to this paragraph (b)(2). However, an electing foreign corporation must
attach to such certification a copy of the acknowledgment of the
election provided to the corporation by the Internal Revenue Service
pursuant to Sec. 1.897-3(d)(4).
An acknowledgment is valid for this purpose only if it states that the
information required by Sec. 1.897-3 has been determined to be complete.
(iii) Sample certifications--(A) Individual transferor.
``Section 1445 of the Internal Revenue Code provides that a
transferee (buyer) of a U.S. real property interest must withhold tax if
the transferor (seller) is a foreign person. To inform the transferee
(buyer) that withholding of tax is not required upon my disposition of a
U.S. real property interest, I, [name of transferor], hereby certify the
following:
1. I am not a nonresident alien for purposes of U.S. income
taxation;
2. My U.S. taxpayer identifying number [Social Security number] is
________; and
3. My home address is:
_______________________________________________________________________
_______________________________________________________________________
I understand that this certification may be disclosed to the
Internal Revenue Service by the transferee and that any false statement
I have made here could be punished by fine, imprisonment, or both.
[[Page 170]]
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true,
correct, and complete. [Signature and Date]''
(B) Entity transferor.
``Section 1445 of the Internal Revenue Code provides that a
transferee of a U.S. real property interest must withhold tax if the
transferor is a foreign person. To inform the transferee that
withholding of tax is not required upon the disposition of a U.S. real
property interest by [name of transferor], the undersigned hereby
certifies the following on behalf of [name of transferor]:
1. [Name of transferor] is not a foreign corporation, foreign
partnership, foreign trust, or foreign estate (as those terms are
defined in the Internal Revenue Code and Income Tax Regulations]:
2. [Name of transferor]'s U.S. employer identification number is
________, and
3. [Name of transferor]'s office address is
_______________________________________________________________________
[Name of transferor] understands that this certification may be
disclosed to the Internal Revenue Service by transferee and that any
false statement contained herein could be punished by fine, imprisonment
or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true,
correct and complete, and I further declare that I have authority to
sign this document on behalf of [name of transferor].
[Signature and date]
[Title ________]
(3) Transferee must retain certification. If a transferee obtains a
transferor's certification pursuant to the rules of this paragraph (b),
then the transferee must retain that certification until the end of the
fifth taxable year following the taxable year in which the transfer
takes place. The transferee must retain the certification, and make it
avaliable to the Internal Revenue Service when requested in accordance
with the requirements of section 6001 and regulations thereunder.
(4) Reliance upon certification not permitted--(i) In general. A
transferee may not rely upon a transferor's certification pursuant to
this paragraph (b) under the circumstances set forth in either
subdivision (ii) or (iii) of this paragraph (b)(4). In either of those
circumstances, a transferee's withholding obligation shall apply as if a
certification had never been obtained, and the transferee is fully
liable pursuant to section 1445 and Sec. 1.1445-1(e) for any failure to
withhold.
(ii) Failure to attach IRS acknowledgment of election. A transferee
that knows that the transferor is a foreign corporation may not rely
upon a certification of non-foreign status provided by the corporation
on the basis of election under section 897(i), unless there is attached
to the certification a copy of the acknowledgment by the Internal
Revenue Service of the corporation's election, as required by paragraph
(b)(2)(ii) of this section.
(iii) Knowledge of falsity. A transferee is not entitled to rely
upon a transferor's certification if prior to or at the time of the
transfer the transferee either--
(A) Has actual knowledge that the transferor's certification is
false; or
(B) Receives a notice that the certification is false from a
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.
(iv) Belated notice of false certification. If after the date of the
transfer a transferee receives a notice that a certification is false,
then that transferee is entitled to rely upon the certification only
with respect to consideration that was paid prior to receipt for the
notice. Such a transferee is required to withhold a full 10 percent of
the amount realized from the consideration that remains to be paid to
the transferor if possible. Thus, if 10 percent or more of the amount
reailzed remains to be paid to the transferor then the transferee is
required to withhold and pay over the full 10 percent. The transferee
must do so by withholding and paying over the entire amount of each
successive payment of consideration to the transferor until the full 10
percent of the amount realized has been withheld and paid over. Amounts
so withheld must be reported and paid over by the 20th day following the
date on which each such payment of consideration is made. A transferee
that is subject to the rules of this paragraph (b)(4)(iv) may not obtain
a withholding certificate pursuant to Sec. 1.1445-3, but must instead
withhold and pay over the amounts required by this paragraph.
(c) Transferred property not a U.S. real property interest--(1) In
general. No withholding is required under section
[[Page 171]]
1445 if the transferee acquires only property that is not a U.S. real
property interest. As defined in section 897(c) and Sec. 1.897-1(c), a
U.S. real property interest includes certain interests in U.S.
corporations, as well as direct interests in real property and certain
associated personal property. This paragraph (c) provides rules pursuant
to which a person acquiring an interest in a U.S. corporation may
determine that withholding is not required because that interest is not
a U.S. real property interest. To determine whether an interest in
tangible property constitutes a U.S. real property interest the
acquisition of which would be subject to withholding, see Sec. 1.897-1
(b) and (c).
(2) Interests in publicly traded entities. No withholding is
required under section 1445(a) upon the acquisition of an interest in a
domestic corporation if any class of stock of the corporation is
regularly traded on an established securities market.
This exemption shall apply if the disposition is incident to an initial
public offering of stock pursuant to a registration statement filed with
the Securities and Exchange Commission. Similarly, no withholding is
required under section 1445(a) upon the acquisition of an interest in a
publicly traded partnership or trust. However, the rule of this
paragraph (c)(2) shall not apply to the acquisition, from a single
transferor in a single (or related transferors (as defined in
Sec. 1.897-1(i)) transaction (or related transactions), of an interest
described in Sec. 1.897-1(c)(2)(iii)(B) (relating to substantial amounts
of non-publicly traded interests in publicly traded corporations) or to
similar interests in publicly traded partnerships or trusts. The person
making an acquisition described in the preceding sentence must otherwise
determine whether withholding is required, pursuant to section 1445 and
the regulations thereunder. Transactions shall be deemed to be related
if they are undertaken within 90 days of one another or if it can
otherwise be shown that they were undertaken in pursuance of a
prearranged plan.
(3) Transferee receives statement that interest in corporation is
not a U.S. real property interest--(i) In general. No withholding is
required under section 1445(a) upon the acquisition of an interest in a
domestic corporation, if the tranferor provides the transferee with a
copy of a statement, issued by the corporation pursuant to Sec. 1.897-
2(h), certifying that the interest is not a U.S. real property interest.
In general, a corporation may issue such a statement only if the
corporation was not a U.S. real property holding corporation at any time
during the previous five years (or the period in which the interest was
held by its present holder, if shorter) or if interests in the
corporation ceased to be United States real property interests under
section 897(c)(1)(B). (A corporation may not provide such a statement
based on its determination that the interest in question is an interest
solely as a creditor). See Sec. 1.897-2 (f) and (h). The corporation may
provide such a statement directly to the transferee at the transferor's
request. The transferor must request such a statement prior to the
transfer, and shall, to the extent possible, specify the anticipated
date of the transfer. A corporation's statement may be relied upon for
purposes of this paragraph (c)(3) only if the statement is dated not
more than 30 days prior to the date of the transfer. A transferee may
also rely upon a corporation's statement that is voluntarily provided by
the corporation in response to a request from the transferee, if that
statement otherwise complies with the requirements of this paragraph
(c)(3) and Sec. 1.897-2(h).
(ii) Reliance on statement not permitted. A transferee is not
entitled to rely upon a statement that a corporation is not a U.S. real
property holding corporation if, prior to or at the time of the
transfer, the transferee either--
(A) Has actual knowledge that the statement is false, or
(B) Receives a notice that the statement is false from a
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.
Such a transferee's withholding obligations shall apply as if a
statement had never been given, and such a transferee may be held fully
liable pursuant to Sec. 1.1445-1(e) for any failure to withhold.
[[Page 172]]
(iii) Belated notice of false statement. If after the date of the
transfer, a transferee receives notice that a statement provided under
Sec. 1.1445-2(c)(3)(i) (that an interest in a corporation is not a U.S.
real property interest) is false, then such transferee may rely on the
statement only with respect to consideration that was paid prior to the
receipt of the notice.
Such a transferee is required to withhold a full 10 percent of the
amount realized from the consideration that remains to be paid to the
transferor, if possible. Thus, if 10 percent or more of the amount
realized remains to be paid to the transferor, then the transferee is
required to withhold and pay over the full 10 percent. The transferee
must do so by withholding and paying over the entire amount of each
successive payment of consideration to the transferor, until the full 10
percent of the amount realized has been withheld and paid over. Amounts
so withheld must be reported and paid over by the 20th day following the
date on which each such payment of consideration is made. A transferee
that is subject to the rules of this Sec. 1.1445-2(c)(3)(iii) may not
obtain a withholding certificate pursuant to Sec. 1.1445-3, but must
instead withhold and pay over the amounts required by this paragraph.
(d) Exceptions to requirement of withholding--(1) Purchase of
residence for $300,000 or less. No withholding is required under section
1445(a) if one or more individual transferees acquire a U.S. real
property interest for use as a residence and the amount realized on the
transaction is $300,000 or less. For purposes of this section, a U.S.
real property interest is acquired for use as a residence if on the date
of the transfer the transferee (or transferees) has definite plans to
reside at the property for at least 50 percent of the number of days
that the property is used by any person during each of the first two 12-
month periods following the date of the transfer. The number of days
that the property will be vacant is not taken into account in
determining the number of days such property is used by any person. A
transferee shall be considered to reside at a property on any day on
which a member of the transferee's family, as defined in section
267(c)(4), resides at the property. No form or other document need be
filed with the Internal Revenue Service to establish a transferee's
entitlement to rely upon the exception provided by this paragraph
(d)(1). A transferee who fails to withhold in reliance upon this
exception, but who does not in fact reside at the property for the
minimum number of days set forth above, shall be liable for the failure
to withhold (if the transferor was a foreign person and did not pay the
full U.S. tax due on any gain recognized upon the transfer). However, if
the transferee establishes that the failure to reside the minimum number
of days was caused by a change in circumstances that could not
reasonably have been anticipated at the time of the transfer, then the
transferee shall not be liable for the failure to withhold.
The exception provided by paragraph (d)(1) does not apply in any case
where the transferee is other than an individual even if the property is
acquired for or on behalf of an individual who will use the property as
a residence. However, this exception applies regardless of the
organizational structure of the transferor (i.e., regardless of whether
the transferor is an individual, partnership, trust, corporation, etc.).
(2) Coordination with nonrecognition provisions--(i) In general. A
transferee shall not be required to withhold under section 1445(a) with
respect to the transfer of a U.S. real property interest if--
(A) The transferor notifies the transferee, in the manner described
in paragraph (d)(2)(iii) of this section, that by reason of the
operation of a nonrecognition provision of the Internal Revenue Code or
the provisions of any United States treaty the transferor is not
required to recognize any gain or loss with respect to the transfer, and
(B) By the 20th day after the date of the transfer the transferee
provides a copy of the transferor's notice to the Assistant Commissioner
(International), at the address provided in Sec. 1.1445-1(g)(10),
together with a cover letter setting forth the name, identifying number
(if any), and home address (in the case of an individual) or office
address (in the case of an entity) of the transferee providing the
notice
[[Page 173]]
to the Service. The rule of this paragraph (d)(2)(i) is subject to the
exceptions set forth in paragraph (d)(2)(ii). For purposes of this
paragraph (d)(2) a nonrecognition provision is any provision of the
Internal Revenue Code for not recognizing gain or loss.
(ii) Exceptions. A transferee may not rely upon the rule of
paragraph (d)(2)(i) of this section, and must therefore withhold under
section 1445(a) with respect to the transfer of a U.S. real property
interest, if either:
(A) The transferor qualifies for nonrecognition treatment with
respect to part, but not all, of the gain realized by the transferor
upon the transfer, or
(B) The transferee knows or has reason to know that the transferor
is not entitled to the nonrecognition treatment claimed by the
transferor.
In either of the above circumstances the transferee or transferor may
request a withholding certificate from the Internal Revenue Service
pursuant to the rules of Sec. 1.1445-3.
(3) Special procedural rules applicable to foreclosures--(i) Amount
to be withheld--(A) foreclosures. A transferee that acquires a U.S. real
property interest pursuant to a repossession or foreclosure on such
property under a mortgage, security agreement, deed of trust or other
instrument securing a debt must withhold tax under section 1445(a) equal
to 10 percent of the amount realized on such sale. Such amount must be
reported and paid over to the Service under the general rules of
Sec. 1.1445-1. However, if the transferee complies with the notice
requirements of Sec. 1.1445-2(d)(3) (ii) and (iii), such transferee may
report and pay over to the Service on or before the 20th day following
the final determination by a court or trustee with jurisdiction over the
foreclosure action, the lesser of:
(1) The amount otherwise required to be withheld under section
1445(a), or
(2) The ``alternative amount'' as defined in the succeeding
sentence. The alternative amount is the entire amount, if any,
determined by a court or trustee with jurisdiction over the matter, that
accrues to the debtor/transferor out of the amount realized from the
foreclosure sale. The amount of any mortgage, lien, or other security
agreement secured by the property, that is terminated, assumed by
another person, or otherwise extinguished (as to the debtor/transferor)
shall not be treated as an amount that accrues to the debtor/transferor
for purposes of this Sec. 1.1445-2(d)(3)(i)(A). If the alternative
amount is zero, no withholding is required. Any difference between the
amount withheld at the time of the foreclosure sale and the amount to be
reported and paid over to the Service must be transferred to the court
or trustee with jurisdiction over the foreclosure action. Amounts
withheld, if any, are to be reported and paid to the Service by using
Forms 8288 and 8288-A in conformity with Sec. 1.1445-1(d).
(B) Deeds in lieu of foreclosures. A transferee of a U.S. real
property interest pursuant to a deed in lieu of foreclosure must
withhold tax equal to 10 percent of the amount realized by the debtor/
transferor on the transfer. However, no withholding is required if:
(1) The transferee is the only person with a security interest in
the property,
(2) No cash or other property (other than incidental fees incurred
with respect to the transfer) is paid, directly or indirectly, to any
person with respect to the transfer, and
(3) The notice requirement of Sec. 1.1445-2(d)(3) are satisfied.
The amount withheld, if any, must be reported and paid over to the
Service not later than the 20th day following the date of transfer. In a
case where withholding would otherwise be required, a withholding
certificate may be requested in accordance with Sec. 1.1445-3.
(ii) Notice to the court or trustee in a foreclosure action--(A)
Notice on day of purchase. A transferee in a foreclosure sale that
chooses to use the special rules applicable to foreclosures must provide
notice to the court or trustee with jurisdiction over the foreclosure
action on the day the property is transferred with respect to such
transferee's withholding obligation. No particular form is necessary but
the notice must set forth the transferee's name, home address in the
case of an individual, office address in the case of an entity, a brief
description of the property, the
[[Page 174]]
date of the transfer, the amount realized on the sale of the foreclosed
property and the amount withheld under section 1445(a).
(B) Notice whether amount withheld or alternative amount is reported
and paid over to the Service. A purchaser/transferee in a foreclosure
that chooses to use the special rules applicable to foreclosures must
provide notice to the court or trustee with jurisdiction over the
foreclosure action regarding whether the amount withheld or the
alternative amount will be (or has been) reported and paid over to the
Service. The notice should set forth all the information required by the
preceding paragraph (d)(3)(ii)(A), the amount withheld or alternative
amount that will be (or has been) reported and paid over to the Service,
and the amount that will be (or has been) paid over to the court or
trustee.
(iii) Notice to the Service--(A) General rule. A transferee that in
reliance upon the rules of this paragraph (d)(3) withholds an
alternative amount (or does not withhold because the alternative amount
is zero) must, on or before the 20th day following the final
determination by a court or trustee in a foreclosure action or on or
before the 20th day following the date of the transfer with respect to a
transfer pursuant to a deed in lieu of foreclosure, provide notice
thereof to the Assistant Commissioner (International) at the address
provided in Sec. 1.1445-1(g)(10). (The filing of such a notice shall not
relieve a creditor of any obligation it may have to file a notice
pursuant to section 6050J and the regulations thereunder.) No particular
form is required but the following information must be set forth in
paragraphs labelled to correspond with the numbers set forth below.
(1) A statement that the notice constitutes a notice of foreclosure
action or transfer pursuant to a deed in lieu of foreclosure under
Sec. 1.1445-2(d)(3).
(2) The name, identifying number (if any) and home address (in the
case of an individual) or office address (in the case of an entity) of
the purchaser/transferee.
(3) The name, identifying number (if any), and home address (in the
case of an individual) or office address (in the case of an entity) of
the debor/transferor.
(4) In a foreclosure action, the date of the final determination by
a court or trustee regarding the distribution of the amount realized
from the foreclosure sale. In a transfer pursuant to a deed in lieu of
foreclosure, the date the property is transferred to the purchaser/
transferee.
(5) A brief description of the property.
(6) The amount realized from the foreclosure sale or with respect to
the transfer pursuant to a deed in lieu of foreclosure.
(7) The alternative amount.
(B) Special rule for lenders required to file Form 1099-A where the
alternative amount is zero. A person required under section 6050J to
file Form 1099-A does not have to comply with the notice requirement of
Sec. 1.1445-2(d)(3)(iii)(A) if the alternative amount is zero. In such
case, the filing of the Form 1099-A will be deemed to satisfy the notice
requirments of Sec. 1.1445-2(d)(3)(iii)(A).
(iv) Requirements not applicable. A transferee is not required to
withhold tax or provide notice pursuant to the rules of this paragraph
(d)(3) if no substantive withholding liability applies to the transfer
of the property by the debtor/transferor. For example, if the debtor/
transferor provides the transferee with a certification of non-foreign
status pursuant to paragraph (b) of this section, then no substantive
withholding liability would exist with respect to the acquisition of the
property from the debtor transferor. In such a case, no withholding of
tax or notice to the Internal Revenue Service is required of the
transferee with respect to the repossession or foreclosure.
(v) Anti-abuse rule. If a U.S. real property interest is transferred
in foreclosure or pursuant to a deed in lieu of foreclosure for a
principal purpose of avoiding the requirements of section 1445(a), then
the provisions of this paragraph (d)(3) shall not apply to the transfer
and the transferee shall be fully liable for any failure to withhold
with respect to the transfer. A principal purpose to avoid section
1445(a) will be presumed (subject to rebuttal
[[Page 175]]
on the basis of all relevant facts and circumstances) if:
(A) The transferee acquires property in which it, or a related
party, has a security interest;
(B) The security interest did not arise in connection with the
debtor/transferor's or a related party's or predecessor in interest's
acquisition, improvement, or maintenance of the property; and
(C) The total amount of all debts secured by the property exceeds 90
percent of the fair market value of the property.
(4) Installment payments. A transferee of a U.S. real property
interest is not required to withhold under section 1445 when making
installment payments on an obligation arising out of a dispositions that
took place before January 1, 1985. With respect to disposition that take
place after December 31, 1984, the transferee shall be required to
satisfy its entire withholding obligation within the time specified in
Sec. 1.1445-1(c) regardless of the amount actually paid by the
transferee. Thereafter, no withholding is required upon further
installment payments on an obligation arising out of the transfer. A
transferee that is unable to satisfy its entire withholding obligation
within the time specified in Sec. 1.1445-1(c) may request a withholding
certificate pursuant to Sec. 1.1445-3.
(5) Acquisitions by governmental bodies. No withholding of tax is
required under section 1445 with respect to any acquisition of property
by the United States, a state or possession of the United States, a
political subdivision thereof, or the District of Columbia.
(6) [Reserved]
(7) Withholding certificate obtained by transferee or transferor. No
withholding is required under section 1445(a) if the transferee is
provided with a withholding cerfiticate that so specifies. Either the
transferor or the transferee may seek a withholding certificate from the
Internal Revenue Service, pursuant to the provisions of Sec. 1.1445-3.
(8) Amount realized by transferor is zero. If the amount realized by
transferor on a transfer of a U.S. real property interest is zero, no
withholding is required.
[T.D. 8113, 51 FR 46633, Dec. 24, 1986; 52 FR 3917, Feb. 6, 1987; as
amended at T.D. 8198, 53 FR 16230, May 5, 1988]
Sec. 1.1445-3 Adjustments to amount required to be withheld pursuant to withholding certificate.
(a) In general. Withholding under section 1445(a) may be reduced or
eliminated pursuant to a withholding certificate issued by the Internal
Revenue Service in accordance with the rules of this section. A
withholding certificate may be issued by the Service in cases where
reduced withholding is appropriate (see paragraph (c) of this section),
where the transferor is exempt from U.S. tax (see paragraph (d) of this
section), or where an agreement for the payment of tax is entered into
with the Service (see paragraph (e) of this section). A withholding
certificate that is obtained prior to a transfer notifies the transferee
that no withholding is required. A withholding certificate that is
obtained after a transfer has been made may authorize a normal refund or
an early refund pursuant to paragraph (g) of this section. Either a
transferee or transferor may apply for a withholding certificate. The
Internal Revenue Service will act upon an application for a withholding
certificate not later than the 90th day after it is received. Solely for
this purpose (i.e., determining the day upon which the 90-day period
commences), an application is received by the Service on the date that
all information necessary for the Service to make a determination is
provided by the applicant. (For rules regarding whether an application
for a withholding certificate has been timely submitted, see Sec. 1.445-
1(c)(2).) The Service may deny a request for a withholding certificate
where, after due notice, an applicant fails to provide information
necessary for the Service to make a determination. The Service will act
upon an application for an early refund not later than the 90th day
after it is received. An application for an early refund must either (1)
include a copy of a withholding certificate issued by the Service with
respect to the transaction or, (2) be combined with an application for a
withholding
[[Page 176]]
certificate. Where an application for an early refund is combined with
an application for a withholding certificate, the Service will act upon
both applications not later than the 90th day after receipt. In the case
of an application for a certificate based on non-conforming secuirty
under paragraph (e)(3)(v) of this section, and in unusually complicated
cases, the Service may be unable to provide a final withholding
certificate by the 90th day. In such a case the Service will notify the
applicant, by the 45th day after receipt of the application, that
additional processing time will be necessary. The Service's notice may
request additional information or explanation concerning particular
aspects of the application, and will provide a target date for final
action (contingent upon the application's timely submission of any
requested information). A withholding certificate issued pursuant to the
provisions of this section serves to fulfill the requirements of section
1445(b)(4) concerning qualifying statements, section 1445(c)(1)
concerning the transferor's maximum tax liability, or section 1445(c)(2)
concerning the Secretary's authority to prescribe reduced withholding.
(b) Applications for withholding certificates--(1) In general. An
application for a withholding certificate must be submitted to the
Assistant Commissioner (International), at the address provided in
Sec. 1.1445-1(g)(10). An application for a withholding certificate must
be signed by a responsible officer in the case of a corporation, by a
general partner in the case of a partnership, by a trustee, executor, or
equivalent fiduciary in the case of a trust or estate, and in the case
of an individual by the individual himself. A duly authorized agent may
sign the application but the application must contain a valid power of
attorney authorizing the agent to sign the application on behalf of the
applicant. The person signing the application must verify under
penalties of perjury that all representations made in connection with
the application are true, correct, and complete to his knowledge and
belief. No particular form is required for an application, but the
application must set forth the information described in paragraphs (b),
(2), (3), and (4) of this section.
(2) Parties to the transaction. The application must set forth the
name, address, and identifying number (if any) of the person submitting
the application (specifying whether that person is the transferee or
transferor), and the name, address, and identifying number (if any) of
other parties to the transaction (specifying whether each such party is
a transferee or transferor). The applicant must determine if an
identifying number exists for each party concerned and if none exists
for a particular party the application must so state. The address
provided in the case of an individual must be that individual's home
address, and the address provided in the case of an entity must be that
entity's office address. A mailing address may be provided in addition
to, but not in lieu of, a home address or office address.
(3) Real property interest to be transferred. The application must
set forth information concerning the U.S. real property interest with
respect to which the withholding certificate is sought, including the
type of interest, the contract price, and, in the case of an interest in
real property, its location and general description, or in the case of
an interest in a U.S. real property holding corporation, the class or
type and amount of the interest.
(4) Basis for certificate--(i) Reduced withholding. If a withholding
certificate is sought on the basis of a claim that reduced withholding
in appropriate, the application must include:
(A) A calculation of the maximum tax that may be imposed on the
disposition in accordance with paragraph (c)(2) of this section. Such
calculation must be accompanied by a copy of the relevant contract and
depreciation schedules or other evidence that confirms the contract
price and adjusted basis of the property. If no depreciation schedules
are provided, the application must state the nature of the use of the
property and why depreciation was not allowable. Evidence that supports
any claimed adjustment to the maximum tax on the disposition must also
be provided;
(B) A calculation of the transferor's unsatisfied withholding
liability, or
[[Page 177]]
evidence supporting the claim that no such liability exists, in
accordance with paragraph (c)(3) of this section; and
(C) In the case of a request for a special reduction of withholding
pursuant to paragraph (c)(4) of this section, a statement of law and
facts in support of the request.
(ii) Exemption. If a withholding certificate is sought on the basis
of the transferor's exemption from U.S. tax, the application must set
forth a brief statement of the law and facts that support the claimed
exemption. In this regard, see paragraph (d) of this section.
(iii) Agreement. If a withholding certificate is sought on the basis
of an agreement for the payment of tax, the application must include a
signed copy of the agreement proposed by the applicant and a copy of the
security instrument (if any) proposed by the applicant. In this regard,
see paragraph (e) of this section.
(c) Adjustment of amount required to be withheld--(1) In general.
The Internal Revenue Service may issue a withholding certificate that
excuses withholding or that permits the transferee to withhold an
adjusted amount reflecting the transferor's maximum tax liability. The
transferor's maximum tax liability is the sum of--
(i) The maximum amount which could be imposed as tax under section
871 or 882 upon the transferor's disposition of the subject real
property interest, as determined under paragraph (c)(2) of this section,
and
(ii) The transferor's unsatisfied withholding liability with respect
to the subject real property interest, as determined under paragraph
(c)(3) of this section.
In addition, the Internal Revenue Service may issue a withholding
certificate that permits the transferee to withhold a reduced amount if
the Service determines pursuant to paragraph (c)(4) of this section that
reduced withholding will not jeopardize the collection of tax.
(2) Maximum tax imposed on disposition. The first element of the
transferor's maximum tax liability is the maximum amount which the
transferor could be required to pay as tax upon the disposition of the
subject real property interest. In the case of an individual transferor
that amount will generally be the contract price of the property minus
its adjusted basis, multiplied by the maximum individual income tax rate
applicable to long term capital gain. In the case of a corporate
transferor, that amount will generally be the contract price of the
property minus its adjusted basis, multiplied by the maximum corporate
income tax rate applicable to long term capital gain. However, that
amount must be adjusted to take into account the following:
(i) Any reduction of tax to which the transferor is entitled under
the provisions of a U.S. income tax treaty;
(ii) The effect of any nonrecognition provision that is applicable
to the transaction;
(iii) Any losses realized and recognized upon the previous
disposition of U.S. real property interests during the taxable year;
(iv) Any amount that is required to be treated as ordinary income;
and
(v) Any other factor that may increase or reduce the tax upon the
disposition.
(3) Transferor's unsatisfied withholding liability--(i) In general.
The second element of the transferor's maximum tax liability is the
transferor's unsatisfied withholding liability. That liability is the
amount of any tax that the transferor was required to but did not
withhold and pay over under section 1445 upon the acquisition of the
subject U.S. real property interest or a predecessor interest. The
transferor's unsatisfied withholding liability is included in the
calculation of maximum tax liability so that such prior withholding
liability can be satisfied by the transferee's withholding upon the
current transfer. Alternatively, the transferor's unsatisfied
withholding liability may be disregarded for purposes of calculating the
maximum tax liability, if either--
(A) Such prior withholding liability is fully satisfied by a payment
that is made with the application submitted pursuant to this section; or
(B) An agreement is entered into for the payment of that liability
pursuant
[[Page 178]]
to the rules of paragraph (e) of this section.
Because section 1445 only requires withholding after December 31, 1984,
no transferor's unsatisfied withholding liability can exist unless the
transferor acquired the subject or predecessor real property interest
after that date. For purposes of this paragraph (c), a predecessor
interest is one that was exchanged for the subject U.S. real property
interest in a transaction in which the transferor was not required to
recognize the full amount of the gain or loss realized upon the
transfer.
(ii) Evidence that no unsatisfied withholding liability exists. For
purposes of paragraph (b)(4)(i)(B) of this section (concerning
information that must be submitted with an application for a withholding
certificate), evidence that the transferor has no unsatisfied
withholding liability includes any one of the following documents:
(A) Evidence that the transferor acquired the subject or predecessor
real property interest prior to January 1, 1985;
(B) A copy of the Form 8288 that was filed by the transferor, and
proof of payment of the amount shown due thereon, with respect to the
transferor's acquisition of the subject or predecessor real property
interest;
(C) A copy of a withholding certificate with respect to the
transferor's acquisition of the subject or predecessor real property
interest, plus a copy of Form 8288 and proof of payment with respect to
any withholding required under that certificate;
(D) A copy of the non-foreign certification furnished by the person
from whom the subject or predecessor U.S. real property interest was
acquired, executed at the time of that acquisition;
(E) Evidence that the transferor purchased the subject or
predecessor real property for $300,000 or less, and a statement signed
by the transferor under penalties of perjury, that the transferor
purchased the property for use as a residence within the meaning of
Sec. 1.1445-2(d)(1);
(F) Evidence that the person from whom the transferor acquired the
subject or predecessor U.S. real property interest fully paid any tax
imposed on that transaction pursuant to section 897.
(G) A copy of a notice of nonrecognition treatment provided to the
transferor pursuant to Sec. 1.1445-2(d)(2) by person from whom the
transferor acquired the subject or predecessor U.S. real property
interest; and
(H) A statement, signed by the transferor under penalties of
perjury, setting forth the facts and circumstances that supported the
transferor's conclusion that no withholding was required under section
1445(a) with respect to the transferor's acquisition of the subject or
predecessor real property interest.
(4) Special reduction of amount required to be withheld. The
Internal Revenue Service may, in its discretion, issue a withholding
certificate that permits the transferee to withhold a reduced amount
based upon a determination that reduced withholding will not jeopardize
the collection of tax. A transferor that requests a withholding
certificate pursuant to this paragraph (c)(4) is required pursuant to
paragraph (b)(4)(i)(C) of this section to submit a statement of law and
facts in support of the request. That statement must explain why the
transferor is unable to enter into an agreement for the payment of tax
pursuant to paragraph (e) of this section.
(d) Transferor's exemption from U.S. tax--(1) In general. The
Internal Revenue Service will issue a withholding certificate that
excuses all withholding by a transferee if it is established that:
(i) The transferor's gain from the disposition of the subject U.S.
real property interest will be exempt from U.S. tax, and
(ii) The transferor has no unsatisfied withholding liability.
For the available exemptions, see paragraph (d)(2) of this section. The
transferor's unsatisfied withholding liability shall be determined in
accordance with the provisions of paragraph (c)(3) of this section. A
transferor that is entitled to a reduction of (rather than an exemption
from) U.S. tax may obtain a withholding certificate to that effect
pursuant to the provisions of paragraph (c) of this section.
(2) Available exemptions. A transferor's gain from the disposition
of a
[[Page 179]]
U.S. real property interest may be exempt from U.S. tax because either:
(i) The transferor is an integral part or controlled entity of a
foreign government and the disposition of the subject property is not a
commercial activity, as determined pursuant to section 892 and the
regulations thereunder; or
(ii) The transferor is entitled to the benefits of an income tax
treaty that provides for such an exemption (subject to the limitations
imposed by section 1125(c) of Pub. L. 96-499, which, in general,
overrides such benefits as of January 1, 1985).
(e) Agreement for the payment of tax--(1) In general. The Internal
Revenue Service will issue a withholding certificate that excuses
withholding or that permits a transferee to withhold a reduced amount,
if either the transferee or the transferor enters into an agreement for
the payment of tax pursuant to the provisions of this paragraph (e). An
agreement for the payment of tax is a contract between the Service and
any other person that consists of two necessary elements. Those elements
are--
(i) A contract between the Service and the other person, setting
forth in detail the rights and obligations of each; and
(ii) A security instrument or other form of security acceptable to
the Director, Foreign Operations District.
(2) Contents of agreement--(i) In general. An agreement for the
payment of tax must cover an amount described in subdivision (ii) or
(iii) of this paragraph (e)(2). The agreement may either provide
adequate security for the payment of the chosen amount in accordance
with paragraph (e)(3) of this section, or provide for the payment of
that amount through a combination of security and withholding of tax by
the transferee.
(ii) Tax that would otherwise be withheld. An agreement for the
payment of tax may cover the amount of tax that would otherwise be
required to be withheld pursuant to section 1445(a). In addition to the
amount computed pursuant to section 1445(a), the applicant must agree to
pay interest upon that amount, at the rate established under section
6621, with respect to the period between the date on which the tax
imposed by section 1445(a) would otherwise be due (i.e., the 20th day
after the date of transfer) and the date on which the transferor's
payment of tax with respect to the disposition will be due under the
agreement. The amount of interest agreed upon must be paid by the
applicant regardless of whether or not the Service is required to draw
upon any security provided pursuant to the agreement. The interest may
be paid either with the return or by the Service drawing upon the
security.
(iii) Maximum tax liability. An agreement for the payment of tax may
cover the transferor's maximum tax liability, determined in accordance
with paragraph (c) of this section. The agreement must also provide for
the payment of an additional amount equal to 25 percent of the amount
determined under paragraph (c) of this section. This additional amount
secures the interest and penalties that would accrue between the date of
a failure to file a return and pay tax with respect to the disposition,
and the date on which the Service collects upon that liability pursuant
to the agreement. Such additional amount will only be collected if the
Service finds it necessary to draw upon any security provided due to the
transferor's failure to file a return and pay tax with respect to the
relevant disposition.
(3) Major types of security--(i) In general. The following are the
major types of security acceptable to the Service. Further details with
respect to the terms and conditions of each type may be specified by
Revenue Procedure.
(ii) Bond with surety or guarantor. The Service may accept as
security with respect to a transferor's tax liability a bond that is
executed with a satisfactory surety or guarantor. Only the following
persons may act as surety or guarantor for this purpose
(A) A surety company holding a certificate of authority from the
Secretary as an acceptable surety on Federal bonds, as listed in
Treasury Department Circular No. 570, published annually in the Federal
Register on the first working day of July;
(B) A person that is engaged within or without the United States in
the conduct of a banking, financing, or similar business under the
principles of
[[Page 180]]
Sec. 1.864-4(c)(5), and that is subject to U.S. or foreign local or
national regulation of such business, if that person is otherwise
acceptable to the Service; and
(C) A person that is engaged within or without the United States in
the conduct of an insurance business that is subject to U.S. or foreign
local or national regulation, if that person is otherwise acceptable to
the Service.
(iii) Bond with collateral. The Service may accept as security with
respect to a transferor's tax liability a bond that is secured by
acceptable collateral. All collateral must be deposited with a
responsible financial institution acting as escrow agent, or, in the
Service's discretion, with the Service. Only the following types of
collateral are acceptable:
(A) Bonds, notes, or other public debt obligations of the United
States, in accordance with the rules of 31 CFR part 225; and
(B) A certified cashier's, or treasurer's check, drawn on an entity
acceptable to the Service that is engaged within or without the United
States in the conduct of a banking, financing, or similar business under
the principles of Sec. 1.864-4(c)(5) and that is subject to U.S. or
foreign local or national regulation of such business.
(iv) Letter of credit. The Service may accept as security with
respect to a transferor's tax liability an irrevocable letter of credit.
The Service may accept a letter of credit issued by an entity acceptable
to the Service that is engaged within or without the United States in
the conduct of a banking, financing, or similar business under the
principles of Sec. 1.864-4(c)(5) and that is subject to U.S. or foreign
local or national regulation of such business. However, the Director
will accept a letter of credit from an entity that is not engaged in
trade or business in the United States only if such letter may be drawn
on an advising bank within the United States.
(v) Guarantees and other non-conforming security--(A) Guarantee. The
Service may in its discretion accept as security with respect to a
transferor's tax liability the applicant's guarantee that it will pay
such liability. The Service will in general accept such a guarantee only
from a corporation, foreign or domestic, any class of stock of which is
regularly traded on an established securities market on the date of the
transfer.
(B) Other forms of security. The Service may in unusual
circumstances and at its discretion accept any form of security that if
finds to be adequate. An application for a withholding certificate that
proposes a form of security that does not conform with any of the
preferred types set forth in paragraph (e)(3) (ii) through (iv) of this
section or any relevant Revenue Procedure must include:
(1) A detailed statement of the facts and circumstances supporting
the use of the proposed form of security, and
(2) A memorandum of law concerning the validity and enforceability
of the proposed form of security.
(4) Terms of security instrument. Any security instrument that is
furnished pursuant to this section must provide that--
(i) The amount of each deposit of estimated tax that will be
required with respect to the gain realized on the subject disposition
may be collected by levy upon the security as of the date following the
date on which each such deposit is due (unless such deposit is timely
made);
(ii) The entire amount of the liability may be collected by levy
upon the security at any time during the nine months following the date
on which the payment of tax with respect to the subject disposition is
due, subject to release of the security upon the full payment of the tax
and any interest and penalties due. If the transferor requests an
extension of time to file a return with respect to the disposition, then
the Director may require that the term of the security instrument be
extended until the date that is nine months after the filing deadline as
extended.
(f) Amendments to application for withholding certificate--(1) In
general. An applicant for a withholding certificate may amend an
otherwise complete application by submitting an amending statement to
the Assistant Commissioner (International), at the address
[[Page 181]]
provided in Sec. 1.1445-1(g)(10). The amending statement shall provide
the information required by Sec. 1.1445-3(f)(3) and must be signed and
accompanied by a penalties of perjury statement in accordance with
Sec. 1.1445-3(b)(1).
(2) Extension of time for the Service to process reqests for
withholding certificates--(i) In general. If an amending statement is
submitted, the time in which the Internal Revenue Service must act upon
the amended application shall be extended by 30 days.
(ii) Substantial amendments. If an amending statement is submitted
and the Service finds that the statement substantially amends the facts
of the underlying application or substantially alters the terms of the
withholding certificate as requested in the initial application, the
time within which the Service must act upon the amended application
shall be extended by 60 days. The applicant shall be so notified.
(iii) Amending statement received after the requested withholding
certificate has been signed by the Assistant Commissioner
(International). If an amending statement is received after the
withholding certificate, drafted in response to the underlying
application, has been signed by the Assistant Commissioner
(International) or his delegate and prior to the day such certificate is
mailed to the applicant, the time in which the Service must act upon the
amended application shall be extended by 90 days. The applicant will be
so notified.
(3) Information required to be submitted. No particular form is
required for an amending statement but the statement must provide the
following information:
(i) Identification of applicant. The amending statement must set
forth the name, address and identifying number (if any) of the person
submitting the amending statement (specifying whether that person is the
transferee or transferor).
(ii) Date of underlying application. The amending statement must set
forth the date of the underlying application for a withholding
certificate.
(iii) Real property interest to be (or that has been) transferred.
The amending statement must set forth a brief description of the real
property interest with respect to which the underlying application for a
withholding certificate was submitted.
(iv) Amending information. The amending statement must fully set
forth the basis for the amendment including any modification of the
facts supporting the application for a withholding certificate and any
change sought in the terms of the withholding certificate.
(g) Early refund of overwithheld amounts. If a transferor receives a
withholding certificate pursuant to this section, and an amount greater
than that specified in the certificate was withheld by the transferee,
then pursuant to the rules of this paragraph (g) the transferor may
apply for a refund (without interest) of the excess amount prior to the
date on which the transferor's tax return is due (without extensions).
(Any interest payable on refunds issued after the filing of a tax return
shall be determined in accordance with the provisions of section 6611
and regulations thereunder.) An application for an early refund must be
addressed to the Assistant Commissioner (International), at the address
provided in Sec. 1.1445-1(g)(10). No particular form is required for the
application, but the following information must be set forth in separate
paragraphs numbered to correspond with the number given below:
(1) Name, address, and identifying number (if any) of the transferor
seeking the refund;
(2) Amount required to be withheld pursuant to the withholding
certificate issued by Internal Revenue Service;
(3) Amount withheld by the transferee (attach a copy of Form 8288-A
stamped by IRS pursuant to Sec. 1.1445-1(c));
(4) Amount to be refunded to the transferor. An application for an
early refund cannot be processed unless the required copy of Form 8288-A
(or substantial evidence of the amount withheld in the case of a failure
to receive Form 8288-A as provided in Sec. 1.1445-1(f)(3)) is attached
to the application. If an application for a withholding certificate
based upon the transferor's maximum tax liability is submitted after the
transfer takes place, then that application may be combined with an
application for an early refund. The
[[Page 182]]
Service will act upon a claim for refund within the time limits set
forth in paragraph (a) of this section.
[T.D. 8113, 51 FR 46637, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]
Sec. 1.1445-4 Liability of agents.
(a) Duty to provide notice of false certification or statement to
transferee. A transferee's or transferor's agent must provide notice to
the transferee if either--
(1) The transferee is furnished with a non-U.S. real property
interest statement pursuant to Sec. 1.1445-2(c)(3) and the agent knows
that the statement is false; or
(2) The transferee is furnished with a non-foreign certification
pursuant to Sec. 1.1445-2(b)(2) and either (i) the agent knows that the
certification is false, or (ii) the agent represents a transferor that
is a foreign corporation. An agent that represents a transferor that is
a foreign corporation is not required to provide notice to the
transferee if the foreign corporation provided a non-foreign
certification to the transferee prior to such agent's employment and the
agent does not know that the corporation did so.
(b) Duty to provide notice of false certification or statement to
entity or fiduciary. A transferee's or transferor's agent must provide
notice to an entity or fiduciary that plans to carry out a transaction
described in section 1445(e) (1), (2), (3), or (4) if either--
(1) The entity or fiduciary is furnished with a non-U.S. real
property interest statement pursuant to Sec. 1.1445-5(b)(4)(iii) and the
agent knows that such statement is false; or
(2) The entity or fiduciary is furnished with a non-foreign
certification pursuant to Sec. 1.1445-5(b)(3) (ii) and either (i) the
agent knows that such certification is false, or (ii) the agent
represents a foreign corporation that made such a certification.
(c) Procedural requirements--(1) Notice to transferee, entity, or
fiduciary. An agent who is required by this section to provide notice
must do so in writing as soon as possible after learning of the false
certification or statement, but not later than the date of the transfer
(prior to the transferee's payment of consideration). If an agent first
learns of a false certification or statement after the date of the
transfer, notice must be given by the third day following that
discovery. The notice must state that the certification or statement is
false and may not be relied upon. The notice must also explain the
possible consequences to the recipient of a failure to withhold. The
notice need not disclose the information on which the agent's statement
is based. The following is an example of an acceptable notice.``This is
to notify you that you may be required to withhold tax in connection
with (describe transaction). You have been provided with a certification
of non-foreign status (or a non-U.S. real property interest statement)
in connection with that transaction. I have learned that that document
is false. Therefore, you may not rely upon it as a basis for failing to
withhold under section 1445 of the Internal Revenue Code. Section 1445
provides that any person who acquires a U.S. real property interest from
a foreign person must withhold a tax equal to 10 percent of the total
purchase price. (The term `U.S. real property interest' includes real
property, stock in U.S. corporations whose assets are primarily real
property, and some personal property associated with realty.) Any person
who is required to withhold but fails to do so can be held liable for
the tax. Thus, if you do not withhold the 10 percent tax from the total
that you pay on this transaction you could be required to pay the tax
yourself, if what you are acquiring is a U.S. real property interest and
the transferor is a foreign person. Tax that is withheld must be
promptly paid over to the IRS using Form 8288. For further information
see sections 897 and 1445 of the Internal Revenue Code and the related
regulations.''
(2) Notice to be filed with IRS. An agent who is required by
paragraph (a) or (b) of this section to provide notice to a transferee,
entity, or fiduciary must furnish a copy of that notice to the Internal
Revenue Service by the date on which the notice is required to be given
to the transferee, entity, or fiduciary. The copy of the notice must be
delivered to the Assistant Commissioner (International) at the address
provided in Sec. 1.1445-1(g)(10) and must be
[[Page 183]]
accompanied by a cover letter stating that the copy is being filed
pursuant to the requirements of this Sec. 1.1445-4(c)(2).
(d) Effect on recipient. A transferee, entity, or fiduciary that
receives a notice pursuant to this section prior to the date of the
transfer from any agent of the transferor or transferee may not rely
upon the subject certification or statement for purposes of excusing
withholding pursuant to Sec. 1.1445-2 or Sec. 1.1445-5. Therefore, the
recipient of a notice may be held liable for any failure to deduct and
withhold tax under section 1445 as if such certification or statement
had never been given. For special rules concerning the effect of the
receipt of a notice after the date of the transfer, see Secs. 1.1445-
2(b)(4)(iv) and 1.1445-5 (c), (d) and (e).
(e) Failure to provide notice. Any agent who is required to provide
notice but who fails to do so in the manner required by paragraph (a) or
(b) of this section shall be held liable for the tax that the recipient
of the notice would have been required to withhold under section 1445 if
such notice had been given. However, an agent's liability under this
paragraph (e) is limited to the amount of compensation that that agent
derives from the transaction. In addition, an agent who assists in the
preparation of, or fails to disclose knowledge of, a false certification
or statement may be liable for civil or criminal penalties.
(f) Definition of transferor's or transferee's agent--(1) In
general. For purposes of this section, the terms ``transferor's agent''
and ``transferee's agent'' means any person who represents the
transferor or transferee (respectively)--
(i) In any negotiation with another person (or another person's
agent) relating to the transaction; or
(ii) In settling the transaction.
(2) Transactions subject to section 1445(e). In the case of
transactions subject section 1445(e), the following definitions apply.
(i) The term ``transferor's agent'' means any person that represents
or advises an entity or fiduciary with respect to the planning,
arrangement, or consummation by the entity of a transaction described in
section 1445(e) (1), (2), (3), or (4).
(ii) The term ``transferee's agent'' means any person that
represents or advises the holder of an interest in an entity with
respect to the planning, arrangement or consummation by the entity of a
transaction described in section 1445(e) (1), (2), (3), or (4).
(3) Exclusion of settlement officers and clerical personnel. For
purposes of this section, a person shall not be treated as a
transferor's agent or transferee's agent with respect to any transaction
solely because such person performs one or more of the following
activities.
(i) The receipt and disbursement of any portion of the consideration
for the transaction;
(ii) The recording of any document in connection with the
transaction;
(iii) Typing, copying, and other clerical tasks;
(iv) The obtaining of title insurance reports and reports concerning
the condition of the real property that is the subject of the
transaction; or
(v) The transmission or delivery of documents between the parties.
(4) Exclusion for governing body of a condominium association and
the board of directors of a cooperative housing corporation. The members
of a board, committee or other governing body of a condominium
association and the board of directors and officers of a cooperative
housing corporation will not be deemed agents of the transferor or
transferee if such individuals function exclusively in their capacity as
representatives of such association or corporation with respect to the
transaction. In addition, the managing agent of a cooperative housing
corporation or condominium association will not be deemed to be an agent
of the transferee or transferor if such person functions exclusively in
its capacity as a managing agent. If a person's activities include
advising the transferee or transferor with respect to the transfer, this
exclusion shall not apply.
[T.D. 8113, 51 FR 46641, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]
Sec. 1.1445-5 Special rules concerning distributions and other transactions by corporations, partnerships, trusts, and estates.
(a) Purpose and scope. This section provides special rules
concerning the
[[Page 184]]
withholding that is required under section 1445(e) upon distributions
and other transactions involving domestic or foreign corporations,
partnerships, trusts, and estates. Paragraph (b) of this section
provides rules that apply generally to the various withholding
requirements set forth in this section. Under section 1445(e)(1) and
paragraph (c) of this section, a domestic partnership or the fiduciary
of a domestic trust or estate is required to withhold tax upon the
entity's disposition of a U.S. real property interest if any foreign
persons are partners or beneficiaries of the entity. Paragraph (d)
provides rules concerning the requirement of section 1445(e)(2) that a
foreign corporation withhold tax upon its distribution of a U.S. real
property interest to its interest-holders. Finally, under section
1445(e)(3) and paragraph (e) of this section a domestic U.S. real
property holding corporation is required to withhold tax upon certain
distributions to interest-holders that are foreign persons. Paragraphs
(f) and (g) of this section are reserved to provide rules concerning
transactions involving interests in partnerships, trusts, and estates
that will be subject to withholding pursuant to sections 1445(e) (4) and
(5).
(b) Rules of general application--(1) Double withholding not
required. If tax is required to be withheld with respect to a transfer
of property in accordance with the rules of this section, then no
additional tax is required to be withheld by the transferee of the
property with respect to that transfer pursuant to the general rules of
section 1445(a) and Sec. 1.1445-1. For rules coordinating the
withholding under section 1441 (or section 1442 or 1443) and under
section 1445 on distributions from a corporation, see Sec. 1.1441-
3(b)(4). If a transfer of a U.S. real property interest described in
section 1445(e) is exempt from withholding under the rules of this
section, then no withholding is required under the general rules of
section 1445(a) and Sec. 1.1445-1.
(2) Coordination with nonrecognition provisions--(i) In general.
Withholding shall not be required under the rules of this section with
respect to a transfer described in section 1445(e) of a U.S. real
property interest if--
(A) By reason of the operation of a nonrecognition provision of the
Internal Revenue Code or the provisions of any treaty of the United
States no gain or loss is required to be recognized by the foreign
person with respect to which withholding would otherwise be required;
and
(B) The entity or fiduciary that is otherwise required to withhold
complies with the notice requirements of paragraph (b)(2)(ii) of this
section. The entity or fiduciary must determine whether gain or loss is
required to be recognized pursuant to the rules of section 897 and the
applicable nonrecognition provisions of the Internal Revenue Code. An
entity or fiduciary may obtain a withholding certificate from the
Internal Revenue Service that confirms the applicability of a
nonrecognition provision, but is not required to do so. For purposes of
this paragraph (b)(2), a nonrecognition provision is any provision of
the Internal Revenue Code for not recognizing gain or loss. If
nonrecognition treatment is available only with respect to part of the
gain realized on a transfer, the exemption from withholding provided by
this paragraph (b)(2) shall not apply. In such cases a withholding
certificate may be sought pursuant to the provisions of Sec. 1.1445-6.
(ii) Notice of nonrecognition transfer. An entity or fiduciary that
fails to withhold tax with respect to a transfer in reliance upon the
rules of this paragraph (b)(2) must by the 20th day after the date of
the transfer deliver a notice thereof to the Assistant Commissioner,
(International), at the address provided in Sec. 1.1445-1(g)(10). No
particular form is required for a notice of transfer, but the following
information must be set forth in paragraphs labelled to correspond with
the letter set forth below:
(A) A statement that the document submitted constitutes a notice of
a nonrecognition transfer pursuant to the requirements of Sec. 1.1445-
5(b)(2)(ii);
(B) The name, office address, and identifying number (if any) of the
entity of fiduciary submitting the notice;
(C) The name, identifying number (if any), and home address (in the
case of an individual) or office address (in the case of an entity) of
each foreign person with respect to which withholding would otherwise be
required;
[[Page 185]]
(D) A brief description of the transfer; and
(E) A brief statement of the law and facts supporting the claim that
recognition of gain or loss is not required with respect to the
transfer.
(3) Interest-holder not a foreign person--(i) In general. Pursuant
to the provisions of paragraphs (c) and (e) of this section, an entity
or fiduciary is required to withhold with respect to certain transfers
of property if a holder of an interest in the entity is a foreign
person. For purposes of determining whether a holder of an interest is a
foreign person, and entity or fiduciary may rely upon a certification of
nonforeign status provided by that person in accordance with paragraph
(b)(3)(ii) of this section. Except to the extent provided in paragraph
(b)(3)(iii) of this section, such a certification excuses the entity or
fiduciary from any liability otherwise imposed pursuant to section
1445(e) and regulations thereunder. However, no obligation is imposed
upon an entity or fiduciary to obtain certifications from interest-
holders; an entity or fiduciary may instead rely upon other means to
ascertain the nonforeign status of an interest-holder. If the entity or
fiduciary does rely upon other means but the interest-holder proves, in
fact, to be a foreign person, then the entity or fiduciary is subject to
any liability imposed pursuant to section 1445 and regulations
thereunder.
An entity or fiduciary is not required to rely upon other means to
ascertain the non-foreign status of an interest-holder and may demand a
certification of non-foreign status. If the certification is not
provided, the entity or fiduciary may withhold tax under section 1445
and will be considered, for purposes of sections 1461 through 1463, to
have been required to withhold such tax.
(ii) Interest-holder's certification of non-foreign status--(A) In
general. For purposes of this section, an entity or fiduciary may treat
any holder of an interest in the entity as a U.S. person if that
interest-holder furnishes to the entity or fiduciary a certification
stating that the interest-holder is not a foreign person, in accordance
with the provisions of paragraph (b)(3)(ii)(B) of this section. In
general, a foreign person is a nonresident alien individual, foreign
corporation, foreign partnership, foreign trust, or foreign estate, but
not a resident alien individual. In this regard, see Sec. 1.897-1(k).
(B) Procedural rules. An interest-holder's certification of non-
foreign status must--
(1) State that the interest-holder is not a foreign person;
(2) Set forth the interest-holder's name, identifying number, home
address (in the case of an individual), or office address (in the case
of an entity), and place of incorporation (in the case of a
corporation); and
(3) Be signed under penalties of perjury.
Pursuant to Sec. 1.897-1(p), an individual's identifying number is the
individual's Social Security number and any other person's identifying
number is its U.S. employer identification number. The certification
must be signed by a responsible officer in the case of a corporation, by
a general partner in the case of a partnership, and by a trustee,
executor, or equivalent fiduciary in the case of a trust or estate. No
particular form is needed for a certification pursuant to this paragraph
(b)(3)(ii)(B), nor is any particular language required, so long as the
document meets the requirements of this paragraph. Samples of acceptable
certifications are provided in paragraph (b)(3)(ii)(D) of this section.
An entity may rely upon a certification pursuant to this paragraph
(b)(3)(ii)(B) for a period of two calendar years following the close of
the calendar year in which the certification was given.
If an interest holder becomes a foreign person within the period
described in the preceding sentence, the interest-holder must notify the
entity prior to any further dispositions or distributions and upon
receipt of such notice (or any other notification of the foreign status
of the interest-holder) the entity may no longer rely upon the prior
certification. An entity that obtains and relies upon a certification
must retain that certification with its books and records for a period
of three calendar years following the close of the last calendar year in
which the entity relied upon the certification.
[[Page 186]]
(C) Foreign corporation that has made an election under section
897(i). A foreign corporation that has made a valid election under
section 897(i) to be treated as a domestic corporation for purposes of
section 897 may provide a certification of non-foreign status pursuant
to this paragraph (b)(3)(ii). However, an electing foreign corporation
must attach to such certification a copy of the acknowledgment of the
election provided to the corporation by the Internal Revenue Service
pursuant to Sec. 1.897-3(d)(4).
An acknowledgment is valid for this purpose only if it states that the
information required by Sec. 1.897-3 has been determined to be complete.
(D) Sample certifications--(1) Individual interest-holder.
``Under section 1445(e) of the Internal Revenue Code, a corporation,
partnership, trust or estate must withhold tax with respect to certain
transfers of property if a holder of an interest in the entity is a
foreign person. To inform (name of entity) that no withholding is
required with respect to my interest in it, I, (name of interest-
holder), hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income
taxation;
2. My U.S. taxpayer identifying number (Social Security number) is
________; and
3. My home address is
_______________________________________________________________________
_______________________________________________________________________
I agree to inform [name of entity] promptly if I become a nonresident
alien at any time during the three years immediately following the date
of this notice.
I understand that this certification may be disclosed to the
Internal Revenue Service by (name of entity) and that any false
statement I have made here could be punished by fine, imprisonment, or
both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true,
correct, and complete.
[Signature and date]''
(2) Entity interest-holder. ``Under section 1445(e) of the Internal
Revenue Code, a corporation, partnership, trust, or estate must withhold
tax with respect to certain transfers of property if a holder of an
interest in the entity is a foreign person. To inform [name of entity]
that no withholding is required with respect to [name of interest-
holder]'s interest in it, the undersigned hereby certifies the following
on behalf of [name of interest-holder]:
1. [Name of interest-holder] is not a foreign corporation, foreign
partnership, foreign trust, or foreign estate (as those terms are
defined in the Internal Revenue Code and Income Tax Regulations);
2. [Name of interest-holder]'s U.S. employer identification number
is ________; and
3. [Name of interest-holder]'s office address is
_______________________________________________________________________
and place of incorporation (if applicable) is
_______________________________________________________________________
[Name of interest holder] agrees to inform [name of entity] if it
becomes a foreign person at any time during the three year period
immediately following the date of this notice.
[Name of interest-holder] understands that this certification may be
disclosed to the Internal Revenue Service by [name of entity] and that
any false statement contained herein could be punished by fine,
imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true,
correct, and complete, and I further declare that I have authority to
sign this document on behalf of [name of interest-holder].
[Signature and date]
[Title ]''
(iii) Reliance upon certification not permitted. An entity or
fiduciary may not rely upon an interest-holder's certification of non-
foreign status if, prior to or at the time of the transfer with respect
to which withholding would be required, the entity or fiduciary either--
(A) Has actual knowledge that the certification is false;
(B) Has received a notice that the certification is false from a
transferor's or transferee's agent, pursuant to Sec. 1.1445-4; or
(C) Has received from a corporation that it knows to be a foreign
corporation a certification that does not have attached to it a copy of
the IRS acknowledgment of the corporation's election under section
897(i), as required by paragraph (b)(3)(ii)(C) of this section. Such an
entity's or fiduciary's withholding obligations shall apply as if a
statement had never been given, and such an entity or fiduciary may be
held fully liable pursuant to Sec. 1.1445-1(e) for any failure to
withhold. For special rules concerning an entity's belated receipt of a
notice concerning a false certification, see paragraphs (c)(2)(ii) and
(e)(2)(iii) of this section.
(4) Property transferred not a U.S. real property interest--(i) In
general. Pursuant to the provisions of paragraphs (c)
[[Page 187]]
and (d) of this section, an entity or fiduciary is required to withhold
with respect to certain transfers of property, if the property
transferred is a U.S. real property interest. (In addition, taxable
distributions of U.S. real property interests by domestic or foreign
partnerships, trusts, and estates will be subject to withholding
pursuant to section 1445(e)(4) and paragraph (f) of this section after
publication of a Treasury decision under sections 897 (e)(2) and (g). As
defined in section 897(c) and Sec. 1.897-1(c), a U.S. real property
interest includes certain interests in U.S. corporations, as well as
direct interests in real property and certain associated personal
property. This paragraph (b)(4) provides rules pursuant to which an
entity (or fiduciary thereof) that transfers an interest in a U.S.
corporation may determine that withholding is not required because the
interest transferred is not a U.S. real property interest. To determine
whether an interest in tangible property constitutes a U.S. real
property interest the transfer of which would be subject to withholding,
see Sec. 1.897-1 (b) and (c).
(ii) Interests in publicly traded entities. Withholding is not
required under paragraph (c) or (d) of this section upon an entity's
transfer of an interest in a domestic corporation if any class of stock
of the corporation is regularly traded on an established securities
market. This exemption shall apply to a disposition incident to an
initial public offering of stock pursuant to a registration statement
filed with the Securities and Exchange Commission.
Similarly, no withholding is required under paragraph (c) or (d) of this
section upon an entity's transfer of an interest in a publicly traded
partnership or trust. However, the rule of this paragraph (b)(4)(ii)
shall not apply to the transfer, to a single transferee (or related
transferees as defined in Sec. 1.897-1(i)) in a single transaction (or
related transactions), of an interest described in Sec. 1.897-
1(c)(2)(iii)(B) (relating to substantial amounts of non-publicly traded
interests in publicly traded corporations) or of similar interests in
publicly traded partnerships or trusts. The entity making a transfer
described in the preceding sentence must otherwise determine whether
withholding is required, pursuant to section 1445(e) and the regulations
thereunder. Transactions shall be deemed to be related if they are
undertaken within 90 days of one another or if it can otherwise be shown
that they were undertaken in pursuance of a prearranged plan.
(iii) Corporation's statement that interest is not a U.S. real
property interest. (A) In general. No withholding is required under
paragraph (c) or (d) of this section upon an entity's transfer of an
interest in a domestic corporation if, prior to the transfer, the entity
or fiduciary obtains a statement, issued by the corporation pursuant to
Sec. 1.897-2(h), certifying that the interest is not a U.S. real
property interest. In general, a corporation may issue such a statement
only if the corporation was not a U.S. real property holding corporation
at any time during the previous five years (or the period in which the
interest was held by its present holder, if shorter) or if interests in
the corporation ceased to be United States real property interests under
section 897(c)(1)(B). (A corporation may not provide such a statement
based on its determination that the interest in question is an interest
solely as a creditor.) See Sec. 1.897-2 (f) and (h). A corporation's
statement may be relied upon for purposes of this paragraph (b)(4)(iii)
only if the statement is dated not more than 30 days prior to the date
of the transfer.
(B) Reliance on statement not permitted. An entity or fiduciary is
not entitled to rely upon a statement that an interest in a corporation
is not a U.S. real property interest, if, prior to or at the time of the
transfer, the entity or fiduciary either--
(1) Has actual knowledge that the statement is false, or
(2) Receives a notice that the statement is false from a
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.
Such an entity's or fiduciary's withholding obligations shall apply as
if a statement had never been given, and such an entity or fiduciary may
be held fully liable pursuant to Sec. 1.1445-1(e) for any failure to
withhold. For special rules concerning an entity's belated receipt of a
notice concerning a false
[[Page 188]]
statement, see paragraphs (c)(2)(iii) and (d)(2)(i) of this section.
(5) Reporting and paying over of withheld amounts--(i) In General.
An entity or fiduciary must report and pay over to the Internal Revenue
Service any tax withheld pursuant to section 1445(e) and this section by
the 20th day after the date of the transfer (as defined in Sec. 1.1445-
1(g)(8). Forms 8288 and 8288-A are used for this purpose and must be
filed with the Internal Revenue Service Center, Philadephia, PA 19255.
The contents of Forms 8288 and 8288-A are described in Sec. 1.1445-1(d).
Pursuant to section 7502 and regulations thereunder, the timely mailing
of Forms 8288 and 8288-A by U.S. mail will be treated as their timely
filing. Form 8288-A will be stamped by the Internal Revenue Service to
show receipt, and a stamped copy will be mailed by the Service to the
interest-holder, at the address shown on the form, for the interest-
holder's use. See paragraph (b)(7) of this section. If an application
for a withholding certificate with respect to a transfer of a U.S. real
property interest was submitted to the Internal Revenue Service on the
day of or at any time prior to the transfer, the entity or fiduciary
must withold the amount required under section 1445(e) and the rules of
this section. However, the amount withheld, or a lesser amount as
determined by the Service, need not be reported and paid over to the
Service until the 20th day following the Service's final determination.
For this purpose, the Service's final determination occurs on the day
when the withholding certificate is mailed to the applicant by the
Service or when a notification denying the request for a withholding
certificate is mailed to the applicant by the Service. An application is
submitted to the Service on the day it is actually received by the
Service at the address provided in Sec. 1.1445-1(g)(10) or, under the
rules of section 7502, on the day it is mailed to the Service at the
address provided in Sec. 1.1445-1(g)(10). For rules concerning the
issuance of withholding certificates, see Sec. 1.1445-6.
(ii) Anti-abuse rule. An entity or fiduciary that in reliance upon
the rules of this paragraph (b)(5)(ii) fails to report and pay over
amounts withheld by the 20th day following the date of the transfer,
shall be subject to the payment of interest and penalties if the
relevant application for a withholding certificate (or an amendment of
the application for a withholding certificate) was submitted for a
principle purpose of delaying the payment to the IRS of the amount
withheld. Interest and penalties shall be assessed on the amount that is
ultimately paid over, with respect to the period between the 20th day
after the date of the transfer and the date on which payment is made.
(6) Liability upon failure to withhold. For rules regarding
liability upon failure to withhold under section 1445(e) and this
Sec. 1.1445-5, see Sec. 1.1445-1(e).
(7) Effect of withholding by entity or fiduciary upon interest
holder. The withholding of tax under section 1445(e) does not excuse a
foreign person that is subject to U.S. tax by reason of the operation of
section 897 from filing a U.S. tax return. Thus, Form 1040NR. 1041. or
1120F, as appropriate must be filed and any tax due must be paid, by the
filing date otherwise applicable to such person (or any extension
thereof). The tax withheld with respect to the foreign person under
section 1445(e) (as shown on Form 8288-A) shall be credited against the
amount of income tax as computed in such return, but only if the stamped
copy of Form 8288-A provided to the entity or fiduciary (under paragraph
(b)(5) of this section) is attached to the return or substantial
evidence of the amount of tax withheld is attached to the return in
accordance with the succeeding sentence. If a stamped copy of Form 8288-
A has not been provided to the interest-holder by the Service, the
interest-holder may establish the amount of tax withheld by the entity
or fiduciary by attaching to its return substantial evidence of such
amount. Such an interestholder must attach to its return a statement
which supplies all of the information required by Sec. 1.1445-1(d) (2)
(expect such information that was not obtained by a diligent effort.) If
the amount withheld under section 1445(e) constitutes less than the full
amount of the foreign person's U.S. tax liability for that taxable year,
then a payment of estimated tax may be required to be made pursuant to
section 6154 or 6654 prior to the filing of the income tax return for
the year.
[[Page 189]]
Alternatively, if the amount withheld under section 1445(e) exceeds the
foreign person's maximum tax liability with respect to the transaction
(as reflected in a withholding certificate issued by the Internal
Revenue Service pursuant to Sec. 1.1445-6), then the foreign person may
seek an early refund of the excess pursuant to Sec. 1.1445-6(g). A
foreign person that takes gain into account in accordance with the
provisions of section 453 shall not be entitled to a refund to the
amount withheld, unless a withholding certificate providing for such a
refund is obtained pursuant to Sec. 1.1445-6. If an entity or fiduciary
withholds tax under section 1445(e) with respect to a beneficial owner
of an interest who is not a foreign person, such beneficial owner may
credit the amount of any tax withheld against his income tax liability
in accordance with the provisions of this Sec. 1.1445-5(b)(7) or apply
for an early refund under Sec. 1.1445-6(g).
(8) Effective dates--(i) Partnership, trust, and estate dispositions
of U.S. real property interests. The provisions of section 1445(e)(1)
and paragraph (c) of this section, requiring withholding upon certain
dispositions of U.S. real property interests by domestic partnerships,
trusts, and estates, shall apply to any disposition on or after January
1, 1985.
(ii) Certain distributions by foreign corporations. The provisions
of section 1445(e)(2) and paragraph (d) of this section, requiring
withholding upon distributions of U.S. real property interests by
foreign corporations shall apply to distributions made on or after
January 1, 1985.
(iii) Distributions by certain domestic corporations to foreign
shareholders. The provisions of section 1445(e)(3) and paragraph (e) of
this section, requiring withholding upon distributions by U.S. real
property holding corporations to foreign shareholders, shall apply to
distributions made on or after January 1. 1985.
(iv) Taxable distributions by domestic or foreign partnerships,
trusts, and estates. The provisions of section 1445(e)(4), requiring
withholding upon certain taxable distributions by domestic or foreign
partnerships, trusts, and estates, shall apply to distributions made on
or after the effective date of a Treasury decision under section 897
(e)(2)(B)(ii) and (g).
(v) [Reserved]
(vi) Tiered Partnerships. No withholding is required upon the
disposition of a U.S. real property interest by a partnership which is
directly owned, in whole or in part, by another domestic partnership
(but only to the extent that the amount realized is attributable to the
partnership interest of that other partnership) until the effective date
of a Treasury Decision published under section 1445(e) providing rules
governing this matter.
(c) Dispositions of U.S. real property interests by domestic
partnerships, trusts, and estates--(1) Withholding required--(i) In
general. If a domestic partnership, trust, or estate disposes of a U.S.
real property interest and any partner, beneficiary, or owner of the
entity is a foreign person, then the partnership or the trustee,
executor, or equivalent fiduciary of the trust or estate must withhold
tax with respect to each such foreign person in accordance with the
provisions of subdivision (ii), (iii), or (iv), of this paragraph (c)(1)
(as applicable). The withholding obligation imposed by this paragraph
(c) applies to the fiduciary of a trust even if the grantor of the trust
or another person is treated as the owner of the trust or any portion
thereof for purposes of the Internal Revenue Code. Thus, the withholding
obligation imposed by this paragraph (c) applies to the trustee of a
land trust or similar arrangement, even if such a trustee is not
ordinarily treated under the applicable provisions of local law as a
true fiduciary.
(ii) Disposition by partnership. A partnership must withhold a tax
equal to 35 percent (or the highest rate specified in section
1445(e)(1)) of each foreign partner's distributive share of the gain
realized by the partnership upon the disposition of each U.S. real
property interest. Such distributive share of the gain must be
determined pursuant to the principles of section 704 and the regulations
thereunder. For the rules applicable to partnerships, interests in which
are regularly traded on an established securities market, see
Sec. 1.1445-8.
[[Page 190]]
(iii) Disposition by trust or estate.--(A) In general. A trustee,
fiduciary, executor or equivalent fiduciary (hereafter collectively
referred to as the fiduciary) of a trust or estate having one or more
foreign beneficiaries must withhold tax in accordance with the rules of
this Sec. 1.1445-5(c)(1)(iii). Such a fiduciary must establish a U.S.
real property interest account and must enter in such account all gains
and losses realized during the taxable year of the trust or estate from
dispositions of U.S. real property interests. The fiduciary must
withhold 35 percent (or the highest rate specified in section
1445(e)(1)) of any distribution to a foreign beneficiary that is
attributable to the balance in the U.S. real property interest account
on the day of the distribution. A distribution from a trust or estate to
a beneficiary (domestic or foreign) shall, solely for purposes of
section 1445(e)(1), be deemed to be attributable first to any balance in
the U.S. real property interest account and then to other amounts.
However, a distribution that occurs prior to the transfer of a U.S. real
property interest in a taxable year or at any other time when the amount
contained in the U.S. real property interest account is zero, is not
subject to withholding under this Sec. 1.1445-5(c)(1)(iii). The U.S.
real property interest account is reduced by the amount distributed to
all beneficiaries (domestic and foreign) attributable to such account
during the taxable year of the trust or estate. Any ending balance of
the U.S. real property interest account not distributed by the close of
the taxable year of the trust or estate is cancelled and is not carried
over (or carried back) to any other year. Thus, the beginning balance of
such account in any taxable year of the trust or estate is always zero.
For rules applicable to grantor trusts see Sec. 1.1445-5(c)(1)(iv). For
rules applicable to trusts, interests in which are regularly traded on
an established securities market and real estate investment trusts, see
Sec. 1.1445-8.
(B) Example.The following example illustrates the rules of paragraph
(c)(1)(iii)(A) of this section.
On January 1, 1994, A establishes a domestic trust (which has as its
taxable year, the calendar year) for the benefit of B, a nonresident
alien, and C, a U.S. citizen. The trust is not a trust subject to
sections 671 through 679. Under the terms of the trust, the trustee, T,
is given discretion to distribute income and corpus of the trust to
provide for the reasonable needs of B and C. During the trust's 1994 tax
year, T disposes of three parcels of vacant land located in the United
States. The following chart illustrates the computation of the amount
subject to withholding under section 1445 with respect to distributions
made by T to B and C during 1994.
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. real
Gains or Distributions Distributions Section 1445 property
Date Parcel sold (loss) to C to B (before withholding interest
realized withholding) 35% rate account
--------------------------------------------------------------------------------------------------------------------------------------------------------
1/01/94.................................. ............................ .............. .............. .............. .............. -0-
3/01/94.................................. Parcel 1.................... 140,000 .............. .............. .............. 140,000
3/05/94.................................. ............................ .............. 5,000 10,000 3,500 125,000
3/15/94.................................. ............................ .............. 10,000 5,000 1,750 110,000
5/01/94.................................. Parcel 2.................... 300,000 .............. .............. .............. 410,000
5/15/94.................................. Parcel 3.................... (50,000) .............. .............. .............. 360,000
12/01/94.................................. ............................ .............. 170,000 170,000 59,500 20,000
1/01/95.................................. ............................ .............. .............. .............. .............. -0-
--------------------------------------------------------------------------------------------------------------------------------------------------------
(iv) Disposition by grantor trust. The trustee or equivalent
fiduciary of a trust that is subject to the provisions of subpart E of
part 1 of subchapter J (sections 671 through 679) must withhold a tax
equal to 35 percent (or the highest rate specified in section
1445(e)(1)) of the gain realized from each disposition of a U.S. real
property interest to the extent such gain is allocable to a portion of
the trust treated as owned by a foreign person under subpart E of part 1
of subchapter J.
(2) Withholding not required under paragraph (c)--(i) [Reserved]
(ii) Interest-holder not a foreign person--(A) In general. A
domestic partnership, trust, or estate that disposes of a U.S. real
property interest shall not be required to withhold with respect to any
partner or beneficiary that it determines, pursuant to the
[[Page 191]]
rules of paragraph (b)(3) of this section, not to be a foreign person.
(B) Belated notice of false certification. If after the date of the
transfer a partnership or fiduciary learns that a partner's or
beneficiary's certification of non-foreign status is false, then that
partnership or fiduciary shall be required to withhold, with respect to
the foreign partner or beneficiary that gave the false certification,
the lessor of--
(1) The amount otherwise required to be withheld under the rules of
this paragraph (c), or
(2) An amount equal to that partner's or beneficiary's remaining
interests in the income or assets of the partnership, trust, or estate.
Amounts so withheld must be reported and paid over by the 60th day
following the date on which the partnership or fiduciary learns that the
certification is false. For rules concerning the notifications of false
certifications that may be required to be given to partnerships and
fiduciaries, see Sec. 1.1445-4(b).
(iii) Property disposed of not a U.S. real property interest--(A) In
general. No withholding is required under this paragraph (c) if a
domestic partnership, trust, or estate that disposes of property
determines pursuant to the rules of paragraph (b)(4) of this section
that the property disposed of is not a U.S. real property interest.
(B) Belated notice of false statement. If after the date of the
transfer a partnership or fiduciary learns that a corporation's
statement (that an interest in the corporation is not a U.S. real
property interest) is false, then that partnership or fiduciary shall be
required to withhold, with respect to each foreign partner or
beneficiary, the lesser of--
(1) The amount otherwise required to be withheld under the rules of
this paragraph (c), or
(2) An amount equal to that partner's or beneficiary's remaining
interests in the income or assets of the parnership, trust, or estate.
Amounts so withheld must be reported and paid over by the 60th day
following the date on which the partnership or fiduciary learns that the
statement is false. For rules concerning the notifications of false
statements that may be required to be given to partnerships or
fiduciaries, see Sec. 1.1445-4(b).
(iv) Withholding certificate. No withholding is required under this
paragraph (c) with respect to the transfer of a U.S. real property
interest if the Internal Revenue Service issues a withholding
certificate that so provides. For rules concerning the issuance of
withholding certificates, see Sec. 1.1445-6.
(v) Nonrecognition transactions. For special rules concerning
transactions entitled to nonrecognition of gain or loss, see paragraph
(b)(2) of this section.
(3) Large partnerships or trusts--(i) In general. If a partnership
or trust has more than 100 partners or beneficiaries, then the
partnership or fiduciary of the trust may elect to withhold in
accordance with the provisions of this Sec. 1.1445-5(c)(3) in lieu of
withholding in the manner required by Sec. 1.1445-5(c)(1). However, the
rules of this Sec. 1.1445-5(c)(3) shall not apply to any partnership or
trust interests in which are regularly traded on an established
securities market except as described in Sec. 1.1445-8(c)(1). The rules
of this Sec. 1.1445-5(c)(3) shall not apply to any real estate
investment trust. See Sec. 1445-8.
(ii) Amount to be withheld. A partnership or trust electing to
withhold under this Sec. 1.1445-5(c)(3) shall withhold from each
distribution to a foreign person an amount equal to 35 percent (or the
highest rate specified in section 1445(e)(1)) of the amount attributable
to section 1445(e)(1) transfers.
(iii) Amounts attributable to section 1445(e)(1) transfers. A
distribution is attributable to section 1445(e)(1) transfers to the
extent of the partner's or beneficiary's proportionate share of the
current balance of the entity's section 1445(e)(1) account. A
distribution from a partnership or trust that has made an election under
this Sec. 1.1445-5(c)(3) shall be deemed first to be attributable to a
section 1445(e)(1) transfer to the extent of the balance in the section
1445(e)(1) account. An entity's section 1445(e)(1) account shall be
equal to--
(A) The total amount of net gain realized by the entity upon all
transfers of U.S. real property interests carried out by the entity
after the date of its election under this Sec. 1.1445-5(c)(3); minus
[[Page 192]]
(B) The total amount of all distributions by the entity to domestic
and foreign distributees from such account.
(iv) Special rules for entities that make recurring sales of growing
crops and timber. An entity that makes an election under Sec. 1.1445-
5(c)(3) and that makes recurring sales of growing crops and timber may
further elect to determine the amount subject to withholding under the
rules of this Sec. 1.1445-5(c)(3)(iv). Such an entity must withhold from
each distribution to a foreign partner or beneficiary an amount equal to
10 percent of such partner's or beneficiary's proportionate share of the
current balance of the entity's gross section 1445(e)(1) account. An
entity's gross section 1445(e)(1) account equals--
(A) The total amount realized by the entity upon all transfers of
U.S. real property interests carried out by the entity after the date of
its election under this Sec. 1.1445-5(c)(3)(iv); minus
(B) The total amount of all distributions to domestic and foreign
distributees from such account.
An entity that elects to compute the amount subject to withholding under
this Sec. 1.1445-5(c)(3)(iv), shall make such election in accordance
with Sec. 1.1445-5(c)(3)(vi) and shall be subject to the provisions
otherwise applicable under Sec. 1.1445-5(c)(3).
(v) Procedural rules. An election under paragraph (c)(3) may be made
by filing a notice thereof with the Assistant Commissioner
(International), at the address provided in Sec. 1.1445-1(g)(10). The
notice must be submitted by a general partner (in the case of a
partnership) or the trustee or equivalent fiduciary (in the case of a
trust). The notice must set forth the name, office address, and
identifying number of the partnership or fiduciary making the election,
and, in the case of a partnership, must include the name, office
address, and identifying number of the general partner submitting the
election. An election under this paragraph (c)(3) may be revoked only
with the consent of the Internal Revenue Service. Consent of the Service
may be requested by filing an application to revoke the election with
the Assistant Commissioner (International) at the address stated above.
This application must include all information provided to the Service
with the election notice and must provide an explanation of the reasons
for revoking the election. The application to revoke an election must
also specify the amount remaining to be distributed in the section
1445(e)(1) account or the gross section 1445(e)(1) account.
An entity that ceases to qualify under section 1.1445-5(c)(3) because
such entity does not have more than 100 partners or beneficiaries may
revoke its election only with the consent of the Internal Revenue
Service.
(d) Distributions of U.S. real property interests by foreign
corporations--(1) In general. A foreign corporation that distributes a
U.S. real property interest must deduct and withhold a tax equal to 35
percent (or the rate specified in section 1445(e)(2)) of the amount of
gain recognized by the corporation on the distribution. The amount of
gain required to be recognized by the corporation must be determined
pursuant to the rules of section 897 and any other applicable section.
For special rules concerning the applicability of a nonrecognition
provision to a distribution, see paragraph (b)(2) of this section. The
withholding liability imposed by this paragraph (d) applies to the same
taxpayer that owes the related substantive income tax liability pursuant
to the operation of section 897. Only one such liability will be
assessed and collected from a foreign corporation, but separate
penalties for failures to comply with the two requirements will be
asserted.
(2) Withholding not required--(i) Property distributed not a U.S.
real property interest--(A) In general. No withholding is required under
this paragraph (d) if a foreign corporation that distributes property
determines pursuant to the rules of paragraph (b)(3) of this section
that the property distributed is not a U.S. real property interest.
(B) Belated notice of false statement. If after the date of a
distribution described in paragraph (d)(1) of this section a foreign
corporation learns that another corporation's statement (that an
interest in that other corporation is not a U.S. real property interest)
is false, then the foreign corporation may not rely upon that statement
for any purpose. Such a foreign corporation's withholding obligations
under this
[[Page 193]]
paragraph (d) shall apply if a statement had never been given, and such
a corporation may be held fully liable pursuant to Sec. 1.1445-5(b)(5)
for any failure to withhold. Amounts withheld pursuant to the rule of
this paragraph (d)(2)(i)(B) must be reported and paid over by the 60th
day following the date on which the foreign corporation learns that the
statement is false. No penalties or interest will be assessed for
failures to withhold prior to that date. For rules concerning the
notifications of false statements that may be required to be given to
foreign corporations, see Sec. 1.1445-4(b).
(ii) Withholding certificate. No withholding is required under this
paragraph (d) with respect to a foreign corporation's distribution of a
U.S. real property interest if the distributing corporation obtains a
withholding certificate from the Internal Revenue Service that so
provides. For rules concerning the issuance of withholding certificates,
see Sec. 1.1445-6.
(e) Distributions to foreign persons by U.S. real property holding
corporations--(1) In general. A domestic corporation that distributes
any property to a foreign person that holds an interest in the
corporation must deduct and withhold a tax equal to 10 percent of the
fair market value of the property distributed to the foreign person,
if--
(i) The foreign person's interest in the corporation constitutes a
U.S. real property interest under the provisions of section 897 and
regulations thereunder; and
(ii) The property is distributed either--
(A) In redemption of stock under section 302; or
(B) In liquidation of the corporation pursuant to the provisions of
part II of subchapter C (sections 331 through 341). For the treatment of
a domestic corporation's transfer of a U.S. real property interest to a
foreign interest-holder in a distribution to which section 301 applies,
see sections 897(f), 1441, and 1442.
(2) Withholding not required--(i) Foreign person's interest not a
U.S. real property interest. Withholding is required under this
paragraph (e) only with respect to distributions to foreign persons
holding interests in the corporation that constitute U.S. real property
interests. In general, a foreign person's interest in a domestic
corporation constitutes a U.S. real property interest if the corporation
was a U.S real property holding corporation at any time during the
shorter of (A) the period in which the foreign person held the interest
or (B) the previous five years (but not earlier than June 19, 1980). See
section 897(c) and Secs. 1.897-1(c) and 1.897-2 (b) and (h). However, an
interest in such a corporation ceases to be a U.S. real property
interest after all of the U.S. real property interests held by the
corporation itself are disposed of in transactions on which gain or loss
is recognized. See section 897(c)(1)(B) and Sec. 1.897-2(f)(2). Thus, if
a U.S. real property holding corporation in the process of liquidation
does not elect section 337 nonrecognition treatment upon its sale of all
U.S. real property interests held by the corporation, and recognizes
gain or loss upon such sales, interests in that corporation cease to be
U.S. real property interests. Therefore, no withholding would be
required with respect to that corporation's subsequent liquidating
distribution to a foreign shareholder of property other than a U.S. real
property interest.
(ii) Nonrecognition transactions. For special rules concerning the
applicability of a nonrecognition provision to a distribution described
in paragraph (e)(1) of this section, see paragraph (b)(2) of this
section.
(iii) Interest-holder not a foreign person--(A) In general. A
domestic corporation shall not be required to withhold under this
paragraph (e) with respect to a distribution of property to any
distributee that it determines, pursuant to the rules of paragraph
(b)(3) of this section, not to be a foreign person.
(B) Belated notice of false certification. If after the date of a
distribution described in paragraph (e)(1) of this section a domestic
corporation learns that an interest-holder's certification of non-
foreign status is false, then the corporation may rely upon that
certification only if the person providing the false certification holds
(or held) less than 10 percent of the value of the outstanding stock of
the corporation. With respect to less than 10 percent interest-holders,
no withholding is required
[[Page 194]]
under this paragraph (e) upon receipt of a belated notice of false
certification. With respect to 10 percent or greater interest-holders,
the corporation's withholding obligations under this paragraph (e) shall
apply as if a certification had never been given, and such a corporation
may be held fully liable pursuant to Sec. 1.1445-5(b)(6) for any failure
to withhold as of the date specified in this Sec. 1.1445-
5(e)(2)(iii)(B). Amounts withheld pursuant to the rule of this paragraph
(e)(2)(iii)(B) must be reported and paid over by the 60th day following
the date on which the corporation learns that the certification is
false. No penalties or interest for failures to withhold will be
assessed prior to that date. For rules concerning the notifications of
false certifications that may be required to be given to U.S. real
property holding corporations, see Sec. 1.1445-4(b).
(iv) Withholding certificate. No withholding, or reduced
withholding, is required under this paragraph (e) with respect to a
domestic corporation's distribution of property if the distributing
corporation obtains a withholding certificate from the Internal Revenue
Service that so provides. For rules concerning the issuance of
withholding certificates, see Sec. 1.1445-6.
(f) Taxable distributions by domestic or foreign partnerships,
trusts, or estates. [Reserved]
(g) Dispositions of interests in partnerships, trusts, and estates.
[Reserved]
[T.D. 8113, 51 FR 46642, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987,
as amended at T.D. 8198, 53 FR 16230, May 5, 1988; T.D. 8321, 55 FR
50553, Dec. 7, 1990; T.D. 8647, 60 FR 66076, Dec. 21, 1995; 61 FR 7157,
Feb. 26, 1996; T.D. 8734, 62 FR 53467, Oct. 14, 1997]
Effective Date Note: By T.D. 8734, 62 FR 53467, Oct. 14, 1997,
Sec. 1.1445-5 was amended in paragraph (b)(1), by revising the second
sentence, effective Jan. 1, 1999. By T.D. 8804, 63 FR 72183, Dec. 31,
1998, the effective date of Sec. 1.1445-5 was delayed until Jan. 1,
2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the effective date was
delayed until Jan. 1, 2001. For the convenience of the user, the
superseded text is set forth as follows:
Sec. 1.1445-5 Special rules concerning distributions and other
transactions by corporations, partnerships, trusts, and
estates.
* * * * *
(b) * * * (1) * * * If tax is required to be withheld under section
1441 or 1442 with respect to a transfer of property, withholding shall
not be required under section 1445 or Sec. 1.1445-5. * * *
* * * * *
Sec. 1.1445-6 Adjustments pursuant to withhold certificate of amount required to be withheld under section 1445(e).
(a) Withholding certificate for purposes of section 1445(e)--(1) In
general. Pursuant to the provisions of Sec. 1.1445-5 (c)(2)(iv),
(d)(2)(ii), and (e)(2)(iv), withholding under section 1445(e) may be
reduced or eliminated pursuant to a withholding certificate issued by
the Internal Revenue Service in accordance with the rules of this
Sec. 1.1445-6. A withholding certificate may be issued in cases where
adjusted withholding is appropriate (e.g., because of the applicability
of a nonrecognition provision--see paragraph (c) of this section), where
the relevant taxpayers are exempt from U.S. tax (see paragraph (d) of
this section), or where an agreement for the payment of tax is entered
into with the Service (see paragraph (e) of this section). A withholding
certificate that is obtained prior to a transfer allows the entity or
fiduciary to withhold a reduced amount or excuses withholding entirely.
A withholding certificate that is obtained after a transfer has been
made may authorize a normal refund or an early refund pursuant to
paragraph (g) of this section. The Internal Revenue Service will act
upon an application for a withholding certificate not later than the
90th day after it is received. (The Service may deny a request for a
withholding certificate where, after due notice, an applicant fails to
provide the information necessary to make a determination.) Solely for
this purpose (i.e., determining the day upon which the 90 day period
commences), an application is received by the Service on the date when
all information necessary for the Service to make a determination is
provided by the applicant. (For rules regarding whether an application
has been timely submitted, see Sec. 1.1445-5(b)(5)). The Internal
Revenue Service will act upon an application for an early refund not
later than the 90th
[[Page 195]]
day after it is received. An application for an early refund must either
(i) include a copy of a withholding certificate issued by the Service
with respect to the transaction, or (ii) be combined with an application
for a withholding certificate. Where an application for an early refund
is combined with an application for a withholding certificate, the
Service will act upon both applications not later than the 90th day
after receipt. Either an entity, a fiduciary, or a relevant taxpayer (as
defined in paragraph (a)(2) of this section) may apply for a withholding
certificate. An entity or fiduciary may apply for a withholding
certificate with respect to all or less than all relevant taxpayers. For
special rules concerning the issuance of a withholding certificate to a
foreign corporation that has made an election under section 897(i), see
Sec. 1.1445-7(d).
(2) Relevant taxpayer. For purposes of this section, the term
``relevant taxpayer'' means any foreign person that will bear
substantive income tax liability by reason of the operation of section
897 with respect to a transaction upon which withholding is required
under section 1445(e).
(b) Applications for withholding certificates--(1) In general. An
application for a withholding certificate pursuant to this Sec. 1.1445-6
must be submitted in the manner provided in Sec. 1.1445--3 (b). However,
in lieu of the information required to be submitted pursuant to
Sec. 1.1445-3(b)(4), the applicant must provide the information required
by paragraph (b)(2) of this section. In addition, the information
required by paragraph (b)(3) of this section must be submitted with the
application.
(2) Basis for certificate--(i) Adjusted withholding. If a
withholding certificate is sought on the basis of a claim that adjusted
withholding is appropriate, the application must include a calculation,
in accordance with paragraph (c) of this section, of the maximum tax
that may be imposed on each relevant taxpayer with respect to which
adjusted withholding is sought. The application must also include all
evidence necessary to substantiate the claimed calculation, such as
records of adjustments to basis or appraisals of fair market value.
(ii) Exemption. If a withholding certificate is sought on the basis
of a relevant taxpayer's exemption from U.S. tax, the application must
set forth a brief statement of the law and facts that support the
claimed exemption. See paragraph (d) of this section.
(iii) Agreement. If a withholding certificate is sought on the basis
of an agreement for the payment of tax, the application must include a
copy of the agreement proposed by the applicant and a copy of the
security instrument (if any) proposed by the applicant. In this regard,
see paragraph (e) of this section.
(3) Relevant taxpayers. An application for withholding certificate
pursuant to this section must set forth the name, identifying number (if
any) and home address (in the case of an individual) or office address
(in the case of an entity) of each relevant taxpayer with respect to
which adjusted withholding is sought.
(c) Adjustment of amount required to be withheld. The Internal
Revenue Service may issue a withhold certificate that excuses
withholding or that permits an entity or fiduciary to withhold an
adjusted amount reflecting the relevant taxpayers' maximum tax
liability. A relevant taxpayer's maximum tax liability is the maximum
amount which that taxpayer could be required to pay as tax by reason of
the transaction upon which withholding is required. In the case of an
individual taxpayer that amount will generally be the gain realized by
the individual, multiplied by the maximum individual income tax rate
applicable to long term capital gain. In the case of a corporate
taxpayer, that amount will generally be the gain realized by the
corporation, multiplied by the maximum corporate income tax rate
applicable to long term capital gain. However, that amount must be
adjusted to take into account the following:
(1) Any reduction of tax to which the relevant taxpayer is entitled
under the provisions of a U.S. income tax treaty;
(2) The effect of any nonrecognition provision that is applicable to
the transaction;
(3) Any losses previously realized and recognized by the relevant
taxpayer
[[Page 196]]
during the taxable year by reason of the operation of section 897;
(4) Any amount realized upon the subject transfer by the relevant
taxpayer that is required to be treated as ordinary income under any
provision of the Code; and
(5) Any other factor that may increase or reduce the tax upon the
transaction.
(d) Relevant taxpayer's exemption from U.S. tax--(1) In general. The
Internal Revenue Service will issue a withholding certificate that
excuses withholding by an entity or fiduciary if it is established that
a relevant taxpayer's income from the transaction will be exempt from
U.S. tax. For the available exemptions, see paragraph (d)(2) of this
section. If a relevant taxpayer is entitled to a reduction of (rather
than an exemption from) U.S. tax, then the entity or fiduciary may
obtain a withholding certificate to that effect pursuant to the
provisions of paragraph (c) of this section.
(2) Available exemptions. A relevant taxpayer's income from a
transaction with respect to which withholding is required under section
1445(e) may be exempt from U.S. tax because either:
(i) The relevant taxpayer is an integral part or controlled entity
of a foreign government and the subject income is exempt from U.S. tax
pursuant to section 892 and the regulations thereunder; or
(ii) The relevant taxpayer is entitled to the benefits of an income
tax treaty that provides for such an exemption (subject to the
limitations imposed by section 1125(c) of Pub. L. 96-499, which, in
general overrides such benefits as of January 1, 1985).
(e) Agreement for the payment of tax--(1) In general. The Internal
Revenue Service will issue a withholding certificate that excuses
withholding or that permits an entity or fiduciary to withhold a reduced
amount, if the entity, fiduciary, or a relevant taxpayer enters into an
agreement for the payment of tax pursuant to the provisions of this
paragraph (e). An agreement for the payment of tax is a contract between
the Service and the entity, fiduciary, or relevant taxpayer that
consists of two necessary elements. Those elements are--
(i) A contract between the Service and the other person, setting
forth in detail the rights and obligations of each; and
(ii) A security instrument or other form of security acceptable to
the Assistant Commissioner (International).
(2) Contents of agreement--(i) In general. An agreement for the
payment of tax must cover an amount described in subdivision (ii) or
(iii) of this paragraph (e)(2). The agreement may either provide
adequate security for the payment of the chosen amount with respect to
the relevant taxpayer in accordance with paragraph (e)(3) of this
section or provide for the payment of that amount through a combination
of security and withholding of tax by the entity or fiduciary.
(ii) Tax that would otherwise be withheld. An agreement for the
payment of tax may cover the amount of tax that would otherwise be
required to be withheld with respect to the relevant taxpayer pursuant
to section 1445(e). In addition to the amount computed pursuant to
section 1445(e), the applicant must agree to pay interest upon that
amount, at the rate established under section 6621, with respect to the
period between the date on which withholding tax under section 1445(e)
would otherwise be due and the date on which the relevant taxpayer's
payment of tax with respect to the disposition will be due. The amount
of interest agreed upon must be paid by the applicant regardless of
whether or not the Service is required to draw upon any security
provided pursuant to the agreement. The interest may be paid either with
the return or by the Service drawing upon the security.
(iii) Maximum tax liability. An agreement for the payment of tax may
cover the relevant taxpayer's maximum tax liability, determined in
accordance with paragraph (c) of this section. The agreement must also
provide for the payment of an additional amount equal to 25 percent of
the amount determined under paragraph (c) of this section. This
additional amount secures the interest and penalties that would accrue
between the date of the relevant taxpayer's failure to file a return and
pay tax with respect to the disposition, and the date of which the
Service collects
[[Page 197]]
upon that liability pursuant to the agreement.
(iv) Allocation of payment. An agreement for the payment of tax
pursuant to this section must set forth an allocation of the payment
provided for by the agreement among the relevant taxpayers with respect
to which the withholding certificate is sought. In the case of an
agreement that covers an amount described in subdivision (ii) of this
paragraph (e)(2), such allocation must be based upon the amount that
would otherwise be required to be withheld with respect to each relevant
taxpayer. In the case of an agreement that covers an amount described in
subdivision (iii) of this paragraph (e)(2), such allocation must be
based upon each relevant taxpayer's maximum tax liability.
(3) Major types of security. The major types of security that are
acceptable to the Internal Revenue Service for purposes of this section
are described in Sec. 1.1445-3(e)(3).
(4) Terms of security instrument. Any security instrument that is
furnished pursuant to this section must contain the terms described in
Sec. 1.1445-3(e)(4).
(f) Amendments to application for withholding certificates--(1) In
general. An applicant for a withholding certificate may amend an
otherwise complete application by submitting an amending statement to
the Assistant Commissioner (International) at the address provided in
Sec. 1.1445-1(g)(10). The amending statement shall provide the
information required by Sec. 1.1445-6(f)(3) and must be signed and
accompanied by a penalties of perjury statement in accordance with
Sec. 1.1445-6(b).
(2) Extension of time for the Service to process requests for
withholding certificates--(i) In general. If an amending statement is
submitted, the time in which the Internal Revenue Service must act upon
the amended application shall be extended by 30 days.
(ii) Substantial amendments. If an amending statement is submitted
and the Service finds that the statement substantially amends to the
facts of the underlying application or substantially alters the terms of
the withholding certificate as requested in the initial application, the
time within which the Service must act upon the amended application
shall be extended by 60 days. The applicant shall be so notified.
(iii) Amending statement received after the requested withholding
certificate has been signed by the Assistant Commissioner
(International). If an amending statement is received after the
withholding certificate, drafted in response to the underlying
application, has been signed by the Assistant Commissioner
(International) or his delegate and prior to the day such certificate is
mailed to the applicant, the time in which the Service must act upon the
amended application shall be extended by 90 days.
(3) Information required to be submitted. No particular form is
required for an amending statement but the statement must provide the
following information:
(i) Identification of applicant. The amending statement must set
forth the name, address, and identifying number (if any) of the person
submitting the amending statement.
(ii) Date of application. The amending statement must set forth the
date of the underlying application for a withholding certificate.
(iii) Real property interest to be (or that has been) transferred.
The amending statement must set forth a brief description of the real
property interest with respect to which the underlying application for a
withholding certificate was submitted.
(iv) Amending information. The amending statement must fully set
forth the basis for the amendment including any modification of the
facts supporting the application for a withholding certificate and any
change sought in the terms of the withholding certificate.
(g) Early refund of overwithheld amounts. If the Internal Revenue
Service issues a withholding certificate pursuant to this section, and
an amount greater than that specified in the certificate was withheld by
the entity or fiduciary, then pursuant to the rules of this paragraph
(g) a relevant taxpayer may apply for an early refund of a proportionate
share of the excess amount (without interest) prior to the date on which
the relevant taxpayer's return is due (without extensions). An
application for an early refund must be
[[Page 198]]
addressed to the Assistant Commissioner (International), at the address
provided in Sec. 1.1445-1(g)(10). No particular form is required for the
application, but the following information must be set forth in separate
paragraphs numbered to correspond with the numbers given below:
(1) Name, address, and identifying number (if any) of the relevant
taxpayer seeking the refund;
(2) Amount required to be withheld pursuant to withholding
certificate;
(3) Amount withheld by entity or fiduciary (attach a copy of Form
8288-A stamped by IRS pursuant to Sec. 1.1445-5(b)(4) or provide
substantial evidence of the amount withheld in the case of a failure to
receive Form 8288-A, as provided in Sec. 1.1445-5(b)(7)); and
(4) Amount to be refunded to the relevant taxpayer.
An application for an early refund cannot be processed unless the
required copy of Form 8288-A or substantial evidence of the amount
withheld in the case of a failure to receive Form 8288-A (as provided in
Sec. 1.1445-5(b)(7)) is attached to the application. If an application
for a withholding certificate is submitted after the transfer takes
place, then that application may be combined with an application for an
early refund. The Service will act upon a claim for refund within the
time limits set forth in Sec. 1.1445-6(a)(1).
[T.D. 8113, 51 FR 46648, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]
Sec. 1.1445-7 Treatment of foreign corporation that has made an election under section 897(i) to be treated as a domestic corporation.
(a) In general. Pursuant to section 897(i) a foreign corporation may
elect to be treated as a domestic corporation for purposes of sections
897 and 6039C. A foreign corporation that has made such an election
shall also be treated as a domestic corporation for purposes of the
withholding required under section 1445, in accordance with the
provisions of this section.
(b) Withholding under section 1445(a)--(1) Dispositions by
corporation. A foreign corporation that has made an election under
section 897(i) may provide a transferee with a certification of non-
foreign status in connection with the corporation's disposition of a
U.S. real property interest. However, in accordance with the provisions
of Secs. 1.1445-2(b)(2)(ii) and 1.1445-5(b)(3)(ii)(C), such an electing
foreign corporation must attach to such certification a copy of the
acknowledgment of the election provided to the corporation by the
Internal Revenue Service pursuant to Sec. 1.897-3(d)(4) which states
that the information required by Sec. 1.897-3 has been determined to be
complete.
(2) Dispositions of interests in corporation. Dispositions of
interests in electing foreign corporations shall be subject to the
withholding requirements of section 1445(a) and the rules of
Secs. 1.1445-1 through 1.1445-4. Therefore, if a foreign person disposes
of an interest in such a corporation, and that interest is a U.S. real
property interest under the provisions of section 897 and regulations
thereunder, then the transferee is required to withhold under section
1445(a).
(c) Withholding under section 1445(e). Because a foreign corporation
that has made an election under section 897(i) is treated as a domestic
corporation for purposes of determining withholding obligations under
section 1445, such a corporation is not subject to the requirement of
section 1445(e)(2) that a foreign corporation withhold at the corporate
capital gain rate from the gain recognized upon the distribution of a
U.S. real property interest. Such a corporation is subject to the
provisions of section 1445(e)(3). Thus, if interests in an electing
corporation constitute U.S. real property interests, then the
corporation is required to withhold with respect to the non-dividend
distribution of any property to an interest-holder that is a foreign
person. See Sec. 1.1445-5(e). Dividend distributions (distributions that
are described in section 301) shall be treated as provided in sections
897(f), 1441 and 1442. In addition, if interests in an electing foreign
corporation do not constitute U.S. real property interests, then
distributions by such corporation shall be treated as provided in
sections 897(f) (if applicable), 1441 and 1442.
(Approved by the Office of Management and Budget under control number
545-0902)
[T.D. 8113, 51 FR 46650, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]
[[Page 199]]
Sec. 1.1445-8 Special rules regarding publicly traded partnerships, publicly traded trusts and real estate investment trusts (REITs).
(a) Entities to which this section applies. The rules of this
section apply to--
(1) Any partnership or trust, interests in which are regularly
traded on an established securities market (regardless of the number of
its partners or beneficiaries), and
(2) Any REIT (regardless of the form of its organization).
For purposes of paragraph (a)(1) of this section, the rules of section
1445 (e)(1) and this section shall not apply to a publicly traded
partnership (as defined in section 7704) which is treated as a
corporation under section 7704(a), or to those entities that are
classified as ``associations'' and taxed as corporations. See
Sec. 301.7701-2.
(b) Obligation to withhold--(1) In general. An entity described in
paragraph (a) of this section is not required to withhold under the
provisions of Sec. 1.1445-5(c), which states the withholding
requirements of domestic partnerships, trusts and estates upon the
disposition of U.S. real property interests. Except as otherwise
provided in this paragraph (b), an entity described in paragraph (a) of
this section shall be liable to withhold tax upon the distribution of
any amount attributable to the disposition of a U.S. real property
interest, with respect to each holder of an interest in the entity that
is a foreign person. The amount to be withhold is described in paragraph
(c) of this section.
(2) Publicly traded partnerships. Publicly traded partnerships which
comply with the withholding procedures under section 1446 will be deemed
to have satisfied their withholding obligations under this paragraph
(b).
(3) Special rule for certain distributions to nominees. In the case
of a person that--
(i) Is a nominee (as defined in paragraph (d) of this section),
(ii) Receives a distribution attributable to the disposition of a
U.S. real property interest directly from an entity described in
paragraph (a) of this section or indirectly from such entity through a
nominee,
(iii) Receives the distribution for payment to any foreign person,
or the account of any foreign person, and
(iv) Receives a qualified notice pursuant to paragraph (f) of this
section,
then the obligation to withhold in accordance with the general rules of
section 1445(e)(1) and this paragraph (b) shall be imposed solely on
that person to the extent of the amount specified by the qualified
notice. A person obligated to withhold by reason of this paragraph
(b)(3) is referred to as a withholding agent.
(4) Person designated to act for withholding agent. The rules stated
in Sec. 1.1441-7(b) (1) and (2) regarding a person designated to act for
a withholding agent shall apply for purposes of this section.
(5) Effect of withholding exemption granted under Sec. 1.1441-4(f).
A letter issued by a district director under the provisions of
Sec. 1.1441-4(f), which exempts a person from withholding under section
1441 or section 1442, shall also exempt that person from withholding
under this paragraph (b), if--
(i) The letter identifies another person as the withholding agent
for purposes of section 1441 or 1442, and
(ii) Such other person enters into a written agreement, with the
district director who issued the letter, to be the withholding agent for
purposes of this paragraph (b).
The exemption granted, and the corresponding withholding obligation
imposed, by this paragraph (b)(5) shall apply with respect to the first
distribution made after execution of the agreement described in the
preceding sentence and shall continue to apply to all distributions made
during the period in which the exemption granted under Sec. 1.1441-4(f)
is in effect.
(6) Payment other than in money. The rule stated in Sec. 1.1441-7(c)
regarding payment other than in money shall apply for purposes of this
section.
(c) Amount to be withheld--(1) Distribution from a publicly traded
partnership or publicly traded trust. The amount to be withheld under
this section with respect to a distribution by a publicly traded
partnership or publicly traded trust shall be computed in the manner
described in Sec. 1.1445-5(c)(3) (ii) and (iii), subject to the rules of
this section.
[[Page 200]]
(2) REITs--(i) In general. The amount to be withheld with respect to
a distribution by a REIT, under this section shall be equal to 35
percent (or the highest rate specified in section 1445(e)(1)) of the
amount described in paragraph (c)(2)(ii) of this section.
(ii) Amount subject to withholding--(A) In general. Except as
otherwise provided in paragraph (c)(2)(ii)(C) of this section, the
amount subject to withholding is the amount of any distribution,
determined with respect to each share or certificate of beneficial
interest, designated by a REIT as a capital gain dividend, multiplied by
the number of shares or certificates of beneficial interest owned by the
foreign person. Solely for purposes of this paragraph, the largest
amount of any distribution occurring after March 7, 1991 that could be
designated as a capital gain dividend under section 857(b)(3)(C) shall
be deemed to have been designated by a REIT as a capital gain dividend
regardless of the amount actually designated.
(B) Distribution attributable to net short-term capital gain from
the disposition of a U.S. real property interest. [Reserved]
(C) Designation of prior distribution as capital gain dividend. If a
REIT makes an actual designation of a prior distribution, in whole or in
part, as a capital gain dividend, such prior distribution shall not be
subject to withholding under this section. Rather, a REIT must
characterize and treat as a capital gain dividend distribution (solely
for purposes of section 1445(e)(1)) each distribution, determined with
respect to each share or certificate of beneficial interest, made on the
day of, or any time subsequent to, such designation as a capital gain
dividend until such characterized amounts equal the amount of the prior
distribution designated as a capital gain dividend. The provisions of
this paragraph shall not be applicable in any taxable year in which the
REIT adopts a formal or informal resolution or plan of complete
liquidation.
(iii) Example. The following example illustrates the rules of
paragraph (c)(2)(ii)(C) of this section.
In the first quarter of 1988, XYZ REIT makes a dividend distribution
of $2X. In the second quarter of 1988, XYZ sells real property,
recognizing a long term capital gain of $15X, and makes a dividend
distribution of $5X. In the third quarter of 1988, XYZ makes a
distribution of $3X. In the fourth quarter of 1988, XYZ sells real
property recognizing a long term capital loss of $2X. Within 30 days
after the close of the taxable year, XYZ designates a capital gain
dividend for the year of $13X. It subsequently makes a fourth quarter
distribution of $7X. Since XYZ has made an actual designation of prior
distributions during the taxable year as capital gain dividends,
withholding on those prior distributions will not be required. However,
the REIT must characterize, solely for purposes of section 1445(e)(1), a
total amount of $13X of dividend distributions as capital gain
dividends. Therefore, the fourth quarter dividend distribution of $7X
must be characterized as a capital gain dividend subject to withholding
under this section. In addition, XYZ will be required to characterize an
additional $6X of subsequent dividend distributions as capital gain
dividends.
(d) Definition of nominee. For purposes of this section, the term
``nominee'' means a domestic person that holds an interest in an entity
described in paragraph (a) of this section on behalf of another domestic
or foreign person.
(e) Determination of non-foreign status by withholding agent. A
withholding agent may rely on a certificate of non-foreign status
pursuant to Sec. 1.1445-2(b) or on the statements and address provided
to it on Form W-9 or a form that is substantailly similar to such form,
to determine whether an interest holder is a domestic person. Reliance
on these documents will excuse the withholding agent from liability
imposed under section 1445(e)(1) in the absence of actual knowledge that
the interest holder is a foreign person. A withholding agent may also
employ other means to determine the status of an interest holder, but,
if the agent relies on such other means and the interest holder proves,
in fact, to be a foreign person, then the withholding agent is subject
to any liability imposed pursuant to section 1445 and the regulations
thereunder for failure to withhold.
(f) Qualified notice. A qualified notice for purposes of paragraph
(b)(3)(iv) of this section is a notice given by a partnership, trust or
REIT regarding a distribution that is attributable to the disposition of
a U.S. real property interest in accordance with the notice requirements
with respect to dividends
[[Page 201]]
described in 17 CFR 240.10b-17(b) (1) or (3) issued pursuant to the
Securities Exchange Act of 1934, 15 U.S.C. 78a et seq. In the case of a
REIT, a qualified notice is only a notice of a distribution, all or any
portion of which the REIT actually designates, or characterizes in
accordance with paragraph (c)(2)(ii)(C) of this section, as a capital
gain dividend in accordance with 17 CFR 240.10b-17(b) (1) or (3), with
respect to each share or certificate of beneficial interest. A deemed
designation under paragraph (c)(2)(ii)(A) of this section may not be the
subject of a qualified notice under this paragraph (f). A person
described in paragraph (b)(3) of this section shall be treated as
receiving a qualified notice at the time such notice is published in
accordance wtih 17 CFR 240.10b-17(b) (1) or (3).
(g) Reporting and paying over withheld amounts. With respect to an
amount withheld under this section, a withholding agent is not required
to conform to the requirements of Sec. 1.1445-5(b)(5) but is required to
report and pay over to the Internal Revenue Service any amount required
to be withheld pursuant to the rules and procedures of section 1461, the
regulations thereunder and Sec. 1.6302-2. Forms 1042 and 1042S are to be
used for this purpose.
(h) Early refund procedure not available. The early refund procedure
set forth in Sec. 1.1445-6(g) shall not apply to amounts withheld under
the rules of this section. For adjustment of over-withheld amounts, see
Sec. 1.1461.4.
(i) Liability upon failure to withhold. For rules regarding
liability upon failure to withhold under Sec. 1445(e) and this section,
see Sec. 1.1445-1(e).
[T.D. 8321, 55 FR 50553, Dec. 7, 1990; 56 FR 4542, Feb. 5, 1991, as
amended by T.D. 8647, 60 FR 66077, Dec. 21, 1995]
Sec. 1.1445-9T Special rule for section 1034 nonrecognition (temporary).
(a) Purpose and scope. This section provides a temporary regulation
that, if and when adopted as a final regulation, will add a new
paragraph (d)(2)(iii) to Sec. 1.1445-2. Paragraph (b) of this section
would then appear as paragraph (d)(2)(iii) of Sec. 1.1445-2.
(b) No particular form is required for a transferor's notice to a
transferee that the transferor is not required to recognize gain or loss
with respect to a transfer. The notice must be verified as true and
signed under penalties of perjury by a responsible officer in the case
of a corporation, by a general partner in the case of a partnership, and
by a trustee or equivalent fiduciary in the case of a trust or estate.
The following information must be set forth in paragraphs labeled to
correspond with the designation set forth below:
(1) A statement that the document submitted constitutes a notice of
a nonrecognition transfer pursuant to the requirements of Sec. 1.1445-
2(d)(2);
(2) The name, identifying number (if any), and home address (in the
case of an individual) or office address (in the case of an entity) of
the transferor submitting the notice;
(3) A statement that the transferor is not required to recognize any
gain or loss with respect to the transfer;
(4) A brief description of the transfer;
(5) A brief summary of the law and facts supporting the claim that
recognition of gain or loss is not required with respect to the
transfer; and
(6) If the transferor claims nonrecognition on the sale or exchange
of a principal residence under section 1034(a) and another principal
residence in the United States has not been purchased as of the date of
sale of the principal residence, either (i) a copy of an executed
binding contract for purchase by the transferor of a further principal
residence in the United States with a purchase price exceeding the
adjusted sales price of the old principal residence or (ii) an affidavit
by the transferor signed under penalties of perjury stating that the
transferor intends to complete purchase of another principal residence
within the United States with a purchase price exceeding the adjusted
sales price of the old principal residence by April 15 of the year
following the taxable year of the sale of the principal residence, and
that the transferor is expected to continue to be employed or stationed
in the United States for a period of two years from the sale of the
principal residence. If the transferor's adjusted sales price of the old
principal residence exceeds the transferor's cost of purchasing another
principal residence in the United States, withholding shall be required
[[Page 202]]
at the rate of ten percent on the portion of the gross amount realized
on the sale or exchange of the principal residence equal to such excess.
(c) Effective Date. The rules of this section are effective with
respect to sale of a principal residence after August 3, 1988.
[T.D. 8198, 53 FR 16230, May 5, 1988]
Sec. 1.1445-10T Special rule for Foreign governments (temporary).
(a) This section provides a temporary regulation that, if and when
adopted as a final regulation will add a new paragraph (d)(6) to
Sec. 1.1445-2. Paragraph (b) of this section would then appear as
paragraph (d)(6) of Sec. 1.1445-2.
(b) Foreign government--(1) As transferor. A foreign government is
subject to U.S. taxation under section 897 on the disposition of a U.S.
real property interest except to the extent specifically otherwise
provided in the regulations issued under section 892. A foreign
government that disposes of a U.S. real property interest that is not
subject to taxation as specifically provided by the regulations under
section 892 may present a notice of nonrecognition treatment pursuant to
paragraph (d)(2) of this section that specifically cites the provision
of such regulation, and thereby avoids withholding by the transferee of
the property. A foreign government that disposes of a U.S. real property
interest or the transferee of the property may obtain a withholding
certificate from the Internal Revenue Service that confirms the
applicability of section 892, but neither is required to do so. Rules
concerning the issuance of withholding certificates are provided in
Sec. 1.1445-3.
(2) As transferee. A foreign government or international
organization that acquires a U.S. real property interest is fully
subject to section 1445 and the regulations thereunder. Therefore, such
an entity is required to withhold tax upon the acquisition of a U.S.
real property interest from a foreign person.
(c) Effective date. The rules of this section shall be effective for
transfers, exchanges, distributions and other dispositions occuring on
or after June 6, 1988.
[T.D. 8198, 53 FR 16230, May 5, 1988]
Sec. 1.1445-11T Special rules requiring withholding under Sec. 1.1445-5 (temporary).
(a) Purpose and scope. This section provides temporary regulations
that, if and when adopted as a final regulation will add certain new
paragraphs within Sec. 1.1445-5 (b) and (c). The paragraphs of this
section would then appear as set forth below. Paragraph (b) of this
section would then appear as paragraph (b)(8)(v) of Sec. 1.1445-5.
Paragraph (c) of this section would then appear as paragraph (c)(2)(i)
of Sec. 1.1445-5. Paragraph (d) of this section would then appear as
paragraph (g) of Sec. 1.1445-5.
(b) Dispositions of interests in partnerships, trusts, and estates.
The provisions of section 1445(e)(5), requiring withholding upon certain
dispositions of interests in partnerships, trusts, and estates, that own
directly or indirectly a U.S. real property interest shall apply to
dispositions on or after the effective date of a later Treasury decision
under section 897(g) of the Code except in the case of dispositions of
interests in partnerships in which fifty percent of the value of the
gross assets consist of U.S. real property interests and ninety percent
or more of the value of the gross assets consist of U.S. real property
interests plus any cash or cash equivalents. The provisions of section
1445(e)(5), shall apply, however, to dispositions after June 6, 1988, of
interests in partnerships in which fifty percent or more of the value of
the gross assets consist of U.S. real property interests, and ninety
percent or more of the value of the gross assets consist of U.S. real
property interests plus any cash or cash equivalents. See paragraph (d)
of this section.
(c) Transactions covered elsewhere. No withholding is required under
this paragraph (c) with respect to the distribution of a U.S. real
property interest by a partnership, trust, or estate. Such distributions
shall be subject to withholding under section 1445(e)(4) and paragraph
(f) of this Sec. 1.1445-5 on the effective date of a later Treasury
decision published under section 897(g) of the Code. No withholding is
required
[[Page 203]]
at this time for distributions described in the preceding sentence. See
paragraph (b)(8)(iv) of this Sec. 1.1445-5. No withholding is required
under this paragraph with respect to the disposition of an interest in a
trust, estate, or partnership except in the case of a partnership in
which fifty percent or more of the value of the gross assets consist of
U.S. real property interests, and ninety percent or more of the value of
the gross assets consist of U.S. real property interests plus any cash
or cash equivalents. See paragraph (b)(8)(v) of Sec. 1.1445-5.
Withholding shall be required as provided in section 1445(e)(5) and
paragraph (g) of this section with respect to the disposition after June
6, 1988, of an interest in a partnership in which fifty percent or more
of the value of the gross assets consist of U.S. real property
interests, and ninety percent or more of the value of the gross assets
consist of U.S. real property interests plus any cash or cash
equivalents.
(d) Dispositions of interests in partnerships, trusts or estates--
(1) Withholding required on disposition of certain partnership
interests. Withholding is required under section 1445(e)(5) and this
paragraph with respect to the disposition by a foreign partner of an
interest in a domestic or foreign partnership in which fifty percent or
more of the value of the gross assets consist of U.S. real property
interests, and ninety percent or more of the value of the gross assets
consist of U.S. real property interests plus any cash or cash
equivalents. For purposes of this paragraph cash equivalents mean any
asset readily convertible into cash (whether or not denominated in U.S.
dollars), including, but not limited to, bank accounts, certificates of
deposit, money market accounts, commercial paper, U.S. and foreign
treasury obligations and bonds, corporate obligations and bonds,
precious metals or commodities, and publicly traded instruments. The
taxpayer on filing an income tax return for the year of the disposition
may demonstrate the extent to which the gain on the disposition of the
interest is not attributable to U.S. real property interests. A taxpayer
is also permitted by Sec. 1.1445-3 to apply for a withholding
certificate in instances where reduced withholding is approporiate.
(2) Withholding not required--(i) Transferee receives statement that
interest in partnership is not described in paragraph (d)(1). No
withholding is required under paragraph (d)(1) of this section upon the
disposition of a partnership interest otherwise described in that
paragraph if the transferee is provided a statement, issued by the
partnership and signed by a general partner under penalties of perjury
no earlier than 30 days before the transfer, certifying that fifty
percent or more of the value of the gross assets does not consist of
U.S. real property interests, or that ninety percent or more of the
value of the gross assets of the partnership does not consist of U.S.
real property interests plus cash or cash equivalents.
(ii) Reliance on statement not permitted. A transferee is not
entitled to rely upon a statement described in paragraph (d)(2)(i) of
this section if, prior to or at the time of the transfer, the transferee
either--
(A) Has actual knowledge that the statement is false, or
(B) Receives a notice, pursuant to Sec. 1.1445-4.
Such a transferee's withholding obligations shall apply as if the
statement had never been given, and such a transferee may be held fully
liable pursuant to Sec. 1.1445-1(e) for any failure to withhold.
(iii) Belated notice of false statement. If, after the date of the
transfer, a transferee receives notice that a statement provided under
paragraph (d)(2)(i) of this section is false, then such transferee may
rely on the statement only with respect to consideration that was paid
prior to the receipt of the notice. Such a transferee is required to
withhold a full 10 percent of the amount realized from the consideration
that remains to be paid to the transferor. Thus, if 10 percent or more
of the amount realized remains to be paid to the transferor, then the
transferee is required to withhold and pay over the full 10 percent. The
transferee must do so by withholding and paying over the entire amount
of each successive payment of consideration to the transferor, until the
full 10 percent of the amount realized has been withheld and
[[Page 204]]
paid over. Amounts so withheld must be reported and paid over by the
20th day following the date on which each such payment of consideration
is made. A transferee that is subject to the rules of this Sec. 1.1445-
10T(d)(2)(iii) may not obtain a withholding certificate pursuant to
Sec. 1.1445-3, but must instead withhold and pay over the amounts
required by this paragraph.
(e) Effective date. The rules of this section are effective for
transactions after June 6, 1988.
[T.D. 8198, 53 FR 16231, May 5, 1988]
TAX-FREE COVENANT BONDS
Sec. 1.1451-1 Tax-free covenant bonds issued before January 1, 1934.
(a) Rates of withholding--(1) Rate of 2 percent. Withholding of a
tax equal to 2 percent is required in the case of interest upon bonds or
other corporate obligations containing a tax-free covenant and issued
before January 1, 1934, paid to an individual, a fiduciary, or a
partnership, whether resident or nonresident, or to a nonresident
foreign corporation, regardless of whether the liability assumed by the
obligor is less than, equal to, or greater than 2 percent.
(2) Rate of 30 percent. Notwithstanding subparagraph (1) of this
paragraph, if the liability assumed by the obligor does not exceed 2
percent of the interest, withholding is required at the rate of 30
percent in the case of payments to a nonresident alien individual, a
nonresident partnership composed in whole or in part of nonresident
aliens, a nonresident foreign corporation, or an owner who is unknown to
the withholding agent.
(3) Obligations of resident payers. The rates of withholding
specified in subparagraphs (1) and (2) of this paragraph are applicable
to interest on such tax-free covenant bonds issued by a domestic
corporation or by a resident foreign corporation.
(4) Obligations of nonresident payers. A nonresident foreign
corporation having a fiscal or paying agent in the United States is
required to withhold a tax of 2 percent in the case of interest upon its
tax-free covenant bonds issued before January 1, 1934, which is paid to
an individual or fiduciary who is a citizen or resident of the United
States, to a partnership any member of which is a citizen or resident,
or to an unknown owner.
(5) Interest from sources without the United States. Withholding is
not required under section 1451 in the case of interest upon bonds or
other corporate obligations issued before January 1, 1934, and
containing a tax-free covenant if the interest is not to be treated as
income from sources within the United States and the payments are made
to a nonresident alien, a partnership composed wholly of nonresident
aliens, or a nonresident foreign corporation.
(6) Tax treaties. The rates of tax to be withheld in accordance with
this paragraph shall be reduced as may be provided by treaty with any
country. See section 894 and Sec. 1.1441-6 relating to income subject to
a reduced rate of, or an exemption from, income tax pursuant to an
income tax convention.
(b) Date of issue. The withholding provisions of section 1451 are
applicable only to bonds, mortgages, or deeds of trust, or other similar
obligations of a corporation which were issued before January 1, 1934,
and which contain a tax-free covenant. For the purpose of section 1451,
bonds, mortgages, or deeds of trust, or other similar obligations of a
corporation, are issued when delivered. If a broker or other person acts
as selling agent of the obligor, the obligation is issued when delivered
by the agent to the purchaser. If a broker or other person purchases the
obligation outright for the purpose of holding or reselling it, the
obligation is issued when delivered to such broker or other person.
(c) Extended maturity date. In cases where on or after January 1,
1934, the maturity date of bonds or other obligations of a corporation
is extended, the bonds or other obligations shall be considered to have
been issued on or after January 1, 1934. The interest on such
obligations is not subject to the withholding provisions of section 1451
but falls within the class of interest described in section 1441. See
paragraph (c)(5)(iii) of Sec. 1.1441-3.
(d) Covenant in trust deed. Bonds issued under a trust deed
containing a tax-free covenant are treated as if they
[[Page 205]]
contain such a covenant. If neither the bonds nor the trust deeds given
by the obligor to secure them contained a tax-free covenant, but the
original trust deeds were modified before January 1, 1934, by
supplemental agreements containing a tax-free covenant executed by the
obligor corporation and the trustee, the bonds issued before January 1,
1934, are subject to the provisions of section 1451, provided
appropriate authority existed for the modification of the trust deeds in
this manner. The authority must have been contained in the original
trust deeds or actually secured from the bondholders.
(e) Notation showing date of issue. In order that the date of issue
of bonds, mortgages, deeds of trust, or other similar corporate
obligations containing a tax-free covenant may be readily determined by
the owner for the purpose of preparing the ownership certificates
required by Sec. 1.1461-1, the issuing or debtor corporation shall
indicate the date of issue by an appropriate notation, or use the phrase
``issued on or after January 1, 1934,'' on each such obligation or in a
statement accompanying the delivery of the obligation.
(f) Effect of withholding on income taxes of bondholder and issuing
corporation--(1) Federal tax. In the case of corporate bonds or other
corporate obligations issued before January 1, 1934, and containing a
tax-free covenant, the corporation paying a Federal tax, or any part of
it, for someone else pursuant to its agreement is not entitled to deduct
such payment from its gross income on any ground; nor shall the tax so
paid be included in the gross income of the bondholder. The amount of
the tax so paid may, nevertheless, be claimed by the bondholder in
accordance with paragraph (a) of Sec. 1.1462-1 as a credit against the
total amount of income tax due. See also section 32. The tax so paid by
the corporation upon tax-free covenant bond interest payable to a
domestic or resident fiduciary and allocable to any nonresident alien
beneficiary under section 652 or 662 is allowable, pro rata, as a credit
against:
(i) The tax required to be withheld by the fiduciary in accordance
with paragraph (f) of Sec. 1.1441-3 from the income of the beneficiary,
and
(ii) The total income tax computed in the return of the beneficiary,
as indicated in paragraph (a) of Sec. 1.1462-1.
(2) State taxes. In the case of corporate bonds or other obligations
containing an appropriate tax-free covenant, the corporation paying for
someone else, pursuant to its agreement, a State tax or any tax other
than a Federal tax may deduct such payment as interest paid on
indebtedness.
(g) Alien resident of Puerto Rico. For purposes of this section the
term ``nonresident alien individual'' includes an alien resident of
Puerto Rico.
(h) Other rules for withholding of tax under section 1451. The rules
for withholding stated in paragraphs (c) (2) and (3), (f), and (g) of
Sec. 1.1441-3 shall also apply for purposes of withholding the tax under
this section.
[T.D. 6500, 25 FR 12076, Nov. 26, 1960, as amended by T.D. 7157, 36 FR
25228, Dec. 30, 1971]
Sec. 1.1451-2 Exemptions from withholding under section 1451.
(a) Claiming personal exemptions. Withholding under Sec. 1.1451-1
from interest on bonds or other obligations of corporations issued
before January 1, 1934, and containing a tax-free covenant shall not be
required if there is filed with the withholding agent when presenting
coupons for payment, or not later than February 1 of the following year,
an ownership certificate on Form 1000 stating:
(1) In the case of a citizen or resident of the United States, that
his taxable income does not exceed his deductions for personal
exemptions allowed under section 151; or
(2) In the case of an estate or trust the fiduciary of which is a
citizen or resident of the United States, that its taxable income does
not exceed the deduction for the personal exemption allowed under
section 642(b).
(b) Claiming residence in United States. To claim residence in the
United States for purposes of section 1451, see Sec. 1.1441-5.
(c) Other exemptions. The exemptions allowed by paragraphs (d) and
(h) of
[[Page 206]]
Sec. 1.1441-4 shall also apply for purposes of section 1451.
[T.D. 6500, 25 FR 12077, Nov. 26, 1960, as amended by T.D. 6908, 31 FR
16774, Dec. 31, 1966]
APPLICATION OF WITHHOLDING PROVISIONS
Sec. 1.1461-1 Payment and returns of tax withheld.
(a) Payment of withheld tax--(1) Deposits of tax. Every withholding
agent who withholds tax pursuant to chapter 3 of the Internal Revenue
Code (Code) and the regulations under such chapter shall deposit such
amount of tax with a Federal reserve bank or authorized financial
institution as provided in Sec. 1.6302-2(a). If for any reason the total
amount of tax required to be returned for any calendar year pursuant to
paragraph (b) of this section has not been deposited pursuant to
Sec. 1.6302-2, the withholding agent shall pay the balance of tax due
for such year at such place as the Internal Revenue Service (IRS) shall
specify. The tax shall be paid when filing the return required under
paragraph (b)(1) of this section for such year, unless the IRS specifies
otherwise. See paragraph (b)(2) of this section when there are multiple
withholding agents.
(2) Penalties for failure to pay tax. For penalties and additions to
the tax for failure to timely pay the tax required to be withheld under
chapter 3 of the Code, see sections 6656, 6672, and 7202 and the
regulations under those sections.
(b) Income tax return--(1) General rule. A withholding agent shall
make an income tax return on Form 1042 (or such other form as the IRS
may prescribe) for income paid during the preceding calendar year that
the withholding agent is required to report on an information return on
Form 1042-S (or such other form as the IRS may prescribe) under
paragraph (c)(1) of this section. See section 6011 and Sec. 1.6011-1(c).
The withholding agent must file the return on or before March 15 of the
calendar year following the year in which the income was paid. The
return must show the aggregate amount of income paid and tax withheld
required to be reported on all the Forms 1042-S for the preceding
calendar year by the withholding agent, in addition to such information
as is required by the form and accompanying instructions. Withholding
certificates or other statements or information provided to a
withholding agent are not required to be attached to the return. A
return must be filed under this paragraph (b)(1) even though no tax was
required to be withheld during the preceding calendar year. The
withholding agent must retain a copy of Form 1042 for the applicable
statute of limitations on assessments and collection with respect to the
amounts required to be reported on the Form 1042. See section 6501 and
the regulations thereunder for the applicable statute of limitations.
Adjustments to the total amount of tax withheld, as described in
Sec. 1.1461-2, shall be stated on the return as prescribed by the form
and accompanying instructions.
(2) Multiple withholding agents--(i) General rule. Except as
otherwise provided in paragraph (b)(2) (ii), (iii), (iv), or (v) of this
section, no Form 1042 is required to be filed under paragraph (b)(1) of
this section if a return is filed by another withholding agent reporting
the same income in compliance with the provisions of this paragraph (b)
and any remaining tax due is paid by such other withholding agent with
the return in accordance with the provisions of paragraph (a) of this
section.
(ii) Payment to a qualified intermediary. A U.S. withholding agent
making a payment to a qualified intermediary (as defined in Sec. 1.1441-
1(e)(5)(ii)) must file a return under paragraph (b)(1) of this section,
regardless of whether the qualified intermediary assumes primary
withholding responsibility for the payment, as described in Sec. 1.1441-
1(e)(5)(iv) and regardless of whether the qualified intermediary is also
required to file a return under the terms of its agreement with the IRS.
A qualified intermediary's agreement with the IRS shall specify the
extent, if any, to which the intermediary is subject to filing
requirements under this section.
(iii) Payment to a non-qualified intermediary. A withholding agent
making a payment to a foreign intermediary
[[Page 207]]
that is not a qualified intermediary described in Sec. 1.1441-
1(e)(5)(ii) must file a return under paragraph (b)(1) of this section to
report such payments. The foreign intermediary is not required to make a
return to report the payments that it itself makes to the persons for
whom it collects the payments to the extent that the withholding agent
represents to the intermediary that it will file such a return or that
it has done so.
(iv) Payment to or through an authorized foreign agent. Both the
U.S. withholding agent making a payment to or through an authorized
foreign agent (defined in Sec. 1.1441-7(c)) and the authorized foreign
agent are required to file a return under paragraph (b)(1) of this
section.
(v) Payments to foreign partnerships. A withholding agent making a
payment to a foreign partnership (whether or not a withholding foreign
partnership) shall file a return under paragraph (b)(1) of this section
in the same manner as is required for a withholding agent making a
payment to a qualified intermediary.
(vi) Payments to a U.S. branch of certain foreign banks, or
insurance companies. A withholding agent making a payment to a U.S.
branch described in Sec. 1.1441-1(b)(2)(iv) must file a return under
paragraph (b)(1) of this section, irrespective of the fact that the
branch is treated as a U.S. person or is presumed to receive income that
is effectively connected with its conduct of a trade or business in the
United States.
(3) Payments to wholly-owned entities. A withholding agent making a
payment to a wholly-owned entity that is disregarded for Federal tax
purposes under Sec. 301.7701-2(c)(2) of this chapter as an entity
separate from its owner and whose single owner is a foreign person shall
file a return under paragraph (b)(1) of this section.
(4) Amended returns. An amended return may be filed on a Form 1042X
or such other form as the IRS may prescribe. An amended return must
include such information as the form or accompanying instructions shall
require, including, with respect to any information that has changed
from the time of the filing of the return, the information that was
shown on the original return and the corrected information.
(c) Information returns--(1) Filing requirement--(i) In general. A
withholding agent (other than an individual who is not acting in the
course of a trade or business with respect to the payment) must make an
information return on Form 1042-S (or such other form as the IRS may
prescribe) to report the amounts specified in paragraph (c)(2) of this
section that were paid during the preceding calendar year. One Form
1042-S shall be prepared for each beneficial owner (except as otherwise
provided in paragraph (c)(4) of this section regarding multiple
withholding agents). The Form 1042-S shall be prepared in such manner as
the form and accompanying instructions prescribe. One copy of the Form
1042-S shall be filed with the IRS on or before March 15 of the calendar
year following the year in which the item of income was paid. It shall
be filed with a transmittal form as provided in the instructions to the
Form 1042-S and to the transmittal form. Withholding certificates or
other statements or documentation provided to a withholding agent are
not required to be attached to the information return. Another copy of
the Form 1042-S shall be furnished to the payee on or before March 15 of
the calendar year following the year in which the item of income was
paid.
The withholding agent shall retain a copy of each Form 1042-S for
the statute of limitations on assessment and collection applicable to
the Form 1042 to which the Form 1042-S relates.
(ii) Joint owners. In the case of joint owners, a single Form 1042-S
may be prepared. However, upon request of any one of the owners, the
withholding agent shall furnish to such owner its own Form 1042-S. Where
more than one Form 1042-S is issued with respect to a single payment to
joint owners, the aggregate amount of items paid and tax withheld
reported on the Forms 1042-S cannot exceed the amounts paid to the joint
owners and tax withheld thereon. If a single Form 1042-S is prepared,
the form shall state the name of only one owner and that name shall be
that of
[[Page 208]]
any person whose status the withholding agent relied upon to determine
the applicable rate of withholding tax.
(2) Amounts subject to reporting--(i) In general. Subject to the
exceptions described in paragraph (c)(2)(ii) of this section, the
amounts required to be reported on a Form 1042-S are amounts paid to
foreign persons (including persons who are presumed to be foreign) that
consist of amounts subject to withholding (as defined in Sec. 1.1441-
2(a)) under section 1441, 1442, or 1443. This includes (but is not
limited to)--
(A) The entire amount of corporate distributions (whether deemed or
actual) paid to a foreign person, irrespective of any estimate of the
portion of the distribution that represents a taxable dividend;
(B) Amounts deemed paid to a foreign person as described in
Sec. 1.1441-2(d) (dealing with exceptions to withholding where no money
or property is paid), except where the amount is exempt from withholding
due to lack of knowledge;
(C) Amounts that are (or are presumed to be) effectively connected
with the conduct of a trade or business in the United States,
irrespective of the fact that no withholding certificate is required to
be furnished by the payee or beneficial owner. In the case of amounts
paid on a notional principal contract described in Sec. 1.1441-4(a)(3)
that are presumed to be effectively connected with the conduct of a
trade or business in the United States, the amount required to be
reported is limited to the net income from the notional principal
contract as described in Sec. 1.446-3(d). Effectively connected non-
periodic payments are reportable for the year in which an actual payment
is made;
(D) Interest (including original issue discount) that is not exempt
from reporting as provided under Sec. 1.6049-8, dealing with certain
interest on deposits with banks paid to Canadian residents;
(E) Amounts representing interest paid on an obligation that is sold
between interest payment dates;
(F) Amounts paid to foreign governments, international
organizations, or the Bank for International Settlements, whether or not
documentation must be provided;
(G) Interest (including original issue discount) paid with respect
to foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2) to the extent the documentation requirements described in
Sec. 1.871-14(e)(3) and (4) are satisfied (taking into account the
provisions of Sec. 1.871-14(e)(4)(ii), if applicable).
(ii) Exceptions to reporting. The amounts listed in paragraphs
(c)(2)(ii)(A) through (G) of this section are not required to be
reported on a Form 1042-S--
(A) Any item paid by a partnership, trust or estate to the extent
the item is required to be reported by the partnership under section
6031 or by the trust or estate under sections 6012(a) and 6034A, and the
regulations under those sections;
(B) Any item required to be reported on a Form W-2, including an
item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2
(relating to return of information as to payments to employees) or
Sec. 1.6052-1 (relating to information regarding payment of wages in the
form of group-term life insurance);
(C) Any item required to be reported on Form 1099, and such other
forms as are prescribed pursuant to the information reporting provisions
of sections 6041 through 6050P and the regulations under these sections;
(D) Amounts paid on a notional principal contract described in
Sec. 1.1441-4(a)(3)(i) that are not effectively connected with the
conduct of a trade or business in the United States (or treated as not
effectively connected pursuant to Sec. 1.1441-4(a)(3)(ii));
(E) Amounts required to be reported on Form 8288 (U.S. Withholding
Tax Return for Dispositions by Foreign Persons of U.S. Real Property
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax
(Section 1446)). A withholding agent that must report a distribution
partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to
report the entire amount on a Form 8288 or 8804;
(F) Original issue discount for which no withholding is required
under Sec. 1.1441-2(b)(3); and
[[Page 209]]
(G) Amounts described in Sec. 1.1441-1(b)(4)(xviii) (dealing with
certain amounts paid by the U.S. government).
(3) Required information. The information required to be furnished
under this paragraph (c)(3) shall be based upon the information provided
by or on behalf of the beneficial owner (e.g., a beneficial owner
withholding certificate or documentary evidence), as corrected and
supplemented based on the withholding agent's actual knowledge. The Form
1042-S must include the following information, if applicable--
(i) The name, address, and taxpayer identifying number of the
withholding agent;
(ii) A description of each category of income paid (e.g., interest,
dividends, royalties, etc.) and the aggregate amount in each category
expressed in U.S. dollars;
(iii) The rate of withholding applied;
(iv) The name and permanent residence address of the beneficial
owner (or of the payee if the beneficial owner is unknown, or of the
person receiving the amount if the payee is also unknown);
(v) The taxpayer identifying number of the beneficial owner if
required under Sec. 1.1441-1(e)(4)(vii) to be stated on a beneficial
owner withholding certificate (or if actually known to the withholding
agent making the return). In the case of a financial institution, actual
knowledge exists with respect to accounts maintained for customers only
if such taxpayer identifying number was stated on a Form W-8 furnished
for another payment made through the same account or through another
account, the information for which can be retrieved through a
centralized account information system (as described in Sec. 1.1441-
1(e)(4)(ix)) containing both accounts; and
(vi) Such information as the form or the instructions may require in
addition to, or in lieu of, information required under this paragraph
(c)(3).
(4) Multiple withholding agents--(i) In general. Except as otherwise
provided in this paragraph (c)(4), no information return is required to
be made under paragraph (c)(1)(i) of this section if a return is filed
by another withholding agent reporting the same amount pursuant to the
provisions of this paragraph (c).
(ii) Payments to a qualified intermediary or a withholding foreign
partnership. A withholding agent making a payment to a qualified
intermediary (described in Sec. 1.1441-1(e)(5)(ii)) or to a withholding
foreign partnership (described in Sec. 1.1441-5(c)(2)(i)) must report
the payment on a single Form 1042-S or as otherwise directed by the form
or the accompanying instructions to the form and must provide a copy of
the Form 1042-S to the intermediary or partnership (but is not required
to provide the Form 1042-S to the beneficial owners or partners). The
Form 1042-S must report the different categories of payments based on
different types of income and applicable withholding rates.
(iii) Payments to an authorized foreign agent--(A) Filing obligation
of foreign authorized agent. An authorized foreign agent (as described
in Sec. 1.1441-7(c)(2)) is subject to the filing requirements described
in paragraph (c)(1)(i) of this section because it is a withholding
agent. Therefore, to the extent the U.S. withholding agent for which it
is acting is not reporting the information required under this paragraph
(c), it must report the information required to be reported under
paragraph (c)(3) or (4)(vi) of this section.
(B) Filing obligations of the U.S. withholding agent. A U.S.
withholding agent making a payment to an authorized foreign agent is
exempted from the requirement under paragraph (c)(4)(iv) of this section
to make a return on Form 1042-S for each beneficial owner and may,
instead, make a return on a single Form 1042-S to report the payment
made to the authorized foreign agent. The exemption in this paragraph
(c)(4)(iii)(B) shall apply only to the extent the authorized foreign
agent complies with the filing requirements under paragraph
(c)(4)(iii)(A) of this section.
(iv) Payments to other intermediaries or foreign partnerships.
Payment of an amount to a foreign intermediary described in Sec. 1.1441-
1(e)(3)(i) that is not a qualified intermediary or to a foreign
partnership that is not a withholding foreign partnership described in
Sec. 1.1441-5(c)(2)(i) may not be shown on a
[[Page 210]]
single Form 1042-S but must be reported on separate Forms 1042-S for
each beneficial owner or payee whose name appears on a withholding
certificate or documentary evidence attached to the intermediary's or
partnership withholding certificate that is from a qualified
intermediary or a withholding foreign partnership. Payments to an
intermediary for the account of undocumented owners or to a foreign
partnership for the account of undocumented partners should be reported
on a single Form 1042-S made out to the intermediary and bearing the
mention ``unknown owners''.
(v) Payments to a U.S. branch of certain foreign entities. Payment
of an amount to the U.S. branch of a foreign entity described in
Sec. 1.1441-1(b)(2)(iv) shall be reported--
(A) On a single Form 1042-S as effectively connected income if the
withholding agent cannot reliably associate documentation with the
payment to the U.S. branch;
(B) On a single Form 1042-S as an amount paid to an intermediary if
the withholding agent can reliably associate the payment with a U.S.
branch withholding certificate described in Sec. 1.1441-1(e)(3)(v)
furnished as evidence of an agreement between the branch and the
withholding agent to treat the branch as a U.S. person; or
(C) On separate Forms 1042-S for each beneficial owner or payee
whose name appears on a withholding certificate or other appropriate
documentation attached to the U.S. branch withholding certificate.
(vi) Required information. An information return on a Form 1042-S by
a withholding agent reporting payments to an intermediary, to a foreign
partnership, or to a U.S. branch must contain the information contained
in this paragraph (c)(4)(vi). The information on the Form 1042-S must be
based upon the withholding certificates furnished by the payee, as
corrected and supplemented by the withholding agent based on its actual
knowledge or reason to know other facts:
(A) The name, address, and taxpayer identifying number of the
withholding agent.
(B) A description of each category of income paid (e.g., interest,
dividends, royalties, etc.) and the aggregate amount in each category
expressed in U.S. dollars.
(C) The rate of withholding applied.
(D) The basis for not withholding or withholding at a reduced rate.
(E) The name, address, and taxpayer identifying number of the payee.
(F) In the case of payments described in paragraph (c)(4)(iv) of
this section, the information described in paragraphs (c)(3)(iv) and (v)
of this section regarding the person for whom a Form 1042-S is required
to be prepared under paragraph (c)(4)(iv).
(G) Such information as the form or instructions may require in
addition to, or in lieu of, the information required under this
paragraph (c)(4)(vi).
(5) Payments to single-member entity. A withholding agent that, upon
reliance on a valid withholding certificate, treats a payment as made to
a wholly-owned entity that is disregarded to federal tax purposes under
Sec. 301.7701-2(c)(2) of this chapter as an entity separate from its
owner and whose single owner is a foreign person shall make an
information return on Form 1042-S in the name of the foreign single
owner, using the owner's taxpayer identifying number if such a number is
required to be stated on the form.
(6) Special rules in the case of claims of treaty benefits by hybrid
entities or their interest holders. A withholding agent must make an
information return on a Form 1042-S for each beneficial owner (within
the meaning of the applicable tax treaty) upon whose withholding
certificate or other appropriate documentation the withholding agent
relies to reduce the rate of withholding under a tax treaty. Therefore,
in the case of concurrent and consistent claims of reduced rates under
several tax treaties by the entity and by one or more interest holders,
the withholding agent must make an information return for the entity and
for each of the interest holders claiming to derive an allocable share
of amounts paid to the entity as a resident of an applicable treaty
country.
(7) Effect of grace period on filing requirements. A withholding
agent who relies on the provisions of Sec. 1.1441-
[[Page 211]]
1(b)(3)(iv) to treat the payee as a foreign person during a 90-day grace
period while awaiting the documentation must make an information return
on a Form 1042-S to report all payments to such person during the grace
period even if such person is (or is presumed to be) a U.S. person based
upon documentation furnished to the withholding agent when the grace
period expired or subsequently, or based upon applicable presumptions in
Sec. 1.1441-1(b)(3).
(8) Magnetic media reporting. A withholding agent that makes 250 or
more Form 1042-S information returns for a taxable year must file Form
1042-S returns on magnetic media. See Sec. 301.6011-2 of this chapter
for requirements applicable to a withholding agent that files Forms
1042-S with the IRS on magnetic media and publications of the IRS
relating to magnetic media filing.
(d) Report of taxpayer identifying numbers. When so required under
procedures that the IRS may prescribe in published guidance (see
Sec. 601.601(d)(2) of this chapter), a withholding agent must attach to
the Form 1042 a list of all the taxpayer identifying numbers (and
corresponding names) that have been furnished to the withholding agent
and upon which the withholding agent has relied to grant a reduced rate
of withholding and that are not otherwise required to be reported on a
Form 1042-S under the provisions of this section.
(e) Indemnification of withholding agent. A withholding agent is
indemnified against the claims and demands of any person for the amount
of any tax it deducts and withholds in accordance with the provisions of
chapter 3 of the Code and the regulations under that chapter. A
withholding agent that withholds based on a reasonable belief that such
withholding is required under chapter 3 of the Code and the regulations
under that chapter is treated for purposes of section 1461 and this
paragraph (e) as having withheld tax in accordance with the provisions
of chapter 3 of the Code and the regulations under that chapter. In
addition, a withholding agent is indemnified against the claims and
demands of any person for the amount of any payments made in accordance
with the grace period provisions set forth in Sec. 1.1441-1(b)(3)(iv).
This paragraph (e) does not apply to relieve a withholding agent from
tax liability under chapter 3 of the Code or the regulations under that
chapter.
(f) Amounts paid not constituting gross income. Any amount withheld
in accordance with Sec. 1.1441-3 shall be reported and paid in
accordance with this section, even though the amount paid to the
beneficial owner may not constitute gross income in whole or in part.
For this purpose, a reference in this section and Sec. 1.1461-2 to an
amount shall, where appropriate, be deemed to refer to the amount
subject to withholding under Sec. 1.1441-3.
(g) Extensions of time to file Forms 1042 and 1042-S. The IRS may
grant an extension of time in which to file a Form 1042 or a Form 1042-
S. Form 2758, Application for Extension of Time to File Certain Excise,
Income, Information, and Other Returns (or such other form as the IRS
may prescribe), must be used to request an extension of time for a Form
1042. Form 8809, Request for Extension of Time to File Information
Returns (or such other form as the IRS may prescribe) must be used to
request an extension of time for a Form 1042-S. The request must contain
a statement of the reasons for requesting the extension and such other
information as the forms or instructions may require. It must be mailed
or delivered not later than March 15 of the year following the end of
the calendar year for which the return will be filed.
(h) Penalties. For penalties and additions to the tax for failure to
file returns or furnish statements in accordance with this section, see
sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and
the regulations under those sections.
(i) Effective date. This section shall apply to returns required for
payments made after December 31, 2000.
[T.D. 8734, 62 FR 53467, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53467, Oct. 14, 1997,
Sec. 1.1461-1 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1461-1 was delayed
until Jan. 1, 2000. By T.D. 8856,
[[Page 212]]
64 FR 73408, 73412, Dec. 30, 1999, paragraph (i) was amended by removing
``December 31, 1999'' and adding in its place ``December 31, 2000'', and
the effective date was delayed until Jan. 1, 2001. For the convenience
of the user, the superseded text is set forth as follows:
Sec. 1.1461-1 Ownership certificates for bond interest.
(a) Tax-free covenant bond interest of citizens and residents of the
United States. Citizens, resident individuals, fiduciaries, and
partnerships, and nonresident partnerships all of the members of which
are citizens or residents, owning bonds, mortgages, or deeds of trust,
or other similar obligations issued by a domestic corporation, a
resident foreign corporation, or a nonresident foreign corporation
having a fiscal or paying agent in the United States, shall, when
presenting interest coupons for payment, file ownership certificates for
each issue of such obligations issued before January 1, 1934, and
containing a tax-free covenant. This rule shall apply without regard to
the amount of the interest coupons.
(b) Nonresident aliens and foreign corporations. (1) Nonresident
alien individuals, foreign partnerships, foreign corporations, and
unknown owners, owning bonds, mortgages, or deeds of trust, or other
similar obligations of a corporation, shall, when presenting interest
coupons for payment, file ownership certificates for each issue of all
such obligations whether or not the obligation contains a tax-free
covenant. This rule shall apply without regard to the amount of the
interest coupons and without regard to the date on which the obligations
were issued.
(2) Ownership certificates shall also be filed in the case of
interest paid on obligations of the United States or of any agency or
instrumentality thereof, irrespective of the date on which the
obligations are issued or of the amount of the interest, if the
obligations are owned by a nonresident alien individual, foreign
partnership, foreign corporation, or an unknown owner.
(3) Notwithstanding subparagraphs (1) and (2) of this paragraph,
ownership certificates are not required to be filed by:
(i) A nonresident alien individual, foreign partnership, or foreign
corporation, engaged in a trade or business in the United States during
the taxable year, if the interest is effectively connected with the
conduct of a trade or business within the United States by such person
and is exempted from withholding under section 1441 or section 1442 by
reason of paragraph (a) of Sec. 1.1441-4,
(ii) A nonresident alien individual, a foreign corporation, or a
foreign partnership composed wholly of nonresident alien individuals and
foreign corporations, if the interest is treated under section 861(a)(1)
and the regulations thereunder as income not from sources within the
United States, or
(iii) A foreign partnership or foreign corporation engaged in trade
or business in the United States during the taxable year, with respect
to interest which is exempted from withholding under section 1441 or
1442 by reason of paragraph (f) of Sec. 1.1441-4.
(4) See Sec. 1.1441-6 in case of coupon bond interest which is
subject to a reduced rate of, or an exemption from, tax pursuant to a
tax convention.
(c) Overdue coupon bonds. In the case of interest payments on
overdue coupon bonds, the interest coupons of which have been exhausted,
ownership certificates are required to be filed when collecting the
interest in the same manner as if interest coupons were presented for
collection.
(d) Information shown on ownership certificate. The ownership
certificate shall include such information as is required by the form
and accompanying instructions. This paragraph shall apply to all special
variations of Form 1001 referred to in paragraph (i) of this section.
(e) Ownership certificates not required. Ownership certificates are
not required to be filed in the case of interest payments on:
(1) Obligations of a State, Territory, or possession of the United
States, or any political subdivision of any of the foregoing, or of the
District of Columbia;
(2) Bonds, mortgages, or deeds of trust, or other similar
obligations issued by an individual or a partnership; and
(3) Obligations owned by a domestic corporation or foreign
government.
(f) Interest coupons unaccompanied by ownership certificates. (1)
When interest coupons detached from corporate bonds, or from obligations
of the United States or of any agency or instrumentality thereof, are
received unaccompanied by ownership certificates, the first bank to
which the coupons are presented for payment shall require of the payee a
statement showing the name and address of the person from whom the
coupons were received by the payee and alleging that the owner of the
bonds is unknown to the payee. This rule shall not apply if the owner of
the bonds is known to the bank and the bank is satisfied that the owner
is a person who is not required to file an ownership certificate.
(2) The bank shall also require the payee to prepare an ownership
certificate on Form 1001, which shall be modified by crossing out
``owner,'' inserting ``payee,'' stamping or writing across the face of
the certificate ``Statement furnished,'' and adding the name of the
bank.
(3) The statement furnished pursuant to this paragraph shall be
forwarded to the Internal Revenue Service Center, Philadelphia, PA 19255
with the annual return on Form 1042.
[[Page 213]]
(g) Noncoupon bonds--(1) General rule. Ownership certificates on
Form 1000 or, in case of payments made on or before December 31, 1971,
on Form 1001, are required in connection with interest payments on
noncoupon bonds as in the case of coupon bonds. If an ownership
certificate is not furnished by the owner of a noncoupon bond, the
certificate shall be prepared by the withholding agent but is not
required to be signed by the owner.
(2) Application of tax treaties. Ownership certificates are not
required when claiming the benefit of an exemption from tax, or reduced
rate of tax, granted by an applicable tax convention in respect of
interest payments on noncoupon bonds. Regulations under the various
income tax conventions require, in lieu of an ownership certificate, the
use of an exemption (or reduced rate) certificate (or corresponding
letter) in the case of such interest payments. These regulations are
effective with respect to payments made prior to December 31, 1974, if
such certificate was filed with respect to such income prior to December
31, 1971. Such a certificate may not be prepared by the withholding
agent but must be signed by the owner of the interest, or by his trustee
or agent in accordance with the applicable tax treaty regulation. See
Sec. 1.1441-6 for requirements with respect to payments to which such
certificates do not apply.
(h) Form of ownership certificate for citizens and residents. Form
1000 shall be used in preparing ownership certificates of individuals or
fiduciaries who are citizens or residents of the United States, of
resident partnerships, and of nonresident partnerships all of the
members of which are citizens or residents. If the obligations are
issued by a nonresident foreign corporation having a fiscal or paying
agent in the United States, Form 1000 shall be modified to show the name
and address of the fiscal agent or the paying agent in addition to the
name and address of the debtor corporation. Duplicate copies of Form
1000 are not required.
(i) Form of ownership certificate for nonresident aliens and foreign
corporations. Form 1001 shall be used in preparing ownership
certificates of nonresident alien individuals, foreign partnerships,
foreign corporations, and unknown owners. For payments of interest made
prior to December 31, 1971, a special variation of Form 1001 (designated
by a letter or letters following the number 1001) shall be used,
however, in preparing ownership certificates of persons claiming the
benefit of an exemption from tax, or reduced rate of tax, granted by an
applicable income tax convention in respect of interest payments on
coupon bonds. See the applicable tax treaty regulation and paragraph (d)
of this section. Form 1001, and the special variations of such form, for
payments of interest made before December 31, 1971, shall be filed in
duplicate. Form 1001, for payments of interest made on or after January
1, 1972, shall be retained by the withholding agent for at least 4 years
after the interest is paid.
(j) Ownership certificates in the case of fiduciaries and joint
owners. (1) Fiduciaries having the control and custody of more than one
estate or trust, the assets of which include bonds of corporations and
other securities, shall execute a certificate of ownership for each
estate or trust even though the bonds are of the same issue. The
ownership certificate shall show both the name of the estate or trust
and the name and address of the fiduciary.
(2) Separate ownership certificates shall be executed in behalf of
each person owning bonds jointly with another.
(k) Inconsistent regulations. All regulations inconsistent with the
provisions of this section shall be deemed to have been modified
accordingly.
(Approved by the Office of Management and Budget under control number
1545-0795)
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
[T.D. 6500, 25 FR 12077, Nov. 26, 1960, as amended by T.D. 6908, 31 FR
16774, Dec. 31, 1966; T.D. 7157, 36 FR 25228, Dec. 30, 1971; T.D. 7977,
49 FR 36835, Sept. 20, 1984]
Sec. 1.1461-2 Adjustments for overwithholding or underwithholding of tax.
(a) Adjustments of overwithheld tax--(1) In general. A withholding
agent that has overwithheld under chapter 3 of the Internal Revenue Code
(Code) and made a deposit of the tax as provided in Sec. 1.6302-2(a) may
adjust the overwithheld amount either pursuant to the reimbursement
procedure described in paragraph (a)(2) of this section or pursuant to
the set-off procedure described in paragraph (a)(3) of this section.
Adjustments under this paragraph (a) may only be made within the time
prescribed under paragraph (a) (2) or (3) of this section. After such
time, a refund of the amount overwithheld can only be claimed by the
beneficial owner with the Internal Revenue Service (IRS) pursuant to the
procedures described in chapter 65 of the Code. For purposes of this
section, the term overwithholding means any amount actually withheld
(determined before application of the adjustment procedures under this
section) from an item of income pursuant to chapter 3 of the Code or the
regulations thereunder in excess
[[Page 214]]
of the actual tax liability due, regardless of whether such
overwithholding was in error or appeared correct at the time it
occurred.
(2) Reimbursement of tax--(i) General rule. Under the reimbursement
procedure, the withholding agent repays the beneficial owner or payee
for the amount overwithheld. In such a case, the withholding agent may
reimburse itself by reducing, by the amount of tax actually repaid to
the beneficial owner or payee, the amount of any deposit of tax made by
the withholding agent under Sec. 1.6302-2(a)(1)(iii) for any subsequent
payment period occurring before the end of the calendar year following
the calendar year of overwithholding. Any such reduction that occurs for
a payment period in the calendar year following the calendar year of
overwithholding shall be allowed only if--
(A) The withholding agent states, on a timely filed (not including
extensions) Form 1042-S for the calendar year of overwithholding, the
amount of tax withheld and the amount of any actual repayment; and
(B) The withholding agent states on a timely filed (not including
extensions) Form 1042 for the calendar year of overwithholding, that the
filing of the Form 1042 constitutes a claim for credit in accordance
with Sec. 1.6414-1.
(ii) Record maintenance. If the beneficial owner is repaid an amount
of withholding tax under the provisions of this paragraph (a)(2), the
withholding agent shall keep as part of its records a receipt showing
the date and amount of repayment and the withholding agent must provide
a copy of such receipt to the beneficial owner. For this purpose, a
canceled check or an entry in a statement is sufficient provided that
the check or statement contains a specific notation that it is a refund
of tax overwithheld.
(3) Set-offs. Under the set-off procedure, the withholding agent may
repay the beneficial owner or payee by applying the amount overwithheld
against any amount which otherwise would be required under chapter 3 of
the Code or the regulations thereunder to be withheld from income paid
by the withholding agent to such person before the earlier of the due
date (without regard to extensions) for filing the Form 1042-S for the
calendar year of overwithholding or the date that the Form 1042-S is
actually filed with the IRS. For purposes of making a return on Form
1042 or 1042-S (or an amended form) for the calendar year of
overwithholding and for purposes of making a deposit of the amount
withheld, the reduced amount shall be considered the amount required to
be withheld from such income under chapter 3 of the Code and the
regulations thereunder.
(4) Examples. The principles of this paragraph (a) are illustrated
by the following examples:
Example 1. (i) N is a nonresident alien individual who is a resident
of the United Kingdom. In December 2001, a domestic corporation C pays a
dividend of $100 to N, at which time C withholds $30 and remits the
balance of $70 to N. On February 10, 2002, prior to the time that C
files its Form 1042, N furnishes a valid Form W-8 described in
Sec. 1.1441-1(e)(2)(i) upon which C may rely to reduce the rate of
withholding to 15 percent under the provisions of the U.S.-U.K. tax
treaty. Consequently, N advises C that its tax liability is only $15 and
not $30 and requests reimbursement of $15. Although C has already
deposited the $30 that was withheld, as required by Sec. 1.6302-
2(a)(1)(iv), C repays N in the amount of $15.
(ii) During 2001, C makes no other payments upon which tax is
required to be withheld under chapter 3 of the Code; accordingly, its
return on Form 1042 for such year, which is filed on March 15, 2002,
shows total tax withheld of $30, an adjusted total tax withheld of $15,
and $30 previously paid for such year. Pursuant to Sec. 1.6414-1(b), C
claims a credit for the overpayment of $15 shown on the Form 1042 for
2001. Accordingly, it is permitted to reduce by $15 any deposit required
by Sec. 1.6302-2 to be made of tax withheld during the calendar year
2002. The Form 1042-S required to be filed by C with respect to the
dividend of $100 paid to N in 2001 is required to show tax withheld of
$30 and tax released of $15.
Example 2. The facts are the same as in Example 1. In addition,
during 2002, C makes payments to N upon which it is required to withhold
$200 under chapter 3 of the Code, all of which is withheld in June 2002.
Pursuant to Sec. 1.6302-2(a)(1)(iii), C deposits the amount of $185 on
July 15, 2002 ($200 less the $15 for which credit is claimed on the Form
1042 for 2001). On March 15, 2003, C Corporation files its return on
Form 1042 for calendar year 2002, which shows total tax withheld of
$200, $185 previously deposited by C, and $15 allowable credit.
[[Page 215]]
Example 3. The facts are the same as in Example 1. Under
Sec. 1.6032-2(a)(1)(ii)), C is required to deposit on a quarter-monthly
basis the tax withheld under chapter 3 of the Code. C withholds tax of
$100 between February 8 and February 15, 2002, and deposits $75 [($100 x
90 percent) less $15] of the withheld tax within 3 banking days after
February 15, 2002, and by depositing $10 [($100-$15) less $75] within 3
banking days after March 15, 2002.
(b) Withholding of additional tax when underwithholding occurs. A
withholding agent may withhold from future payments made to a beneficial
owner the tax that should have been withheld from previous payments to
such beneficial owner. In the alternative, the withholding agent may
satisfy the tax from property that it holds in custody for the
beneficial owner or property over which it has control. Such additional
withholding or satisfaction of the tax owed may only be made before the
date that the Form 1042 is required to be filed (not including
extensions) for the calendar year in which the underwithholding
occurred. See Sec. 1.6302-2 for making deposits of tax or Sec. 1.1461-
1(a) for making payment of the balance due for a calendar year.
(c) Definition. For purposes of this section, the term payment
period means the period for which the withholding agent is required by
Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3 of
the Code.
(d) Effective date. This section applies to payments made after
December 31, 2000.
[T.D. 8734, 62 FR 53470, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]
Effective Date Note 1: By T.D. 8734, 62 FR 53467, Oct. 14, 1997,
Sec. 1.1461-2 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1461-2 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001. For the convenience of
the user, the superseded text is set forth as follows:
Sec. 1.1461-2 Return of tax withheld.
(a) Effective date. This section shall apply only with respect to
payments of income occurring after December 31, 1966.
(b) Form 1042--(1) Filing requirement. Every withholding agent shall
make on or before March 15 an annual return on Form 1042 of the tax
required to be withheld under chapter 3 of the Code during the preceding
calendar year. Form 1042 is required to be made in respect of a calendar
year, even though no tax was required to be withheld under such chapter
during such year, if the withholding agent is required by paragraph
(c)(1) of this section to make an information return on Form 1042S with
respect to any payments made during such year. Form 1042 shall be filed
with the Internal Revenue Service Center, Philadelphia, PA. 19255. The
return shall be prepared in duplicate and shall include such information
as is required by the form and accompanying instructions. If an
adjustment is required on Form 1042 because of repayments of withheld
tax pursuant to paragraph (a)(1) of Sec. 1.1461-4, only the aggregate
amount of such adjustment shall be shown thereon and no itemized
explanation of such aggregate amount shall be required to accompany such
form. See paragraph (b) of Sec. 1.1461-4. If, pursuant to paragraph
(a)(2) of Sec. 1.1461-3, any additional amount of tax is required to be
paid to the Internal Revenue Service Center, Philadelphia, PA. for the
preceding calendar year when filing Form 1042, no itemized explanation
of such additional payment of tax shall be required to accompany such
form. The duplicate copy of Form 1042 shall be retained by the
withholding agent.
(2) Summary of accompanying forms. Form 1042 shall be accompanied by
the original copies of all Forms 1042S which were prepared by the
withholding agent during the previous calendar year, including such
forms upon which income exempt from withholding of tax is reported. The
forms so forwarded with Form 1042 are not required to be listed thereon;
but they shall be summarized on Form 1042 in the manner prescribed
thereon and in the instructions applicable thereto. The exemption and
reduced rate certificates, such as Form 1001A-D or Form 1001A-J,
referred to in paragraph (g)(2) of Sec. 1.1461-1 are not required to
accompany, or to be summarized on, Form 1042.
(c) Form 1042S--(1) Filing requirement. Every withholding agent
shall make on or before March 15 an annual information return on Form
1042S of all items of income specified in Sec. 1.1441-2 paid during the
previous calendar year to nonresident alien individuals, foreign
partnerships, nonresident alien or foreign fiduciaries of a trust or
estate, or foreign corporations if such items consist of--
(i) Amounts upon which tax would have been required to be withheld
under chapter 3 of the Code,
(ii) Amounts upon which tax would have been required to be withheld
under such chapter but for an exclusion from gross income applicable
under any income tax treaty to which the United States is a party,
(iii) Amounts upon which tax would have been required to be withheld
under such chapter but for the provisions of any specific
[[Page 216]]
complete or partial exemption from withholding applicable under the
authority of any regulation under this title or any ruling or procedure
of the Commissioner, or
(iv) Amounts in respect of which tax withheld under such chapter
has, pursuant to such authority, been released or refunded to the payee
by the withholding agent.
All amounts shall be shown in U.S. currency. Notwithstanding
subdivisions (i) through (iv) of this subparagraph (1), income paid to
nonresident alien individual, foreign partnerships, nonresident alien or
foreign fiduciaries of a trust or estate, or foreign corporations and
required to be shown on Form W-2, or in the case of income paid prior to
January 1, 1972, on Form 1001 (or on any special variation of Form 1001
referred to in paragraph (i) of Sec. 1.1461-1, or the substitute
thereof) is not required to be shown on Form 1042S. However, a return
under this subparagraph is required on Form 1042S (rather than on Form
W-2) in respect of amounts which otherwise would be required to be shown
on Form W-2 solely by reason of Sec. 1.6041-2 (relating to return of
information as to payments to employees) or Sec. 1.6052-1 (relating to
information regarding payment of wages in the form of group-term life
insurance). The original Form 1042S shall accompany Form 1042 and shall
be filed with the Internal Revenue Service Center, Philadelphia, PA
19255.
(2) Information to be furnished. (i) Form 1042S shall include such
information as is required by the form and accompanying instructions.
(ii) If a Form 1042S is prepared in respect of an item of income
upon which tax has not been withheld under chapter 3 of the Code, a
brief statment as to the authority for such failure to withhold shall be
made upon the form itself. If necessary, however, a separate statement
as to such authority may be attached to the original copy of the Form
1042S.
(iii) If a Form 1042S is prepared in respect of compensation from
which the personal exemption is deducted in accordance with paragraph
(e) of Sec. 1.1441-3, the amount of the compensation allocable to labor
or personal services performed within the United States, together with
the amount of the deduction for the prorated personal exemption, shall
be shown on a separate statement attached to the original copy of that
form.
(iv) If any certificate, statement, letter, or form relating to an
exemption (as described in Sec. 1.1441-4) is filed with or presented to
a withholding agent, such certificate, statement, letter, or form shall
be attached to each Form 1042S relating to the income subject to the
exemption.
(3) Manner of preparing Form 1042S. (i) Form 1042S shall be prepared
with respect to all payments of any item of income made during the
calendar year to the same payee in the manner prescribed by the form and
accompanying instructions. Payment of an item of income to a nominee or
representative for the benefit of other persons in respect of whom Form
1042S are required may not be shown on a single Forms 1042S but must be
identified with the ultimate recipients of the income if such
information is known to the payer of the income.
(ii) The duplicate copy of Form 1042S shall be furnished to the
payee indicated thereon, and a copy shall be retained by the withholding
agent.
(4) Alternative methods. To the extent that the withholding agent's
system of record keeping makes impractical the use of Form 1042S in the
manner prescribed by paragraph (c)(3) of this section, he may devise and
submit for the prior annual approval of the Commissioner a variation of
Form 1042S which will include the information required by paragraph
(c)(2) of this section and which will substantially comply with the
requirements of paragraph (c)(3) of this section. Request for such
approval shall be sent to: Internal Revenue Service, Attn: Substitute
Forms Program, 1111 Constitution Avenue, NW., Washington, DC 20224 and
shall be accompanied by an explanation as to why such variation is
necessary.
(d) Information to be furnished by Commissioner. If a foreign
country has entered into an income tax treaty with the United States
which provides for the mutual exchange of information, the Commissioner
shall, as soon as practicable after the close of a calendar year during
which the treaty is in effect, transmit to the appropriate authority
designated in the treaty with that country the information contained in
Forms 1042S showing a payee with an address in the country. This
information is not to be furnished to any such foreign country, however,
if the Commissioner ascertains through appropriate channels that the
information is not required by that country.
(e) Penalties. For penalties and additions to the tax attaching upon
failure to comply with this section, see sections 6651, 6656, 6676, and
7203.
(f) Special items. The tax withheld in accordance with paragraphs
(b)(1), (c)(3), and (d)(1) of Sec. 1.1441-3 shall be returned and paid
in accordance with this section even though the items involved may not
constitute gross income in whole or in part. For such purpose, a
reference in this section to an item or amount of income shall, where
appropriate, be deemed to refer also to the items specified in such
paragraphs or the amount thereof.
(g) Inconsistent regulations. All regulations inconsistent with the
provisions of this section shall be deemed to have been modified
accordingly.
(Approved by the Office of Management and Budget under control number
1545-0795)
[[Page 217]]
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
[T.D. 6500, 25 FR 12078, Nov. 26, 1960, as amended by T.D. 6922, 32 FR
8711, June 17, 1967; T.D. 7157, 36 FR 25228, Dec. 30, 1971; T.D. 7977,
49 FR 36835, Sept. 20, 1984]
Effective Date Note 2: By T.D. 8856, 64 FR 73412, Dec. 30, 1999,
Sec. 1.1461-2 was amended in paragraphs (a)(4), Examples 1, 2, and 3 and
(d), by revising certain dates, effective Jan. 1, 2001. See Federal
Register for superseded dates.
Sec. 1.1461-3 Payment of withheld tax.
(a) Payments of tax--(1) Quarterly payments--(i) Years prior to
1973. Every withholding agent who, pursuant to chapter 3 of the Code,
withholds tax during any calendar quarter beginning after December 31,
1966, and ending on or before December 31, 1972, shall, to the extent
such amounts have not been deposited pursuant to Sec. 1.6302-2 with a
Federal Reserve bank or an authorized commercial bank, pay such withheld
tax to the Internal Revenue Service Center, Philadelphia, PA 19255, on
or before the last day of the first calendar month following the close
of the calendar quarter. Any amounts required to be paid to the Director
pursuant to this subdivision shall be made with quarterly transmittal
Form 4277, even though the withholding agent has made no deposits
pursuant to paragraph (a)(2) of Sec. 1.6302-2 and has no validated
depositary receipts to accompany that transmittal form.
(ii) 1973 and subsequent years. Payments are not required to be made
for calendar quarters ending after December 31, 1972.
(2) Payment of balance of tax with Form 1042. If for any reason the
total amount of tax required to be returned for any calendar year
pursuant to paragraph (b) of Sec. 1.1461-2 has not been deposited
pursuant to Sec. 1.6302-2 (or, for years prior to 1973 deposited
pursuant to Sec. 1.6302-2 or paid pursuant to subparagraph (1) of this
paragraph), the withholding agent shall pay the balance of tax due for
such year to the Internal Revenue Service Center, Philadelphia, PA
19255, when filing Form 1042 for such year.
(b) Penalties for failure to pay tax. For penalties and additions to
the tax for failure to pay the tax required to be withheld under chapter
3 of the Code, see sections 6653 and 7202.
(c) Deposits of tax. For provisions relating to the use of Federal
Reserve banks or authorized financial institutions for the deposit of
tax required to be withheld under chapter 3 of the Code, see
Sec. 1.6302-2.
(Approved by the Office of Management and Budget under control number
1545-0257)
[T.D. 6922, 32 FR 8712, June 17, 1967, as amended by T.D. 7243, 38 FR
21, Jan. 3, 1973; T.D. 7953, 49 FR 19644, May 9, 1984; T.D. 7977, 49 FR
36836, Sept. 20, 1984]
Effective Date Note: By T.D. 8734, 62 FR 53471, Oct. 14, 1997,
Sec. 1.1461-3 was removed, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of the removal of Sec. 1.1461-3
was delayed until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30,
1999, the effective date was delayed until Jan. 1, 2001.
Sec. 1.1461-4 Adjustments for overwithholding of tax.
(a) Repayment of erroneously withheld tax after payment of tax by
withholding agent--(1) Repayment of tax to payee. If, in any payment
period (as defined in paragraph (c) of this section) occurring in a
calendar year, a withholding agent (i) withholds from amounts paid to
any person more than the correct amount of tax required to be withheld
under chapter 3 of the Code and (ii) makes a deposit of the amount of
such overwithholding as provided in Sec. 1.6302-2 (or, for years prior
to 1973, makes a payment or deposit of the amount of such
overwithholding as provided in Sec. 1.1461-3 or Sec. 1.6302-2), the
withholding agent may repay such amount, at any time before filing Form
1042 for such calendar year, to the person from whose income such amount
was withheld.
(2) Reimbursement of payee. If the withholding agent does not repay
the amount of the overwithholding pursuant to subparagraph (1) of this
paragraph, the withholding agent may reimburse the person entitled to
such amount by applying the amount of the overwithholding against any
tax which otherwise would be required under chapter 3 of the Code to be
withheld from income paid by the withholding agent to such person before
filing Form
[[Page 218]]
1042 for the calendar year in which such overwithholding occurred. For
purposes of making a return on Form 1042 and for purposes of making a
payment or deposit of the amount withheld, the reduced amount so
withheld shall be considered the amount required to be withheld from
such income under chapter 3 of the Code.
(b) Adjustment of tax payments or deposits. If, pursuant to
paragraph (a)(1) of this section, a withholding agent repays a person
the amount of tax overwithheld from such person under Chapter 3 of the
Code during any payment period of the calendar year, the withholding
agent may reduce, by the amount so overwithheld, the amount of any
deposit of tax required by paragraph (a) of Sec. 1.6302-2 (or, for years
prior to 1973, the amount of any payment or deposit of tax required by
Sec. 1.1461-3 or paragraph (a) of Sec. 1.6302-2) to be made by the
withholding agent for any subsequent payment period occurring before the
end of the calendar year following the calendar year of overwithholding.
The reduction of a payment or deposit of tax for a payment period
occurring in the calendar year following the calendar year of
overwithholding shall be made only if the withholding agent files, on
his Form 1042 for the calendar year of overwithholding, a claim for
credit in accordance with paragraph (b) of Sec. 1.6414-1. The
application of this paragraph may be illustrated by the following
examples:
Example (1). (a) A is a nonresident alien individual who is a
resident of the United Kingdom. In December 1973, a domestic corporation
M pays a dividend of $100 to A, at which time M Corporation withholds
$30 and remits the balance of $70 to A. On February 16, 1974, A advises
M Corporation that, pursuant to the income tax convention with the
United Kingdom, only $15 tax should have been withheld from the $100
dividend and requests repayment of the $15 which was erroneously
withheld. Although M Corporation has already deposited the $30 which was
withheld, as permitted by paragraph (a)(1)(iv) of Sec. 1.6302-2, such
corporation repays A in the amount of $15.
(b) During 1973 M Corporation makes no other payments upon which tax
is required to be withheld under Chapter 3 of the Code; accordingly, its
return on Form 1042 for such year, which is filed on March 15, 1974,
shows total tax withheld of $30, which is reduced by an adjustment of
$15 for the amount repaid to A, an adjusted total tax withheld of $15,
and $30 previously paid for such year. Pursuant to paragraph (b) of
Sec. 1.6414-1, M Corporation claims credit for the overpayment of $15
shown on the Form 1042 for 1973. Accordingly, it is permitted to reduce
by $15 any deposit required by Sec. 1.6302-2 to be made of tax withheld
during 1974. The Form 1042S required to be filed by M Corporation with
respect to the dividend of $100 paid to A in 1973 is required to show
tax withheld of $30 and tax released of $15. The Form 1042S (or
authorized substitute) is required to accompany the Form 1042 for 1973
which is filed on March 15, 1974. No additional explanation is required
to be filed with the Form 1042 for 1973 in support of the $15 adjustment
claimed thereon.
(c) During 1974 M Corporation is required to withhold under chapter
3 of the Code $200, all of such amount being withheld in June of that
year. Pursuant to Sec. 1.6302-2, M Corporation deposits on July 15,
1974, the amount of $185, that is, $200 less the $15 for which credit is
claimed on the Form 1042 for 1973. On March 17, 1975, M Corporation
files its return on Form 1042 for 1974, which shows total tax withheld
of $200, $185 previously deposited by M Corporation, and $15 allowable
credit.
Example (2). The facts are the same as in example (1) except that
paragraph (c) of such example does not apply and that M Corporation is
required to deposit on a quarter-monthly basis the tax withheld under
chapter 3 of the Code. M Corporation withholds tax of $100 between
February 22, and February 28, 1974, and complies with the quarter-
monthly deposit requirement of paragraph (a)(1)(ii) of Sec. 1.6302-2 by
depositing $75 [(100 x 90 percent) less $15] of the withheld tax by
March 5, 1974 (3 banking days after February 28, 1974) and by depositing
$10 [($100-$15) less $75] by March 20, 1974 (3 banking days after March
15, 1974).
(c) Definition--(1) 1973 and subsequent years. For purposes of this
section, for calendar years beginning on or after January 1, 1973, the
term payment period means a calendar month or a quarter-monthly period
(as the case may be) in such a calendar year with respect to which the
withholding agent is required by paragraph (a)(1) of Sec. 1.6302-2 to
make a deposit of tax withheld under Chapter 3 of the Code.
(2) Years prior to 1973. For the purposes of this section, for
calendar years ending on or before December 31, 1972, the term payment
period means (i)(a) a calendar month or (b) a semimonthly period (as the
case may be) in such a calendar year with respect to which the
withholding agent is required by
[[Page 219]]
paragraph (a)(2) of Sec. 1.6302-2 to make a deposit of tax withheld
under Chapter 3 of the Code, or (ii) a calendar quarter in such a
calendar year with respect to which he is required by paragraph (a)(1)
of Sec. 1.1461-3 to make a payment of such tax.
[T.D. 6922, 32 FR 8712, June 17, 1967, as amended by T.D. 7243, 38 FR
22, Jan. 3, 1973]
Effective Date Note: By T.D. 8734, 62 FR 53471, Oct. 14, 1997,
Sec. 1.1461-4 was removed, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of the removal of Sec. 1.1461-4
was delayed until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, Dec. 30,
1999, the effective date was delayed until Jan. 1, 2001.
Sec. 1.1462-1 Withheld tax as credit to recipient of income.
(a) Creditable tax. The entire amount of the income from which the
tax is required to be withheld (including amounts calculated under the
gross-up formula in Sec. 1.1441-3(f)(1)) shall be included in gross
income in the return required to be made by the beneficial owner of the
income, without deduction for the amount required to be or actually
withheld, but the amount of tax actually withheld shall be allowed as a
credit against the total income tax computed in the beneficial owner's
return.
(b) Amounts paid to persons who are not the beneficial owner.
Amounts withheld at source under chapter 3 of the Internal Revenue Code
(Code) on payments to a fiduciary, partnership, or intermediary is
deemed to have been paid by the taxpayer ultimately liable for the tax
upon such income. Thus, for example, if a beneficiary of a trust is
subject to the taxes imposed by section 1, 2, 3, or 11 upon any portion
of the income received from a foreign trust, the part of any amount
withheld at source which is properly allocable to the income so taxed to
such beneficiary shall be credited against the amount of the income tax
computed upon the beneficiary's return, and any excess shall be
refunded. Further, if a partnership withholds an amount under chapter 3
of the Code with respect to the distributive share of a partner that is
a partnership or with respect to the distributive share of partners in
an upper tier partnership, such amount is deemed to have been withheld
by the upper tier partnership.
(c) Effective date. This section applies to payments made after
December 31, 2000.
[T.D. 8734, 62 FR 53471, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72188, Dec. 31, 1998]
Effective Date Note: By T.D. 8734, 62 FR 53471, Oct. 14, 1997,
Sec. 1.1462-1 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1462-1 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73412, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001, and paragraph (c) was
amended by removing ``December 31, 1999'' and adding in its place
``December 31, 2000''. For the convenience of the user, the superseded
text is set forth as follows:
Sec. 1.1462-1 Withheld tax as credit to recipient of income.
(a) Return of income from which tax was withheld. The entire amount
of the income from which the tax is required to be withheld shall be
included in gross income in the return required to be made by the
recipient of the income, without deduction for the amount required to be
withheld, but the tax so withheld shall be allowed as a credit against
the total income tax computed in the taxpayer's return.
(b) Amounts paid to fiduciaries. Tax withheld at the source under
chapter 3 of the Code upon income paid to any fiduciary is deemed to
have been paid by the taxpayer ultimately liable for the tax upon such
income. Thus, for example, if any taxpayer is subject to the taxes
imposed by section 1, 2, 3, or 11 upon any portion of the income of a
nonresident alien estate or trust, the part of any tax withheld at the
source which is properly allocable to the income so taxed to such
taxpayer shall be credited against the amount of the income tax computed
upon the taxpayer's return, and any excess shall be credited against any
income, war profits, or excess profits tax, or installment thereof, then
due from the taxpayer, and any balance shall be refunded.
(Approved by the Office of Management and Budget under control number
1545-0795)
(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C.
7805) of the Internal Revenue Code of 1954)
[T.D. 6500, 25 FR 12080, Nov. 26, 1960, as amended by T.D. 7977, 49 FR
36836, Sept. 20, 1984]
[[Page 220]]
Sec. 1.1463-1 Tax paid by recipient of income.
(a) Tax paid. If the tax required to be withheld under chapter 3 of
the Internal Revenue Code is paid by the beneficial owner of the income
or by the withholding agent, it shall not be re-collected from the
other, regardless of the original liability therefor. However, this
section does not relieve the person that did not withhold tax from
liability for interest or any penalties or additions to tax otherwise
applicable. See Sec. 1.1441-7(b) for additional applicable rules.
(b) Effective date. This section applies to failures to withhold
occurring after December 31, 2000.
[T.D. 8734, 62 FR 53471, Oct. 14, 1997, as amended by T.D. 8804, 63 FR
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]
Effective Date Note: By T.D. 8734, 62 FR 53471, Oct. 14, 1997,
Sec. 1.1463-1 was revised, effective Jan. 1, 1999. By T.D. 8804, 63 FR
72183, Dec. 31, 1998, the effective date of Sec. 1.1463-1 was delayed
until Jan. 1, 2000. By T.D. 8856, 64 FR 73408, 73412, Dec. 30, 1999, the
effective date was delayed until Jan. 1, 2001, and paragraph (b) was
amended by removing ``December 31, 1999'' and adding in its place
``December 31, 2000''. For the convenience of the user, the superseded
text is set forth as follows:
Sec. 1.1463-1 Tax paid by recipient of income.
If the tax required to be withheld under chapter 3 of the Code is
paid by the recipient of the income or by the withholding agent, it
shall not be recollected from the other, regardless of the original
liability therefor; and, in such event, no penalty will be asserted
against either person for failure to return or pay the tax where no
fraud or purpose to evade payment is involved.
[T.D. 6500, 25 FR 12081, Nov. 26, 1960]
Sec. 1.1464-1 Refunds or credits.
(a) In general. The refund or credit under chapter 65 of the Code of
an overpayment of tax which has actually been withheld at the source
under chapter 3 of the Code shall be made to the taxpayer from whose
income the amount of such tax was in fact withheld. To the extent that
the overpayment under chapter 3 was not in fact withheld at the source,
but was paid, by the withholding agent the refund or credit under
chapter 65 of the overpayment shall be made to the withholding agent.
Thus, where a debtor corporation assumes liability pursuant to its tax-
free covenant for the tax required to be withheld under chapter 3 upon
interest and pays the tax in behalf of its bondholder, and it can be
shown that the bondholder is not in fact liable for any tax, the
overpayment of tax shall be credited or refunded to the withholding
agent in accordance with chapter 65 since the tax was not actually
deducted and withheld from the interest paid to the bondholder. In
further illustration, where a withholding agent who is required by
chapter 3 to withhold $300 tax from rents paid to a nonresident alien
individual mistakenly withholds $320 and mistakenly pays $350 as
internal revenue tax, the amount of $30 shall be credited or refunded to
the withholding agent in accordance with chapter 65 and the amount of
$20 shall be credited or refunded in accordance with such chapter to the
person from whose income such amount has been withheld.
(b) Tax repaid to payee. For purposes of this section and
Sec. 1.6414-1, any amount of tax withheld under chapter 3 of the Code,
which, pursuant to paragraph (a)(1) of Sec. 1.1461-2, is repaid by the
withholding agent to the person from whose income such amount was
erroneously withheld shall be considered as tax which, within the
meaning of sections 1464 and 6414, was not actually withheld by the
withholding agent.
[T.D. 6922, 32 FR 8713, June 17, 1967, as amended by T.D. 8804, 63 FR
72188, Dec. 31, 1998]
Effective Date Note: By T.D. 8804, 63 FR 72188, Dec. 31, 1998, in
Sec. 1.1464-1 paragraph (b) was amended by removing ``Sec. 1.1461-4''
and inserting in its place ``1.1461-2'', effective Jan. 1, 2000.
Rules Applicable to Recovery of Excessive Profits on Government
Contracts
RECOVERY OF EXCESSIVE PROFITS ON GOVERNMENT CONTRACTS
Sec. 1.1471-1 Recovery of excessive profits on government contracts.
The inclusion of the statutory provisions of section 1471 in this
part does not supersede the provisions of 26 CFR (1939) part 17
(Treasury Decision 4906)
[[Page 221]]
and 26 CFR (1939) part 16 (Treasury Decision 4909) as made applicable to
section 1471 by Treasury Decision 6091 (19 FR 5167, C.B. 1954-2, 47).
[T.D. 6500, 25 FR 12081, Nov. 26, 1960]
Editorial Note: For the convenience of the user, the text of parts
16 and 17 (not entirely superseded) of 26 CFR (1939) referred to above
is set forth below:
Part 16--Excess Profits on Army Contracts for Aircraft
Regulations Under Section 14 of the Act of April 3, 1939, and Other
Provisions
Authority: Sections 16.1 to 16.18 issued under 52 Stat. 467; 26
U.S.C. 3791. Interpret or apply sec. 3, 48 Stat. 505, as amended, sec.
14, 53 Stat. 560; 34 U.S.C. 496, 10 U.S.C. 311, 312.2206
Source: Sections 16.1 to 16.18 contained in T.D. 4909, 4 FR 2733,
July 1, 1939, except as otherwise noted.
Sec. 16.1 Definitions. As used in the regulations in this part the
term:
(a) ``Act'' means the act of April 3, 1939 (53 Stat. 560; 10 U.S.C.
311, 312, 34 U.S.C. 496), together with the applicable provisions of
section 3 of the act of March 27, 1934, 48 Stat. 505; 34 U.S.C. 496, as
amended by the act of June 25, 1936, 49 Stat. 1926; 34 U.S.C., Sup. IV,
496, and as further amended by the act of April 3, 1939 (53 Stat. 560;
34 U.S.C. 496).
(b) ``Person'' includes an individual, a corporation, a partnership,
a trust or estate, a joint-stock company, an association, or a
syndicate, group, pool, joint venture or other unincorporated
organization or group, through or by means of which any business,
financial operation or venture is carried on.
(c) ``Contract'' means an agreement made by authority of the
Secretary of the Army for the construction or manufacture of any
complete aircraft or any portion thereof for the Army.
(d) ``Contractor'' means a person entering into a direct contract
with the Secretary of the Army or his duly authorized representative.
(e) ``Subcontract'' means an agreement entered into by one person
with another person for the construction or manufacture of any complete
aircraft or any portion thereof for the Army, the prime contract for
such aircraft or portion thereof having been entered into between a
contractor and the Secretary of the Army or his duly authorized
representative.
(f) ``Subcontractor'' means any person other than a contractor
entering into a subcontract.
(g) ``Contracting party'' means a contractor or subcontractor as the
case may be.
(h) ``Contract price'' or ``total contract price'' means the amount
or total amount to be received under a contract or subcontract as the
case may be.
(i) ``Income-taxable year'' means the calendar year, the fiscal year
ending during such calendar year, or the fractional part of such
calendar or fiscal year, upon the basis of which the contracting party's
net income is computed and for which its income tax returns are made for
Federal income tax purposes.
Sec. 16.2 Contracts and subcontracts under which excess profit
liability may be incurred. Except as otherwise provided with respect to
contracts or subcontracts for certain scientific equipment (see
Sec. 16.3), every contract awarded for an amount exceeding $10,000 and
entered into after the enactment of the act of April 3, 1939 for the
construction or manufacture of any complete aircraft or any portion
thereof for the Army, is subject to the provisions of the act relating
to excess profit liability. Any subcontract made with respect to such a
contract and involving an amount in excess of $10,000 is also within the
scope of the act. If a contracting party places orders with another
party, aggregating an amount in excess of $10,000, for articles or
materials which constitute a part of the cost of performing the contract
or subcontract, the placing of such orders shall constitute a
subcontract within the scope of the act, unless it is clearly shown that
each of the orders involving $10,000 or less is a bona fide separate and
distinct subcontract and not a subdivision made for the purpose of
evading the provisions of the act.
Sec. 16.3 Contracts or subcontracts for scientific equipment. No
excess profit liability is incurred upon a contract or subcontract
entered into after the enactment of the act of April 3, 1939, if at the
time or prior to the time such contract or subcontract is made it is
designated by the Secretary of the Army as being exempt under the
provisions of the act pertaining to scientific equipment used for
communication, target detection, navigation, and fire control.
Sec. 16.4 Completion of contract defined. The date of delivery of
the aircraft or portion thereof covered by the contract or subcontract
shall be considered the date of completion of the contract or
subcontract unless otherwise determined jointly by the Secretary of the
Army and the Secretary of the Treasury or their duly authorized
representatives. Except as otherwise provided in the preceding sentence,
the replacement of defective parts or delivered articles or the
performance of other guarantee work in respect of such articles will not
operate to extend the date of completion. As to the treatment of the
cost of such work as a cost of performing a contract or subcontract, see
Sec. 16.8(h). As to a refund in case of adjustment due to any
subsequently incurred additional
[[Page 222]]
costs, see Sec. 16.18. If a contract or subcontract is at any time
cancelled or terminated, it is completed at the time of the cancellation
or termination.
Sec. 16.5 Manner of determining liability. (a) The first step in the
determination of the excess profit to be paid to the United States by a
contracting party with respect to contracts and subcontracts completed
within an income-taxable year is to ascertain the total contract prices
of all contracts and subcontracts completed by the contracting party
within the income-taxable year. As to total contract prices, see
Sec. 16.7.
(b) The second step is to ascertain the cost of performing such
contracts and subcontracts and to deduct such cost from the total
contract prices of such contracts and subcontracts as computed in the
first step. See Sec. 16.8. The amount remaining after such subtraction
is the amount of net profit or net loss upon the contracts and
subcontracts completed within the income-taxable year.
(c) The third step, in case there is a net profit upon such
contracts and subcontracts, is to subtract from the amount of such net
profit as computed in the second step the sum of:
(1) An amount equal to 12 percent of the total contract prices of
the contracts and subcontracts completed within the income- taxable
year;
(2) The amount of any net loss allowable as a credit in determining
the excess profit for the income-taxable year (see Sec. 16.9); and
(3) The amount of any deficiency in profit allowable as a credit in
determining the excess profit for the income-taxable year (see
Sec. 16.9). The amount remaining after such subtraction is the amount of
excess profit for the income-taxable year.
(d) The fourth step is to ascertain the amount of credit allowed for
Federal income taxes paid or remaining to be paid upon the amount of
such excess profit (see Sec. 16.10) and then subtract from the amount of
such excess profit the amount of credit for Federal income taxes. The
amount remaining after this subtraction is the amount of excess profit
to be paid to the United States by the contracting party for the income-
taxable year.
[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR
12442, Dec. 6, 1960]
Sec. 16.6 Computation of excess profit liability. The application of
the provisions of Sec. 16.5 may be illustrated by the following example:
Example. On September 1, 1939, the B Corporation, which keeps its
books and makes its Federal income tax returns on a calendar year basis,
entered into a contract for the construction of Army aircraft coming
within the scope of the act, the total contract price of which was
$200,000. On March 10, 1940, the corporation entered into another such
contract, the total contract price of which was $40,000. Both contracts
were completed within the calendar year 1940, the first at a cost of
$155,000 and the second at a cost of $45,000. During the year 1940, the
B Corporation also completed at a deficiency in profit of $2,000 a
contract entered into after April 3, 1939, for the construction of naval
aircraft coming within the scope of 10 U.S.C. 2382 (formerly section 3
of the Act of March 27, 1934 (48 Stat. 505)). For the year 1939, the B
Corporation sustained a net loss of $1,500 and a deficiency in profit of
$1,000 on all contracts and subcontracts entered into after April 3,
1939, for Army aircraft coming within the scope of the act and completed
within the calendar year 1939. For the year 1939, the B Corporation also
sustained a net loss of $1,000 on a contract, entered into after April
3, 1939, and completed within the calendar year 1939, for naval aircraft
coming within the scope of 10 U.S.C. 2382 (formerly section 3 of the Act
of March 27, 1934 (48 Stat. 505)). For purposes of the Federal income
tax, the net income of the B Corporation for the year 1940, on which the
tax was paid, amounted to $96,000, which included the total net profit
of $40,000 upon the two contracts entered into on September 1, 1939, and
March 10, 1940. The excess profit liability is $4,332, computed as
follows:
Total contract prices:
Contract No. 1................................ $200,000
Contract No. 2................................ 40,000
-------------
$240,000
Less: Cost of performing contracts:
Contract No. 1................................ 155,000
Contract No. 2................................ 45,000
============
$200,000
-----------
Net profit on contracts..................................... $40,000
Less:
12 percent of total contract prices (12 $28,800
percent of $240,000).........................
Deficiency in profit (in naval aircraft 2,000
contracts) in 1940...........................
Net loss (in Army aircraft contracts) from 1,500
1939.........................................
Net loss (in naval aircraft contracts) from 1,000
1939.........................................
Deficiency in profit (in Army aircraft 1,000 ..........
contracts) from 1939.........................
-----------
Excess profit for year 1940................................. 5,700
Less: Credit for Federal income taxes (Federal income tax on 1,368
$5,700 at rates for 1940)..................................
34,300
-------------
Amount of excess profit payable to the United States........ 4,332
[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR
---------------------------------------------------------------------------
12442, Dec. 6, 1960]
Sec. 16.7 Total contract price. The total contract price of a
particular contract or subcontract (see Sec. 16.1) may be received in
money or its equivalent. If something other than money is received, only
the fair market
[[Page 223]]
value of the thing received, at the date of receipt, is to be included
in determining the amount received. Bonuses earned for bettering
performance and penalties incurred for failure to meet the contract
guarantees are to be regarded as adjustments of the original contract
price. Trade or other discounts granted by a contracting party in
respect of a contract or subcontract performed by such party are also to
be deducted in determining the true total contract price of such
contract or subcontract.
Sec. 16.8 Cost of performing a contract or subcontract.--(a) General
rule. The cost of performing a particular contract or subcontract shall
be the sum of (1) the direct costs, including therein expenditures for
materials, direct labor and direct expenses, incurred by the contracting
party in performing the contract or subcontract; and (2) the proper
proportion of any indirect costs (including therein a reasonable
proportion of management expenses) incident to and necessary for the
performance of the contract or subcontract.
(b) Elements of cost. No definitions of the elements of cost may be
stated which are of invariable application to all contractors and
subcontractors. In general, the elements of cost may be defined for
purposes of the act as follows:
(1) Manufacturing cost, which is the sum of factory cost (see
paragraph (c) of this section) and other manufacturing cost (see
paragraph (d) of this section);
(2) Miscellaneous direct expenses (see paragraph (e) of this
section);
(3) General expenses, which are the sum of indirect engineering
expenses, usually termed ``engineering overhead'' (see paragraph (f) of
this section) and expenses of distribution, servicing and administration
(see paragraph (g) of this section); and
(4) Guarantee expenses (see paragraph (h) of this section).
(c) Factory cost. Factory cost is the sum of the following:
(1) Direct materials. Materials, such as those purchased for stock
and subsequently issued for contract operations and those acquired under
subcontracts, which become a component part of the finished product or
which are used directly in fabricating, converting or processing such
materials or parts.
(2) Direct productive labor. Productive labor, usually termed ``shop
labor,'' which is performed on and is properly chargeable directly to
the article manufactured or constructed pursuant to the contract or
subcontract, but which ordinarily does not include direct engineering
labor (see subparagraph (3) of this paragraph).
(3) Direct engineering labor. The compensation of professional
engineers and other technicists (including reasonable advisory fees),
and of draftsmen, properly chargeable directly to the cost of the
contract or subcontract.
(4) Miscellaneous direct factory charges. Items which are properly
chargeable directly to the factory cost of performing the contract or
subcontract but which do not come within the classifications in
subparagraphs (1), (2), and (3) of this paragraph, as for example,
royalties which the contracting party pays to another party and which
are properly chargeable to the cost of performing the contract or
subcontract (but see paragraph (d) of this section).
(5) Indirect factory expenses. Items, usually termed ``factory
overhead,'' which are not directly chargeable to the factory cost of
performing the contract or subcontract but which are properly incident
to and necessary for the performance of the contract or subcontract and
consist of the following:
(i) Labor. Amounts expended for factory labor, such as supervision
and inspection, clerical labor, timekeeping, packing and shipping,
stores supply, services of tool crib attendants, and services in the
factory employment bureau, which are not chargeable directly to
productive labor of the contract or subcontract.
(ii) Materials and supplies. The cost of materials and supplies for
general use in the factory in current operations, such as shop fuel,
lubricants, heat-treating, plating, cleaning and anodizing supplies,
nondurable tools and gauges, stationery (such as time tickets and other
forms), and boxing and wrapping materials.
(iii) Service expenses. Factory expenses of a general nature, such
as those for power, heat and light (whether purchased or produced),
ventilation and air-conditioning and operation and maintenance of
general plant assets and facilities.
(iv) Fixed charges and obsolescence. Recurring charges with respect
to property used for manufacturing purposes of the contract or
subcontract, such as premiums for fire and elevator insurance, property
taxes, rentals and allowances for depreciation of such property,
including maintenance and depreciation of reasonable stand-by equipment;
and depreciation and obsolescence of special equipment and facilities
necessarily acquired primarily for the performance of the contract or
subcontract. In making allowances for depreciation, consideration shall
be given to the number and length of shifts.
(v) Miscellaneous indirect factory expenses. Miscellaneous factory
expenses not directly chargeable to the factory cost of performing the
contract or subcontract, such as purchasing expenses; ordinary and
necessary expenses of rearranging facilities within a department or
plant; employees' welfare expenses; premiums or dues on compensation
insurance; employers' payments to unemployment, old age and social
security Federal and State funds not including payments
[[Page 224]]
deducted from or chargeable to employees or officers; pensions and
retirement payments to factory employees; factory accident compensation
(as to self-insurance, see paragraph (g) of this section); but not
including any amounts which are not incident to services, operations,
plant, equipment or facilities involved in the performance of the
contract or subcontract.
(d) Other manufacturing cost. Other manufacturing cost as used in
paragraph (b) of this section includes items of manufacturing costs
which are not properly or satisfactorily chargeable to factory costs
(see paragraph (c) of this section) but which upon a complete showing of
all pertinent facts are properly to be included as a cost of performing
the contract or subcontract, as for instance, payments of royalties and
amortization of the cost of designs purchased and patent rights over
their useful life; and ``deferred'' or ``unliquidated'' experimental and
development charges. For example, in case experimental and development
costs have been properly deferred or capitalized and are amortized in
accordance with a reasonably consistent plan, a proper portion of the
current charge, determined by a ratable allocation which is reasonable
in consideration of the pertinent facts, may be treated as a cost of
performing the contract or subcontract. In the case of general
experimental and development expenses which may be charged off
currently, a reasonable portion thereof may be allocated to the cost of
performing the contract or subcontract. If a special experimental or
development project is carried on in pursuance of a contract, or in
anticipation of a contract which is later entered into, and the expense
is not treated as a part of general experimental and development
expenses or is not otherwise allowed as a cost of performing the
contract, there clearly appearing no reasonable prospect of an
additional contract for the type of article involved, the entire cost of
such project may be allowed as a part of the cost of performing the
contract.
(e) Miscellaneous direct expenses. Miscellaneous direct expenses as
used in paragraph (b) of this section include:
(1) Cost of installation and construction. Cost of installation and
construction includes the cost of materials, labor and expenses
necessary for the erection and installation prior to the completion of
the contract and after the delivery of the product or material
manufactured or constructed pursuant to the contract or subcontract.
(2) Sundry direct expenses. Items of expense which are properly
chargeable directly to the cost of performing a contract or subcontract
and which do not constitute guarantee expenses (see paragraph (h) of
this section) or direct costs classified as factory cost or other
manufacturing cost (see paragraphs (c) and (d) of this section), such as
premiums on performance or other bonds required under the contract or
subcontract; State sales taxes imposed on the contracting party; freight
on outgoing shipments; fees paid for wind tunnel and model basin tests;
demonstration and test expenses; crash insurance premiums; traveling
expenses. In order for any such item to be allowed as a charge directly
to the cost of performing a contract or subcontract, (i) a detailed
record shall be kept by the contracting party of all items of a similar
character, and (ii) no item of a similar character which is properly a
direct charge to other work shall be allowed as a part of any indirect
expenses in determining the proper proportion thereof chargeable to the
cost of performing the contract or subcontract. As to allowable indirect
expenses, see paragraphs (c)(5), (f), (g) and (j) of this section.
(f) Indirect engineering expenses. Indirect engineering expenses,
usually termed ``engineering overhead,'' which are treated in this
section as a part of general expenses in determining the cost of
performing a contract or subcontract (see paragraph (b) of this
section), comprise the general engineering expenses which are incident
to and necessary for the performance of the contract or subcontract,
such as the following:
(1) Labor. Reasonable fees of engineers employed in a general
consulting capacity, and compensation of employees for personal services
to the engineering department, such as supervision, which is properly
chargeable to the contract or subcontract, but which is not chargeable
as direct engineering labor (see paragraph (c)(3) of this section).
(2) Material. Supplies for the engineering department, such as paper
and ink for drafting and similar supplies.
(3) Miscellaneous expenses. Expenses of the engineering department,
such as (i) maintenance and repair of engineering equipment, and (ii)
services purchased outside of the engineering department for blue
printing, drawing, computing, and like purposes.
(g) Expenses of distribution, servicing and administration. Expenses
of distribution, servicing and administration, which are treated in this
section as a part of general expenses in determining the cost of
performing a contract or subcontract (see paragraph (b) of this
section), comprehend the expenses incident to and necessary for the
performance of the contract or subcontract, which are incurred in
connection with the distribution and general servicing of the
contracting party's products and the general administration of the
business, such as:
(1) Compensation for personal services of employees. The salaries of
the corporate and general executive officers and the salaries and wages
of administrative clerical employees and of the office services
employees such as telephone operators, janitors, cleaners, watchmen and
office equipment repairmen.
[[Page 225]]
(2) Bidding and general selling expenses. Bidding and general
selling expenses which by reference to all the pertinent facts and
circumstances reasonably constitute a part of the cost of performing a
contract or subcontract. The treatment of bidding and general selling
expenses as a part of general expenses in accordance with this paragraph
is in lieu of any direct charges which otherwise might be made for such
expenses. The term ``bidding expenses'' as used in this section includes
all expenses in connection with preparing and submitting bids.
(3) General servicing expenses. Expenses which by reference to all
the pertinent facts and circumstances reasonably constitute a part of
the cost of performing a contract or subcontract and which are incident
to delivered or installed articles and are due to ordinary adjustments
or minor defects; but including no items which are treated as a part of
guarantee expenses (see paragraph (h) of this section) or as a part of
direct costs, such as direct materials, direct labor, and other direct
expense.
(4) Other expenses. Miscellaneous office and administrative
expenses, such as stationery and office supplies; postage; repair and
depreciation of office equipment; contributions to local charitable or
community organizations to the extent constituting ordinary and
necessary business expenses; employees' welfare expenses; premiums and
dues on compensation insurance; employers' payments to unemployment, old
age and social security Federal and State funds not including payments
deducted from or chargeable to employees or officers; pensions and
retirement payments to administrative office employees and accident
compensation to office employees (as to self-insurance, see subdivision
(i) of this subparagraph.
(i) Subject to the exception stated in this subdivision, in cases
where a contracting party assumes its own insurable risks (usually
termed ``self-insurance''), losses and payments will be allowed in the
cost of performing a contract or subcontract only to the extent of the
actual losses suffered or payments incurred during, and in the course
of, the performance of the contract or subcontract and properly
chargeable to such contract or subcontract. If however, a contracting
party assumes its own insurable risks (a) for compensation paid to
employees for injuries received in the performance of their duties, or
(b) for unemployment risks in States where insurance is required, there
may be allowed as a part of the cost of performing a contract or
subcontract a reasonable portion of the charges set up for purposes of
self-insurance under a system of accounting regularly employed by the
contracting party, as determined by the Commissioner of Internal
Revenue, at rates not exceeding the lawful or approved rates of
insurance companies for such insurance, reduced by amounts representing
the acquisition cost in such companies, provided the contracting party
adopts and consistently follows this method with respect to self-
insurance in connection with all contracts and subcontracts subsequently
performed by him.
(ii) Allowances for interest on invested capital are not allowable
as costs of performing a contract or subcontract.
(iii) Among the items which shall not be included as a part of the
cost of performing a contract or subcontract or considered in
determining such cost, are the following: Entertainment expenses; dues
and memberships other than of regular trade associations; donations
except as otherwise provided above; losses on other contracts; profits
or losses from sales or exchanges of capital assets; extraordinary
expenses due to strikes or lockouts; fines and penalties; amortization
of unrealized appreciation of values of assets; expenses, maintenance
and depreciation of excess facilities (including idle land and building,
idle parts of a building, and excess machinery and equipment) vacated or
abandoned, or not adaptable for future use in performing contracts or
subcontracts; increases in reserve accounts for contingencies, repairs,
compensation insurance (except as above provided with respect to self-
insurance) and guarantee work; Federal and State income and excess-
profits taxes and surtaxes; cash discount earned up to one percent of
the amount of the purchase, except that all discounts on subcontracts
subject to the act will be considered; interest incurred or earned; bond
discount or finance charges; premiums for life insurance on the lives of
officers; legal and accounting fees in connection with reorganizations,
security issues, capital stock issues and the prosecution of claims
against the United State (including income tax matters); taxes and
expenses on issues and transfers of capital stock; losses on
investments; bad debts; and expenses of collection and exchange.
(iv) In order that the cost of performing a contract or subcontract
may be accounted for clearly, the amount of any excess profits repayable
to the United States pursuant to the act should not be charged to or
included in such cost.
(h) Guarantee expenses. Guarantee expenses include the various items
of factory cost, other manufacturing cost, cost of installation and
construction, indirect engineering expenses and other general expenses
(see paragraphs (c) to (g), of this section) which are incurred after
delivery or installation of the article manufactured or constructed
pursuant to the particular contract or subcontract and which are
incident to the correction of defects or deficiencies which the
contracting party is required to make under the guarantee provisions of
the particular contract or subcontract. If the total amount
[[Page 226]]
of such guarantee expenses is not ascertainable at the time of filing
the report required to be filed with the district director of internal
revenue (see Sec. 16.15) and the contracting party includes any
estimated amount of such expenses as part of the claimed total cost of
performing the contract or subcontract, such estimated amount shall be
separately shown on the report and the reasons for claiming such
estimated amount shall accompany the report; but only the amount of
guarantee expenses actually incurred will be allowed. If the amount of
guarantee expenses actually incurred is greater than the amount (if any)
claimed on the report and the contracting party has made an overpayment
of excess profit, a refund of the overpayment shall be made in
accordance with the provisions of Sec. 16.18. If the amount of guarantee
expenses actually incurred is less than the amount claimed on the report
and an additional amount of excess profit is determined to be due, the
additional amount of excess profit shall be assessed and paid in
accordance with the provisions of Sec. 16.18.
(i) Unreasonable compensation. (1) The salaries and compensation for
services which are treated as a part of the cost of performing a
contract or subcontract include reasonable payments for salaries,
bonuses, or other compensation for services. As a general rule, bonuses
paid to employees (and not to officers) in pursuance of a regularly
established incentive bonus system may be allowed as a part of the cost
of performing a contract or subcontract.
(2) The test of allowability is whether the aggregate compensation
paid to each individual is for services actually rendered incident to,
and necessary for, the performance of the contract or subcontract, and
is reasonable. Excessive or unreasonable payments, whether in cash,
stock or other property ostensibly as compensation for services shall
not be included in the cost of performing a contract or subcontract.
(j) Allocation of indirect costs. No general rule applicable to all
cases may be stated for ascertaining the proper proportion of the
indirect costs to be allocated to the cost of performing a particular
contract or subcontract. Such proper proportion depends upon all the
facts and circumstances relating to the performance of the particular
contract or subcontract. Subject to a requirement that all items which
have no relation to the performance of the contract or subcontract shall
be eliminated from the amount to be allocated, the following methods of
allocation are outlined as acceptable in a majority of cases:
(1) Factory indirect expenses. The allowable indirect factory
expenses (see paragraph (c)(5) of this section) shall ordinarily be
allocated or ``distributed'' to the cost of the contract or subcontract
on the basis of the proportion which the direct productive labor (see
paragraph (c)(2) of this section) attributable to the contract or
subcontract bears to the total direct productive labor of the production
department or particular section thereof during the period within which
the contract or subcontract is performed, except that if the indirect
factory expenses are incurred in different amounts and in different
proportions by the various producing departments consideration shall be
given to such circumstances to the extent necessary to make a fair and
reasonable determination of the true profit and excess profit.
(2) Engineering indirect expenses. The allowable indirect
engineering expenses (see paragraph (f) of this section) shall
ordinarily be allocated or ``distributed'' to the cost of the contract
or subcontract on the basis of the proportion which the direct
engineering labor attributable to the contract or subcontract (see
paragraph (c)(3) of this section) bears to the total direct engineering
labor of the engineering department or particular section thereof during
the period within which the contract or subcontract is performed. If the
expenses of the engineering department are not sufficient in amount to
require the maintenance of separate accounts, the engineering indirect
costs may be included in the indirect factory expenses (see paragraph
(c)(5) of this section) and allocated or distributed to the cost of
performing the contract or subcontract as a part of such expenses,
provided the proportion so allocated or distributed is proper under the
facts and circumstances relating to the performance of the particular
contract or subcontract.
(3) Administrative expenses (or ``overhead''). The allowable
expenses of administration (see paragraph (g) of this section) or other
general expenses except indirect engineering expenses, bidding and
general selling expenses, and general servicing expenses shall
ordinarily be allocated or distributed to the cost of performing a
contract or subcontract on the basis of the proportion which the sum of
the manufacturing cost (see paragraph (b) of this section) and the cost
of installation and construction (see paragraph (e) of this section)
attributable to the particular contract or subcontract bears to the sum
of the total manufacturing cost and the total cost of installation and
construction during the period within which the contract or subcontract
is performed.
(4) Bidding, general selling, and general servicing expenses. The
allowable bidding and general selling expenses and general servicing
expenses (see paragraph (g) (2) and (3) of this section) shall
ordinarily be allocated or distributed to the cost of performing a
contract or subcontract on the basis of:
(i) The proportion which the contract price of the particular
contract or subcontract bears to the total sales made(including
contracts or subcontracts completed) during the
[[Page 227]]
period within which the particular contract or subcontracts is
performed, or
(ii) The proportion which the sum of the manufacturing cost (see
paragraph (b) of this section) and the cost of installation and
construction (see paragraph (e) of this section) attributable to the
particular contract or subcontract bears to the sum of the total
manufacturing cost and the total cost of installation and construction
during the period within which the contract or subcontract is performed,
except that special consideration shall be given to the relation which
certain classes of such expenses bear to the various classes of articles
produced by the contracting party in each case in which such
consideration is necessary in order to make a fair and reasonable
determination of the true profit and excess profit. See Sec. 16.13.
Sec. 16.9 Credit for net loss or for deficiency in profit in
computing excess profit. (a) The term ``net loss'' as used in the act
and as applied to contracts and subcontracts for aircraft or portions
thereof coming within the regulations prescribed under the act or under
10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 1934 (48
Stat. 505)) means the amount by which the total cost of performing all
such contracts and subcontracts for aircraft entered into after April 3,
1939, and completed by a particular contracting party within the income-
taxable year exceeds the total contract prices of such contracts and
subcontracts. As to the meaning of income-taxable year, see Sec. 16.1.
(b) The term ``deficiency in profit'', as used in the act and as
applied to contracts and subcontracts for aircraft or portions thereof
coming within the regulations prescribed under the act or under 10
U.S.C. 2882 (formerly section 3 of the Act of March 27, 1934 (48 Stat.
505)), means the amount by which 12 percent of the total contract prices
of all such contracts and subcontracts for aircraft entered into after
April 3, 1939, and completed by a particular contracting party within
the income-taxable year exceeds the net profit upon all such contracts
and subcontracts.
(c) A net loss or a deficiency in profit sustained by a contracting
party for an income-taxable year is allowable as a credit in computing
the contracting party's excess profit on contracts and subcontracts for
aircraft coming within the regulations prescribed under the act or under
10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 1934 (48
Stat. 505)) and completed during the four next succeeding income-taxable
years. Credit for such a net loss or deficiency in profit may be claimed
in the contracting party's annual report of profit filed with the
district director of internal revenue (see Sec. 16.15), but it shall be
supported by separate schedules for each contract or subcontract
involved showing total contract prices, costs of performance and
pertinent facts relative thereto, together with a summarized computation
of the net loss or deficiency in profit. The net loss or deficiency in
profit claimed is subject to verification and adjustment. As to
preservation of books and records, see Sec. 16.13.
(d) Net loss or deficiency in profit sustained on contracts and
subcontracts completed within one income-taxable year may not be
considered in computing net loss or deficiency in profit sustained on
contracts and subcontracts completed within another income-taxable year.
(e) The provisions of this section may be illustrated by the
following example:
Example. For the calendar year 1939, the A Corporation, which keeps
its books and makes its Federal income tax returns on a calendar year
basis, sustained a net loss of $30,000 on the contracts and subcontracts
for Army aircraft and portions thereof coming within the scope of the
act and completed within that year. During the year 1939, the A
Corporation also completed contracts for naval aircraft coming within
the scope of 10 U.S.C. 2382 (formerly section 3 of the Act of March 27,
1934 (48 Stat. 505)) at a deficiency in profit of $10,000. In 1940, the
A Corporation completed similar contracts for Army aircraft totaling
$175,000 at a cost of $155,000, whereby the A Corporation realized a net
profit of $20,000 but sustained a deficiency in profit of $1,000 (i.e.,
12 percent of $175,000, or $21,000, less $20,000. During the year 1940,
the A Corporation also completed contracts for naval aircraft coming
within the scope of 10 U.S.C. 2382 (formerly section 3 of the Act of
March 27, 1934 (48 Stat. 505)) at a net loss of $2,000. In 1941, the A
Corporation completed contracts for Army aircraft coming within the
scope of the act totaling $400,000 at a cost of $300,000, or at a net
profit of $100,000. After deducting from the net profit of $100,000 for
the year 1941 the amount of $48,000 (i.e., 12 percent of the total
contract price of $400,000), there remains $52,000 in excess profit on
the contracts completed in the year 1941. The A Corporation may deduct
from such $52,000, in determining the amount of excess profit it must
pay for the year 1941 with respect to the contracts completed in such
year, the net loss of $30,000 and the deficiency in profit of $10,000
sustained in 1939 on Army and naval aircraft contracts, respectively,
and the net loss of $2,000 and the deficiency in profit of $1,000
sustained in 1940 on naval and Army aircraft contracts, respectively.
[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR
12442, Dec. 6, 1960]
Sec. 16.10 Credit for Federal income taxes. For the purpose of
computing the amount of excess profit to be paid to the United States, a
credit is allowable against the excess profit for the amount of Federal
income taxes paid or remaining to be paid on the amount of
[[Page 228]]
such excess profit. The ``Federal income taxes'' in respect of which
this credit is allowable include the income taxes imposed by Titles I
and IA of the Revenue Act of 1938, and Chapter 1 and Subchapter A of
Chapter 2 of the Internal Revenue Code, and the excess-profits taxes
imposed by section 602 of the Revenue Act of 1938 and Subchapter B of
Chapter 2 of the Internal Revenue Code. This credit is allowable for
these taxes only to the extent that it is affirmatively shown that they
have been finally determined and paid or remain to be paid and that they
were imposed upon the excess profit against which the credit is to be
made. In case such a credit has been allowed and the amount of Federal
income taxes imposed upon the excess profit is redetermined, the credit
previously allowed shall be adjusted accordingly.
Sec. 16.11 Failure of contractor to require agreement by
subcontractor. (a) Every contract or subcontract coming within the scope
of the act and the regulations in this part is required by the act to
contain, among other things, an agreement by the contracting party to
make no subcontract unless the subcontractor agrees:
(1) To make a report, as described in the act, under oath to the
Secretary of War upon the completion of the subcontract;
(2) To pay into the Treasury excess profit, as determined by the
Treasury Department, in the manner and amounts specified in the act;
(3) To make no subdivision of the subcontract for the same article
or articles for the purpose of evading the provisions of the act;
(4) That the manufacturing spaces and books of its own plant,
affiliates, and subdivisions shall at all times be subject to inspection
and audit as provided in the act.
(b) If a contracting party enters into a subcontract with a
subcontractor who fails to make such agreement, such contracting party
shall, in addition to its liability for excess profit determined on
contracts or subcontracts performed by it, be liable for any excess
profit determined to be due the United States on the subcontract entered
into with such subcontractor. In such event, however, the excess profit
to be paid to the United States in respect of the subcontract entered
into with such subcontractor shall be determined separately from any
contracts or subcontracts performed by the contracting party entering
into the subcontract with such subcontractor.
Sec. 16.12 Evasion of excess profit. Section 3 of the act of March
27, 1934, as amended, provides that the contracting party shall agree to
make no subdivisions of any contract or subcontract for the same article
or articles for the purpose of evading the provisions of the act. If any
such subdivision or subcontract is made it shall constitute a violation
of the agreement provided for in the act, and the cost of completing a
contract or subcontract by a contracting party which violates such
agreement shall be determined in a manner necessary clearly to reflect
the true excess profit of such contracting party.
Sec. 16.13 Books of account and records. (a) It is recognized that
no uniform method of accounting can be prescribed for all contracting
parties subject to the provisions of the act. Each contracting party is
required by law to make a report of its true profits and excess profit.
Such party must, therefore, maintain such accounting records as will
enable it to do so. See Sec. 16.8. Among the essentials are the
following:
(1) The profit or loss upon a particular contract or subcontract
shall be accounted for and fully explained in the books of account
separately on each contract or subcontract.
(2) Any cost accounting methods, however standard they may be and
regardless of long continued practice, shall be controlled by, and be in
accord with, the objectives and purposes of the act and of any
regulations prescribed thereunder.
(3) The accounts shall clearly disclose the nature and amount of the
different items of cost of performing a contract or subcontract.
(b) In cases where it has been the custom priorly to use so-called
``normal'' rates of overhead expense or administrative expenses, or
``standard'' or ``normal'' prices of material or labor charges, no
objection will be made to the use temporarily during the period of
performing the contract or subcontract of such methods in charging the
contract or subcontract, if the method of accounting employed is such as
clearly to reflect, in the final determination upon the books of
account, the actual profit derived from the performance of the contract
or subcontract and if the necessary adjusting entries are entered upon
the books and they explain in full detail the revisions necessary to
accord with the facts. As to the elements of cost, see Sec. 16.8.
(c) All books, records, and original evidences of costs (including,
among other things, production orders, bills or schedules of materials,
purchase requisitions, purchase orders, vouchers, requisitions for
materials, standing expense orders, inventories, labor time cards, pay
rolls, cost distribution sheets) pertinent to the determination of the
true profit, excess profit, deficiency in profit or net loss from the
performance of a contract or subcontract shall be kept at all times
available for inspection by internal- revenue officers, and shall be
carefully preserved and retained so long as the contents thereof may
become material in the administration of the act. This provision is not
confined to books, records, and original evidences pertaining to items
which may be considered to be a part of the cost of performing a
contract or subcontract. It is applicable to all books, records, and
original
[[Page 229]]
evidences of costs of each plant, branch or department involved in the
performance of a contract or subcontract or in the allocation or
distribution of costs to the contract or subcontract.
Sec. 16.14 Report to Secretary of the Army. (a) Upon the completion
of a contract or subcontract coming within the scope of the act and the
regulations in this part, the contracting party is required to make a
report, under oath, to the Secretary of the Army. As to the date of
completion of a contract or subcontract, see Sec. 16.4. Such report
shall be in the form prescribed by the Secretary of the Army and shall
state the total contract price, the cost of performing the contract, the
net income from such contract, and the per centum such income bears to
the contract price. The contracting party shall also include as a part
of such report a statement showing:
(1) The manner in which the indirect costs were determined and
allocated to the cost of performing the contract or subcontract (see
Sec. 16.8);
(2) The name and address of every subcontractor with whom a
subcontract was made, the object of such subcontract, the date when
completed and the amount thereof; and
(3) The name and address of each affiliate or other organization,
trade or business owned or controlled directly or indirectly by the same
interests as those who so own or control the contracting party, together
with a statement showing in detail all transactions which were made with
such affiliate or other organization, trade or business and are
pertinent to the determination of the excess profit.
(b) A copy of the report required to be made to the Secretary of the
Army is required to be transmitted by the contracting party to the
Secretary of the Treasury. Such copy shall not be transmitted directly
to the Secretary of the Treasury but shall be filed as a part of the
annual report. See Sec. 16.15.
Sec. 16.15 Annual reports for income-taxable years--(a) General
requirements. Every contracting party completing a contract or
subcontract within the contracting party's income-taxable year ending
after April 3, 1939 shall file with the district director of internal
revenue for the internal revenue district in which the contracting
party's Federal income tax returns are required to be filed an annual
report on the prescribed form of the profit and excess profit on all
contracts and subcontracts coming within the scope of the act and the
regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a
statement, preferably in columnar form, showing separately for each such
contract or subcontract completed by the contracting party within the
income-taxable year the total contract price, the cost of performing the
contract or subcontract and the resulting profit or loss on each
contract or subcontract together with a summary statement showing in
detail the computation of the net profit or net loss upon all contracts
and subcontracts completed within the income-taxable year and the amount
of the excess profit, if any, for the income-taxable year covered by the
report. A copy of the report made to the Secretary of the Army (see
Sec. 16.14) with respect to each contract or subcontract covered in the
annual report, shall be filed as a part of such annual report. In case
the income-taxable year of the contracting party is a period of less
than twelve months (see Sec. 16.1), the report required by this section
shall be made for such period and not for a full year.
(b) Time for filing annual reports. Annual reports of contracts and
subcontracts coming within the scope of the act and the regulations in
this part completed by a contracting party within an income-taxable year
must be filed on or before the 15th day of the ninth month following the
close of the contracting party's income-taxable year. It is important
that the contracting party render on or before the due date an annual
report as nearly complete and final as it is possible for the
contracting party to prepare. An extension of time granted the
contracting party for filing its Federal income tax return does not
serve to extend the time for filing the annual report required by this
section. Authority consistent with authorizations for granting
extensions of time for filing Federal income tax returns is hereby
delegated to the various collectors of internal revenue for granting
extensions of time for filing the reports required by this section.
Application for extensions of time for filing such reports should be
addressed to the district director of internal revenue for the district
in which the contracting party files its Federal income tax returns and
must contain a full recital of the causes for the delay.
Sec. 16.16 Payment of excess profit liability. The amount of the
excess profit liability to be paid to the United States shall be paid on
or before the due date for filing the report with the district director
of internal revenue. See Sec. 16.15. At the option of the contracting
party, the amount of the excess profit liability may be paid in four
equal installments instead of in a single payment, in which case the
first installment is to be paid on or before the date prescribed for the
payment of the excess profit as a single payment, the second installment
on or before the 15th day of the third month, the third installment on
or before the 15th day of the sixth month, and the fourth installment on
or before the 15th day of the ninth month, after such date.
Sec. 16.17 Liability of surety. The surety under contracts entered
into with the Secretary of the Army for the construction or manufacture
of any complete aircraft or any portion thereof for the Army shall not
be liable for
[[Page 230]]
payment of excess profit due the United States in respect of such
contracts.
Sec. 16.18 Determination of liability for excess profit, interest
and penalties; assessment, collection, payment, refunds. (a) The duty of
determining the correct amount of excess profit liability on contracts
and subcontracts coming within the scope of the act and the regulations
in this part is upon the Commissioner of Internal Revenue. Under section
3(b) of the act of March 27, 1934, as last amended, all provisions of
law (including the provisions of law relating to interest, penalties and
refunds) applicable with respect to the taxes imposed by Title I of the
Revenue Act of 1934 and not inconsistent with section 3 of the act of
March 27, 1934, as last amended, are applicable with respect to the
assessment, collection, or payment of excess profits on contracts and
subcontracts coming within the scope of the act and the regulations in
this part and to refunds of overpayments of profits into the Treasury
under the act. Claims by a contracting party for the refund of an amount
of excess profit, interest, penalties, and additions to such excess
profit shall conform to the general requirements prescribed with respect
to claims for refund of overpayments of taxes imposed by Title I of the
Revenue Act of 1934 and, if filed on account of any additional costs
incurred pursuant to guarantee provisions in a contract, shall be
supplemented by a statement under oath showing the amount and nature of
such costs and all facts pertinent thereto.
(b) Administrative procedure for the determination, assessment and
collection of excess profit liability under the act and the regulations
in this part and the examination of reports and claims in connection
therewith will be prescribed from time to time by the Commissioner of
Internal Revenue.
Part 17--Excess Profits on Navy Contracts
Regulations for Income-Taxable Years Ending After April 3, 1939
Authority: Sections 17.1 to 17.19 issued under 52 Stat. 467; 26
U.S.C. 3791. Interpret or apply sec. 3, 48 Stat. 505, as amended, 53
Stat. 112; 34 U.S.C. 496, 26 U.S.C. 650, 651.
Source: Sections 17.1 to 17.19 contained in T.D. 4906, 4 FR 2492,
June 27, 1939, except as otherwise noted.
Sec. 17.1 Definitions. As used in the regulations in this part the
term:
(a) Act means the act of March 27, 1934 (48 Stat. 505; 34 U.S.C.
496), as originally enacted, as amended by the act of June 25, 1936 (49
Stat. 1926; 34 U.S.C. 496), and as further amended by the act of April
3, 1939 (53 Stat. 560; 34 U.S.C. 496).
(b) Person includes an individual, a corporation, a partnership, a
trust or estate, a joint-stock company, an association, or a syndicate,
group, pool, joint venture or other unincorporated organization or
group, through or by means of which any business, financial operation or
venture is carried on.
(c) Contract means an agreement made by authority of the Secretary
of the Navy for the construction or manufacture of any complete naval
vessel or aircraft or any portion thereof.
(d) Contractor means a person entering into a direct contract with
the Secretary of the Navy or his duly authorized representative.
(e) Subcontract means an agreement entered into by one person with
another person for the construction or manufacture of a complete naval
vessel or aircraft or any portion thereof, the prime contract for such
vessel or aircraft or portion thereof having been entered into between a
contractor and the Secretary of the Navy or his duly authorized
representative.
(f) Subcontractor means any person other than a contractor entering
into a subcontract.
(g) Contracting party means a contractor or subcontractor as the
case may be.
(h) Contract price or contract price means the amount or total
amount to be received under a contract or subcontract as the case may
be.
(i) Income-taxable year means the calendar year, the fiscal year
ending during such calendar year or the fractional part of such calendar
or fiscal year, upon the basis of which the contracting party's net
income is computed and for which its income tax returns are made for
Federal income tax purposes.
Sec. 17.2 Scope of this part. The regulations in this part deal with
liability for excess profit on contracts and subcontracts for the
construction or manufacture of any complete naval vessel or aircraft or
any portion thereof completed within income-taxable years ending after
April 3, 1939. As to the date of the completion of a contract or
subcontract, see Sec. 17.5.
Sec. 17.3 Contracts and subcontracts under which excess profit
liability may be incurred. Except as otherwise provided with respect to
contracts or subcontracts for certain scientific equipment (see
Sec. 17.4), every contract awarded for an amount exceeding $10,000 and
entered into after the enactment of the act of March 27, 1934 for the
construction or manufacture of any complete naval vessel or aircraft, or
any portion thereof, is subject to the provisions of the act relating to
excess profit liability. Any subcontract made with respect to such a
contract and involving an amount in excess of $10,000 is also within the
scope of the act. If a contracting party places orders with another
party, aggregating an amount in excess of $10,000, for articles or
materials which constitute a part of the cost of performing the contract
or subcontract, the placing of such orders shall
[[Page 231]]
constitute a subcontract within the scope of the act, unless it is
clearly shown that each of the orders involving $10,000 or less is a
bona fide separate and distinct subcontract and not a subdivision made
for the purpose of evading the provisions of the act.
Sec. 17.4 Contracts or subcontracts for scientific equipment. No
excess profit liability is incurred upon a contract or subcontract
entered into after the amendment of section 3(b) of the act of June 25,
1936, if at the time or prior to the time such contract or subcontract
is made it is designated by the Secretary of the Navy as being exempt
under the provisions of the act pertaining to scientific equipment used
for communication, target detection, navigation, or fire control. The
exemption of contracts or subcontracts for scientific equipment does not
extend to any contract or subcontract entered into prior to the
enactment of such amendment of section 3(b) of the act.
Sec. 17.5 Completion of contract defined. The date of delivery of
the vessel, aircraft or portion thereof covered by the contract or
subcontract shall be considered the date of completion of the contract
or subcontract unless otherwise determined jointly by the Secretary of
the Navy and the Secretary of the Treasury or their duly authorized
representatives. Except as otherwise provided in the preceding sentence,
the replacement of defective parts of delivered articles or the
performance of other guarantee work in respect to such articles will not
operate to extend the date of completion. As to the treatment of the
cost of such work as a cost of performing a contract or subcontract, see
Sec. 17.9(h). As to a refund in case of adjustment due to any
subsequently incurred additional costs, see Sec. 17.19. If a contract or
subcontract is at any time cancelled or terminated, it is completed at
the time of the cancellation or termination.
Sec. 17.6 Manner of determining liability with respect to contracts
or subcontracts for complete naval vessles or portions thereof. If in an
income-taxable year ending after April 3, 1939 a contracting party
completes one or more contracts or subcontracts coming within the scope
of the act and entered into for the construction or manufacture of any
complete naval vessel or any portion thereof, the amount of excess
profit to be paid to the United States with respect to all such
contracts and subcontracts completed within the income-taxable year
shall be computed as follows:
(a) The first step is to ascertain the total contract prices of all
such contracts and subcontracts completed by the contracting party
within the income-taxable year. As to total contract prices, see
Secs. 17.1 and 17.8.
(b) The second step is to ascertain the cost of performing such
contracts and subcontracts (see Sec. 17.9) and to deduct such cost from
the total contract prices of such contracts and subcontracts as computed
in the first step.
The amount remaining after such subtraction is the amount of net profit
or net loss upon such contracts and subcontracts completed within the
income-taxable year.
(c) The third step, in case there is a new profit upon such
contracts and subcontracts, is to subtract from the amount of such net
profit as computed in the second step the sum of:
(1) An amount equal to 10 percent of the total contract prices of
such contracts and subcontracts completed within the income- taxable
year; and
(2) The amount of any net loss which was sustained in the preceding
income-taxable year with respect to contracts or subcontracts entered
into for the construction or manufacture of any complete naval vessel or
any portion thereof, and which is allowable as a credit in determining
the excess profit for the income-taxable year with respect to contracts
and subcontracts entered into for the construction or manufacture of any
complete naval vessel or any portion thereof (see Sec. 17.10(a)).
The amount remaining after such subtraction is the amount of excess
profit for the income-taxable year with respect to contracts and
subcontracts entered into for the construction or manufacture of any
complete naval vessel or any portion thereof.
(d) The fourth step is to ascertain the amount of credit allowed for
Federal income taxes paid or remaining to be paid upon the amount of
such excess profit as computed in the third step (see Sec. 17.11) and
then subtract from the amount of such excess profit the amount of credit
for Federal income taxes. The amount remaining after this subtraction is
the amount of excess profit to be paid to the United States by the
contracting party for the income-taxable year with respect to contracts
and subcontracts entered into for the construction or manufacture of any
complete naval vessel or any portion thereof and completed within the
income- taxable year.
(e) The application of the provisions of this section of the
regulations may be illustrated by the following example:
Example: On September 1, 1939 the A Corporation, which keeps its
books and makes its Federal income tax returns on a calendar year basis,
entered into a contract with the Secretary of the Navy for the
construction of portions of a naval vessel coming within the scope of
the act, the total contract price of which $200,000. On March 10, 1940
the A Corporation entered into another such contract, the total contract
price of which was $40,000. Both contracts were completed within the
calendar year 1940, the first at a cost of $155,000 and the second at a
cost of $45,000. During the year 1940 the A Corporation also completed
at a loss of $10,000 two contracts
[[Page 232]]
entered into for the construction or manufacture of naval aircraft
coming within the scope of the act. For the year 1939 the A Corporation
sustained a net loss of $2,500 on all contracts and subcontracts for any
complete naval vessel or any portion thereof coming within the scope of
the act and completed within the calendar year 1939. For the year 1939
the A Corporation also sustained a net loss of $1,800 on all other
contracts and subcontracts coming within the scope of the act which were
completed within the calendar year 1939. For purposes of Federal income
tax, the net income of the A Corporation for the year 1940 amounted to
$96,000, which amount included the net profit of $40,000 upon the
contracts entered into on September 1, 1939 and March 10, 1940. For the
year 1940 the A Corporation paid Federal income taxes amounting to
$19,200. The excess profit liability of the A Corporation for 1940 is
payable with respect to the contracts for portions of a naval vessel
which were completed in 1940. The loss of $10,000 on other contracts
completed in 1940 and the net loss of $1,800 for 1939 on contracts and
subcontracts for naval aircraft do not enter into the computation of
such liability. Accordingly, the excess profit liability of the A
Corporation for 1940 is $10,800 computed as follows:
Total contract prices:
Contract No. 1................................ $200,000
Contract No. 2................................ 40,000
------------
$240,000
Less cost of performing contracts:
Contract No. 1................................ 155,000
Contract No. 2................................ 45,000
------------
200,000
-----------
Net profit on contracts................................. 40,000
Less:
10 percent of total contract prices (10 24,000
percent of $240,000).........................
Net loss from 1939............................ 2,500
------------
26,500
-----------
Excess profit for year 1940........................... 13,500
Less credit for Federal income taxes (Federal income tax 2,700
on $13,500 at rates for 1940)............................
-------------
Amount of excess profit payable to the United States.... 10,800
Sec. 17.7 Manner of determining liability with respect to contracts
or subcontracts for complete naval aircraft or portions thereof. If in
an income-taxable year ending after April 3, 1939 a contracting party
completes one or more contracts or subcontracts coming within the scope
of the act and entered into for the construction or manufacture of any
complete naval aircraft or any portion thereof, the amount of excess
profit to be paid to the United States with respect to all such
contracts and subcontracts completed within the income-taxable year
shall be computed as follows:
(a) The first step is to ascertain the total contract prices of all
such contracts and subcontracts completed by the contracting party
within the income-taxable year. As to total contract prices, see
Sec. Sec. 17.1 and 17.8.
(b) The second step is to ascertain the cost of performing such
contracts and subcontracts (see Sec. 17.9) and to deduct such cost from
the total contract prices of such contracts and subcontracts as computed
in the first step.
The amount remaining after such subtraction is the amount of net profit
or net loss upon such contracts and subcontracts completed within the
income-taxable year.
(c) The third step, in case there is a net profit upon such
contracts and subcontracts, is to subtract from the amount of such net
profit as computed in the second step the sum of:
(1) An amount equal to 12 percent of the total contract prices of
such contracts and subcontracts completed within the income- taxable
year;
(2) The amount of any net loss which was sustained in the same or a
prior income- taxable year with respect to contracts or subcontracts for
the construction or manufacture of any complete aircraft or any portion
thereof, and which is allowable as a credit in determining the excess
profit for the income-taxable year with respect to contracts and
subcontracts entered into for the construction or manufacture of
complete aircraft or any portion thereof (see Sec. 17.10(b)); and
(3) The amount of any deficiency in profit which was sustained in
the same or a prior income-taxable year with respect to contracts or
subcontracts for the construction or manufacture of any complete
aircraft or any portion thereof, and which is allowable as a credit in
determining the excess profit for the income-taxable year with respect
to contracts and subcontracts entered into for the construction or
manufacture of complete aircraft or any portion thereof (see
Sec. 17.10(c)).
The amount remaining after such subtraction is the amount of excess
profit for the income-taxable year with respect to contracts and
subcontracts entered into for the construction or manufacture of
complete naval aircraft or any portion thereof.
(d) The fourth step is to ascertain the amount of credit allowed for
Federal income taxes paid or remaining to be paid upon the amount of
such excess profit as computed in the third step (see Sec. 17.11) and
then subtract from the amount of such excess profit the amount of credit
for Federal income taxes. The amount remaining after this subtraction is
the amount of excess profit to be paid to the United States by the
contracting party
[[Page 233]]
for the income-taxable year with respect to contracts and subcontracts
entered into for the construction or manufacture of complete naval
aircraft or any portion thereof and completed within the income-taxable
year.
(e) The application of the provisions of this section of the
regulations may be illustrated by the following example:
Example. On September 1, 1939, the B Corporation, which keeps its
books and makes its Federal income tax returns on a calendar year basis,
entered into a contract with the Secretary of the Navy for the
construction of naval aircraft coming within the scope of the act, the
total contract price of which was $200,000. On March 10, 1940, the B
Corporation entered into another such contract, the total contract price
of which was $40,000. Both contracts were completed within the calendar
year 1940, the first at a cost of $155,000 and the second at a cost of
$45,000. During the year 1940, the B Corporation also completed at a
deficiency in profit of $2,000 a contract entered into for the
construction of Army aircraft coming within the scope of the act. During
the year 1940, the B Corporation also completed at a loss of $10,000 two
contracts entered into for the construction or manufacture of portions
of a naval vessel coming within the scope of the act. For the year 1939,
the B Corporation sustained a net loss of $2,500 and a deficiency in
profit of $1,000 on all contracts and subcontracts for naval aircraft
coming within the scope of the act and completed within the calendar
year 1939. For the year 1939, the B Corporation also sustained a net
loss of $1,800 on a contract for the construction of Army aircraft
coming within the scope of the act which was completed within the
calendar year 1939. For the purposes of the Federal income tax, the net
income of the B Corporation for the year 1940, on which the tax was
paid, amounted to $96,000, which included the net profit of $40,000 upon
the contracts entered into on September 1, 1939, and March 10, 1940. The
excess profit liability of the B Corporation for 1940 is payable with
respect to the contracts for naval aircraft which were completed in
1940. The loss of $10,000 on the contracts for portions of a naval
vessel completed in 1940 does not enter into the computation of such
liability. Accordingly, the excess profit liability of the B Corporation
for 1940 is $2,964 computed as follows:
Total contract prices:
Contract No. 1................................ $200,000
Contract No. 2................................ 40,000
------------
$240,000
Less: Cost of performing contracts:
Contract No. 1................................ 155,000
Contract No. 2................................ 45,000
------------
200,000
-----------
Net profit on contracts..................................... 40,000
Less:
12 percent of total contract prices (12 28,800
percent of $240,000).........................
Deficiency in profit (in Army aircraft 2,000
contracts) in 1940...........................
Net loss (in naval aircraft contracts) from 2,500
1939.........................................
Net loss (in Army aircraft contracts) from 1,800
1939.........................................
Deficiency in profit (in naval aircraft 1,000
contracts) from 1939.........................
------------
36,100
-----------
Excess profit for year 1940................................. 3,900
Less: Credit for Federal income taxes (Federal income tax on 936
$3,900 at rates for 1940)..................................
-------------
Amount of excess profit payable to the United States........ 2,964
[T.D. 4906, 4 FR 2492, June 27, 1939, as amended by T.D. 6512, 25 FR
12443, Dec. 6, 1960]
Sec. 17.8 Total contract price. The total contract price of a
particular contract or subcontract (see Sec. 17.1) may be received in
money or its equivalent. If something other than money is received, only
the fair market value of the thing received, at the date of receipt, is
to be included in determining the amount received. Bonuses earned for
bettering performance and penalties incurred for failure to meet the
contract guarantees are to be regarded as adjustments of the original
contract price. Trade or other discounts granted by a contracting party
in respect of a contract or subcontract performed by such party are also
to be deducted in determining the true total contract price of such
contract or subcontract.
Sec. 17.9 Cost of performing a contract or subcontract--(a) General
rule. The cost of performing a particular contract or subcontract shall
be the sum of (1) the direct costs, including therein expenditures for
materials, direct labor and direct expenses, incurred by the contracting
party in performing the contract or subcontract; and (2) the proper
proportion of any indirect costs (including therein a reasonable
proportion of management expenses) incident to and necessary for the
performance of the contract or subcontract.
(b) Elements of cost. No definitions of the elements of cost may be
stated which are of invariable application to all contractors and
subcontractors. In general, the elements of cost may be defined for
purposes of the act as follows:
(1) Manufacturing cost, which is the sum of factory cost (see
paragraph (c) of this section) and other manufacturing cost (see
paragraph (d) of this section);
(2) Miscellaneous direct expenses (see paragraph (e) of this
section);
[[Page 234]]
(3) General expenses, which are the sum of indirect engineering
expenses, usually termed ``engineering overhead'' (see paragraph (f) of
this section) and expenses of distribution, servicing and administration
(see paragraph (g) of this section); and
(4) Guarantee expenses (see paragraph (h) of this section).
(c) Factory cost. Factory cost is the sum of the following:
(1) Direct materials. Materials, such as those purchased for stock
and subsequently issued for contract operations and those acquired under
subcontracts, which become a component part of the finished product or
which are used directly in fabricating, converting or processing such
materials or parts.
(2) Direct productive labor. Productive labor, usually termed ``shop
labor,'' which is performed on and is properly chargeable directly to
the article manufactured or constructed pursuant to the contract or
subcontract, but which ordinarily does not include direct engineering
labor (see subparagraph (3) of this paragraph).
(3) Direct engineering labor. The compensation of professional
engineers and other technicists (including reasonable advisory fees),
and of draftsmen, properly chargeable directly to the cost of the
contract or subcontract.
(4) Miscellaneous direct factory charges. Items which are properly
chargeable directly to the factory cost of performing the contract or
subcontract but which do not come within the classifications in
subparagraphs (1), (2), and (3) of this paragraph, as for example,
royalties which the contracting party pays to another party and which
are properly chargeable to the cost of performing the contract or
subcontract (but see paragraph (d) of this section).
(5) Indirect factory expenses. Items, usually termed ``factory
overhead,'' which are not directly chargeable to the factory cost of
performing the contract or subcontract but which are properly incident
to and necessary for the performance of the contract or subcontract and
consist of the following:
(i) Labor. Amounts expended for factory labor, such as supervision
and inspection, clerical labor, timekeeping, packing and shipping,
stores supply, services of tool crib attendants, and services in the
factory employment bureau, which are not chargeable directly to
productive labor of the contract or subcontract.
(ii) Materials and supplies. The cost of materials and supplies for
general use in the factory in current operations, such as shop fuel,
lubricants, heat-treating, plating, cleaning and anodizing supplies,
nondurable tools and gauges, stationery (such as time tickets and other
forms), and boxing and wrapping materials.
(iii) Service expenses. Factory expenses of a general nature, such
as those for power, heat and light (whether purchased or produced),
ventilation and air conditioning and operation and maintenance of
general plant assets and facilities.
(iv) Fixed charges and obsolescence. Recurring charges with respect
to property used for manufacturing purposes of the contract or
subcontract, such as premiums for fire and elevator insurance, property
taxes, rentals and allowances for depreciation of such property,
including maintenance and depreciation of reasonable standby equipment;
and depreciation and obsolescence of special equipment and facilities
necessarily acquired primarily for the performance of the contract or
subcontract. In making allowances for depreciation, consideration shall
be given to the number and length of shifts.
(v) Miscellaneous indirect factory expenses. Miscellaneous factory
expenses not directly chargeable to the factory cost of performing the
contract or subcontract, such as purchasing expenses; ordinary and
necessary expenses of rearranging facilities within a department or
plant; employees' welfare expenses; premiums or dues on compensation
insurance; employers' payments to unemployment, old age and social
security, Federal and State funds not including payments deducted from
or chargeable to employees or officers; pensions and retirement payments
to factory employees; factory accident compensation (as to self-
insurance, see paragraph (g) of this section); but not including any
amounts which are not incident to services, operations, plant, equipment
or facilities involved in the performance of the contract or
subcontract.
(d) Other manufacturing cost. Other manufacturing cost as used in
paragraph (b) of this section includes items of manufacturing costs
which are not properly or satisfactorily chargeable to factory costs
(see paragraph (c) of this section) but which upon a complete showing of
all pertinent facts are properly to be included as a cost of performing
the contract or subcontract, as for instance, payments of royalties and
amortization of the cost of designs purchased and patent rights over
their useful life; and ``deferred'' or ``unliquidated'' experimental and
development charges. For example, in case experimental and development
costs have been properly deferred or capitalized and are amortized in
accordance with a reasonably consistent plan, a proper portion of the
current charge, determined by a ratable allocation which is reasonable
in consideration of the pertinent facts, may be treated as a cost of
performing the contract or subcontract. In the case of general
experimental and development expenses which may be charged off
currently, a reasonable portion thereof may be allocated to the cost of
performing the contract or subcontract. If a special experimental or
development project is carried on in pursuance of a contract, or in
anticipation
[[Page 235]]
of a contract which is later entered into, and the expense is not
treated as a part of general experimental and development expenses or is
not otherwise allowed as a cost of performing the contract, there
clearly appearing no reasonable prospect of an additional contract for
the type of article involved, the entire cost of such project may be
allowed as a part of the cost of performing the contract.
(e) Miscellaneous direct expenses. Miscellaneous direct expenses as
used in paragraph (b) of this section include:
(1) Cost of installation and construction. Cost of installation and
construction includes the cost of materials, labor and expenses
necessary for the erection and installation prior to the completion of
the contract and after the delivery of the product or material
manufactured or constructed pursuant to the contract or subcontract.
(2) Sundry direct expenses. Items of expense which are properly
chargeable directly to the cost of performing a contract or subcontract
and which do not constitute guarantee expenses (see paragraph (h) of
this section) or direct costs classified as factory cost or other
manufacturing cost (see paragraphs (c) and (d) of this section), such as
premiums on performance or other bonds required under the contract or
subcontract; State sales taxes imposed on the contracting party; freight
on outgoing shipments; fees paid for wind tunnel and model basin tests;
demonstration and test expenses; crash insurance premiums; traveling
expenses. In order for any such item to be allowed as a charge directly
to the cost of performing a contract or subcontract, (i) a detailed
record shall be kept by the contracting party of all items of a similar
character, and (ii) no item of a similar character which is properly a
direct charge to other work shall be allowed as a part of any indirect
expenses in determining the proper proportion thereof chargeable to the
cost of performing the contract or subcontract. As to allowable indirect
expenses, see paragraphs (c)(5), (f), (g), and (j) of this section.
(f) Indirect engineering expenses. Indirect engineering expenses,
usually termed ``engineering overhead,'' which are treated in this
section as a part of general expenses in determining the cost of
performing a contract or subcontract (see paragraph (b) of this
section), comprise the general engineering expenses which are incident
to and necessary for the performance of the contract or subcontract,
such as the following:
(1) Labor. Reasonable fees of engineers employed in a general
consulting capacity, and compensation of employees for personal services
to the engineering department, such as supervision, which is properly
chargeable to the contract or subcontract, but which is not chargeable
as direct engineering labor (see paragraph (c)(3) of this section).
(2) Material. Supplies for the engineering department, such as paper
and ink for drafting and similar supplies.
(3) Miscellaneous expenses. Expenses of the engineering department,
such as (i) maintenance and repair of engineering equipment, and (ii)
services purchased outside of the engineering department for blue-
printing, drawing, computing, and like purposes.
(g) Expenses of distribution, servicing and administration. Expenses
of distribution, servicing and administration, which are treated in this
section as a part of general expenses in determining the cost of
performing a contract or subcontract (see paragraph (b) of this
section), comprehend the expenses incident to and necessary for the
performance of the contract or subcontract, which are incurred in
connection with the distribution and general servicing of the
contracting party's products and the general administration of the
business, such as:
(1) Compensation for personal services of employees. The salaries of
the corporate and general executive officers and the salaries and wages
of administrative clerical employees and of the office services
employees such as telephone operators, janitors, cleaners, watchmen and
office equipment repairmen.
(2) Bidding and general selling expenses. Bidding and general
selling expenses which by reference to all the pertinent facts and
circumstances reasonably constitute a part of the cost of performing a
contract or subcontract. The treatment of bidding and general selling
expenses as a part of general expenses in accordance with this paragraph
is in lieu of any direct charges which otherwise might be made for such
expenses. The term ``bidding expenses'' as used in this section includes
all expenses in connection with preparing and submitting bids.
(3) General servicing expenses. Expenses which by reference to all
the pertinent facts and circumstances reasonably constitute a part of
the cost of performing a contract or subcontract and which are incident
to delivered or installed articles and are due to ordinary adjustments
or minor defects; but including no items which are treated as a part of
guarantee expenses (see paragraph (h) of this section) or as a part of
direct costs, such as direct materials, direct labor, and other direct
expense.
(4) Other expenses. Miscellaneous office and administrative
expenses, such as stationery and office supplies; postage; repair and
depreciation of office equipment; contributions to local charitable or
community organizations to the extent constituting ordinary and
necessary business expenses; employees' welfare expenses; premiums and
dues on compensation insurance; employers' payments to unemployment, old
age and social security Federal and State funds not including payments
deducted from or chargeable to employees or officers; pensions and
retirement
[[Page 236]]
payments to administrative office employees and accident compensation to
office employees (as to self-insurance, see subdivision (i) of this
subparagraph).
(i) Subject to the exception stated in this subdivision, in cases
where a contracting party assumes its own insurable risks (usually
termed ``self-insurance''), losses and payments will be allowed in the
cost of performing a contract or subcontract only to the extent of the
actual losses suffered or payments incurred during, and in the course
of, the performance of the contract or subcontract and properly
chargeable to such contract or subcontract. If, however, a contracting
party assumes its own insurable risks (a) for compensation paid to
employees for injuries received in the performance of their duties, or
(b) for unemployment risks in States where insurance is required, there
may be allowed as a part of the cost of performing a contract or
subcontract a reasonable portion of the charges set up for purposes of
self-insurance under a system of accounting regularly employed by the
contracting party, as determined by the Commissioner of Internal
Revenue, at rates not exceeding the lawful or approved rates of
insurance companies for such insurance, reduced by amounts representing
the acquisition cost in such companies, provided the contracting party
adopts and consistently follows this method with respect to self-
insurance in connection with all contracts and subcontracts subsequently
performed by him.
(ii) Allowances for interest on invested capital are not allowable
as costs of performing a contract or subcontract.
(iii) Among the items which shall not be included as a part of the
cost of performing a contract or subcontract or considered in
determining such cost, are the following: Entertainment expenses; dues
and memberships other than of regular trade associations; donations
except as otherwise provided above; losses on other contracts; profits
or losses from sales or exchanges of capital assets; extraordinary
expenses due to strikes or lockouts; fines and penalties; amortization
of unrealized appreciation of values of assets; expenses, maintenance
and depreciation of excess facilities (including idle land and building,
idle parts of a building, and excess machinery and equipment) vacated or
abandoned, or not adaptable for future use in performing contracts or
subcontracts; increases in reserve accounts for contingencies, repairs,
compensation insurance (except as above provided with respect to self-
insurance) and guarantee work; Federal and State income and excess-
profits taxes and surtaxes; cash discount earned up to one percent of
the amount of the purchase, except that all discounts on subcontracts
subject to the act will be considered; interest incurred or earned; bond
discount or finance charges; premiums for life insurance on the lives of
officers; legal and accounting fees in connection with reorganizations,
security issues, capital stock issues and the prosecution of claims
against the United States (including income tax matters); taxes and
expenses on issues and transfers of capital stock; losses on
investments; bad debts; and expenses of collection and exchange.
(iv) In order that the cost of performing a contract or subcontract
may be accounted for clearly, the amount of any excess profits repayable
to the United States pursuant to the act should not be charged to or
included in such cost.
(h) Guarantee expenses. Guarantee expenses include the various items
of factory, cost, other manufacturing cost, cost of installation and
construction, indirect engineering expenses and other general expenses
(see paragraphs (c) to (g) of this section) which are incurred after
delivery or installation of the article manufactured or constructed
pursuant to the particular contract or subcontract and which are
incident to the correction of defects or deficiencies which the
contracting party is required to make under the guarantee provisions of
the particular contract or subcontract. If the total amount of such
guarantee expenses is not ascertainable at the time of filing the report
required to be filed with the district director of internal revenue (see
Sec. 17.16) and the contracting party includes any estimated amount of
such expenses as part of the claimed total cost of performing the
contract or subcontract, such estimated amount shall be separately shown
on the report and the reasons for claiming such estimated amount shall
accompany the report; but only the amount of guarantee expenses actually
incurred will be allowed. If the amount of guarantee expenses actually
incurred is greater than the amount (if any) claimed on the report and
the contracting party has made an overpayment of excess profit, a refund
of the overpayment shall be made, in accordance with the provisions of
Sec. 17.19. If the amount of guarantee expenses actually incurred is
less than the amount claimed on the report and an additional amount of
excess profit is determined to be due, the additional amount of excess
profit shall be assessed and paid in accordance with the provisions of
Sec. 17.19.
(i) Unreasonable compensation. (1) The salaries and compensation for
services which are treated as a part of the cost of performing a
contract or subcontract include reasonable payments for salaries,
bonuses, or other compensation for services. As a general rule, bonuses
paid to employees (and not to officers) in pursuance of a regularly
established incentive bonus system may be allowed as a part of the cost
of performing a contract or subcontract.
[[Page 237]]
(2) The test of allowability is whether the aggregate compensation
paid to each individual is for services actually rendered incident to,
and necessary for, the performance of the contract or subcontract, and
is reasonable. Excessive or unreasonable payments whether in cash, stock
or other property ostensibly as compensation for services shall not be
included in the cost of performing a contract or subcontract.
(j) Allocation of indirect costs. No general rule applicable to all
cases may be stated for ascertaining the proper proportion of the
indirect costs to be allocated to the cost of performing a particular
contract or subcontract. Such proper proportion depends upon all the
facts and circumstances relating to the performance of the particular
contract or subcontract. Subject to a requirement that all items which
have no relation to the performance of the contract or subcontract shall
be eliminated from the amount to be allocated, the following methods of
allocation are outlined as acceptable in a majority of cases:
(1) Factory indirect expenses. The allowable indirect factory
expenses (see paragraph (c)(5) of this section) shall ordinarily be
allocated or ``distributed'' to the cost of the contract or subcontract
on the basis of the proportion which the direct productive labor (see
paragraph (c)(2) of this section) attributable to the contract or
subcontract bears to the total direct productive labor of the production
department or particular section thereof during the period within which
the contract or subcontract is performed, except that if the indirect
factory expenses are incurred in different amounts and in different
proportions by the various producing departments consideration shall be
given to such circumstances to the extent necessary to make a fair and
reasonable determination of the true profit and excess profit.
(2) Engineering indirect expenses. The allowable indirect
engineering expenses (see paragraph (f) of this section) shall
ordinarily be allocated or ``distributed'' to the cost of the contract
or subcontract on the basis of the proportion which the direct
engineering labor attributable to the contract or subcontract (see
paragraph (c)(3) of this section) bears to the total direct engineering
labor of the engineering department or particular section thereof during
the period within which the contract or subcontract is performed. If the
expenses of the engineering department are not sufficient in amount to
require the maintenance of separate accounts, the engineering indirect
costs may be included in the indirect factory expenses (see paragraph
(c)(5) of this section) and allocated or distributed to the cost of
performing the contract or subcontract as a part of such expenses,
provided the proportion so allocated or distributed is proper under the
facts and circumstances relating to the performance of the particular
contract or subcontract.
(3) Administrative expenses (or ``overhead''). The allowable
expenses of administration (see paragraph (g) of this section) or other
general expenses except indirect engineering expenses, bidding and
general selling expenses, and general servicing expenses shall
ordinarily be allocated or distributed to the cost of performing a
contract or subcontract on the basis of the proportion which the sum of
the manufacturing cost (see paragraph (b) of this section) and the cost
of installation and construction (see paragraph (e) of this section)
attributable to the particular contract or subcontract bears to the sum
of the total manufacturing cost and the total cost of installation and
construction during the period within which the contract or subcontract
is performed.
(4) Bidding, general selling, and general servicing expenses. The
allowable bidding and general selling expenses and general servicing
expenses (see paragraph (g) (2) and (3) of this section) shall
ordinarily be allocated or distributed to the cost of performing a
contract or subcontract on the basis of:
(i) The proportion which the contract price of the particular
contract or subcontract bears to the total sales made (including
contracts or subcontracts completed) during the period within which the
particular contract or subcontract is performed, or
(ii) The proportion which the sum of the manufacturing cost (see
paragraph (b) of this section) and the cost of installation and
construction (see paragraph (e) of this section) attributable to the
particular contract or subcontract bears to the sum of the total
manufacturing cost and the total cost of installation and construction
during the period within which the contract or subcontract is performed.
except that special consideration shall be given to the relation which
certain classes of such expenses bear to the various classes of article
produced by the contracting party in each case in which such
consideration is necessary in order to make a fair and reasonable
determination of the true profit and excess profit. See Sec. 17.14.
Sec. 17.10 Credits for net loss and deficiency in profit in
computing excess profit--(a) Net loss on contracts and subcontracts for
naval vessels or portions thereof. In the case of contracts or
subcontracts for the construction or manufacture of any complete naval
vessel or any portion thereof coming within the scope of the act which
are completed within an income-taxable year ending after April 3, 1939,
the term ``net loss'' as used in the act and in this part means the
amount by which the total costs of performing all such contracts and
subcontracts completed within such income-taxable year exceeds the total
contract prices of such contracts and subcontracts. Such net loss
sustained by a contracting
[[Page 238]]
party for an income-taxable year ending after April 3, 1939, is
allowable as a credit in computing the contracting party's excess profit
on contracts and subcontracts for the construction or manufacture of any
complete naval vessel or any portion thereof which are completed within
the next succeeding income-taxable year.
(b) Net loss on contracts and subcontracts for aircraft or portions
thereof. In the case of contracts or subcontracts for the construction
or manufacture of any complete aircraft or any portion thereof coming
within the scope of the act, which are completed within an income-
taxable year ending after April 3, 1939, the term ``net loss'' as used
in the act and in these regulations means the amount by which the total
costs of performing all such contracts and subcontracts completed within
such income-taxable year exceeds the total contract prices of such
contracts and subcontracts. Such net loss sustained by a contracting
party for an income-taxable year ending after April 3, 1939, is
allowable as a credit in computing the contracting party's excess profit
on contracts and subcontracts for the construction or manufacture of any
complete aircraft or any portion thereof which are completed within the
four next succeeding income-taxable years.
(c) Deficiency in profit. The term ``deficiency in profit'' as used
in the act and in this part relates to contracts and subcontracts coming
within the scope of the act which are for the construction or
manufacture of any complete aircraft or any portion thereof and are
completed within an income-taxable year ending after April 3, 1939. As
so used, the term ``deficiency in profit'' means the amount by which 12
percent of the total contract prices of such contracts and subcontracts
which are completed by a particular contracting party within the income-
taxable year exceeds the net profit upon such contracts and
subcontracts. A deficiency in profit sustained by a contracting party
with respect to such contracts and subcontracts for the construction or
manufacture of complete aircraft or any portion thereof and completed
within any income-taxable year ending after April 3, 1939, is allowable
as a credit in computing the contracting party's excess profit on
contracts and subcontracts for the construction or manufacture of
complete aircraft or any portion thereof which are completed within the
same or the four next succeeding income-taxable years.
(d) Claim for credit. Credit for a deficiency in profit or a net
loss may be claimed in the contracting party's annual report of profit
filed with the district director of internal revenue (see Sec. 17.16),
but it shall be supported by separate schedules for each contract or
subcontract involved showing total contract prices, costs of performance
and pertinent facts relative thereto, together with a summarized
computation of the deficiency in profit or net loss. The deficiency in
profit or net loss claimed is subject to verification and adjustment. As
to preservation of books and records, see Sec. 17.14. A deficiency in
profit or net loss sustained on contracts and subcontracts completed
within one income-taxable year may not be considered in computing a net
loss or deficiency in profit sustained on contracts and subcontracts
completed within another income- taxable year.
(e) Examples. The provisions of this section of the regulations may
be illustrated by the following examples:
Example (1) For the calendar year 1939 the A Corporation, which
keeps its books and makes its Federal income tax returns on a calendar
year basis, sustained a net loss of $50,000 upon all contracts and
subcontracts coming within the scope of the act which were entered into
for the construction or manufacture of any complete naval vessel or any
portion thereof and were completed within the calendar year 1939. For
the calendar year 1940 the A Corporation had a net profit of $30,000
upon all such contracts and subcontracts completed within the year 1940.
It also had a net profit of $10,000 upon other contracts completed
within that year all such contracts being for naval aircraft coming
within the scope of the act. For the calendar year 1941 the corporation
had a net profit of $25,000 upon contracts completed within that year.
The net loss of $50,000 sustained in 1939 may be taken as a credit
against the net profit of $30,000 realized in 1940 upon the contracts
for the construction or manufacture of complete naval vessels or
portions thereof completed within that year; but the excess of $20,000
($50,000 minus $30,000) may not be taken as a credit in computing the
excess profit realized upon the other contracts completed in 1940 at a
net profit of $10,000 or as a credit in computing the excess profit upon
the contracts completed within the year 1941 at a net profit of $25,000.
Example (2). For the calendar year 1939, the B Corporation, which
keeps its books and makes its Federal income tax returns on a calendar
year basis, sustained a net loss of $10,000 and a deficiency in profit
of $35,000 upon all contracts and subcontracts for naval aircraft and
portions thereof coming within the scope of the act and completed within
that year. During the year 1939, the B Corporation also completed
contracts for Army aircraft coming within the scope of the Act at a net
profit which was $15,000 in excess of 12 percent of the total contract
prices of such contracts. On all contracts and subcontracts for naval
aircraft coming within the scope of the act and completed within the
calendar year 1940, the B Corporation realized a net profit which was
$25,000 in excess of 12 percent of the total contract prices of such
contracts and subcontracts while sustaining a deficiency in profit of
$10,000 on
[[Page 239]]
like contracts and subcontracts for Army aircraft. On all contracts and
subcontracts for naval aircraft coming within the scope of the act and
completed within the calendar year 1941, the B Corporation realized a
net profit which was $20,000 in excess of 12 percent of the total
contract prices of such contracts. The net loss of $10,000 and
deficiency in profit of $35,000 (or a total of $45,000) sustained in
1939 with respect to contracts and subcontracts for naval aircraft
completed within that year may be taken as a credit to the extent of
$15,000 in computing the excess profit on the contracts and subcontracts
for Army aircraft completed in 1939. The remainder of such net loss and
such deficiency in profit ($45,000 minus $15,000, or $30,000) may be
combined with the deficiency in profit of $10,000 sustained in 1940 on
contracts for Army aircraft and taken as a credit to the extent of
$25,000 in computing the excess profit on the contracts and subcontracts
for aircraft completed during 1940. The sum of such net loss and such
deficiency in profit then remaining ($40,000 minus $25,000, or $15,000)
may be taken as a credit in computing the excess profit realized on the
contracts and subcontracts for aircraft completed in the year 1941.
[T.D. 4906, 4 FR 2492, June 27, 1939, as amended by T.D. 6512, 25 FR
12444, Dec. 6, 1960]
Sec. 17.11 Credit for Federal income taxes. For the purpose of
computing the amount of excess profit to be paid to the United States, a
credit is allowable against the excess profit for the amount of Federal
income taxes paid or remaining to be paid on the amount of such excess
profit. The ``Federal income taxes'' in respect of which this credit is
allowable include the income taxes imposed by Titles I and IA of the
Revenue Act of 1938, and Chapter 1 and Subchapter A of Chapter 2 of the
Internal Revenue Code, and the excess-profits taxes imposed by section
602 of the Revenue Act of 1938, and Subchapter B of Chapter 2 of the
Internal Revenue Code. This credit is allowable for these taxes only to
the extent that it is affirmatively shown that they have been finally
determined and paid or remain to be paid and that they were imposed upon
the excess profit against which the credit is to be made. In case such a
credit has been allowed and the amount of Federal income taxes imposed
upon the excess profit is redetermined, the credit previously allowed
shall be accordingly adjusted.
Sec. 17.12 Failure of contractor to require agreement by
subcontractor. (a) Every contract or subcontract coming within the scope
of the act is required by the act to contain, among other things, an
agreement by the contracting party to make no subcontract unless the
subcontractor agrees:
(1) To make a report, as described in the act, under oath to the
Secretary of the Navy upon the completion of the subcontract;
(2) To pay into the Treasury excess profit, as determined by the
Treasury Department, in the manner and amounts specified in the act;
(3) To make no subdivision of the subcontract for the same article
or articles for the purpose of evading the provisions of the act;
(4) That the manufacturing spaces and books of its own plant,
affiliates, and subdivisions shall at all times be subject to inspection
and audit as provided in the act.
(b) If a contracting party enters into a subcontract with a
subcontractor who fails to make such agreement, such contracting party
shall, in addition to its liability for excess profit determined on
contracts or subcontracts performed by it, be liable for any excess
profit determined to be due the United States on the subcontract entered
into with such subcontractor. In such event, however, the excess profit
to be paid to the United States in respect of the subcontract entered
into with such subcontractor shall be determined separately from any
contracts or subcontracts performed by the contracting party entering
into the subcontract with such subcontractor.
Sec. 17.13 Evasion of excess profit. Section 3 of the act provides
that the contracting party shall agree to make no subdivisions of any
contract or subcontract for the same article or articles for the purpose
of evading the provisions of the act. If any such subdivision or
subcontract is made it shall constitute a violation of the agreement
provided for in the act, and the cost of completing a contract or
subcontract by a contracting party which violates such agreement shall
be determined in a manner necessary clearly to reflect the true excess
profit of such contracting party.
Sec. 17.14 Books of account and records. (a) It is recognized that
no uniform method of accounting can be prescribed for all contracting
parties subject to the provisions of the act. Each contracting party is
required by law to make a report of its true profit and excess profit.
Such party must, therefore, maintain such accounting records as will
enable it to do so. See Sec. 17.9. Among the essentials are the
following:
(1) The profit or loss upon a particular contract or subcontract
shall be accounted for and fully explained in the books of account
separately on each contract or subcontract.
(2) Any cost accounting methods, however standard they may be and
regardless of long continued practice, shall be controlled by, and be in
accord with, the objectives and purposes of the act and of any
regulations prescribed thereunder.
(3) The accounts shall clearly disclose the nature and amount of the
different items of cost of performing a contract or subcontract.
(b) In cases where it has been the custom priorly to use so-called
``normal'' rates of
[[Page 240]]
overhead expense or administrative expenses, or ``standard'' or
``normal'' prices of material or labor charges, no objection will be
made to the use temporarily during the period of performing the contract
or subcontract of such methods in charging the contract or subcontract,
if the method of accounting employed is such as clearly to reflect, in
the final determination upon the books of account, the actual profit
derived from the performance of the contract or subcontract and if the
necessary adjusting entries are entered upon the books and they explain
in full detail the revisions necessary to accord with the facts. As to
the elements of cost, see Sec. 17.9.
(c) All books, records, and original evidences of costs (including,
for example, production orders, bills or schedules of materials,
purchase requisitions, purchase orders, vouchers, requisitions for
materials, standing expense orders, inventories, labor time cards,
payrolls, cost distribution sheets) pertinent to the determination of
the true profit, excess profit, deficiency in profit, or net loss from
the performance of a contract or subcontract shall be kept at all times
available for inspection by internal revenue officers, and shall be
carefully preserved and retained so long as the contents thereof may
become material in the administration of the act. This provision is not
confined to books, records and original evidences pertaining to items
which may be considered to be a part of the cost of performing a
contract or subcontract. It is applicable to all books, records and
original evidences of costs of each plant, branch or department involved
in the performance of a contract or subcontract or in the distribution
of costs to the contract or subcontract.
Sec. 17.15 Report to Secretary of the Navy. (a) Upon the completion
of a contract or a subcontract coming within the scope of the act and
this part, the contracting party is required to make a report, under
oath, to the Secretary of the Navy. As to the date of completion of a
contract or subcontract, see Sec. 17.5. The act requires that such
report shall be in the form prescribed by the Secretary of the Navy and
shall state the total contract price, the cost of performing the
contract, the net income from such contract, and the per centum such
income bears to the contract price. The contracting party shall also
include as a part of such report a statement showing:
(1) The manner in which the indirect costs were determined and
allocated to the cost of performing the contract or subcontract (see
Sec. 17.9);
(2) The name and address of every subcontractor with whom a
subcontract was made, the object of such subcontract, the date when
completed and the amount thereof; and
(3) The name and address of each affiliate or other organization,
trade or business owned or controlled directly or indirectly by the same
interests as those who so own or control the contracting party, together
with a statement showing in detail all transactions which were made with
such affiliate or other organization, trade or business and are
pertinent to the determination of the excess profit.
(b) A copy of the report required to be made to the Secretary of the
Navy is required to be transmitted by the contracting party to the
Secretary of the Treasury. Such copy shall not be transmitted directly
to the Secretary of the Treasury but shall be filed as a part of the
annual report. See Sec. 17.16.
Sec. 17.16 Annual reports for income-taxable years--(a) General
requirements. Every contracting party completing a contract or
subcontract within the contracting party's income-taxable year ending
after April 3, 1939 shall file, with the district director of internal
revenue for the internal revenue district in which the contracting
party's Federal income tax return is required to be filed, annual
reports on the prescribed forms of the profit and excess profit on all
contracts and subcontracts coming within the scope of the act. If any
contracts or subcontracts so completed by the contracting party were
entered into for the construction or manufacture of any complete naval
vessel or any portion thereof, the profit and excess profit on all such
contracts and subcontracts completed within the income-taxable year
ending after April 3, 1939 shall be computed in accordance with the
provisions of Sec. 17.6. If any contracts or subcontracts so completed
by the contracting party were entered into for the construction or
manufacture of any complete naval aircraft or any portion thereof, the
profit and excess profit on all such contracts and subcontracts
completed within the income-taxable year ending after April 3, 1939
shall be computed in accordance with the provisions of Sec. 17.7. There
shall be included as a part of the annual report a statement, preferably
in columnar form, showing separately for each contract or subcontract
completed by the contracting party within the income-taxable year and
covered by the report, the total contract price, the cost of performing
the contract or subcontract and resulting profit or loss on each
contract or subcontract together with a summary statement showing in
detail the computation of the net profit or net loss upon each group of
contracts and subcontracts covered by the report and the amount of the
excess profit, if any, with respect to each group of contracts and
subcontracts covered by the report. A copy of the report made to the
Secretary of the Navy (see Sec. 17.15) with respect to each contract or
subcontract covered in the annual report, shall be filed as a part of
such annual report. In case the income-taxable year of the contracting
party is a period of
[[Page 241]]
less than twelve months (see Sec. 17.1), the reports required by this
section shall be made for such period and not for a full year.
(b) Time for filing annual reports. Annual reports of contracts and
subcontracts completed by a contracting party within an income-taxable
year ending after April 3, 1939 shall be filed on or before the 15th day
of the ninth month following the close of the contracting party's
income-taxable year. It is important that the contracting party render
on or before the due date annual reports as nearly complete and final as
it is possible for the contracting party to prepare. An extension of
time granted the contracting party for filing its Federal income tax
return does not serve to extend the time for filing the annual reports
required by this section. Authority consistent with authorizations for
granting extensions of time for filing Federal income tax returns is
hereby delegated to the various district directors of internal revenue
for granting extensions of time for filing the reports required by this
section. Application for extensions of time for filing such reports
should be addressed to the district director of internal revenue for the
district in which the contracting party files its Federal income tax
returns and must contain a full recital of the causes for the delay.
Sec. 17.17 Payment of excess profit liability. The amount of the
excess profit liability to be paid to the United States shall be paid on
or before the due date for filing the report with the district director
of internal revenue. See Sec. 17.16. At the option of the contracting
party, the amount of the excess profit liability may be paid in four
equal installments instead of in a single payment, in which case the
first installment is to be paid on or before the date prescribed for the
payment of the excess profit as a single payment, the second installment
on or before the 15th day of the third month, the third installment on
or before the 15th day of the sixth month, and the fourth installment on
or before the 15th day of the ninth month, after such date.
Sec. 17.18 Liability of surety. The surety under contracts entered
into after the amendment of section 3(b) of the act of June 25, 1936
shall not be liable for payment of excess profit due the United States
in respect of such contracts.
Sec. 17.19 Determination of liability for excess profit, interest
and penalties; assessment, collection, payment, refunds. (a) The duty of
determining the correct amount of excess profit liability on contracts
and subcontracts coming within the scope of the act is upon the
Commissioner of Internal Revenue. Under section 3(b) of the act, as
amended, and section 651 of the Internal Revenue Code, all provisions of
law (including the provisions of law relating to interest, penalties and
refunds) applicable with respect to the taxes imposed by Title I of the
Revenue Act of 1934 and not inconsistent with section 3 of the act are
applicable with respect to the assessment, collection, or payment of
excess profits on contracts and subcontracts coming within the scope of
the act and to refunds of overpayments of profits into the Treasury
under the act. Claims by a contracting party for the refund of an amount
of excess profit, interest, penalties, and additions to such excess
profit shall conform to the general requirements prescribed with respect
to claims for refund of overpayments of taxes imposed by Title I of the
Revenue Act of 1934 and, if filed on account of any additional costs
incurred pursuant to guarantee provisions in a contract, shall be
supplemented by a statement under oath showing the amount and nature of
such costs and all facts pertinent thereto.
(b) Administrative procedure for the determination, assessment and
collection of excess profit liability under section 3 of the act,
sections 650 and 651 of the Internal Revenue Code, and this part, and
the examination of reports and claims in connection therewith will be
prescribed from time to time by the Commissioner of Internal Revenue.
MITIGATION OF EFFECT OF RENEGOTIATION OF GOVERNMENT CONTRACTS
Sec. 1.1481-1 [Reserved]
Tax on Transfers To Avoid Income Tax
Sec. 1.1491-1 Imposition of tax.
Section 1491 imposes an excise tax upon transfers of stock or
securities by a citizen or resident of the United States, or by a
domestic corporation or partnership, or by a trust which is not a
foreign trust, to a foreign corporation as paid-in surplus or as a
contribution to capital, or to a foreign trust, or to a foreign
partnership. The tax is in an amount equal to 27\1/2\ percent of the
excess of (a) the value of the stock or securities so transferred over
(b) its adjusted basis, as provided in section 1011, for determining
gain in the hands of the transferor.
[T.D. 6500, 25 FR 12082, Nov. 26, 1960]
Sec. 1.1492-1 Nontaxable transfers.
(a) The tax imposed by section 1491 does not apply:
(1) If the transferee is an organization (other than an organization
described in section 401(a) exempt from
[[Page 242]]
income tax under the provisions of sections 501 to 504, inclusive; or
(2) If before the transfer it has been established to the
satisfaction of the Commissioner that the transfer is not in pursuance
of a plan having as one of its principal purposes the avoidance of
Federal income taxes.
(b) Whether a transfer of stock or securities is in pursuance of a
plan having as one of its principal purposes the avoidance of Federal
income taxes is a question to be determined from the facts and
circumstances of each particular case. In any such case where a
transferor desires to establish that the transfer is not in pursuance of
such a plan, a statement of the facts relating to the plan under which
the transfer is to be made or was made, together with a copy of the plan
if in writing, shall be forwarded to the Commissioner of Internal
Revenue, Washington, DC 20225, for a ruling. This statement shall
contain, or be verified by, a written declaration that it is made under
the penalties of perjury. A letter notifying the transferor of the
Commissioner's determination will be mailed to the transferor.
[T.D. 6500, 25 FR 12082, Nov. 26, 1960]
Sec. 1.1493-1 Definition of foreign trust.
For taxable years beginning before January 1, 1967, a trust is to be
considered a ``foreign trust'' within the meaning of chapter 5 of the
Code, if, assuming a subsequent sale by the trustee, outside the United
States and for cash, of the property transferred to the trust, the
profit, if any, from such sale (being income from sources without the
United States under the provisions of part I (section 861 and
following), subchapter N, chapter 1 of the Code), would not be included
in the gross income of the trust under subtitle A of the Code. For
taxable years beginning after December 31, 1966, the term ``foreign
trust,'' as used in chapter 5 of the Code, shall have the meaning
prescribed by section 7701(a)(31).
[T.D. 7332, 39 FR 44230, Dec. 23, 1974]
Sec. 1.1494-1 Returns; payment and collection of tax.
(a) Returns and payment. Every person making a transfer described in
section 1491 shall make a return to the district director on the day on
which the transfer is made and, unless the transfer is nontaxable under
section 1492, pay the tax due on such transfer. This return, which shall
contain, or be verified by, a written declaration that it is made under
the penalties of perjury, shall be made on Form 926 and shall be filed
with the district director to whom the transferor's return of income is
required to be made. The return shall set forth in detail the following
information:
(1) Name and address of transferor, and place of organization or
creation, if a corporation, partnership, or trust.
(2) Name and address of transferee, place of organization or
creation, and whether the transferee is a foreign corporation, a foreign
trust, or a foreign partnership. If the transferee is a foreign trust or
a foreign partnership, the name and address of the fiduciary and each
beneficiary, in the case of a trust, or of each partner, in the case of
a partnership, must be shown.
(3) Description and amount of stock or securities transferred, the
date of transfer, and a complete statement showing all the facts
relating to the transfer, accompanied by a copy of the plan under which
the transfer was made.
(4) The fair market value of the stock or securities transferred as
of the date of transfer, and the adjusted basis provided in section 1011
for determining gain in the hands of the transferor.
(5) Whether the transfer was made in pursuance of a plan submitted
to and approved by the Commissioner as not having as one of its
principal purposes the avoidance of Federal income taxes. If the plan
has been so approved, a copy of the Commissioner's letter approving the
plan shall accompany the return.
(6) Such other information as may be required by the return form.
(b) Certificate. (1) If the transferee of the stock or securities,
the transfer of which is reported in the return, is a foreign
organization meeting the tests of exemption from income tax provided in
part I (section 501 and following), subchapter F, chapter 1 of the Code,
and the transferor on that account claims that no liability for tax is
imposed by section 1491, such transferor
[[Page 243]]
must file with Form 926 a certificate establishing the exemption of the
transferee under such part I. This certificate, which shall contain, or
be verified by, a written declaration that it is made under the
penalties of perjury, shall contain complete information showing the
character of the transferee, the purpose for which it was organized, its
actual activities, the source of its income and the disposition of such
income, whether or not any of its income is credited to surplus or may
inure to the benefit of any private shareholder or individual, and in
general all facts relating to its operations which affect its right to
exemption. To such certificate shall be attached a copy of the charter
or articles of incorporation, the by-laws of the organization, and the
latest financial statement showing the assets, liabilities, receipts,
and disbursements of the organization.
(2) If the transferee is a foreign organization which has been held
to be exempt from income tax under such part I (or corresponding
provisions of prior law), a copy of the Commissioner's letter so holding
shall be filed with Form 926 in lieu of the above certificate and
attachments.
(c) Assessment and collection. The determination, assessment, and
collection of the tax and the examination of returns and claims filed
pursuant to chapter 5 of the Code will be made under such procedure as
may be prescribed from time to time by the Commissioner.
[T.D. 6500, 25 FR 12082, Nov. 26, 1960]
Sec. 1.1494-2 Effective date.
Chapter 5 (section 1491 and following) of the Internal Revenue Code
of 1954 and the regulations prescribed thereunder apply with respect to
transfers occurring after December 31, 1954. (See section
7851(a)(1)(B).) Chapter 7 (section 1250 and following) of the Internal
Revenue Code of 1939 and the regulations applicable thereto apply with
respect to transfers occurring prior to January 1, 1955.
[T.D. 6500, 25 FR 12083, Nov. 26, 1960]
Consolidated Returns
RETURNS AND PAYMENT OF TAX
Consolidated Return Regulations
Sec. 1.1502-0 Effective dates.
(a) The regulations under section 1502 are applicable to taxable
years beginning after December 31, 1965, except as otherwise provided
therein.
(b) The provisions of Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A
through 1.1502-19A, and 1.1502-30A through 1.1502-51A (as contained in
the 26 CFR part 1 edition revised April 1, 1996) are applicable to
taxable years beginning before January 1, 1966.
[T.D. 8677, 61 FR 33325, June 27, 1996]
Sec. 1.1502-1 Definitions.
(a) Group. The term group means an affiliated group of corporations
as defined in section 1504. See Sec. 1.1502-75(d) as to when a group
remains in existence. Except as the context otherwise requires,
references to a group are references to a consolidated group (as defined
in paragraph (h) of this section).
(b) Member. The term member means a corporation (including the
common parent) that is included in the group, or as the context may
require, a corporation that is included in a subgroup.
(c) Subsidiary. The term subsidiary means a corporation other than
the common parent which is a member of such group.
(d) Consolidated return year. The term consolidated return year
means a taxable year for which a consolidated return is filed or
required to be filed by such group.
(e) Separate return year. The term separate return year means a
taxable year of a corporation for which it files a separate return or
for which it joins in the filing of a consolidated return by another
group.
(f) Separate return limitation year--(1) In general. Except as
provided in paragraphs (f)(2) and (3) of this section, the term separate
return limitation year (or SRLY) means any separate return year of a
member or of a predecessor of a member.
(2) Exceptions. The term separate return limitation year (or SRLY)
does not include:
[[Page 244]]
(i) A separate return year of the corporation which is the common
parent for the consolidated return year to which the tax attribute is to
be carried (except as provided in Sec. 1.1502- 75(d)(2)(ii) and
subparagraph (3) of this paragraph),
(ii) A separate return year of any corporation which was a member of
the group for each day of such year, or
(iii) A separate return year of a predecessor of any member if such
predecessor was a member of the group for each day of such year,
Provided that an election under section 1562(a) (relating to the
privilege to elect multiple surtax exemptions) was never effective (or
is no longer effective as a result of a termination of such election)
for such year. An election under section 1562(a) which is effective for
a taxable year beginning in 1963 and ending in 1964 shall be
disregarded.
(3) Reverse acquisitions. In the event of an acquisition to which
Sec. 1.1502-75(d)(3) applies, all taxable years of the first corporation
and of each of its subsidiaries ending on or before the date of the
acquisition shall be treated as separate return limitation years, and
the separate return years (if any) of the second corporation and each of
its subsidiaries shall not be treated as separate return limitation
years (unless they were so treated immediately before the acquisition).
For example, if corporation P merges into corporation T, and the persons
who were stockholders of P immediately before the merger, as a result of
owning the stock of P, own more than 50 percent of the fair market value
of the outstanding stock of T, then a loss incurred before the merger by
T (even though it is the common parent), or by a subsidiary of T, is
treated as having been incurred in a separate return limitation year.
Conversely, a loss incurred before the merger by P, or by a subsidiary
of P in a separate return year during all of which such subsidiary was a
member of the group of which P was the common parent and for which
section 1562 was not effective, is treated as having been incurred in a
year which is not a separate return limitation year.
(4) Predecessor and successors. The term predecessor means a
transferor or distributor of assets to a member (the successor) in a
transaction--
(i) To which section 381(a) applies; or
(ii) That occurs on or after January 1, 1997, in which the
successor's basis for the assets is determined, directly or indirectly,
in whole or in part, by reference to the basis of the assets of the
transferor or distributor, but in the case of a transaction that occurs
before June 25, 1999, only if the amount by which basis differs from
value, in the aggregate, is material. For a transaction that occurs
before June 25, 1999, only one member may be considered a predecessor to
or a successor of one other member.
(g) Consolidated return change of ownership--(1) In general. A
consolidated return change of ownership occurs during any taxable year
(referred to in this subparagraph as the ``year of change'') of the
corporation which is the common parent for the taxable year to which the
tax attribute is to be carried, if, at the end of the year of change:
(i) Any one or more of the persons described in section 382(a)(2)
own a percentage of the fair market value of the outstanding stock of
such corporation which is more than 50 percentage points greater than
such person or persons owned at:
(a) The beginning of such taxable year, or
(b) The beginning of the preceding taxable year, and
(ii) The increase in percentage points at the end of such year is
attributable to:
(a) A purchase (within the meaning of section 382(a)(4)) by such
person or persons of such stock, the stock of another corporation owning
stock in such corporation, or an interest in a partnership or trust
owning stock in such corporation, or
(b) A decrease in the amount of such stock outstanding or the amount
of stock outstanding of another corporation owning stock in such
corporation, except a decrease resulting from a redemption to pay death
taxes to which section 303 applies.
For purposes of subdivision (i) (a) and (b) of this subparagraph, the
beginning of the taxable years specified therein shall be the beginning
of such taxable
[[Page 245]]
years or October 1, 1965, whichever occurs later.
(2) Operating rules. For purposes of this paragraph:
(i) The term stock means all shares except nonvoting stock which is
limited and preferred as to dividends, and
(ii) Section 318 (relating to constructive ownership of stock) shall
apply in determining the ownership of stock, except that section 318(a)
(2)(C) and (3)(C) shall be applied without regard to the 50-percent
limitation contained therein.
(3) Old members. The term old members of a group means:
(i) Those corporations which were members of such group immediately
preceding the first day of the taxable year in which the consolidated
return change of ownership occurs, or
(ii) If the group was not in existence prior to the taxable year in
which the consolidated return change of ownership occurs, the
corporation which is the common parent for the taxable year to which the
tax attribute is to be carried.
(4) Reverse acquisitions. If there has been a consolidated return
change of ownership of a corporation under subparagraph (1) of this
paragraph and the stock or assets of such corporation are subsequently
acquired by another corporation in an acquisition to which Sec. 1.1502-
75(d)(3) applies so that the group of which the former corporation is
the common parent is treated as continuing in existence, then the ``old
members'', as defined in subparagraph (3) of this paragraph, of such
group immediately before the acquisition shall continue to be treated as
``old members'' immediately after the acquisition. For example, assume
that corporations P and S comprise group PS, and PS undergoes a
consolidated return change of ownership. Subsequently, the stock of P,
the common parent, is acquired by corporation T, the common parent of
group TU, in an acquisition to which section 368(a)(1)(B) and
Sec. 1.1502-75(d)(3) apply. The PS group is treated as continuing in
existence with T as the common parent. P and S continue to be treated as
old members, as defined in subparagraph (3) of this paragraph.
(h) Consolidated group. The term ``consolidated group'' means a
group filing (or required to file) consolidated returns for the tax
year.
(i) [Reserved]
(j) Affiliated. Corporations are affiliated if they are members of a
group with each other.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR
758, Jan. 4, 1973; T.D. 8294, 55 FR 9434, Mar. 14, 1990; T.D. 8319, 55
FR 49038, Nov. 26, 1990; T.D. 8560, 59 FR 41675, Aug. 15, 1994; T.D.
8677, 61 FR 33325, June 27, 1996; T.D. 8823, 64 FR 36101, July 2, 1999]
Consolidated Tax Liability
Sec. 1.1502-2 Computation of tax liability.
The tax liability of a group for a consolidated return year shall be
determined by adding together:
(a) The tax imposed by section 11 on the consolidated taxable income
for such year (see Sec. 1.1502-11 for the computation of consolidated
taxable income);
(b) The tax imposed by section 541 on the consolidated undistributed
personal holding company income;
(c) If paragraph (b) of this section does not apply, the aggregate
of the taxes imposed by section 541 on the separate undistributed
personal holding company income of the members which are personal
holding companies;
(d) If paragraph (b) of this section does not apply, the tax imposed
by section 531 on the consolidated accumulated taxable income (see
Sec. 1.1502-43);
(e) The tax imposed by section 594(a) in lieu of the taxes imposed
by section 11 or 1201 on the taxable income of a life insurance
department of the common parent of a group which is a mutual savings
bank;
(f) The tax imposed by section 802(a) on consolidated life insurance
company taxable income;
(g) The tax imposed by section 831(a) on the consolidated insurance
company taxable income of the members which are subject to such tax;
(h) The tax imposed by section 1201, instead of the taxes computed
under paragraphs (a) and (g) of this section, computed by reference to
the net capital gain of the group (see Sec. 1.1502-22) (or, for
consolidated return years to
[[Page 246]]
which Sec. 1.1502-22 does not apply, computed by reference to the excess
of the consolidated net long-term capital gain over the consolidated net
short-term capital loss (see Sec. 1.1502-41A for the determination of
the consolidated net long-term capital gain and the consolidated net
short-term capital loss));
(i) [Reserved]
(j) The tax imposed by section 1333 on war loss recoveries; and
by allowing as a credit against such taxes the investment credit under
section 38 (see Sec. 1.1502-3), and the foreign tax credit under section
33 (see Sec. 1.1502-4). For purposes of this section, the surtax
exemption of the group for a consolidated return year is $25,000, or if
a lesser amount is allowed under section 1561, such lesser amount. See
Sec. 1.1561-2(a)(2). For increase in tax due to the application of
section 47, see Sec. 1.1502-3(f). For amount of tax surcharge, see
section 51 and Sec. 1.1502-7.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7093, 36 FR
4871, Mar. 13, 1971; T.D. 7937, 49 FR 3462, Jan. 27, 1984; T.D. 8677, 61
FR 33326, June 27, 1996; T.D. 8823, 64 FR 36099, July 2, 1999]
Sec. 1.1502-3 Consolidated investment credit.
(a) Determination of amount of consolidated credit--(1) In general.
The credit allowed by section 38 for a consolidated return year of a
group shall be equal to the consolidated credit earned. The consolidated
credit earned is equal to the aggregate of the credit earned (as
determined under subparagraph (2) of this paragraph) by all members of
the group for the consolidated return year.
(2) Determination of credit earned. The credit earned of a member is
an amount equal to 7 percent of such member's qualified investment
(determined under section 46(c)). For purposes of computing a member's
qualified investment, the basis of property shall not include any gain
or loss realized with respect to such property by another member in an
intercompany transaction (as defined in Sec. 1.1502-13(b)), whether or
not such gain or loss is deferred. Thus, if section 38 property acquired
in an intercompany transaction has a basis of $100 to the purchasing
member, and if the selling member has a $20 gain with respect to such
property, the basis of such property for purposes of computing the
purchaser's qualified investment is only $80. Such $80 basis shall also
be used for purposes of applying section 47 to such property. See
paragraph (f) of this section.
(3) Consolidated limitation based on amount of tax. (i)
Notwithstanding the amount of the consolidated credit earned for the
taxable year, the consolidated credit allowed by section 38 to the group
for the consolidated return year is limited to:
(a) So much of the consolidated liability for tax as does not exceed
$25,000, plus
(b) For taxable years ending on or before March 9, 1967, 25 percent
of the consolidated liability for tax in excess of $25,000, or
(c) For taxable years ending after March 9, 1967, 50 percent of the
consolidated liability for tax in excess of $25,000.
The $25,000 amount referred to in the preceding sentence shall be
reduced by any part of such $25,000 amount apportioned under Sec. 1.46-1
to component members of the controlled group (as defined in section
46(a)(5)) which do not join in the filing of the consolidated return.
For further rules for computing the limitation based on amount of tax
with respect to the suspension period (as defined in section 48(j)), see
section 46(a)(2). The amount determined under this subparagraph is
referred to in this section as the ``consolidated limitation based on
amount of tax.''
(ii) If an organization to which section 593 applies or a
cooperative organization described in section 1381(a) joins in the
filing of the consolidated return, the $25,000 amount referred to in
subdivision (i) of this subparagraph (reduced as provided in such
subdivision) shall be apportioned equally among the members of the group
filing the consolidated return. The amount so apportioned equally to any
such organization shall then be decreased in accordance with the
provisions of section 46(d). Finally, the sum of all such equal portions
(as decreased under section 46(d)) of each member of the group shall be
substituted for the $25,000 amount referred to in subdivision (i) of
this subparagraph.
[[Page 247]]
(4) Consolidated liability for tax. For purposes of subparagraph (3)
of this paragraph, the consolidated liability for tax shall be the
income tax imposed for the taxable year upon the group by chapter 1 of
the Code, reduced by the consolidated foreign tax credit allowable under
Sec. 1.1502-4. The tax imposed by section 56 (relating to minimum tax
for tax preferences), section 531 (relating to accumulated earnings
tax), section 541 (relating to personal holding company tax), and any
additional tax imposed by section 1351(d)(1) (relating to recoveries of
foreign expropriation losses), shall not be considered tax imposed by
chapter 1 of the Code. In addition, any increase in tax resulting from
the application of section 47 (relating to certain dispositions, etc.,
of section 38 property) shall not be treated as tax imposed by chapter 1
for purposes of computing the consolidated liability for tax.
(b) Carryback and carryover of unused credits--(1) Allowance of
unused credit as consolidated carryback or carryover. A group shall be
allowed to add to the amount allowable as a credit under paragraph
(a)(1) of this section for any consolidated return year an amount equal
to the aggregate of the consolidated investment credit carryovers and
carrybacks to such year. The consolidated investment credit carryovers
and carrybacks to the taxable year shall consist of any consolidated
unused credits of the group, plus any unused credits of members of the
group arising in separate return years of such members, which may be
carried over or back to the taxable year under the principles of section
46(b). However, such consolidated carryovers and carrybacks shall not
include any consolidated unused credits apportioned to a corporation for
a separate return year pursuant to paragraph (c) of Sec. 1.1502-79 and
shall be subject to the limitations contained in paragraphs (c) and (e)
of this section. A consolidated unused credit for any consolidated
return year is the excess of the consolidated credit earned over the
consolidated limitation based on amount of tax for such year.
(2) Absorption rules. For purposes of determining the amount, if
any, of an unused credit (whether consolidated or separate) which can be
carried to a taxable year (consolidated or separate), the amount of such
unused credit which is absorbed in a prior consolidated return year
under section 46(b) shall be determined by:
(i) Applying all unused credits which can be carried to such prior
year in the order of the taxable years in which such unused credits
arose, beginning with the taxable year which ends earliest, and
(ii) Applying all such unused credits which can be carried to such
prior year from taxable years ending on the same date on a pro rata
basis.
(c) Limitation on investment credit carryovers and carrybacks from
separate return limitation years--(1) General rule. In the case of an
unused credit of a member of the group arising in a separate return
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such
member (and in a separate return limitation year of any predecessor of
such member), the amount which may be included under paragraph (b) of
this section (computed without regard to the limitation contained in
paragraph (e) of this section) shall not exceed the amount determined
under subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph with respect to a member of the group
is the excess, if any, of:
(i) The limitation based on amount of tax of the group, minus such
limitation recomputed by excluding the items of income, deduction, and
foreign tax credit of such member, over
(ii) The sum of (a) the investment credit earned by such member for
such consolidated return year, and (b) the unused credits attributable
to such member which may be carried to such consolidated return year
arising in unused credit years ending prior to the particular separate
return limitation year.
(3) Special effective date. This paragraph (c) applies to
consolidated return years for which the due date of the income tax
return (without extensions) is on or before March 13, 1998. See
Sec. 1.1502-3T(c) for the rule that limits the group's use of a section
38 credit carryover or carryback from a SRLY for a
[[Page 248]]
consolidated return year for which the due date of the income tax return
(without extensions) is after March 13, 1998. For taxable years not
subject to Sec. 1.1502-3T(c), prior law applies. See Sec. 1.1502-3(c) in
effect prior to January 12, 1998 (Sec. 1.1502-3(c) as contained in the
26 CFR part 1 edition revised April 1, 1997) for prior law. See also
Sec. 1.1502-3T(c)(4) for an optional effective date rule (generally
making the rules of this paragraph (c) inapplicable to a consolidated
return year beginning after December 31, 1996, if the due date of the
income tax return (without extensions) for such year is on or before
March 13, 1998).
(d) Examples. (1) Examples. The provisions of paragraphs (a), (b),
and (c) of this section may be illustrated by the following examples:
Example (1). Corporation P is incorporated on January 1, 1966. On
that same day P incorporates corporation S, a wholly owned subsidiary. P
and S file consolidated returns for calendar years 1966 and 1967. P's
and S's credit earned, the consolidated credit earned, and the
consolidated limitation based on amount of tax for 1966 and 1967 are as
follows:
------------------------------------------------------------------------
Consolidated
Consolidated limitation
Credit credit based on
earned earned amount of
tax
------------------------------------------------------------------------
1966:
P............................. $60,000
S............................. 30,000 $90,000 $100,000
1967:
P............................. 40,000
S............................. 25,000 65,000 50,000
------------------------------------------------------------------------
(i) P's and S's credit earned for 1966 are aggregated and the
group's consolidated credit earned, $90,000, is allowable in full to the
group as a credit under section 38 for 1966 since such amount is less
than the consolidated limitation based on amount of tax for 1966,
$100,000.
(ii) Since the consolidated limitation based on amount of tax for
1967 is $50,000, only $50,000 of the $65,000 consolidated credit earned
for such year is allowable to the group under section 38 as a credit for
1967. The consolidated unused credit for 1967 of $15,000 ($65,000 less
$50,000) is a consolidated investment credit carryback and carryover to
the years prescribed in section 46(b). In this case the consolidated
unused credit is a consolidated investment credit carryback to 1966
(since P and S were not in existence in 1964 and 1965) and a
consolidated investment credit carryover to 1968 and subsequent years.
The portion of the consolidated unused credit for 1967 which is
allowable as a credit for 1966 is $10,000. This amount shall be added to
the amount allowable as a credit to the group for 1966. The balance of
the consolidated unused credit for 1967 to be carried to 1968 is $5,000.
These amounts are computed as follows:
Consolidated carryback to 1966.............................. $15,000
1966 consolidated limitation based on tax... $100,000
Less: Consolidated credit earned $90,000
for 1966.........................
Consolidated unused credits 0 90,000
attributable to years preceding
1967...........................
------------------------
Limit on amount of 1967 .......... .......... 10,000
consolidated unused credit which
may be added as a credit for 1966
-----------
Balance of 1967 consolidated unused credit to be carried 5,000
to 1968
Example (2) (i) Assume the same facts as in example (1), except that
all the stock of corporation T, also a calendar year taxpayer, is
acquired by P on January 1, 1968, and that P, S, and T file a
consolidated return for 1968. In 1966 T had an unused credit of $10,000
which has not been absorbed and is available as an investment credit
carryover to 1968. Such carryover is from a separate return limitation
year. P's and S's credit earned for 1968 is $10,000 each and T's credit
earned is $8,000; the consolidated credit earned is therefore $28,000.
The group's consolidated limitation based on amount of tax for 1968 is
$50,000. Such limitation recomputed by excluding the items of income,
deduction, and foreign tax credit of T is $30,000. Thus, the amount
determined under paragraph (c)(2)(i) of this section is $20,000 ($50,000
minus $30,000). Accordingly, the limitation on the carryover of T's
unused credit is $12,000, the excess of $20,000 over $8,000 (the sum of
T's credit earned for the taxable year and any carryovers from prior
unused credit years (none in this case)). Therefore T's $10,000 unused
credit from 1966 may be carried over to the consolidated return year
without limitation.
(ii) The group's consolidated credit earned for 1968, $28,000, is
allowable in full as a credit under section 38 since such amount is less
than the consolidated limitation based on amount of tax, $50,000.
(iii) The group's consolidated investment credit carryover to 1968
is $15,000, consisting of the consolidated unused credits of the group
($5,000), plus T's separate return year unused credit ($10,000). The
entire $15,000 consolidated carryover shall be added to the
[[Page 249]]
amount allowable to the group as a credit under section 38 for 1968,
since such amount is less than $22,000 (the excess of the consolidated
limitation based on tax, $50,000, over the sum of the consolidated
credit earned for 1968, $28,000, and unused credits arising in prior
unused credit years, zero).
Example (3). Assume the same facts as in example (2), except that
the amount determined under paragraph (c)(2)(i) of this section is
$12,000. Therefore, the limitation on the carryover of T's unused credit
is $4,000. Accordingly, the consolidated investment credit carryover is
only $9,000 since the amount of T's separate return year unused credit
which may be added to the group's $5,000 consolidated unused credit is
$4,000. These amounts are computed as follows:
T's carryover to 1968......................................... $10,000
Consolidated limitation based on amount of tax $12,000
minus recomputed limitation......................
Less: T's credit earned for 1968.......... $8,000
Unused credits attributable to T arising 0 8,000
in unused credit years preceding 1966..
--------------------
Limit on amount of 1966 unused credit of T which may be 4,000
added to consolidated investment credit carryover
-----------
Balance of 1966 unused credit of T to be carried to 1969 6,000
(subject to the limitation contained in paragraph (c) of this
section)
(2) Example (2) and Example (3) of this paragraph (d) do not apply
to consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998. For consolidated
return years for which the due date of the income tax return (without
extensions) is after March 13, 1998, see Sec. 1.1502-3T(d).
(e) Limitation on investment credit carryovers where there has been
a consolidated return change of ownership-- (1) General rule. If a
consolidated return change of ownership (as defined in paragraph (g) of
Sec. 1.1502-1) occurs during the taxable year or an earlier taxable
year, the amount which may be included under paragraph (b) of this
section in the consolidated investment credit carryovers to the taxable
year with respect to the aggregate unused credits attributable to old
members of the group (as defined in paragraph (g)(3) of Sec. 1.1502-1)
arising in taxable years (consolidated or separate) ending on the same
day and before the taxable year in which the consolidated return change
of ownership occurred shall not exceed the amount determined under
subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph shall be the excess of the
consolidated limitation based on the amount of tax for the taxable year,
recomputed by including only the items of income, deduction, and foreign
tax credit of the old members, over the sum of:
(i) The aggregate investment credits earned by the old members for
the taxable year, and
(ii) The aggregate unused investment credits attributable to the old
members which may be carried to the taxable year arising in unused
credit years ending prior to the particular unused credit year or years.
(3) Special effective date. This paragraph (e) applies only to a
consolidated return change of ownership that occurred during a
consolidated return year for which the due date of the income tax return
(without extensions) is on or before March 13, 1998. See Sec. 1.1502-
3T(c)(4) for an optional effective date rule (generally making the rules
of this paragraph (e) inapplicable if the consolidated return change of
ownership occurred on or after January 1, 1997, and during a
consolidated return year for which the due date of the income tax return
(without extensions) is on or before March 13, 1998).
(f) Early dispositions, etc., of section 38 property--(1)
Dispositions of section 38 property during and after consolidated return
year. If property is subject to section 47(a) (1) or (2) with respect to
a member during a consolidated return year, any increase in tax shall be
added to the tax liability of the group under Sec. 1.1502-2 (regardless
of whether the property was placed in service in a consolidated or
separate return year). Also, if property is subject to section 47(a) (1)
or (2) with respect to a corporation during a taxable year for which
such corporation files on a separate return basis, any increase in tax
shall be added to the tax liability of such corporation (regardless of
whether such property was placed in service in a consolidated or
separate return year).
[[Page 250]]
(2) Exception for transfer to another member. (i) Except as provided
in subdivisions (ii) and (iii) of this subparagraph, a transfer of
section 38 property from one member of the group to another member of
such group during a consolidated return year shall not be treated as a
disposition or cessation within the meaning of section 47(a)(1). If such
section 38 property is disposed of, or otherwise ceases to be section 38
property or becomes public utility property with respect to the
transferee, before the close of the estimated useful life which was
taken into account in computing qualified investment, then section 47(a)
(1) or (2) shall apply to the transferee with respect to such property
(determined by taking into account the period of use, qualified
investment, other dispositions, etc., of the transferor). Any increase
in tax due to the application of section 47(a) (1) or (2) shall be added
to the tax liability of such transferee (or the tax liability of a
group, if the transferee joins in the filing of a consolidated return).
(ii) Except as provided in subdivision (iii) of this subparagraph,
if section 38 property is disposed of during a consolidated return year
by one member of the group to another member of such group which is an
organization to which section 593 applies or a cooperative organization
described in section 1381(a), the tax under chapter 1 of the Code for
such consolidated return year shall be increased by an amount equal to
the aggregate decrease in the credits allowed under section 38 for all
prior taxable years which would result solely from treating such
property, for purposes of determining qualified investment, as placed in
service by such organization to which section 593 applies or such
cooperative organization described in section 1381(a), as the case may
be, but with due regard to the use of the property before such transfer.
(iii) Section 47(a)(1) shall apply to a transfer of section 38
property by a corporation during a consolidated return year if such
corporation is liquidated in a transaction to which section 334(b)(2)
applies.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). P, S, and T file a consolidated return for calendar
year 1967. In such year S places in service section 38 property having
an estimated useful life of more than 8 years. In 1968, P, S, and T file
a consolidated return and in such year S sells such property to T. Such
sale will not cause section 47(a)(1) to apply.
Example (2). Assume the same facts as in example (1), except that P,
S, and T filed separate returns for 1967. The sale from S to T will not
cause section 47(a)(1) to apply.
Example (3). Assume the same facts as in example (1), except that P,
S, and T continue to file consolidated returns through 1971 and in such
year T disposes of the property to individual A. Section 47(a)(1) will
apply to the group and any increase in tax shall be added to the tax
liability of the group. For the purposes of determining the actual
period of use by T, such period shall include S's period of use.
Example (4). Assume the same facts as in example (3), except that T
files a separate return in 1971. Again, the actual periods of use by S
and T will be combined in applying section 47. If the disposition
results in an increase in tax under section 47(a)(1), such additional
tax shall be added to the separate tax liability of T.
Example (5). Assume the same facts as in example (1), except that in
1969, P sells all the stock of T to a third party. Such sale will not
cause section 47(a)(1) to apply.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR
758, Jan. 4, 1973; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8751, 63
FR 1742, Jan. 12, 1998; T.D. 8766, 63 FR 12642, Mar. 16, 1998]
Sec. 1.1502-3T Consolidated investment credit (temporary).
(a) and (b) [Reserved]. For further guidance, see Sec. 1.1502-3 (a)
and (b).
(c) Limitation on tax credit carryovers and carrybacks from separate
return limitation years--(1) General rule. The aggregate of a member's
unused section 38 credits arising in SRLYs that are included in the
consolidated section 38 credits for all consolidated return years of the
group may not exceed--
(i) The aggregate for all consolidated return years of the member's
contributions to the consolidated section 38(c) limitation for each
consolidated return year; reduced by--
(ii) The aggregate of the member's section 38 credits arising and
absorbed in all consolidated return years (whether or not absorbed by
the member).
[[Page 251]]
(2) Computational rules--(i) Member's contribution to the
consolidated section 38(c) limitation. If the consolidated section 38(c)
limitation for a consolidated return year is determined by reference to
the consolidated tentative minimum tax (see section 38(c)(1)(A)), then a
member's contribution to the consolidated section 38(c) limitation for
such year equals the member's share of the consolidated net income tax
minus the member's share of the consolidated tentative minimum tax. If
the consolidated section 38(c) limitation for a consolidated return year
is determined by reference to the consolidated net regular tax liability
(see section 38(c)(1)(B)), then a member's contribution to the
consolidated section 38(c) limitation for such year equals the member's
share of the consolidated net income tax minus 25 percent of the
quantity which is equal to so much of the member's share of the
consolidated net regular tax liability less its portion of the $25,000
amount specified in section 38(c)(1)(B). The group computes the member's
shares by applying to the respective consolidated amounts the principles
of section 1552 and the percentage method under Sec. 1.1502-33(d)(3),
assuming a 100% allocation of any decreased tax liability. The group
must make proper adjustments so that taxes and credits not taken into
account in computing the limitation under section 38(c) are not taken
into account in computing the member's share of the consolidated net
income tax, etc. (See, for example, the taxes described in section 26(b)
that are disregarded in computing regular tax liability.) Also, the
group may apportion all or a part of the $25,000 amount (or lesser
amount if reduced by section 38(c)(3)) for any year to one or more
members.
(ii) Years included in computation. For purposes of computing the
limitation under this paragraph (c), the consolidated return years of
the group include only those years, including the year to which a credit
is carried, that the member has been continuously included in the
group's consolidated return, but exclude--
(A) For carryovers, any years ending after the year to which the
credit is carried; and
(B) For carrybacks, any years ending after the year in which the
credit arose.
(iii) Subgroups and successors. The SRLY subgroup principles under
Sec. 1.1502-21(c)(2) apply for purposes of this paragraph (c). The
predecessor and successor principles under Sec. 1.1502-21(f) also apply
for purposes of this paragraph (c).
(3) Effective date. This paragraph (c) applies to consolidated
return years for which the due date of the income tax return (without
extensions) is after March 13, 1998. However, a group does not take into
account a consolidated taxable year for which the due date of the income
tax return (without extensions) is on or before March 13, 1998, in
determining a member's (or subgroup's) contributions to the consolidated
section 38(c) limitation under this paragraph (c). See also Sec. 1.1502-
3(c).
(4) Optional effective date of January 1, 1997. In lieu of
paragraphs (c)(3) and (d)(2) of this section and Secs. 1.1502-3(c)(3),
(d)(2) and (e)(3) (relating to the general business credit), 1.1502-
4(f)(3) and (g)(3), 1.1502-4T(f) and (g)(3) (relating to the foreign tax
credit), 1.1502-9(a) (the next to last sentence), 1.1502-9A(b)(1)(v)
(relating to overall foreign losses), and 1.1502-55T(h)(4)(iii)(C)
(relating to the alternative minimum tax credit), a consolidated group
may apply such paragraphs as they appear in 1998-10 I.R.B. 23 (see
Sec. 601.601(d)(2) of this chapter). A consolidated group making this
choice generally must apply all such paragraphs for all relevant years.
However, a consolidated group making the election provided in
Sec. 1.1502-9A(b)(1)(vi) (electing not to apply Sec. 1.1502-9A(b)(1)(v)
to years beginning before January 1, 1998) may nevertheless choose to
apply all such paragraphs other than Sec. 1.1502-9A(b)(1)(v) for all
relevant years.
(d) Example. (1) The following example illustrates the provisions of
paragraph (c) of this section:
Example. (i) P, the common parent of the P group, acquires all the
stock of T at the beginning of Year 2. T carries over an unused section
38 general business credit from Year 1 of $100,000. The table below
shows the group's net consolidated income tax, consolidated tentative
minimum tax, and consolidated net regular tax liabilities, and T's
[[Page 252]]
share of such taxes computed under the principles of section 1552 and
the percentage method under Sec. 1.1502-33(d)(3), assuming a 100%
allocation of any decreased tax liability, for Year 2. (The effects of
the lower section 11 brackets are ignored, there are no other tax
credits affecting a group amount or member's share, and $1,000s are
omitted.)
[GRAPHIC] [TIFF OMITTED] TR12JA98.000
(ii) The amount of T's unused section 38 credits from Year 1 that
are included in the consolidated section 38 credits for Year 2 may not
exceed T's contribution to the consolidated section 38(c) limitation.
For Year 2, the group determines the consolidated section 38(c)
limitation by reference to consolidated tentative minimum tax for Year
2. Therefore, T's contribution to the consolidated section 38(c)
limitation for Year 2 equals its share of consolidated net income tax
minus its share of consolidated tentative minimum tax. T's contribution
is $280,000 minus $160,000, or $120,000. However, because the group has
a consolidated section 38 limitation of zero, it may not include any of
T's unused section 38 credits in the consolidated section 38 credits for
Year 2.
(iii) The following table shows similar information for the group
for Year 3:
[[Page 253]]
[GRAPHIC] [TIFF OMITTED] TR12JA98.001
(iv) The amount of T's unused section 38 credits from Year 1 that
are included in the consolidated section 38 credits for Year 3 may not
exceed T's aggregate contribution to the consolidated section 38(c)
limitation for Years 2 and 3. For Year 3, the group determines the
consolidated section 38(c) limitation by reference to the consolidated
tentative minimum tax for Year 3. Therefore, T's contribution to the
consolidated section 38(c) limitation for Year 3 equals its share of
consolidated net income tax minus its share of consolidated tentative
minimum tax. Applying the principles of section 1552 and Sec. 1.1502-
33(d) (taking into account, for example, that T's positive earnings and
profits adjustment under Sec. 1.1502-33(d) reflects its losses actually
absorbed by the group), T's contribution is $(105,000) minus $(40,000),
or $(65,000). T's aggregate contributions to the consolidated section
38(c) limitation for Years 2 and 3 is $120,000 + $(65,000), or $55,000.
The group may include $55,000 of T's Year 1 unused section 38 credits in
its consolidated section 38 tax credit in Year 3.
(2) This paragraph (d) applies to consolidated return years for
which the due date of the income tax return (without extensions) is
after March 13, 1998. See also Sec. 1.1502-3(d) for years for which the
due date of the income tax return (without extensions) is on or before
March 13, 1998.
[[Page 254]]
(e) and (f) [Reserved]. For further guidance, see Sec. 1.1502-3 (e)
and (f).
[T.D. 8751, 63 FR 1742, Jan. 12, 1998, as amended by T.D. 8766, 63 FR
12642, Mar. 16, 1998; T.D. 8800, 63 FR 71590, Dec. 29, 1998; T.D. 8823,
64 FR 36099, July 2, 1999; T.D. 8833, 64 FR 43615, Aug. 11, 1999]
Sec. 1.1502-4 Consolidated foreign tax credit.
(a) In general. The credit under section 901 for taxes paid or
accrued to any foreign country or possession of the United States shall
be allowed to the group only if the common parent corporation chooses to
use such credit in the computation of the tax liability of the group for
the consolidated return year. If this choice is made, no deduction may
be taken on the consolidated return for such taxes paid or accrued by
any member of the group. See section 275(a)(4).
(b) Limitation effective under section 904(a) for the group--(1)
Common parent's limitation effective for group. The determination of
whether the overall limitation or the per-country limitation applies for
a consolidated return year shall be made by reference to the limitation
effective with respect to the common parent corporation for such year.
If the limitation effective with respect to a member for its immediately
preceding separate return year differs from the limitation effective
with respect to the common parent corporation for the consolidated
return year, then such member shall, if the overall limitation is
effective with respect to the common parent, be deemed to have made an
election to use such overall limitation, or, if the per-country
limitation is effective with respect to the common parent, be deemed to
have revoked its election to use the overall limitation. Consent of the
Secretary or his delegate (if otherwise required) is hereby given to
such member for such election or revocation. Any such election or
revocation shall apply only prospectively beginning with such
consolidated return year.
(2) Limitation effective for subsequent years. The limitation
effective with respect to a member for the last year for which it joins
in the filing of a consolidated return with a group shall remain in
effect for a subsequent separate return year and may be changed by such
corporation for such subsequent year only in accordance with the
provisions of section 904(b) (and this paragraph if it joins in the
filing of a consolidated return with another group). Any retroactive
change in the limitation by the common parent corporation for such
member's last consolidated return year shall change the election
effective with respect to such member for such last period. Thus, if the
common parent (P) elects the overall limitation with respect to calendar
year 1966, such election would be effective with respect to its
subsidiary S for 1966. If S leaves the group at the beginning of
calendar year 1967, such election shall be effective for 1967 with
respect to S (unless S revokes such election for 1967 or a subsequent
year in accordance with section 904(b), or this paragraph if it joins in
the filing of a consolidated return with another group). However, if P
retroactively changes back to the per-country limitation with respect to
1966, such limitation would be effective with respect to S for 1966 and
subsequent years (unless S elects the overall limitation for any such
subsequent year).
(c) Computation of consolidated foreign tax credit. The foreign tax
credit for the consolidated return year shall be determined on a
consolidated basis under the principles of sections 901 through 905 and
section 960. For example, if the per-country limitations applies to the
consolidated return year, taxes paid or accrued for such year (including
those deemed paid or accrued under sections 902 and 960(a) and paragraph
(e) of this section) to each foreign country or possession by the
members of the group shall be aggregated. If the overall limitation
applies, taxes paid or accrued for such year (including those deemed
paid or accrued) to all foreign countries and possessions by members of
the group shall be aggregated. If the overall limitation applies and a
member of the group qualifies as a Western Hemisphere trade corporation,
see section 1503(b).
(d) Computation of limitation on credit. For purposes of computing
the group's applicable limitation under section 904(a), the following
rules shall apply:
(1) Computation of taxable income from foreign sources. The
numerator of the
[[Page 255]]
applicable limiting fraction under section 904(a) shall be an amount
(not in excess of the amount determined under subparagraph (2) of this
paragraph) equal to the aggregate of the separate taxable incomes of the
members from sources within each foreign country or possession of the
United States (if the per-country limitation is applicable), or from
sources without the United States (if the overall limitation is
applicable), determined under Sec. 1.1502-12, adjusted for the following
items taken into account in the computation of consolidated taxable
income:
(i) The portion of the consolidated net operating loss deduction,
the consolidated charitable contributions deduction, the consolidated
dividends received deduction, and the consolidated section 922
deduction, attributable to such foreign source income;
(ii) Any such foreign source capital gain net income (net capital
gain for taxable years beginning before January 1, 1977) (determined
without regard to any net capital loss carryover or carryback);
(iii) Any such foreign source net capital loss and section 1231 net
loss, reduced by the portion of the consolidated net capital loss
attributable to such foreign source loss; and
(iv) The portion of any consolidated net capital loss carryover or
carryback attributable to such foreign source income which is absorbed
in the taxable year.
(2) Computation of entire taxable income. The denominator of the
applicable limiting fraction under section 904(a) (that is, the entire
taxable income of the group) shall be the consolidated taxable income of
the group computed in accordance with Sec. 1.1502-11.
(3) Computation of tax against which credit is taken. The tax
against which the limiting fraction under section 904(a) is applied
shall be the consolidated tax liability of the group determined under
Sec. 1.1502-2, but without regard to paragraphs (b), (c), (d), and (j)
thereof, and without regard to any credit against such liability.
(e) Carryover and carryback of unused foreign tax--(1) Allowance of
unused foreign tax as consolidated carryover or carryback. The aggregate
of the consolidated unused foreign tax carryovers and carrybacks to the
taxable year, to the extent absorbed for such year under the principles
of section 904(d), shall be deemed to be paid or accrued to a foreign
country or possession for such year. The consolidated unused foreign tax
carryovers and carrybacks to the taxable year shall consist of any
consolidated unused foreign tax, plus any unused foreign tax of members
for separate return years of such members, which may be carried over or
back to the taxable year under the principles of section 904 (d) and
(e). However, such consolidated carryovers and carrybacks shall not
include any consolidated unused foreign taxes apportioned to a
corporation for a separate return year pursuant to Sec. 1.1502-79(d) and
shall be subject to the limitations contained in paragraphs (f) and (g)
of this section. A consolidated unused foreign tax is the excess of the
foreign taxes paid or accrued by the group (or deemed paid or accrued by
the group, other than by reason of section 904(d) over the applicable
limitation for the consolidated return year.
(2) Absorption rules. For purposes of determining the amount, if
any, of an unused foreign tax (consolidated or separate) which can be
carried to a taxable year (consolidated or separate), the amount of such
unused tax which is absorbed in a prior consolidated return year under
section 904(d) shall be determined by:
(i) Applying all unused foreign taxes which can be carried to such
prior year in the order of the taxable years in which such unused taxes
arose, beginning with the taxable year which ends earliest, and
(ii) Applying all such unused taxes which can be carried to such
prior year from taxable years ending on the same date on a pro rata
basis.
(f) Limitation on unused foreign tax carryover or carryback from
separate return limitation years--(1) General rule. In the case of an
unused foreign tax of a member of the group arising in a separate return
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such
member, the amount which may be included under paragraph (e) of this
section (computed without regard to the limitation contained in
paragraph (g) of this section) shall not exceed the
[[Page 256]]
amount determined under subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph with respect to a member of the group
is the excess, if any, of:
(i) The section 904(a) limitation of the group, minus such
limitation recomputed by excluding the items of income and deduction of
such member, over
(ii) The sum of (a) the foreign taxes paid (or deemed paid, other
than by reason of section 904(d)) by such member for the consolidated
return year, and (b) the unused foreign tax attributable to such member
which may be carried to such consolidated return year arising in taxable
years ending prior to the particular separate return limitation year.
(3) Special effective date ending SRLY limitation. See Sec. 1.1502-
4T(f) for the rule that ends the SRLY limitation with respect to foreign
tax credits for consolidated return years for which the due date of the
income tax return (without extensions) is after March 13, 1998. See also
Sec. 1.1502-3T(c)(4) for an optional effective date rule (generally
making the rules of this paragraph (f) inapplicable to a consolidated
return year beginning after December 31, 1996, if the due date of the
income tax return (without extensions) for such year is on or before
March 13, 1998).
(g) Limitation on unused foreign tax carryover where there has been
a consolidated return change of ownership--(1) General rule. If a
consolidated return change of ownership (as defined in paragraph (g) of
Sec. 1.1502-1) occurs during the taxable year or an earlier taxable
year, the amount which may be included under paragraph (e) of this
section in the consolidated unused foreign tax carryovers to the taxable
year with respect to the aggregate unused credits attributable to the
old members of the group (as defined in paragraph (g)(3) of Sec. 1.1502-
1) arising in taxable years (consolidated or separate) ending on the
same day and before the taxable year in which the consolidated return
change of ownership occurred shall not exceed the amount determined
under subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph shall be the excess of the section
904(a) limitation of the group for the taxable year, recomputed by
including only the items of income and deduction of the old members of
the group, over the sum of:
(i) The aggregate foreign taxes paid (or deemed paid, other than by
reason of section 904(d)) by the old members for the taxable year, and
(ii) The aggregate unused foreign tax attributable to the old
members which can be carried to the taxable year arising in taxable
years ending prior to the particular unused foreign tax year or years.
(3) Special effective date for CRCO limitation. See Sec. 1.1502-
4T(g)(3) for the rule that ends the CRCO limitation with respect to a
consolidated return change of ownership that occurs on or after the
first day of a taxable year for which the due date of the income tax
return (without extensions) is after March 13, 1998. See also
Sec. 1.1502-3T(c)(4) for an optional effective date rule (generally
making the rules of this paragraph (g) inapplicable if the consolidated
return change of ownership occurred on or after January 1, 1997, and
during a consolidated return year for which the due date of the income
tax return (without extensions) is on or before March 13, 1998).
(h) Amount of credit with respect to interest income. If any member
of the group has interest income described in section 904(f)(2) (for a
year for which it filed on a consolidated or separate basis), the
group's foreign tax credit with respect to such interest shall be
computed separately in accordance with the principles of section 904(f)
and this section.
(i) [Reserved]
(j) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). Domestic corporation P is incorporated on January 1,
1966. On that same day it also incorporates domestic corporations S and
T, wholly owned subsidiaries. P, S, and T file consolidated returns for
1966 and 1967 on the basis of a calendar year. T engages in business
solely in country A. S transacts business solely in countries A and B. P
does business solely in the United
[[Page 257]]
States. During 1966 T sold an item of inventory to P at a profit of
$2,000. Under Sec. 1.1502-13 (as contained in the 26 CFR part 1 edition
revised as of April 1, 1995) such profit is deferred and none of the
circumstances of restoration contained in paragraph (d), (e), or (f) of
Sec. 1.1502-13 have occurred as of the close of 1966. The taxable income
for 1966 from foreign and United States sources, and the foreign taxes
paid on such foreign income are as follows:
----------------------------------------------------------------------------------------------------------------
Country A Country B
U.S. ---------------------------------------- Total
Corporation taxable Taxable Foreign Taxable Foreign taxable
income income tax paid income tax paid income
----------------------------------------------------------------------------------------------------------------
P................................................... $40,000 ........ ........ ........ ........ $40,000
T................................................... ........ $20,000 $12,000 ........ ........ 20,000
S................................................... ........ 10,000 6,000 $10,000 $3,000 20,000
---------
$80,000
----------------------------------------------------------------------------------------------------------------
Such taxable income was computed by taking into account the rules
provided in Sec. 1.1502-12. Thus, the $2,000 deferred profit is not
included in T's taxable income for 1966 (but will be included for the
taxable year for which one of the events specified in paragraph (d),
(e), or (f) of Sec. 1.1502-13 occurs). The consolidated taxable income
of the group (computed in accordance with Sec. 1.1502-11) is $80,000.
The consolidated tax liability against which the credit may be taken
(computed in accordance with paragraph (d)(3) of this section) is
$31,900.
(i) Assuming P chooses to use the foreign taxes paid as a credit and
the group is subject to the per-country limitation, the group may take
as a credit against the consolidated tax liability $11,962.50 of the
amount paid to country A, plus the $3,000 paid to country B. Such
amounts are computed as follows: The aggregate taxes paid to country A
of $18,000 is limited to $11,962.50 ($31,900 times $30,000/$80,000). The
unused foreign tax with respect to country A is $6,037.50 ($18,000 less
$11,962.50), and is a consolidated unused foreign tax which shall be
carried to the years prescribed by section 904(d). A credit of $3,000 is
available with respect to the taxes paid to country B since such amount
is less than the limitation of $3,987.50 ($31,900 times $10,000/
$80,000).
(ii) Assuming the overall limitation is in effect for the taxable
year, the group may take $15,950 as a credit, computed as follows: The
aggregate taxes paid to all foreign countries of $21,000 is limited to
$15,950 ($31,900 times $40,000/$80,000). The unused foreign tax is
$5,050 ($21,000 less $15,950), and is a consolidated unused foreign tax
which shall be carried to the years prescribed by section 904(d).
Example (2). Assume the same facts as in example (1), except that T
has a $10,000 long-term capital gain (derived from a sale to a nonmember
in country A) and P has a $10,000 long-term capital loss (derived from a
sale to a nonmember in the United States). Notwithstanding that the
consolidated net capital gain (capital gain net income for taxable years
beginning after December 31, 1976) of the group is zero, T's capital
gain shall be reflected in full in the computation of taxable income
from foreign sources.
Example (3). Assume the same facts as in example (1), except that
the group had a consolidated section 172 deduction of $8,000 which is
attributable to a net operating loss sustained by T. The $8,000
consolidated net operating loss deduction is offset against T's income
from country A, thus reducing T's taxable income from country A to
$12,000.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8766,
63 FR 12642, Mar. 16, 1998]
Sec. 1.1502-4T Consolidated foreign tax credit (temporary).
(a) through (e) [Reserved]. For further guidance, see Sec. 1.1502-4
(a) through (e).
(f) Limitation on unused foreign tax carryover or carryback from
separate return limitation years. Section 1.1502-4(f) does not apply for
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998. For consolidated
return years for which the due date of the income tax return (without
extensions) is after March 13, 1998, a group shall include an unused
foreign tax of a member arising in a SRLY without regard to the
contribution of the member to consolidated tax liability for the
consolidated return year. See also Sec. 1.1502-3T(c)(4) for an optional
effective date rule (generally making the rules of this paragraph (f)
applicable to a consolidated return year beginning after December 31,
1996, if the due date of the income tax return (without extensions) for
such year is on or before March 13, 1998).
[[Page 258]]
(g) (1) and (2) [Reserved]. For further guidance, see Sec. 1.1502-
4(g) (1) and (2).
(g)(3) Special effective date for CRCO limitation. Section 1.1502-
4(g) applies only to a consolidated return change of ownership that
occurred during a consolidated return year for which the due date of the
income tax return (without extensions) is on or before March 13, 1998.
See also Sec. 1.1502-3T(c)(4) for an optional effective date rule
(generally making the rules of this paragraph (g)(3) applicable if the
consolidated return change of ownership occurred on or after January 1,
1997, and during a consolidated return year for which the due date of
the income tax return (without extensions) is on or before March 13,
1998).
[T.D. 8751, 63 FR 1744, Jan. 12, 1998, as amended by T.D. 8766, 63 FR
12643, Mar. 16, 1998]
Sec. 1.1502-5 Estimated tax.
(a) General rule--(1) Consolidated estimated tax. If a group files a
consolidated return for two consecutive taxable years, it must make
payments of estimated tax on a consolidated basis for each subsequent
taxable year, until such time as separate returns are properly filed.
Until such time, the group is treated as a single corporation for
purposes of section 6154 (relating to payment of estimated tax by
corporations). If separate returns are filed by the members for a
taxable year, the amount of any estimated tax payments made with respect
to a consolidated payment of estimated tax for such year shall be
credited against the separate tax liabilities of the members in any
manner designated by the common parent which is satisfactory to the
Commissioner. The consolidated payments of estimated tax shall be
deposited with the authorized commercial dispositary or Federal Reserve
Bank with which the common parent deposits its estimated tax payments. A
statement should be attached to the payment setting forth the name,
address, employer identification number, and internal revenue service
center of each member.
(2) First two consolidated return years. For the first 2 years for
which a group files a consolidated return, it may make payments of
estimated tax on either a consolidated or separate basis. If a
consolidated return is filed for such year, the amount of any estimated
tax payments made for such year by any member shall be credited against
the tax liability of the group.
(3) Effective date. This section applies to taxable years for which
the due date (without extensions) for filing returns is after August 6,
1979. For prior taxable years see 26 CFR 1.1502-5 (Revised as of April
1, 1978).
(b) Addition to tax for failure to pay estimated tax under section
6655--(1) Consolidated return filed. For the first two taxable years for
which a group files a consolidated return, the group may compute the
amount of the penalty (if any) under section 6655 on a consolidated
basis or separate member basis, regardless of the method of payment.
Thereafter, for a taxable year for which the group files a consolidated
return, the group must compute the penalty on a consolidated basis.
(2) Computation of penalty on consolidated basis. (i) This paragraph
(b)(2) gives the rules for computing the penalty under section 6655 on a
consolidated basis.
(ii) The tax and facts shown on the return for the preceding taxable
year referred to in section 6655(d) (1) and (2) are, if a consolidated
return was filed for that preceding year, such items shown on the
consolidated return for that preceding year or, if one was not filed for
that preceding year, the aggregate taxes and the facts shown on the
separate returns of the common parent and any other corporation that was
a member of the same affiliated group as the common parent for that
preceding year.
(iii) If estimated tax was not paid on a consolidated basis, then
the amount of the group's payments of estimated tax for the taxable year
is the aggregate of the payments made by all members for the year.
(iv) Section 6655(d)(1) applies only if the common parent's
consolidated return, or each member's separate return, for the preceding
taxable year (as the case may be) was a taxable year of 12 months.
(3) Computation of penalty on separate member basis. To compute any
penalty under section 6655 on a separate member basis, for purposes of
section
[[Page 259]]
6655(b)(1), the ``tax shown on the return for the taxable year'' is the
portion of the tax shown on the consolidated return allocable to the
member under paragraph (b)(5) of this section. If the member was
included in the consolidated return filed by the group for the preceding
taxable year then:
(i) For purposes of section 6655(d)(1), the ``tax shown on the
return'' for any member shall be the portion of the tax shown on the
consolidated return for the preceding year allocable to the member under
paragraph (b)(5) of this section.
(ii) For purposes of section 6655(d)(2), the ``facts shown on the
return'' shall be the facts shown on the consolidated return for the
preceding year and the tax computed under that section shall be
allocated under the rules of paragraph (b)(5) of this section.
(4) Consolidated payments if separate returns filed. If the group
does not file a consolidated return for the taxable year, but makes
payments of estimated tax on a consolidated basis, for purposes of
section 6655(b)(2), the ``amount, if any of the installment paid'' by
any member is an amount apportioned to the member in a manner designated
by the common parent that is satisfactory to the Commissioner. If the
member was included in the consolidated return filed by the group for
the preceding taxable year, the amount of a member's penalty under
section 6655 is computed on the separate member basis described in
paragraph (b)(3) (i) and (ii) of this section.
(5) Rules for allocation of consolidated tax liability. For purposes
of subparagraphs (1) and (2) of this paragraph, the tax shown on a
consolidated return shall be allocated to the members of the group under
the method which the group has elected pursuant to section 1552 and
1.1502-33(d)(2).
(c) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). Corporations P and S-1 file a consolidated return for
the first time for calendar year 1978. P and S-1 also file consolidated
returns for 1979 and 1980. For 1978 and 1979, P and S-1 may make
payments of estimated tax on either a separate or consolidated basis.
For 1980, however, the group must pay its estimated tax on a
consolidated basis. In determining whether P and S-1 come within the
exception provided in section 6655(d)(1) for 1980, the ``tax shown on
the return'' is the tax shown on the consolidated return for 1979.
Example (2). Assume the same facts as in example (1). Assume further
that corporation S-2 was a member of the group during 1979, and joins in
the filing of the consolidated return for such year but ceases to be a
member of the group on September 15, 1980. In determining whether the
group (which no longer includes S-2) comes within the exception provided
in section 6655(d)(1) for 1980, the ``tax shown on the return'' is the
tax shown on the consolidated return for 1979.
Example (3). Assume the same facts as in example (1). Assume further
that corporation S-2 becomes a member of the group on July 1, 1980, and
joins in the filing of the consolidated return for 1968. In determining
whether the group (which now includes S-2) comes within the exception
provided in section 6655(d)(1) for 1980, the ``tax shown on the return''
is the tax shown on the consolidated return for 1979. Any tax of S-2 for
any separate return year is not included as a part of the ``tax shown on
the return'' for purposes of applying section 6655(d)(1).
Example (4). Corporations X and Y filed consolidated returns for the
calendar years 1977 and 1978 and separate returns for 1979. In
determining whether X and Y comes within the exception provided in
section 6655(d)(1) for 1979, the ``tax shown on the return'' is the
amount of tax shown on the consolidated return for 1978 allocable to X
and Y in accordance with paragraph (b)(5) of this section.
(d) Cross reference. For provisions relating to quick refunds of
corporate estimated tax payments, see Sec. 1.1502-78, and Secs. 1.6425-1
through 1.6425-3.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7059, 35 FR
14549, Sept. 17, 1970; T.D. 7637, 44 FR 46840, Aug. 9, 1979; 62 FR
23657, May 1, 1997]
Sec. 1.1502-6 Liability for tax.
(a) Several liability of members of group. Except as provided in
paragraph (b) of this section, the common parent corporation and each
subsidiary which was a member of the group during any part of the
consolidated return year shall be severally liable for the tax for such
year computed in accordance with the regulations under section 1502
prescribed on or before the due date (not including extensions of time)
for the filing of the consolidated return for such year.
(b) Liability of subsidiary after withdrawal. If a subsidiary has
ceased to be
[[Page 260]]
a member of the group and in such cessation resulted from a bona fide
sale or exchange of its stock for fair value and occurred prior to the
date upon which any deficiency is assessed, the district director may,
if he believes that the assessment or collection of the balance of the
deficiency will not be jeopardized, make assessment and collection of
such deficiency from such former subsidiary in an amount not exceeding
the portion of such deficiency which the district director may determine
to be allocable to it. If the district director makes assessment and
collection of any part of a deficiency from such former subsidiary, then
for purposes of any credit or refund of the amount collected from such
former subsidiary the agency of the common parent under the provisions
of Sec. 1.1502-77 shall not apply.
(c) Effect of intercompany agreements. No agreement entered into by
one or more members of the group with any other member of such group or
with any other person shall in any case have the effect of reducing the
liability prescribed under this section.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966]
Sec. 1.1502-9 Consolidated overall foreign losses and separate limitation losses.
(a) In general. This section provides rules for applying section
904(f) (including its definitions and nomenclature) to a group and its
members. Generally, section 904(f) concerns rules relating to overall
foreign losses (OFLs) and separate limitation losses (SLLs) and the
consequences of such losses. As provided in section 904(f)(5), losses
are computed separately in each category of income described in section
904(d)(1) (basket). Paragraph (b) of this section defines terms and
provides computational and accounting rules, including rules regarding
recapture. Paragraph (c) of this section provides rules that apply to
OFLs and SLLs when a member becomes or ceases to be a member of a group.
Paragraph (d) of this section provides a predecessor and successor rule.
Paragraph (e) of this section provides effective dates.
(b) Consolidated application of section 904(f). A group applies
section 904(f) for a consolidated return year in accordance with that
section, subject to the following rules:
(1) Computation of CSLI or CSLL and consolidated U.S. source income
or loss. The group computes its consolidated separate limitation income
(CSLI) or consolidated separate limitation loss (CSLL) for each basket
under the principles of Sec. 1.1502-11 by aggregating each member's
foreign-source taxable income or loss in such basket computed under the
principles of Sec. 1.1502-12, and taking into account the foreign
portion of the consolidated items described in Sec. 1.1502-11(a)(2)
through (8) for such basket. The group computes its consolidated U.S.-
source taxable income or loss under similar principles.
(2) Netting CSLLs, CSLIs, and consolidated U.S. source taxable
income or loss. The group applies section 904(f)(5) to determine the
extent to which a CSLL for a basket reduces CSLI for another basket or
consolidated U.S.-source taxable income.
(3) CSLL and COFL accounts. To the extent provided in section
904(f), the amount by which a CSLL for a basket (the loss basket)
reduces CSLI for another basket (the income basket) shall result in the
creation of (or addition to) a CSLL account for the loss basket with
respect to the income basket. Likewise, the amount by which a CSLL for a
loss basket reduces consolidated U.S.-source income will create (or add
to) a consolidated overall foreign loss account (a COFL account).
(4) Recapture of COFL and CSLL accounts. In the case of a COFL
account for a loss basket, section 904(f)(1) and (3) recharacterizes
some or all of the foreign-source income in the loss basket as U.S.-
source income. In the case of a CSLL account for a loss basket with
respect to an income basket, section 904(f)(5)(C) and (F)
recharacterizes some or all of the foreign-source income in the loss
basket as foreign-source income in the income basket. The COFL account
or CSLL account is reduced to the extent amounts are recharacterized
with respect to such account.
(5) Intercompany transactions--(i) Nonapplication of section 904(f)
disposition rules. Neither section 904(f)(3) (in the case of a COFL
account) nor (5)(F) (in the case of a CSLL account) applies at
[[Page 261]]
the time of a disposition that is an intercompany transaction to which
Sec. 1.1502-13 applies. Instead, section 904(f)(3) and (5)(F) applies
only at such time and only to the extent that the group is required
under Sec. 1.1502-13 (without regard to section 904(f)(3) and (5)(F)) to
take into account any intercompany items resulting from the disposition,
based on the COFL or CSLL account existing at the end of the
consolidated return year during which the group takes the intercompany
items into account.
(ii) Example. Paragraph (b)(5)(i) of this section is illustrated by
the following examples. The identity of the parties and the basic
assumptions set forth in Sec. 1.1502-13(c)(7)(i) apply to the examples.
Except as otherwise stated, assume further that the consolidated group
recognizes no foreign-source income other than as a result of the
transactions described. The examples are as follows:
Example 1. (i) On June 10, Year 1, S transfers nondepreciable
property with a basis of $100 and a fair market value of $250 to B in a
transaction to which section 351 applies. The property was predominantly
used without the United States in a trade or business, within the
meaning of section 904(f)(3). B continues to use the property without
the United States. The group has a COFL account in the relevant loss
basket of $120 as of December 31, Year 1.
(ii) Because the contribution from S to B is an intercompany
transaction, section 904(f)(3) does not apply to result in any gain
recognition in Year 1. See paragraph (b)(5)(i) of this section.
(iii) On January 10, Year 4, B ceases to be a member of the group.
Because S did not recognize gain in Year 1 under section 351, no gain is
taken into account in Year 4 under Sec. 1.1502-13(d). Thus, no portion
of the group's COFL account is recaptured in Year 4. For rules requiring
apportionment of a portion of the COFL account to B, see paragraph
(c)(2) of this section.
Example 2. (i) The facts are the same as in paragraph (i) of Example
1. On January 10, Year 4, B sells the property to X for $300. As of
December 31, Year 4, the group's COFL account is $40. (The COFL account
was reduced between Year 1 and Year 4 due to unrelated foreign-source
income taken into account by the group.)
(ii) B takes into account gain of $200 in Year 4. The $40 COFL
account in Year 4 recharacterizes $40 of the gain as U.S. source. See
section 904(f)(3).
Example 3. (i) On June 10, Year 1, S sells nondepreciable property
with a basis of $100 and a fair market value of $250 to B for $250 cash.
The property was predominantly used without the United States in a trade
or business, within the meaning of section 904(f)(3). The group has a
COFL account in the relevant loss basket of $120 as of December 31, Year
1. B predominately uses the property in a trade or business without the
United States.
(ii) Because the sale is an intercompany transaction, section
904(f)(3) does not require the group to take into account any gain in
Year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL
account is not reduced in Year 1.
(iii) On January 10, Year 4, B sells the property to X for $300. As
of December 31, Year 4, the group's COFL account is $60. (The COFL
account was reduced between Year 1 and Year 4 due to unrelated foreign-
source income taken into account by the group.)
(iv) In Year 4, S's $150 intercompany gain and B's $50 corresponding
gain are taken into account to produce the same effect on consolidated
taxable income as if S and B were divisions of a single corporation. See
Sec. 1.1502-13(c). All of B's $50 corresponding gain is recharacterized
under section 904(f)(3). If S and B were divisions of a single
corporation and the intercompany sale were a transfer between the
divisions, B would succeed to S's $100 basis in the property and would
have $200 of gain ($60 of which would be recharacterized under section
904(f)(3)), instead of a $50 gain. Consequently, S's $150 intercompany
gain and B's $50 corresponding gain are taken into account, and $10 of
S's gain is recharacterized under section 904(f)(3) as U.S. source to
reflect the $10 difference between B's $50 recharacterized gain and the
$60 recomputed gain that would have been recharacterized.
(c) Becoming or ceasing to be a member of a group--(1) Adding
separate accounts on becoming a member. At the time that a corporation
becomes a member of a
[[Page 262]]
group (a new member), the group adds to the balance of its COFL or CSLL
account the balance of the new member's corresponding OFL account or SLL
account. A new member's OFL account corresponds to a COFL account if the
account is for the same loss basket. A new member's SLL account
corresponds to a CSLL account if the account is for the same loss basket
and with respect to the same income basket. If the group does not have a
COFL or CSLL account corresponding to the new member's account, it
creates a COFL or CSLL account with a balance equal to the balance of
the member's account.
(2) Apportionment of consolidated account to departing member--(i)
In general. A group apportions to a member that ceases to be a member (a
departing member) a portion of each COFL and CSLL account as of the end
of the year during which the member ceases to be a member and after the
group makes the additions or reductions to such account required under
paragraphs (b)(3), (b)(4) and (c)(1) of this section (other than an
addition under paragraph (c)(1) of this section attributable to a member
becoming a member after the departing member ceases to be a member). The
group computes such portion under paragraph (c)(2)(ii) of this section,
as limited by paragraph (c)(2)(iii) of this section. The departing
member carries such portion to its first separate return year after it
ceases to be a member. Also, the group reduces each account by such
portion and carries such reduced amount to its first consolidated return
year beginning after the year in which the member ceases to be a member.
If two or more members cease to be members in the same year, the group
computes the portion allocable to each such member (and reduces its
accounts by such portion) in the order that the members cease to be
members.
(ii) Departing member's portion of group's account. A departing
member's portion of a group's COFL or CSLL account for a loss basket is
computed based upon the member's share of the group's assets that
generate income subject to recapture at the time that the member ceases
to be a member. Under the characterization principles of Secs. 1.861-
9T(g)(3) and 1.861-12T, the group identifies the assets of the departing
member and the remaining members that generate foreign-source income
(foreign assets) in each basket. The assets are characterized based upon
the income that the assets are reasonably expected to generate after the
member ceases to be a member. The member's portion of a group's COFL or
CSLL account for a loss basket is the group's COFL or CSLL account,
respectively, multiplied by a fraction, the numerator of which is the
value of the member's foreign assets for the loss basket and the
denominator of which is the value of the foreign assets of the group
(including the departing member) for the loss basket. The value of the
foreign assets is determined under the asset valuation rules of
Sec. 1.861-9T(g)(1) and (2) using either tax book value or fair market
value under the method chosen by the group for purposes of interest
apportionment as provided in Sec. 1.861-9T(g)(1)(ii). For purposes of
this paragraph (c)(2)(ii), Sec. 1.861-9T(g)(2)(iv) (assets in
intercompany transactions) shall apply, but Sec. 1.861-9T(g)(2)(iii)
(adjustments for directly allocated interest) shall not apply. If the
group uses the tax book value method, the member's portions of COFL and
CSLL accounts are limited by paragraph (c)(2)(iii) of this section. In
addition, for purposes of this paragraph (c)(2)(ii), the tax book value
of assets transferred in intercompany transactions shall be determined
without regard to previously deferred gain or loss that is taken into
account by the group as a result of the transaction in which the member
ceases to be a member. The assets should be valued at the time the
member ceases to be a member, but values on other dates may be used
unless this creates substantial distortions. For example, if a member
ceases to be a member in the middle of the group's consolidated return
year, an average of the values of assets at the beginning and end of the
year (as provided in Sec. 1.861-9T(g)(2)) may be used or, if a member
ceases to be a member in the early part of the group's consolidated
return year, values at the beginning of the year may be used, unless
this creates substantial distortions.
[[Page 263]]
(iii) Limitation on member's portion for groups using tax book value
method. If a group uses the tax book value method of valuing assets for
purposes of paragraph (c)(2)(ii) of this section and the aggregate of a
member's portions of COFL and CSLL accounts for a loss basket (with
respect to one or more income baskets) determined under paragraph
(c)(2)(ii) of this section exceeds 150 percent of the actual fair market
value of the member's foreign assets in the loss basket, the member's
portion of the COFL or CSLL accounts for the loss basket shall be
reduced (proportionately, in the case of multiple accounts) by such
excess. This rule does not apply if the departing member and all other
members that cease to be members as part of the same transaction own all
(or substantially all) the foreign assets in the loss basket.
(iv) Determination of values of foreign assets binding on departing
member. The group's determination of the value of the member's and the
group's foreign assets for a loss basket is binding on the member,
unless the Commissioner concludes that the determination is not
appropriate. The common parent of the group must attach a statement to
the return for the taxable year that the departing member ceases to be a
member of the group that sets forth the name and taxpayer identification
number of the departing member, the amount of each COFL or CSLL for each
loss basket that is apportioned to the departing member under this
paragraph (c)(2), the method used to determine the value of the member's
and the group's foreign assets in each such loss basket, and the value
of the member's and the group's foreign assets in each such loss basket.
The common parent must also furnish a copy of the statement to the
departing member.
(v) Anti-abuse rule. If a corporation becomes a member and ceases to
be a member, and a principal purpose of the corporation becoming and
ceasing to be a member is to transfer the corporation's OFL account or
SLL account to the group or to transfer the group's COFL or CSLL account
to the corporation, appropriate adjustments will be made to eliminate
the benefit of such a transfer of accounts. Similarly, if any member
acquires assets or disposes of assets (including a transfer of assets
between members of the group and the departing member) with a principal
purpose of affecting the apportionment of accounts under paragraph
(c)(2)(i) of this section, appropriate adjustments will be made to
eliminate the benefit of such acquisition or disposition.
(vi) Examples. The following examples illustrate this paragraph (c):
Example 1. (i) On November 6, Year 1, S, a member of the P group, a
consolidated group with a calendar consolidated return year, ceases to
be a member of the group. On December 31, Year 1, the P group has a $40
COFL account for the general limitation basket, a $20 CSLL account for
the general limitation basket (i.e., the loss basket) with respect to
the passive basket (i.e., the income basket), and a $10 CSLL account for
the shipping income basket (i.e., the loss basket) with respect to the
passive basket (i.e., the income basket). No member of the group has
foreign-source income or loss in Year 1. The group apportions its
interest expense according to the tax book value method.
(ii) On November 6, Year 1, the group identifies S's assets and its
own assets (including S's assets) expected to produce foreign general
limitation income. Use of end-of-the-year values will not create
substantial distortions in determining the relative values of S's and
the group's relevant assets on November 6, Year 1. The group determines
that S's relevant assets have a tax book value of $2,000 and a fair
market value of $2,200. Also, the group's relevant assets (including S's
assets) have a tax book value of $8,000. On November 6, Year 1, S has no
assets expected to produce foreign shipping income.
(iii) Under paragraph (c)(2)(ii) of this section, S takes a $10 COFL
account for the general limitation basket ($40 x $2000/$8000) and a $5
CSLL account for the general limitation basket with respect to the
passive basket ($20 x $2000/$8000). S does not take any portion of the
shipping income basket CSLL account. The limitation described in
paragraph (c)(2)(iii) of this section does not apply because the
aggregate of the
[[Page 264]]
COFL and CSLL accounts for the general limitation basket that are
apportioned to S ($15) is less than 150 percent of the actual fair
market value of S's general limitation foreign assets ($2,200 x 150%).
Example 2. (i) Assume the same facts as in Example 1, except that
the fair market value of S's general limitation foreign assets is $4 as
of November 6, Year 1.
(ii) Under paragraph (c)(2)(iii) of this section, S's COFL and CSLL
accounts for the general limitation basket must be reduced by $9, which
is the excess of $15 (the aggregate amount of the accounts apportioned
under paragraph (c)(2)(ii) of this section) over $6 (150 percent of the
$4 actual fair market value of S's general limitation foreign assets). S
thus takes a $4 COFL account for the general limitation basket ($10-($9
x $10/$15)) and a $2 CSLL account for the general limitation basket
with respect to the passive basket ($5-($9 x $5/$15)).
(d) Predecessor and successor. A reference to a member includes, as
the context may require, a reference to a predecessor or successor of
the member. See Sec. 1.1502-1(f).
(e) Effective dates. This section applies to consolidated return
years for which the due date of the income tax return (without
extensions) is after August 11, 1999. However, paragraph (b)(5) of this
section (intercompany transactions) is not applicable for intercompany
transactions that occur before January 28, 1999. A group applies the
principles of Sec. 1.1502-9A(e) to a disposition which is an
intercompany transaction to which Sec. 1.1502-13 applies and that occurs
before January 28, 1999. Also, paragraph (c)(2) of this section
(apportionment of consolidated account to departing member) is not
applicable for members ceasing to be members of a group before January
28, 1999. A group applies the principles of Sec. 1.1502-9A (rather than
paragraph (c)(2) of this section) to determine the amount of a
consolidated account that is apportioned to a member that ceases to be a
member of the group before January 28, 1999 (and reduces its
consolidated account by such apportioned amount) before applying
paragraph (c)(2) of this section to members that cease to be members on
or after January 28, 1999.
[T.D. 8833, 64 FR 43616, Aug. 11, 1999]
Computation of Consolidated Taxable Income
Sec. 1.1502-11 Consolidated taxable income.
(a) In general. The consolidated taxable income for a consolidated
return year shall be determined by taking into account:
(1) The separate taxable income of each member of the group (see
Sec. 1.1502-12 for the computation of separate taxable income);
(2) Any consolidated net operating loss deduction (see
Sec. Sec. 1.1502-21 (or 1.1502-21A, as appropriate) for the computation
of the consolidated net operating loss deduction);
(3) Any consolidated capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) (see Sec. Sec. 1.1502-22
(or 1.1502-22A, as appropriate) for the computation of the consolidated
capital gain net income (net capital gain for taxable years beginning
before January 1, 1977));
(4) Any consolidated section 1231 net loss (see Sec. Sec. 1.1502-23
(or 1.1502-23A, as appropriate) for the computation of the consolidated
section 1231 net loss);
(5) Any consolidated charitable contributions deduction (see
Sec. 1.1502-24 for the computation of the consolidated charitable
contributions deduction);
(6) Any consolidated section 922 deduction (see Sec. 1.1502-25 for
the computation of the consolidated section 922 deduction);
(7) Any consolidated dividends received deduction (see Sec. 1.1502-
26 for the computation of the consolidated dividends received
deduction); and
(8) Any consolidated section 247 deduction (see Sec. 1.1502-27 for
the computation of the consolidated section 247 deduction).
(b) Elimination of circular stock basis adjustments--(1) In general.
If one member (P) disposes of the stock of another member (S), this
paragraph (b) limits the use of S's deductions and losses in the year of
disposition and the carryback of items to prior years. The purpose of
the limitation is to prevent P's income or gain from the disposition
[[Page 265]]
of S's stock from increasing the absorption of S's deductions and
losses, because the increased absorption would reduce P's basis (or
increase its excess loss account) in S's stock under Sec. 1.1502-32 and,
in turn, increase P's income or gain. See paragraph (b)(3) of this
section for the application of these principles to P's deduction or loss
from the disposition of S's stock, and paragraph (b)(4) of this section
for the application of these principles to multiple stock dispositions.
See Sec. 1.1502-19(c) for the definition of disposition.
(2) Limitation on deductions and losses--(i) Determination of amount
of limitation. If P disposes of one or more shares of S's stock, the
extent to which S's deductions and losses for the tax year of the
disposition (and its deductions and losses carried over from prior
years) may offset income and gain is subject to limitation. The amount
of S's deductions and losses that may offset income and gain is
determined by tentatively computing taxable income (or loss) for the
year of disposition (and any prior years to which the deductions or
losses may be carried) without taking into account P's income and gain
from the disposition.
(ii) Application of limitation. S's deductions and losses offset
income and gain only to the extent of the amount determined under
paragraph (b)(2)(i) of this section. To the extent S's deductions and
losses in the year of disposition cannot offset income or gain because
of the limitation under this paragraph (b), the items are carried to
other years under the applicable provisions of the Internal Revenue Code
and regulations as if they were the only items incurred by S in the year
of disposition. For example, to the extent S incurs an operating loss in
the year of disposition that is limited, the loss is treated as a
separate net operating loss attributable to S arising in that year. The
tentative computation does not affect the manner in which S's unlimited
deductions and losses are absorbed or the manner in which deductions and
losses of other members are absorbed. (If the amount of S's unlimited
deductions and losses actually absorbed is less than the amount absorbed
in the tentative computation, P's stock basis adjustments under
Sec. 1.1502-32 reflect only the amounts actually absorbed.)
(iii) Examples. For purposes of the examples in this paragraph (b),
unless otherwise stated, P owns all of the only class of S's stock for
the entire year, S owns no stock of lower-tier members, the tax year of
all persons is the calendar year, all persons use the accrual method of
accounting, the facts set forth the only corporate activity, all
transactions are between unrelated persons, and tax liabilities are
disregarded. The principles of this paragraph (b)(2) are illustrated by
the following examples.
Example 1. Limitation on losses with respect to stock gain. (a) P
has a $500 basis in S's stock. For Year 1, P has ordinary income of $30
(determined without taking P's gain or loss from the disposition of S's
stock into account) and S has an $80 ordinary loss. P sells S's stock
for $520 at the close of Year 1.
(b) To determine the amount of the limitation on S's loss under
paragraph (b)(2)(i) of this section, and the effect under Sec. 1.1502-
32(b) of the absorption of S's loss on P's basis in S's stock, P's gain
or loss from the disposition of S's stock is not taken into account. The
group is tentatively treated as having a consolidated net operating loss
of $50 (P's $30 of income minus S's $80 loss). Thus, $50 of S's loss is
limited under this paragraph (b).
(c) Because $30 of S's loss is absorbed in the determination of
consolidated taxable income under paragraph (b)(2)(ii) of this section,
P's basis in S's stock is reduced under Sec. 1.1502-32(b) from $500 to
$470 immediately before the disposition. Consequently, P recognizes a
$50 gain from the sale of S's stock and the group has consolidated
taxable income of $50 for Year 1 (P's $30 of ordinary income and $50
gain from the sale of S's stock, less the $30 of S's loss). In addition,
S's limited loss of $50 is treated as a separate net operating loss
attributable to S and, because S ceases to be a member, the loss is
apportioned to S under Sec. 1.1502-21 (or Sec. 1.1502-79A, as
appropriate) and carried to its first separate return year.
Example 2. Carrybacks and carryovers. (a) For Year 1, the P group
has consolidated taxable income of $30, and a consolidated net capital
loss of $100 ($50 attributable to P and $50 to S). At the beginning of
Year 2, P has a $300 basis in S's stock. For Year 2, P has ordinary
income of $30, and a $20 capital gain (determined without taking the
$100 consolidated net capital loss carryover or P's gain or loss from
the disposition of S's stock into account), and S has a $100 ordinary
loss. P sells S's stock for $280 at the close of Year 2.
[[Page 266]]
(b) To determine the amount of the limitation under paragraph
(b)(2)(i) of this section on S's losses, and the effect of the
absorption of S's losses on P's basis in S's stock under Sec. 1.1502-
32(b), P's gain or loss from the disposition of S's stock is not taken
into account. For Year 2, the P group is tentatively treated as having a
$70 consolidated net operating loss (S's $100 ordinary loss, less P's
$30 of ordinary income). The P group is also treated as having no
consolidated net capital gain in Year 2, because P's $20 capital gain is
reduced by $20 of the consolidated net capital loss carryover from Year
1 under section 1212(a) (the absorption of which is attributed equally
to P and S). In addition, of the $70 consolidated net operating loss,
$30 is carried back to Year 1 and offsets P's ordinary income in that
year, and $40 is carried forward. Consequently, $40 of S's operating
loss from Year 2, and $40 of the consolidated net capital loss carryover
from Year 1 attributable to S, are limited under this paragraph (b).
(c) Under paragraph (b)(2)(ii) of this section, the limitation under
this paragraph (b) does not affect the absorption of any deductions and
losses attributable to P, $60 of S's operating loss from Year 2, and $10
of the consolidated net capital loss from Year 1 attributable to S.
Consequently, P's basis in S's stock is reduced under Sec. 1.1502-32(b)
by $70, from $300 to $230, and P recognizes a $50 gain from the sale of
S's stock in Year 2. Thus, the P group is treated as having a $20
unlimited net operating loss that is carried back to Year 1:
Ordinary income:
P........................................................... $30
S (excluding the $40 limited loss).......................... (60)
---------
Sub Total................................................. $(30)
Consolidated net capital gain:
P ($20 + $50 from S stock - $50 from Year 1)................ $20
S (-$10 from Year 1)........................................ (10)
---------
Sub Total................................................. $10
Consolidated taxable income................................... $(20)
(d) Under paragraph (b)(2)(ii) of this section, S's $40 ordinary
loss from Year 2 that is limited under this paragraph (b) is treated as
a separate net operating loss arising in Year 2. Similarly, $40 of the
consolidated net capital loss from Year 1 attributable to S is treated
as a separate net capital loss carried over from Year 1. Because S
ceases to be a member, the $40 net operating loss from Year 2 and the
$40 consolidated net capital loss from Year 1 are allocated to S under
Sec. Sec. 1.1502-21 and 1.1502-22, respectively (or Sec. 1.1502-79A, as
appropriate) and are carried to S's first separate return year.
Example 3. Allocation of basis adjustments. (a) For Year 1, the P
group has consolidated taxable income of $100. At the beginning of Year
2, P has a $40 basis in each of the 10 shares of S's stock. For Year 2,
P has an $80 ordinary loss (determined without taking into account P's
gain or loss from the disposition of S's stock) and S has an $80
ordinary loss. P sells 2 shares of S's stock for $85 each at the close
of Year 2.
(b) Under paragraph (b)(2)(i) of this section, the amount of the
limitation on S's loss is determined by tentatively treating the P group
as having a $160 consolidated net operating loss for Year 2. Of this
amount, $100 is carried back under section 172 and absorbed in Year 1
($50 attributable to S and $50 attributable to P). Consequently, $30 of
S's loss is limited under this paragraph (b).
(c) Under paragraph (b)(2)(ii) of this section, the limitation under
this paragraph (b) does not affect the absorption of P's $80 ordinary
loss or $50 of S's ordinary loss. Consequently, P's basis in each share
of S's stock is reduced from $40 to $35 under Sec. 1.1502-32(b), and P
recognizes a $100 gain from the sale of the 2 shares. Thus, the P group
is treated as having a $30 unlimited net operating loss:
Ordinary loss:
P........................................................... $ (80)
S (excluding the $30 limited loss).......................... (50)
---------
Sub Total................................................. $(130)
Consolidated net capital gain:
P........................................................... $100
S........................................................... 0
---------
Sub Total................................................. $100
Unlimited consolidated net operating loss..................... $(30)
(d) A portion of the $130 of unlimited operating losses for Year 2
is fully absorbed in that year, and a portion is carried back to Year 1.
Thus, $61.50 of P's $80 loss ($100 multiplied by $80/$130) and $38.50 of
S's $50 unlimited loss ($100 multiplied by $50/$130) are absorbed in
Year 2. P's remaining $18.50 of loss and S's remaining $11.50 of loss
are not subject to limitation and are carried back and absorbed in Year
1.
(e) Under paragraph (b)(2)(ii) of this section, S's $30 of loss
limited under this paragraph (b) is treated as a separate net operating
loss.
(3) Loss dispositions--(i) General rule. The principles of paragraph
(b)(2) of this section apply to the extent necessary to carry out the
purposes of paragraph (b)(1) of this section if P recognizes a deduction
or loss from the disposition of S's stock.
(ii) Example. The principles of this paragraph (b)(3) are
illustrated by the following example.
Example. (a) P has a $400 basis in S's stock. For Year 1, P has a
capital gain of $100 (determined without taking P's gain or loss
[[Page 267]]
from the disposition of S's stock into account) and S has both a $60
capital loss and a $200 ordinary loss. P sells S's stock for $140 at the
close of Year 1.
(b) Under paragraph (b)(3) of this section, the amount of S's
ordinary and capital losses that may offset income and gain is
determined by tentatively computing the group's consolidated net
operating loss and consolidated net capital loss without taking into
account P's loss from the disposition of S's stock. The limitation is
necessary to prevent P's loss from the disposition of S's stock from
affecting the absorption of S's losses and thereby the adjustments to
P's basis in S's stock under Sec. 1.1502-32(b) (which would, in turn,
affect P's loss).
(c) Under the principles of paragraph (b)(2)(i) of this section, the
amount of the limitation on S's loss is determined by tentatively
treating the P group as having a $40 consolidated net capital gain and a
$200 ordinary loss, which results in a $160 consolidated net operating
loss for Year 1, all of which is attributable to S. Thus, $160 of S's
ordinary loss is limited under this paragraph (b). See also Sec. 1.1502-
20 for rules applicable to losses from the sale of stock of
subsidiaries.
(4) Multiple dispositions--(i) Stock of a member. To the extent
income, gain, deduction, or loss from a prior disposition of S's stock
is deferred under any rule of law, the limitation under paragraph (b)(2)
of this section is determined by treating the year the deferred amount
is taken into account as the year of the disposition.
(ii) Stock of different members. If S is a higher-tier corporation
with respect to another member (T), and all of T's items of income,
gain, deduction, and loss (including the absorption of T's deduction or
loss) would be fully reflected in P's basis in S's stock under
Sec. 1.1502-32, the limitation under paragraph (b)(2)(i) of this section
with respect to T's deductions and losses is determined without taking
into account any income, gain, deduction, or loss from the disposition
of the stock of S or T (or of the stock of members owned in the chain
connecting S and T). However, this paragraph (b) does not otherwise
limit the absorption of one member's deduction or loss with respect to
the disposition of another member's stock.
(iii) Examples. The principles of this paragraph (b)(4) are
illustrated by the following examples.
Example 1. Chain of subsidiaries. (a) P owns all of S's stock with a
$500 basis, and S owns all of T's stock with a $500 basis. For Year 1, P
has ordinary income of $30, S has no income or loss, and T has an $80
ordinary loss. P sells S's stock for $520 at the close of Year 1.
(b) Under paragraph (b)(4) of this section, to determine the amount
of the limitation under paragraph (b) of this section on T's loss, and
the effect of the absorption of T's loss on P's basis in S's stock under
Sec. 1.1502-32(b), P's gain or loss from the disposition of S's stock is
not taken into account. The group is tentatively treated as having a
consolidated net operating loss of $50 (P's $30 of income minus T's $80
loss). Because only $30 of T's loss offsets income or gain, P's basis in
S's stock is reduced under Sec. 1.1502-32(b) from $500 to $470
immediately before the disposition of S's stock. Thus, P takes into
account a $50 gain from the sale of S's stock.
(c) The facts are the same as in paragraph (a) of this Example 1,
except that S has a $10 excess loss account in T's stock (rather than a
$500 basis). Under paragraph (b)(4) of this section, neither P's gain or
loss from the disposition of S's stock nor S's gain or loss from the
disposition of T's stock (under Sec. 1.1502-19) are taken into account
for purposes of the tentative computations and the effect of any
absorption under Sec. 1.1502-32(b) on P's basis in S's stock and S's
excess loss account in T's stock. The group is tentatively treated as
having a consolidated net operating loss of $50 (P's $30 of income minus
T's $80 loss), and only $30 of T's loss may offset the group's income or
gain. Under Sec. 1.1502-32(b), the absorption of $30 of T's loss
increases S's excess loss account in T's stock to $40 and, under
Sec. 1.1502-19, the excess loss account is taken into account. Moreover,
under Sec. 1.1502-32(b), P's basis in S's stock is increased immediately
before the sale by $10 (S's $40 gain under Sec. 1.1502-19(b) minus T's
$30 loss absorbed and tiered up under Sec. 1.1502-32(b)), from $500 to
$510. Thus, P takes into account a $10 gain from the sale of S's stock,
and S takes into account a $40 gain from its excess loss account in T's
stock.
Example 2. Brother-sister subsidiaries. (a) P owns all of the stock
of S1 and S2, each with a $50 basis. For Year 1, the group has a $100
consolidated net operating loss ($50 of which is attributable to S1, and
$50 to S2) determined without taking gain or loss from the disposition
of member stock into account. At the close of Year 1, P sells the stock
of S1 and S2 for $100 each.
(b) Paragraph (b)(4) of this section does not limit the loss of S1
or S2 with respect to the disposition of stock of the other.
Consequently, each subsidiary's loss may offset P's gain from the
disposition of the stock of the other subsidiary. Because this
absorption results in a $50 reduction in P's basis in the stock of each
subsidiary under Sec. 1.1502-32(b), P's aggregate gain from the stock
dispositions is increased from $100 to $200, $100 of
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which is offset by the losses of the subsidiaries.
(5) Effective date. This paragraph (b) applies to stock dispositions
occurring in consolidated return years beginning on or after January 1,
1995. For prior years, see Sec. 1.1502-11(b) as contained in the 26 CFR
part 1 edition revised as of April 1, 1994.
(c) Disallowance of loss attributable to pre-1966 distributions. No
loss shall be allowed upon the sale or other disposition of stock,
bonds, or other obligations of a member or former member to the extent
that such loss is attributable to a distribution made in an affiliated
year beginning before January 1, 1966, out of earnings and profits
accumulated before the distributing corporation became a member.
[T.D. 7246, 38 FR 759, Jan. 4, 1973, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980; T.D. 8560, 59 FR 41675, Aug. 15, 1994; T.D. 8677,
61 FR 33323, 33326, June 27, 1996; T.D. 8560, 62 FR 12097, Mar. 14,
1997; T.D. 8823, 64 FR 36099, July 2, 1999]
Computation of Separate Taxable Income
Sec. 1.1502-12 Separate taxable income.
The separate taxable income of a member (including a case in which
deductions exceed gross income) is computed in accordance with the
provisions of the Code covering the determination of taxable income of
separate corporations, subject to the following modifications:
(a) Transactions between members and transactions with respect to
stock, bonds, or other obligations of members shall be reflected
according to the provisions of Sec. 1.1502-13;
(b) Any deduction which is disallowed under Sec. Sec. 1.1502-15A or
1.1502-15 shall be taken into account as provided in those sections;
(c) The limitation on deductions provided in section 615(c) or
section 617(h) shall be taken into account as provided in Sec. 1.1502-
16;
(d) The method of accounting under which such computation is made
and the adjustments to be made because of any change in method of
accounting shall be determined under Sec. 1.1502-17;
(e) Inventory adjustments shall be made as provided in Sec. 1.1502-
18;
(f) Any amount included in income under Sec. 1.1502-19 shall be
taken into account;
(g) In the computation of the deduction under section 167, property
shall not lose its character as new property as a result of a transfer
from one member to another member during a consolidated return year if:
(1) The transfer occurs on or before January 4, 1973, or
(2) The transfer occurs after January 4, 1973, and the transfer is
an intercompany transaction as defined in Sec. 1.1502-13 or the basis of
the property in the hands of the transferee is determined (in whole or
in part) by reference to its basis in the hands of the transferor;
(h) No net operating loss deduction shall be taken into account;
(i) [Reserved]
(j) No capital gains or losses shall be taken into account;
(k) No gains and losses subject to section 1231 shall be taken into
account;
(l) No deduction under section 170 with respect to charitable
contributions shall be taken into account;
(m) No deduction under section 922 (relating to the deduction for
Western Hemisphere trade corporations) shall be taken into account;
(n) No deductions under section 243(a)(1), 244(a), 245, or 247
(relating to deductions with respect to dividends received and dividends
paid) shall be taken into account;
(o) Basis shall be determined under Secs. 1.1502-31 and 1.1502-32,
and earnings and profits shall be determined under Sec. 1.1502-33; and
(p) The limitation on deductions provided in section 613A shall be
taken into account for each member's oil and gas properties as provided
in Sec. 1.1502-44.
(q) A thrift institution's deduction under section 593(b)(2)
(relating to the addition to the reserve for bad debts of a thrift
institution under the percentage of taxable income method) shall be
determined under Sec. 1.1502-42.
(r) For rules relating to loss disallowance or basis reduction on
the disposition or deconsolidation of stock of a
[[Page 269]]
subsidiary, see Secs. 1.337(d)-1, 1.337(d)-2 and Sec. 1.1502-20.
(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat.
637; 917; 26 U.S.C. 1502, 7805))
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7191, 37 FR
12949, June 30, 1972; T.D. 7246, 38 FR 760, Jan. 4, 1973; T.D. 7725, 45
FR 65561, Oct. 3, 1980; T.D. 7876, 48 FR 11258, Mar. 17, 1983; T.D.
8294, 55 FR 9434, Mar. 14, 1990; T.D. 8319, 55 FR 49038, Nov. 26, 1990;
T.D. 8364, 56 FR 47401, Sept. 19, 1991; T.D. 8597, 60 FR 36679, July 18,
1995; T.D. 8677, 61 FR 33323, June 27, 1996; T.D. 8823, 64 FR 36099,
July 2, 1999]
Sec. 1.1502-13 Intercompany transactions.
(a) In general--(1) Purpose. This section provides rules for taking
into account items of income, gain, deduction, and loss of members from
intercompany transactions. The purpose of this section is to provide
rules to clearly reflect the taxable income (and tax liability) of the
group as a whole by preventing intercompany transactions from creating,
accelerating, avoiding, or deferring consolidated taxable income (or
consolidated tax liability).
(2) Separate entity and single entity treatment. Under this section,
the selling member (S) and the buying member (B) are treated as separate
entities for some purposes but as divisions of a single corporation for
other purposes. The amount and location of S's intercompany items and
B's corresponding items are determined on a separate entity basis
(separate entity treatment). For example, S determines its gain or loss
from a sale of property to B on a separate entity basis, and B has a
cost basis in the property. The timing, and the character, source, and
other attributes of the intercompany items and corresponding items,
although initially determined on a separate entity basis, are
redetermined under this section to produce the effect of transactions
between divisions of a single corporation (single entity treatment). For
example, if S sells land to B at a gain and B sells the land to a
nonmember, S does not take its gain into account until B's sale to the
nonmember.
(3) Timing rules as a method of accounting--(i) In general. The
timing rules of this section are a method of accounting for intercompany
transactions, to be applied by each member in addition to the member's
other methods of accounting. See Sec. 1.1502-17. To the extent the
timing rules of this section are inconsistent with a member's otherwise
applicable methods of accounting, the timing rules of this section
control. For example, if S sells property to B in exchange for B's note,
the timing rules of this section apply instead of the installment sale
rules of section 453. S's or B's application of the timing rules of this
section to an intercompany transaction clearly reflects income only if
the effect of that transaction as a whole (including, for example,
related costs and expenses) on consolidated taxable income is clearly
reflected.
(ii) Automatic consent for joining and departing members--(A)
Consent granted. Section 446(e) consent is granted under this section to
the extent a change in method of accounting is necessary solely by
reason of the timing rules of this section--
(1) For each member, with respect to its intercompany transactions,
in the first consolidated return year which follows a separate return
year and in which the member engages in an intercompany transaction; and
(2) For each former member, with respect to its transactions with
members that would otherwise be intercompany transactions if the former
member were still a member, in the first separate return year in which
the former member engages in such a transaction.
(B) Cut-off basis. Any change in method of accounting described in
paragraph (a)(3)(ii)(A) of this section is to be effected on a cut-off
basis for transactions entered into on or after the first day of the
year for which consent is granted under paragraph (a)(3)(ii)(A) of this
section.
(4) Other law. The rules of this section apply in addition to other
applicable law (including nonstatutory authorities). For example, this
section applies in addition to sections 267(f) (additional rules for
certain losses), 269 (acquisitions to evade or avoid income tax), and
482 (allocations among commonly controlled taxpayers). Thus, an item
taken into account under this section can be deferred, disallowed, or
eliminated under other applicable law,
[[Page 270]]
for example, section 1091 (losses from wash sales).
(5) References. References in other sections to this section
include, as appropriate, references to prior law. For effective dates
and prior law see paragraph (l) of this section.
(6) Overview--(i) In general. The principal rules of this section
that implement single entity treatment are the matching rule and the
acceleration rule of paragraphs (c) and (d) of this section. Under the
matching rule, S and B are generally treated as divisions of a single
corporation for purposes of taking into account their items from
intercompany transactions. The acceleration rule provides additional
rules for taking the items into account if the effect of treating S and
B as divisions cannot be achieved (for example, if S or B becomes a
nonmember). Paragraph (b) of this section provides definitions.
Paragraph (e) of this section provides simplifying rules for certain
transactions. Paragraphs (f) and (g) of this section provide additional
rules for stock and obligations of members. Paragraphs (h) and (j) of
this section provide anti-avoidance rules and miscellaneous operating
rules.
(ii) Table of examples. Set forth below is a table of the examples
contained in this section.
Matching rule. (Sec. 1.1502-13(c)(7)(ii))
Example 1. Intercompany sale of land.
Example 2. Dealer activities.
Example 3. Intercompany section 351 transfer.
Example 4. Depreciable property.
Example 5. Intercompany sale followed by installment sale.
Example 6. Intercompany sale of installment obligation.
Example 7. Performance of services.
Example 8. Rental of property.
Example 9. Intercompany sale of a partnership interest.
Example 10. Net operating losses subject to section 382 or the SRLY
rules.
Example 11. Section 475.
Example 12. Section 1092.
Example 13. Manufacturer incentive payments.
Example 14. Source of income under section 863.
Example 15. Section 1248.
Acceleration rule. (Sec. 1.1502-13(d)(3))
Example 1. Becoming a nonmember--timing.
Example 2. Becoming a nonmember--attributes.
Example 3. Selling member's disposition of installment note.
Example 4. Cancellation of debt and attribute reduction under
section 108(b).
Example 5. Section 481.
Simplifying rules--inventory. (Sec. 1.1502-13(e)(1)(v))
Example 1. Increment averaging method.
Example 2. Increment valuation method.
Example 3. Other reasonable inventory methods.
Stock of members. (Sec. 1.1502-13(f)(7))
Example 1. Dividend exclusion and property distribution.
Example 2. Excess loss accounts.
Example 3. Intercompany reorganization.
Example 4. Stock redemptions and distributions.
Example 5. Intercompany stock sale followed by section 332
liquidation.
Example 6. Intercompany stock sale followed by section 355
distribution.
Obligations of members. (Sec. 1.1502-13(g)(5))
Example 1. Interest on intercompany debt.
Example 2. Intercompany debt becomes nonintercompany debt.
Example 3. Loss or bad debt deduction with respect to intercompany
debt.
Example 4. Nonintercompany debt becomes intercompany debt.
Example 5. Notional principal contracts.
Anti-avoidance rules. (Sec. 1.1502-13(h)(2))
Example 1. Sale of a partnership interest.
Example 2. Transitory status as an intercompany obligation.
Example 3. Corporate mixing bowl.
Example 4. Partnership mixing bowl.
Example 5. Sale and leaseback.
Miscellaneous operating rules. (Sec. 1.1502-13(j)(9))
Example 1. Intercompany sale followed by section 351 transfer to
member.
Example 2. Intercompany sale of member stock followed by
recapitalization.
Example 3. Back-to-back intercompany transactions--matching.
Example 4. Back-to-back intercompany transactions--acceleration.
Example 5. Successor group.
Example 6. Liquidation--80% distributee.
Example 7. Liquidation--no 80% distributee.
(b) Definitions. For purposes of this section--
(1) Intercompany transactions--(i) In general. An intercompany
transaction is a transaction between corporations
[[Page 271]]
that are members of the same consolidated group immediately after the
transaction. S is the member transferring property or providing
services, and B is the member receiving the property or services.
Intercompany transactions include--
(A) S's sale of property (or other transfer, such as an exchange or
contribution) to B, whether or not gain or loss is recognized;
(B) S's performance of services for B, and B's payment or accrual of
its expenditure for S's performance;
(C) S's licensing of technology, rental of property, or loan of
money to B, and B's payment or accrual of its expenditure; and
(D) S's distribution to B with respect to S stock.
(ii) Time of transaction. If a transaction occurs in part while S
and B are members and in part while they are not members, the
transaction is treated as occurring when performance by either S or B
takes place, or when payment for performance would be taken into account
under the rules of this section if it were an intercompany transaction,
whichever is earliest. Appropriate adjustments must be made in such
cases by, for example, dividing the transaction into two separate
transactions reflecting the extent to which S or B has performed.
(iii) Separate transactions. Except as otherwise provided in this
section, each transaction is analyzed separately. For example, if S
simultaneously sells two properties to B, one at a gain and the other at
a loss, each property is treated as sold in a separate transaction.
Thus, the gain and loss cannot be offset or netted against each other
for purposes of this section. Similarly, each payment or accrual of
interest on a loan is a separate transaction. In addition, an accrual of
premium is treated as a separate transaction, or as an offset to
interest that is not a separate transaction, to the extent required
under separate entity treatment. If two members exchange property, each
member is S with respect to the property it transfers and B with respect
to the property it receives. If two members enter into a notional
principal contract, each payment under the contract is a separate
transaction and the member making the payment is B with respect to that
payment and the member receiving the payment is S. See paragraph (j)(4)
of this section for rules aggregating certain transactions.
(2) Intercompany items--(i) In general. S's income, gain, deduction,
and loss from an intercompany transaction are its intercompany items.
For example, S's gain from the sale of property to B is intercompany
gain. An item is an intercompany item whether it is directly or
indirectly from an intercompany transaction.
(ii) Related costs or expenses. S's costs or expenses related to an
intercompany transaction are included in determining its intercompany
items. For example, if S sells inventory to B, S's direct and indirect
costs properly includible under section 263A are included in determining
its intercompany income. Similarly, related costs or expenses that are
not capitalized under S's separate entity method of accounting are
included in determining its intercompany items. For example, deductions
for employee wages, in addition to other related costs, are included in
determining S's intercompany items from performing services for B, and
depreciation deductions are included in determining S's intercompany
items from renting property to B.
(iii) Amounts not yet recognized or incurred. S's intercompany items
include amounts from an intercompany transaction that are not yet taken
into account under its separate entity method of accounting. For
example, if S is a cash method taxpayer, S's intercompany income might
be taken into account under this section even if the cash is not yet
received. Similarly, an amount reflected in basis (or an amount
equivalent to basis) under S's separate entity method of accounting that
is a substitute for income, gain, deduction or loss from an intercompany
transaction is an intercompany item.
(3) Corresponding items--(i) In general. B's income, gain,
deduction, and loss from an intercompany transaction, or from property
acquired in an intercompany transaction, are its corresponding items.
For example, if B pays rent to S,
[[Page 272]]
B's deduction for the rent is a corresponding deduction. If B buys
property from S and sells it to a nonmember, B's gain or loss from the
sale to the nonmember is a corresponding gain or loss; alternatively, if
B recovers the cost of the property through depreciation, B's
depreciation deductions are corresponding deductions. An item is a
corresponding item whether it is directly or indirectly from an
intercompany transaction (or from property acquired in an intercompany
transaction).
(ii) Disallowed or eliminated amounts. B's corresponding items
include amounts that are permanently disallowed or permanently
eliminated, whether directly or indirectly. Thus, corresponding items
include amounts disallowed under section 265 (expenses relating to tax-
exempt income), and amounts not recognized under section 311(a)
(nonrecognition of loss on distributions), section 332 (nonrecognition
on liquidating distributions), or section 355(c) (certain distributions
of stock of a subsidiary). On the other hand, an amount is not
permanently disallowed or permanently eliminated (and therefore is not a
corresponding item) to the extent it is not recognized in a transaction
in which B receives a successor asset within the meaning of paragraph
(j)(1) of this section. For example, B's corresponding items do not
include amounts not recognized from a transaction with a nonmember to
which section 1031 applies or from another transaction in which B
receives exchanged basis property.
(4) Recomputed corresponding items. The recomputed corresponding
item is the corresponding item that B would take into account if S and B
were divisions of a single corporation and the intercompany transaction
were between those divisions. For example, if S sells property with a
$70 basis to B for $100, and B later sells the property to a nonmember
for $90, B's corresponding item is its $10 loss, and the recomputed
corresponding item is $20 of gain (determined by comparing the $90 sales
price with the $70 basis the property would have if S and B were
divisions of a single corporation). Although neither S nor B actually
takes the recomputed corresponding item into account, it is computed as
if B did take it into account (based on reasonable and consistently
applied assumptions, including any provision of the Internal Revenue
Code or regulations that would affect its timing or attributes).
(5) Treatment as a separate entity. Treatment as a separate entity
means treatment without application of the rules of this section, but
with the application of the other consolidated return regulations. For
example, if S sells the stock of another member to B, S's gain or loss
on a separate entity basis is determined with the application of
Sec. 1.1502-80(b) (non-applicability of section 304), but without
redetermination under paragraph (c) or (d) of this section.
(6) Attributes. The attributes of an intercompany item or
corresponding item are all of the item's characteristics, except amount,
location, and timing, necessary to determine the item's effect on
taxable income (and tax liability). For example, attributes include
character, source, treatment as excluded from gross income or as a
noncapital, nondeductible amount, and treatment as built-in gain or loss
under section 382(h) or 384. In contrast, the characteristics of
property, such as a member's holding period, or the fact that property
is included in inventory, are not attributes of an item, but these
characteristics might affect the determination of the attributes of
items from the property.
(c) Matching rule. For each consolidated return year, B's
corresponding items and S's intercompany items are taken into account
under the following rules:
(1) Attributes and holding periods--(i) Attributes. The separate
entity attributes of S's intercompany items and B's corresponding items
are redetermined to the extent necessary to produce the same effect on
consolidated taxable income (and consolidated tax liability) as if S and
B were divisions of a single corporation, and the intercompany
transaction were a transaction between divisions. Thus, the activities
of both S and B might affect the attributes of both intercompany items
and corresponding items. For example, if S holds property for
[[Page 273]]
sale to unrelated customers in the ordinary course of its trade or
business, S sells the property to B at a gain and B sells the property
to an unrelated person at a further gain, S's intercompany gain and B's
corresponding gain might be ordinary because of S's activities with
respect to the property. Similar principles apply if S performs
services, rents property, or engages in any other intercompany
transaction.
(ii) Holding periods. The holding period of property transferred in
an intercompany transaction is the aggregate of the holding periods of S
and B. However, if the basis of the property is determined by reference
to the basis of other property, the property's holding period is
determined by reference to the holding period of the other property. For
example, if S distributes stock to B in a transaction to which section
355 applies, B's holding period in the distributed stock is determined
by reference to B's holding period in the stock of S.
(2) Timing--(i) B's items. B takes its corresponding items into
account under its accounting method, but the redetermination of the
attributes of a corresponding item might affect its timing. For example,
if B's sale of property acquired from S is treated as a dealer
disposition because of S's activities, section 453(b) prevents any
corresponding income of B from being taken into account under the
installment method.
(ii) S's items. S takes its intercompany item into account to
reflect the difference for the year between B's corresponding item taken
into account and the recomputed corresponding item.
(3) Divisions of a single corporation. As divisions of a single
corporation, S and B are treated as engaging in their actual transaction
and owning any actual property involved in the transaction (rather than
treating the transaction as not occurring). For example, S's sale of
land held for investment to B for cash is not disregarded, but is
treated as an exchange of land for cash between divisions (and B
therefore succeeds to S's basis in the property). Similarly, S's
issuance of its own stock to B in exchange for property is not
disregarded, B is treated as owning the stock it receives in the
exchange, and section 1032 does not apply to B on its subsequent sale of
the S stock. Although treated as divisions, S and B nevertheless are
treated as:
(i) Operating separate trades or businesses. See, e.g., Sec. 1.446-
1(d) (accounting methods for a taxpayer engaged in more than one
business).
(ii) Having any special status that they have under the Internal
Revenue Code or regulations. For example, a bank defined in section 581,
a domestic building and loan association defined in section 7701(a)(19),
and an insurance company to which section 801 or 831 applies are treated
as divisions having separate special status. On the other hand, the fact
that a member holds property for sale to customers in the ordinary
course of its trade or business is not a special status.
(4) Conflict or allocation of attributes. This paragraph (c)(4)
provides special rules for redetermining and allocating attributes under
paragraph (c)(1)(i) of this section.
(i) Offsetting amounts--(A) In general. To the extent B's
corresponding item offsets S's intercompany item in amount, the
attributes of B's corresponding item, determined based on both S's and
B's activities, control the attributes of S's offsetting intercompany
item. For example, if S sells depreciable property to B at a gain and B
depreciates the property, the attributes of B's depreciation deduction
(ordinary deduction) control the attributes of S's offsetting
intercompany gain. Accordingly, S's gain is ordinary.
(B) B controls unreasonable. To the extent the results under
paragraph (c)(4)(i)(A) are inconsistent with treating S and B as
divisions of a single corporation, the attributes of the offsetting
items must be redetermined in a manner consistent with treating S and B
as divisions of a single corporation. To the extent, however, that B's
corresponding item on a separate entity basis is excluded from gross
income, is a noncapital, nondeductible amount, or is otherwise
permanently disallowed or eliminated, the attributes of B's
corresponding item always control the attributes of S's offsetting
intercompany item.
[[Page 274]]
(ii) Allocation. To the extent S's intercompany item and B's
corresponding item do not offset in amount, the attributes redetermined
under paragraph (c)(1)(i) of this section must be allocated to S's
intercompany item and B's corresponding item by using a method that is
reasonable in light of all the facts and circumstances, including the
purposes of this section and any other rule affected by the attributes
of S's intercompany item and B's corresponding item. A method of
allocation or redetermination is unreasonable if it is not used
consistently by all members of the group from year to year.
(5) Special status. Notwithstanding the general rule of paragraph
(c)(1)(i) of this section, to the extent an item's attributes determined
under this section are permitted or not permitted to a member under the
Internal Revenue Code or regulations by reason of the member's special
status, the attributes required under the Internal Revenue Code or
regulations apply to that member's items (but not the other member). For
example, if S is a bank to which section 582(c) applies, and sells debt
securities at a gain to B, a nonbank, the character of S's intercompany
gain is ordinary as required under section 582(c), but the character of
B's corresponding item as capital or ordinary is determined under
paragraph (c)(1)(i) of this section without the application of section
582(c). For other special status issues, see, for example, sections
595(b) (foreclosure on property securing loans), 818(b) (life insurance
company treatment of capital gains and losses), and 1503(c) (limitation
on absorption of certain losses).
(6) Treatment of intercompany items if corresponding items are
excluded or nondeductible--(i) In general. Under paragraph (c)(1)(i) of
this section, S's intercompany item might be redetermined to be excluded
from gross income or treated as a noncapital, nondeductible amount. For
example, S's intercompany loss from the sale of property to B is treated
as a noncapital, nondeductible amount if B distributes the property to a
nonmember shareholder at no further gain or loss (because, if S and B
were divisions of a single corporation, the loss would not have been
recognized under section 311(a)). Paragraph (c)(6)(ii) of this section,
however, provides limitations on the application of this rule to
intercompany income or gain. See also Secs. 1.1502-32 and 1.1502-33
(adjustments to S's stock basis and earnings and profits to reflect
amounts so treated).
(ii) Limitation on treatment of intercompany items as excluded from
gross income. Notwithstanding the general rule of paragraph (c)(1)(i) of
this section, S's intercompany income or gain is redetermined to be
excluded from gross income only to the extent one of the following
applies:
(A) Disallowed amounts. B's corresponding item is a deduction or
loss and, in the taxable year the item is taken into account under this
section, it is permanently and explicitly disallowed under another
provision of the Internal Revenue Code or regulations. For example,
deductions that are disallowed under section 265 are permanently and
explicitly disallowed. An amount is not permanently and explicitly
disallowed, for example, to the extent that--
(1) The Internal Revenue Code or regulations provide that the amount
is not recognized (for example, a loss that is realized but not
recognized under section 332 or section 355(c) is not permanently and
explicitly disallowed, notwithstanding that it is a corresponding item
within the meaning of paragraph (b)(3)(ii) of this section (certain
disallowed or eliminated amounts));
(2) A related amount might be taken into account by B with respect
to successor property, such as under section 280B (demolition costs
recoverable as capitalized amounts);
(3) A related amount might be taken into account by another
taxpayer, such as under section 267(d) (disallowed loss under section
267(a) might result in nonrecognition of gain for a related person);
(4) A related amount might be taken into account as a deduction or
loss, including as a carryforward to a later year, under any provision
of the Internal Revenue Code or regulations (whether or not the
carryforward expires in a later year); or
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(5) The amount is reflected in the computation of any credit against
(or other reduction of) Federal income tax (whether allowed for the
taxable year or carried forward to a later year).
(B) Section 311. The corresponding item is a loss that is realized,
but not recognized under section 311(a) on a distribution to a nonmember
(even though the loss is not a permanently and explicitly disallowed
amount within the meaning of paragraph (c)(6)(ii)(A) of this section).
(C) Other amounts. The Commissioner determines that treating S's
intercompany item as excluded from gross income is consistent with the
purposes of this section and other applicable provisions of the Internal
Revenue Code and regulations.
(7) Examples--(i) In general. For purposes of the examples in this
section, unless otherwise stated, P is the common parent of the P
consolidated group, P owns all of the only class of stock of
subsidiaries S and B, X is a person unrelated to any member of the P
group, the taxable year of all persons is the calendar year, all persons
use the accrual method of accounting, tax liabilities are disregarded,
the facts set forth the only corporate activity, no member has any
special status, and the transaction is not otherwise subject to
recharacterization. If a member acts as both a selling member and a
buying member (e.g., with respect to different aspects of a single
transaction, or with respect to related transactions), the member is
referred to as M, M1, or M2 (rather than as S or B).
(ii) Matching rule. The matching rule of this paragraph (c) is
illustrated by the following examples.
Example 1. Intercompany sale of land followed by sale to a
nonmember. (a) Facts. S holds land for investment with a basis of $70. S
has held the land for more than one year. On January 1 of Year 1, S
sells the land to B for $100. B also holds the land for investment. On
July 1 of Year 3, B sells the land to X for $110.
(b) Definitions. Under paragraph (b)(1) of this section, S's sale of
the land to B is an intercompany transaction, S is the selling member,
and B is the buying member. Under paragraphs (b)(2) and (3) of this
section, S's $30 gain from the sale to B is its intercompany item, and
B's $10 gain from the sale to X is its corresponding item.
(c) Attributes. Under the matching rule of paragraph (c) of this
section, S's $30 intercompany gain and B's $10 corresponding gain are
taken into account to produce the same effect on consolidated taxable
income (and consolidated tax liability) as if S and B were divisions of
a single corporation. In addition, the holding periods of S and B for
the land are aggregated. Thus, the group's entire $40 of gain is long-
term capital gain. Because both S's intercompany item and B's
corresponding item on a separate entity basis are long-term capital
gain, the attributes are not redetermined under paragraph (c)(1)(i) of
this section.
(d) Timing. For each consolidated return year, S takes its
intercompany item into account under the matching rule to reflect the
difference for the year between B's corresponding item taken into
account and the recomputed corresponding item. If S and B were divisions
of a single corporation and the intercompany sale were a transfer
between the divisions, B would succeed to S's $70 basis in the land and
would have a $40 gain from the sale to X in Year 3, instead of a $10
gain. Consequently, S takes no gain into account in Years 1 and 2, and
takes the entire $30 gain into account in Year 3, to reflect the $30
difference in that year between the $10 gain B takes into account and
the $40 recomputed gain (the recomputed corresponding item). Under
Secs. 1.1502-32 and 1.1502-33, P's basis in its S stock and the earnings
and profits of S and P do not reflect S's $30 gain until the gain is
taken into account in Year 3. (Under paragraph (a)(3) of this section,
the results would be the same if S sold the land to B in an installment
sale to which section 453 would otherwise apply, because S must take its
intercompany gain into account under this section.)
(e) Intercompany loss followed by sale to a nonmember at a gain. The
facts are the same as in paragraph (a) of this Example 1, except that
S's basis in the land is $130 (rather than $70). The attributes and
timing of S's intercompany loss and B's corresponding gain are
determined under the matching rule in the manner provided in paragraphs
(c) and (d) of this Example 1. If S and B were divisions of a single
corporation and the intercompany sale were a transfer between the
divisions, B would succeed to S's $130 basis in the land and would have
a $20 loss from the sale to X instead of a $10 gain. Thus, S takes its
entire $30 loss into account in Year 3 to reflect the $30 difference
between B's $10 gain taken into account and the $20 recomputed loss.
(The results are the same under section 267(f).) S's $30 loss is long-
term capital loss, and B's $10 gain is long-term capital gain.
(f) Intercompany gain followed by sale to a nonmember at a loss. The
facts are the same as in paragraph (a) of this Example 1, except that B
sells the land to X for $90 (rather than
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$110). The attributes and timing of S's intercompany gain and B's
corresponding loss are determined under the matching rule. If S and B
were divisions of a single corporation and the intercompany sale were a
transfer between the divisions, B would succeed to S's $70 basis in the
land and would have a $20 gain from the sale to X instead of a $10 loss.
Thus, S takes its entire $30 gain into account in Year 3 to reflect the
$30 difference between B's $10 loss taken into account and the $20
recomputed gain. S's $30 gain is long-term capital gain, and B's $10
loss is long-term capital loss.
(g) Intercompany gain followed by distribution to a nonmember at a
loss. The facts are the same as in paragraph (a) of this Example 1,
except that B distributes the land to X, a minority shareholder of B,
and at the time of the distribution the land has a fair market value of
$90. The attributes and timing of S's intercompany gain and B's
corresponding loss are determined under the matching rule. Under section
311(a), B does not recognize its $10 loss on the distribution to X. If S
and B were divisions of a single corporation and the intercompany sale
were a transfer between divisions, B would succeed to S's $70 basis in
the land and would have a $20 gain from the distribution to X instead of
an unrecognized $10 loss. Under paragraph (b)(3)(ii) of this section,
B's loss that is not recognized under section 311(a) is a corresponding
item. Thus, S takes its $30 gain into account under the matching rule in
Year 3 to reflect the difference between B's $10 corresponding
unrecognized loss and the $20 recomputed gain. B's $10 corresponding
loss offsets $10 of S's intercompany gain and, under paragraph (c)(4)(i)
of this section, the attributes of B's corresponding item control the
attributes of S's intercompany item. Paragraph (c)(6) of this section
does not prevent the redetermination of S's intercompany item as
excluded from gross income. (See paragraph (c)(6)(ii)(B) of this
section). Thus, $10 of S's $30 gain is redetermined to be excluded from
gross income.
(h) Intercompany sale followed by section 1031 exchange with
nonmember. The facts are the same as in paragraph (a) of this Example 1,
except that, instead of selling the land to X, B exchanges the land for
land owned by X in a transaction to which section 1031 applies. There is
no difference in Year 3 between B's $0 corresponding item taken into
account and the $0 recomputed corresponding item. Thus, none of S's
intercompany gain is taken into account under the matching rule as a
result of the section 1031 exchange. Instead, B's gain is preserved in
the land received from X and, under the successor asset rule of
paragraph (j)(1) of this section, S's intercompany gain is taken into
account by reference to the replacement property. (If B takes gain into
account as a result of boot received in the exchange, S's intercompany
gain is taken into account under the matching rule to the extent the
boot causes a difference between B's gain taken into account and the
recomputed gain.)
(i) Intercompany sale followed by section 351 transfer to nonmember.
The facts are the same as in paragraph (a) of this Example 1, except
that, instead of selling the land to X, B transfers the land to X in a
transaction to which section 351(a) applies and X remains a nonmember.
There is no difference in Year 3 between B's $0 corresponding item taken
into account and the $0 recomputed corresponding item. Thus, none of S's
intercompany gain is taken into account under the matching rule as a
result of the section 351(a) transfer. However, S's entire gain is taken
into account in Year 3 under the acceleration rule of paragraph (d) of
this section (because X, a nonmember, reflects B's $100 cost basis in
the land under section 362).
Example 2. Dealer activities. (a) Facts. S holds land for investment
with a basis of $70. On January 1 of Year 1, S sells the land to B for
$100. B develops the land as residential real estate, and sells
developed lots to customers during Year 3 for an aggregate amount of
$110.
(b) Attributes. S and B are treated under the matching rule as
divisions of a single corporation for purposes of determining the
attributes of S's intercompany item and B's corresponding item. Thus,
although S held the land for investment, whether the gain is treated as
from the sale of property described in section 1221(1) is based on the
activities of both S and B. If, based on both S's and B's activities,
the land is described in section 1221(1), both S's gain and B's gain are
ordinary income.
Example 3. Intercompany section 351 transfer. (a) Facts. S holds
land with a $70 basis and a $100 fair market value for sale to customers
in the ordinary course of business. On January 1 of Year 1, S transfers
the land to B in exchange for all of the stock of B in a transaction to
which section 351 applies. S has no gain or loss under section 351(a),
and its basis in the B stock is $70 under section 358. Under section
362, B's basis in the land is $70. B holds the land for investment. On
July 1 of Year 3, B sells the land to X for $100. Assume that if S and B
were divisions of a single corporation, B's gain from the sale would be
ordinary income because of S's activities.
(b) Timing and attributes. Under paragraph (b)(1) of this section,
S's transfer to B is an intercompany transaction. Under paragraph (c)(3)
of this section, S is treated as transferring the land in exchange for
B's stock even though, as divisions, S could not own stock of B. S has
no intercompany item, but B's $30 gain from its sale of the land to X is
a corresponding item because the land was acquired in an intercompany
transaction. B's $30 gain is ordinary income that is taken
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into account under B's method of accounting.
(c) Intercompany section 351 transfer with boot. The facts are the
same as in paragraph (a) of this Example 3, except that S receives $10
cash in addition to the B stock in the transfer. S recognizes $10 of
gain under section 351(b), and its basis in the B stock is $70 under
section 358. Under section 362, B's basis in the land is $80. S takes
its $10 intercompany gain into account in Year 3 to reflect the $10
difference between B's $20 corresponding gain taken into account and the
$30 recomputed gain. Both S's $10 gain and B's $20 gain are ordinary
income.
(d) Partial disposition. The facts are the same as in paragraph (c)
of this Example 3, except B sells only a one- half, undivided interest
in the land to X for $50. The timing and attributes are determined in
the manner provided in paragraph (b) of this Example 3, except that S
takes only $5 of its gain into account in Year 3 to reflect the $5
difference between B's $10 gain taken into account and the $15
recomputed gain.
Example 4. Depreciable property. (a) Facts. On January 1 of Year 1,
S buys 10-year recovery property for $100 and depreciates it under the
straight-line method. On January 1 of Year 3, S sells the property to B
for $130. Under section 168(i)(7), B is treated as S for purposes of
section 168 to the extent B's $130 basis does not exceed S's adjusted
basis at the time of the sale. B's additional basis is treated as new
10-year recovery property for which B elects the straight-line method of
recovery. (To simplify the example, the half-year convention is
disregarded.)
(b) Depreciation through Year 3; intercompany gain. S claims $10 of
depreciation for each of Years 1 and 2 and has an $80 basis at the time
of the sale to B. Thus, S has a $50 intercompany gain from its sale to
B. For Year 3, B has $10 of depreciation with respect to $80 of its
basis (the portion of its $130 basis not exceeding S's adjusted basis).
In addition, B has $5 of depreciation with respect to the $50 of its
additional basis that exceeds S's adjusted basis.
(c) Timing. S's $50 gain is taken into account to reflect the
difference for each consolidated return year between B's depreciation
taken into account with respect to the property and the recomputed
depreciation. For Year 3, B takes $15 of depreciation into account. If
the intercompany transaction were a transfer between divisions of a
single corporation, B would succeed to S's adjusted basis in the
property and take into account only $10 of depreciation for Year 3.
Thus, S takes $5 of gain into account in Year 3. In each subsequent year
that B takes into account $15 of depreciation with respect to the
property, S takes into account $5 of gain.
(d) Attributes. Under paragraph (c)(1)(i) of this section, the
attributes of S's gain and B's depreciation must be redetermined to the
extent necessary to produce the same effect on consolidated taxable
income as if the intercompany transaction were between divisions of a
single corporation (the group must have a net depreciation deduction of
$10). In each year, $5 of B's corresponding depreciation deduction
offsets S's $5 intercompany gain taken into account and, under paragraph
(c)(4)(i) of this section, the attributes of B's corresponding item
control the attributes of S's intercompany item. Accordingly, S's
intercompany gain that is taken into account as a result of B's
depreciation deduction is ordinary income.
(e) Sale of property to a nonmember. The facts are the same as in
paragraph (a) of this Example 4, except that B sells the property to X
on January 1 of Year 5 for $110. As set forth in paragraphs (c) and (d)
of this Example 4, B has $15 of depreciation with respect to the
property in each of Years 3 and 4, causing S to take $5 of intercompany
gain into account in each year as ordinary income. The $40 balance of
S's intercompany gain is taken into account in Year 5 as a result of B's
sale to X, to reflect the $40 difference between B's $10 gain taken into
account and the $50 of recomputed gain ($110 of sale proceeds minus the
$60 basis B would have if the intercompany sale were a transfer between
divisions of a single corporation). Treating S and B as divisions of a
single corporation, $40 of the gain is section 1245 gain and $10 is
section 1231 gain. On a separate entity basis, S would have more than
$10 treated as section 1231 gain, and B would have no amount treated as
section 1231 gain. Under paragraph (c)(4)(ii) of this section, all $10
of the section 1231 gain is allocated to S. S's remaining $30 of gain,
and all of B's $10 gain, is treated as section 1245 gain.
Example 5. Intercompany sale followed by installment sale. (a)
Facts. S holds land for investment with a basis of $70x. On January 1 of
Year 1, S sells the land to B for $100x. B also holds the land for
investment. On July 1 of Year 3, B sells the land to X in exchange for
X's $110x note. The note bears a market rate of interest in excess of
the applicable Federal rate, and provides for principal payments of $55x
in Year 4 and $55x in Year 5. The interest charge under section 453A(c)
applies to X's note.
(b) Timing and attributes. S takes its $30x gain into account to
reflect the difference in each consolidated return year between B's gain
taken into account for the year and the recomputed gain. Under section
453, B takes into account $5x of gain in Year 4 and $5x of gain in Year
5. Thus, S takes into account $15x of gain in Year 4 and $15x of gain in
Year 5 to reflect the $15x difference in each of those years between B's
$5x gain taken into account and the $20x recomputed gain. Both S's $30x
gain and B's $10x gain are subject to the section 453A(c) interest
charge beginning in Year 3.
[[Page 278]]
(c) Election out under section 453(d). If, under the facts in
paragraph (a) of this Example 5, the P group wishes to elect not to
apply section 453 with respect to S's gain, an election under section
453(d) must be made for Year 3 with respect to B's gain. This election
will cause B's $10x gain to be taken into account in Year 3. Under the
matching rule, this will result in S's $30x gain being taken into
account in Year 3. (An election by the P group solely with respect to
S's gain has no effect because the gain from S's sale to B is taken into
account under the matching rule, and therefore must reflect the
difference between B's gain taken into account and the recomputed gain.)
(d) Sale to a nonmember at a loss, but overall gain. The facts are
the same as in paragraph (a) of this Example 5, except that B sells the
land to X in exchange for X's $90x note (rather than $110x note). If S
and B were divisions of a single corporation, B would succeed to S's
basis in the land, and the sale to X would be eligible for installment
reporting under section 453, because it resulted in an overall gain.
However, because only gains may be reported on the installment method,
B's $10x corresponding loss is taken into account in Year 3. Under
paragraph (b)(4) of this section the recomputed corresponding item is
$20x gain that would be taken into account under the installment method,
$0 in Year 3 and $10x in each of Years 4 and 5. Thus, in Year 3 S takes
$10x of gain into account to reflect the difference between B's $10x
loss taken into account and the $0 recomputed gain for Year 3. Under
paragraph (c)(4)(i) of this section, B's $10x corresponding loss offsets
$10x of S's intercompany gain, and B's attributes control. S takes $10x
of gain into account in each of Years 4 and 5 to reflect the difference
in those years between B's $0 gain taken into account and the $10x
recomputed gain that would be taken into account under the installment
method. Only the $20x of S's gain taken into account in Years 4 and 5 is
subject to the interest charge under section 453A(c) beginning in Year
3. (If P elects under section 453(d) for Year 3 not to apply section 453
with respect to the gain, all of S's $30x gain will be taken into
account in Year 3 to reflect the difference between B's $10x loss taken
into account and the $20x recomputed gain.)
(e) Intercompany loss, installment gain. The facts are the same as
in paragraph (a) of this Example 5, except that S has a $130x (rather
than $70x) basis in the land. Under paragraph (c)(1)(i) of this section,
the separate entity attributes of S's and B's items from the
intercompany transaction must be redetermined to produce the same effect
on consolidated taxable income (and tax liability) as if the transaction
had been a transfer between divisions. If S and B were divisions of a
single corporation, B would succeed to S's basis in the land and the
group would have $20x loss from the sale to X, installment reporting
would be unavailable, and the interest charge under section 453A(c)
would not apply. Accordingly, B's gain from the transaction is not
eligible for installment treatment under section 453. B takes its $10x
gain into account in Year 3, and S takes its $30x of loss into account
in Year 3 to reflect the difference between B's $10x gain and the $20x
recomputed loss.
(f) Recapture income. The facts are the same as in paragraph (a) of
this Example 5, except that S bought depreciable property (rather than
land) for $100x, claimed depreciation deductions, and reduced the
property's basis to $70x before Year 1. (To simplify the example, B's
depreciation is disregarded.) If the intercompany sale of property had
been a transfer between divisions of a single corporation, $30x of the
$40x gain from the sale to X would be section 1245 gain (which is
ineligible for installment reporting) and $10x would be section 1231
gain (which is eligible for installment reporting). On a separate entity
basis, S would have $30x of section 1245 gain and B would have $10x of
section 1231 gain. Accordingly, the attributes are not redetermined
under paragraph (c)(1)(i) of this section. All of B's $10x gain is
eligible for installment reporting and is taken into account $5x each in
Years 4 and 5 (and is subject to the interest charge under section
453A(c)). S's $30x gain is taken into account in Year 3 to reflect the
difference between B's $0 gain taken into account and the $30x of
recomputed gain. (If S had bought the depreciable property for $110x and
its recomputed basis under section 1245 had been $110x (rather than
$100x), B's $10x gain and S's $30x gain would both be recapture income
ineligible for installment reporting.)
Example 6. Intercompany sale of installment obligation. (a) Facts. S
holds land for investment with a basis of $70x. On January 1 of Year 1,
S sells the land to X in exchange for X's $100x note, and S reports its
gain on the installment method under section 453. X's note bears
interest at a market rate of interest in excess of the applicable
Federal rate, and provides for principal payments of $50x in Year 5 and
$50x in Year 6. Section 453A applies to X's note. On July 1 of Year 3, S
sells X's note to B for $100x, resulting in $30x gain from S's prior
sale of the land to X under section 453B(a).
(b) Timing and attributes. S's sale of X's note to B is an
intercompany transaction, and S's $30x gain is intercompany gain. S
takes $15x of the gain into account in each of Years 5 and 6 to reflect
the $15x difference in each year between B's $0 gain taken into account
and the $15x recomputed gain. S's gain continues to be treated as its
gain from the sale to X, and the deferred tax liability remains subject
to the interest charge under section 453A(c).
[[Page 279]]
(c) Worthlessness. The facts are the same as in paragraph (a) of
this Example 6, except that X's note becomes worthless on December 1 of
Year 3 and B has a $100x short-term capital loss under section 165(g) on
a separate entity basis. Under paragraph (c)(1)(ii) of this section, B's
holding period for X's note is aggregated with S's holding period. Thus,
B's loss is a long- term capital loss. S takes its $30x gain into
account in Year 3 to reflect the $30x difference between B's $100x loss
taken into account and the $70x recomputed loss. Under paragraph
(c)(1)(i) of this section, S's gain is long-term capital gain.
(d) Pledge. The facts are the same as in paragraph (a) of this
Example 6, except that, on December 1 of Year 3, B borrows $100x from an
unrelated bank and secures the indebtedness with X's note. X's note
remains subject to section 453A(d) following the sale to B. Under
section 453A(d), B's $100x of proceeds from the secured indebtedness is
treated as an amount received on December 1 of Year 3 by B on X's note.
Thus, S takes its entire $30x gain into account in Year 3.
Example 7. Performance of services. (a) Facts. S is a driller of
water wells. B operates a ranch in a remote location, and B's taxable
income from the ranch is not subject to section 447. B's ranch requires
water to maintain its cattle. During Year 1, S drills an artesian well
on B's ranch in exchange for $100 from B, and S incurs $80 of expenses
(e.g., for employees and equipment). B capitalizes its $100 cost for the
well under section 263, and takes into account $10 of cost recovery
deductions in each of Years 2 through 11. Under its separate entity
method of accounting, S would take its income and expenses into account
in Year 1. If S and B were divisions of a single corporation, the costs
incurred in drilling the well would be capitalized.
(b) Definitions. Under paragraph (b)(1) of this section, the service
transaction is an intercompany transaction, S is the selling member, and
B is the buying member. Under paragraph (b)(2)(ii) of this section, S's
$100 of income and $80 of related expenses are both included in
determining its intercompany income of $20.
(c) Timing and attributes. S's $20 of intercompany income is taken
into account under the matching rule to reflect the $20 difference
between B's corresponding items taken into account (based on its $100
cost basis in the well) and the recomputed corresponding items (based on
the $80 basis that B would have if S and B were divisions of a single
corporation and B's basis were determined by reference to S's $80 of
expenses). In Year 1, S takes into account $80 of its income and the $80
of expenses. In each of Years 2 through 11, S takes $2 of its $20
intercompany income into account to reflect the annual $2 difference
between B's $10 of cost recovery deductions taken into account and the
$8 of recomputed cost recovery deductions. S's $100 income and $80
expenses, and B's cost recovery deductions, are ordinary items (because
S's and B's items would be ordinary on a separate entity basis, the
attributes are not redetermined under paragraph (c)(1)(i) of this
section). If S's offsetting $80 of income and expense would not be taken
into account in the same year under its separate entity method of
accounting, they nevertheless must be taken into account under this
section in a manner that clearly reflects consolidated taxable income.
See paragraph (a)(3)(i) of this section.
(d) Sale of capitalized services. The facts are the same as in
paragraph (a) of this Example 7, except that B sells the ranch before
Year 11 and recognizes gain attributable to the well. To the extent of
S's income taken into account as a result of B's cost recovery
deductions, as well as S's offsetting $80 of income and expense, the
timing and attributes are determined in the manner provided in paragraph
(c) of this Example 7. The attributes of the remainder of S's $20 of
income and B's gain from the sale are redetermined to produce the same
effect on consolidated taxable income as if S and B were divisions of a
single corporation. Accordingly, S's remaining intercompany income is
treated as recapture income or section 1231 gain, even though it is from
S's performance of services.
Example 8. Rental of property. B operates a ranch that requires
grazing land for its cattle. S owns undeveloped land adjoining B's
ranch. On January 1 of Year 1, S leases grazing rights to B for Year 1.
B's $100 rent expense is deductible for Year 1 under its separate entity
accounting method. Under paragraph (b)(1) of this section, the rental
transaction is an intercompany transaction, S is the selling member, and
B is the buying member. S takes its $100 of income into account in Year
1 to reflect the $100 difference between B's rental deduction taken into
account and the $0 recomputed rental deduction. S's income and B's
deduction are ordinary items (because S's intercompany item and B's
corresponding item would both be ordinary on a separate entity basis,
the attributes are not redetermined under paragraph (c)(1)(i) of this
section).
Example 9. Intercompany sale of a partnership interest. (a) Facts. S
owns a 20% interest in the capital and profits of a general partnership.
The partnership holds land for investment with a basis equal to its
value, and operates depreciable assets which have value in excess of
basis. S's basis in its partnership interest equals its share of the
adjusted basis of the partnership's land and depreciable assets. The
partnership has an election under section 754 in effect. On January 1 of
Year 1, S sells its partnership interest to B at a gain. During Years 1
through 10, the partnership depreciates the operating assets, and B's
[[Page 280]]
depreciation deductions from the partnership reflect the increase in the
basis of the depreciable assets under section 743(b).
(b) Timing and attributes. S's gain is taken into account during
Years 1 through 10 to reflect the difference in each year between B's
depreciation deductions from the partnership taken into account and the
recomputed depreciation deductions from the partnership. Under
paragraphs (c)(1)(i) and (c)(4)(i) of this section, S's gain taken into
account is ordinary income. (The acceleration rule does not apply to S's
gain as a result of the section 743(b) adjustment, because the
adjustment is solely with respect to B and therefore no nonmember
reflects any part of the intercompany transaction.)
(c) Partnership sale of assets. The facts are the same as in
paragraph (a) of this Example 9, and the partnership sells some of its
depreciable assets to X at a gain on December 31 of Year 4. In addition
to the intercompany gain taken into account as a result of the
partnership's depreciation, S takes intercompany gain into account in
Year 4 to reflect the difference between B's partnership items taken
into account from the sale (which reflect the basis increase under
section 743(b)) and the recomputed partnership items. The attributes of
S's additional gain are redetermined to produce the same effect on
consolidated taxable income as if S and B were divisions of a single
corporation (recapture income or section 1231 gain).
(d) B's sale of partnership interest. The facts are the same as in
paragraph (a) of this Example 9, and on December 31 of Year 4, B sells
its partnership interest to X at no gain or loss. In addition to the
intercompany gain taken into account as a result of the partnership's
depreciation, the remaining balance of S's intercompany gain is taken
into account in Year 4 to reflect the difference between B's $0 gain
taken into account from the sale of the partnership interest and the
recomputed gain. The character of S's remaining intercompany item and
B's corresponding item are determined on a separate entity basis under
section 751, and then redetermined to the extent necessary to produce
the same effect as treating the intercompany transaction as occurring
between divisions of a single corporation.
(e) No section 754 election. The facts are the same as in paragraph
(d) of this Example 9, except that the partnership does not have a
section 754 election in effect, and B recognizes a capital loss from its
sale of the partnership interest to X on December 31 of Year 4. Because
there is no difference between B's depreciation deductions from the
partnership taken into account and the recomputed depreciation
deductions, S does not take any of its gain into account during Years 1
through 4 as a result of B's partnership's items. Instead, S's entire
intercompany gain is taken into account in Year 4 to reflect the
difference between B's loss taken into account from the sale to X and
the recomputed gain or loss.
Example 10. Net operating losses subject to section 382 or the SRLY
rules. (a) Facts. On January 1 of Year 1, P buys all of S's stock. S has
net operating loss carryovers from prior years. P's acquisition results
in an ownership change under section 382 with respect to S's loss
carryovers, and S has a net unrealized built-in gain (within the meaning
of section 382(h)(3)). S owns nondepreciable property with a $70 basis
and $100 value. On July 1 of Year 3, S sells the property to B for $100,
and its $30 gain is recognized built-in gain (within the meaning of
section 382(h)(2)) on a separate entity basis. On December 1 of Year 5,
B sells the property to X for $90.
(b) Timing and attributes. S's $30 gain is taken into account in
Year 5 to reflect the $30 difference between B's $10 loss taken into
account and the recomputed $20 gain. S and B are treated as divisions of
a single corporation for purposes of applying section 382 in connection
with the intercompany transaction. Under a single entity analysis, the
single corporation has losses subject to limitation under section 382,
and this limitation may be increased under section 382(h) if the single
corporation has recognized built-in gain with respect to those losses.
B's $10 corresponding loss offsets $10 of S's intercompany gain, and
thus, under paragraph (c)(4)(i) of this section, $10 of S's intercompany
gain is redetermined not to be recognized built-in gain. S's remaining
$20 intercompany gain continues to be treated as recognized built-in
gain.
(c) B's recognized built-in gain. The facts are the same as in
paragraph (a) of this Example 10, except that the property declines in
value after S becomes a member of the P group, S sells the property to B
for its $70 basis, and B sells the property to X for $90 during Year 5.
Treating S and B as divisions of a single corporation, S's sale to B
does not cause the property to cease to be built-in gain property. Thus,
B's $20 gain from its sale to X is recognized built-in gain that
increases the section 382 limitation applicable to S's losses.
(d) SRLY limitation. The facts are the same as in paragraph (a) of
this Example 10, except that P's acquisition of S is not subject to the
overlap rule of Sec. 1.1502-21(g), and S's net operating loss carryovers
are subject to the separate return limitation year (SRLY) rules. See
Sec. 1.1502-21(c). The application of the SRLY rules depends on S's
status as a separate corporation having losses from separate return
limitation years. Under paragraph (c)(5), the attribute of S's
intercompany item as it relates to S's SRLY limitation is not
redetermined, because the SRLY limitation depends on S's special status.
Accordingly, S's $30 intercompany gain is included in determining its
SRLY limitation for Year 5.
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Example 11. Section 475. (a) Facts. S, a dealer in securities within
the meaning of section 475(c), owns a security with a basis of $70. The
security is held for sale to customers and is not identified under
section 475(b) as within an exception to marking to market. On July 1 of
Year 1, S sells the security to B for $100. B is not a dealer and holds
the security for investment. On December 31 of Year 1, the fair market
value of the security is $100. On July 1 of Year 2, B sells the security
to X for $110.
(b) Attributes. Under section 475, a dealer in securities can treat
a security as within an exception to marking to market under section
475(b) only if it timely identifies the security as so described. Under
the matching rule, attributes must be redetermined by treating S and B
as divisions of a single corporation. As a result of S's activities, the
single corporation is treated as a dealer with respect to securities,
and B must continue to mark to market the security acquired from S.
Thus, B's corresponding items and the recomputed corresponding items are
determined by continuing to treat the security as not within an
exception to marking to market. Under section 475(d)(3), it is possible
for the character of S's intercompany items to differ from the character
of B's corresponding items.
(c) Timing and character. S has a $30 gain when it disposes of the
security by selling it to B. This gain is intercompany gain that is
taken into account in Year 1 to reflect the $30 difference between B's
$0 gain taken into account from marking the security to market under
section 475 and the recomputed $30 gain that would be taken into
account. The character of S's gain and B's gain are redetermined as if
the security were transferred between divisions. Accordingly, S's gain
is ordinary income under section 475(d)(3)(A)(i), but under section
475(d)(3)(B)(ii) B's $10 gain from its sale to X is capital gain that is
taken into account in Year 2.
(d) Nondealer to dealer. The facts are the same as in paragraph (a)
of this Example 11, except that S is not a dealer and holds the security
for investment with a $70 basis, B is a dealer to which section 475
applies and, immediately after acquiring the security from S for $100, B
holds the security for sale to customers in the ordinary course of its
trade or business. Because S is not a dealer and held the security for
investment, the security is treated as properly identified as held for
investment under section 475(b)(1) until it is sold to B. Under section
475(b)(3), the security thereafter ceases to be described in section
475(b)(1) because B holds the security for sale to customers. The mark-
to-market requirement applies only to changes in the value of the
security after B's acquisition. B's mark-to-market gain taken into
account and the recomputed mark-to-market gain are both determined based
on changes from the $100 value of the security at the time of B's
acquisition. There is no difference between B's $0 mark-to-market gain
taken into account in Year 1 and the $0 recomputed mark-to-market gain.
Therefore, none of S's gain is taken into account in Year 1 as a result
of B's marking the security to market in Year 1. In Year 2, B has a $10
gain when it disposes of the security by selling it to X, but would have
had a $40 gain if S and B were divisions of a single corporation. Thus,
S takes its $30 gain into account in Year 2 under the matching rule.
Under section 475(d)(3), S's gain is capital gain even though B's
subsequent gain or loss from marking to market or disposing of the
security is ordinary gain or loss. If B disposes of the security at a
$10 loss in Year 2, S's gain taken into account in Year 2 is still
capital because on a single entity basis section 475(d)(3) would provide
for $30 of capital gain and $10 of ordinary loss. Because the attributes
are not redetermined under paragraph (c)(1)(i) of this section,
paragraph (c)(4)(i) of this section does not apply. Furthermore, if B
held the security for investment, and so identified the security under
section 475(b)(1), the security would continue to be excepted from
marking to market.
Example 12. Section 1092. (a) Facts. On July 1 of Year 1, S enters
into offsetting long and short positions with respect to actively traded
personal property. The positions are not section 1256 contracts, and
they are the only positions taken into account for purposes of applying
section 1092. On August 1 of Year 1, S sells the long position to B at
an $11 loss, and there is $11 of unrealized gain in the offsetting short
position. On December 1 of Year 1, B sells the long position to X at no
gain or loss. On December 31 of Year 1, there is still $11 of unrealized
gain in the short position. On February 1 of Year 2, S closes the short
position at an $11 gain.
(b) Timing and attributes. If the sale from S to B were a transfer
between divisions of a single corporation, the $11 loss on the sale to X
would have been deferred under section 1092(a)(1)(A). Accordingly, there
is no difference in Year 1 between B's corresponding item of $0 and the
recomputed corresponding item of $0. S takes its $11 loss into account
in Year 2 to reflect the difference between B's corresponding item of $0
taken into account in Year 2 and the recomputed loss of $11 that would
have been taken into account in Year 2 under section 1092(a)(1)(B) if S
and B had been divisions of a single corporation. (The results are the
same under section 267(f)).
Example 13. Manufacturer incentive payments. (a) Facts. B is a
manufacturer that sells its products to independent dealers for resale.
S is a credit company that offers financing, including financing to
customers of the dealers. S also purchases the product from the dealers
for lease to customers of
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the dealers. During Year 1, B initiates a program of incentive payments
to the dealers' customers. Under B's program, S buys a product from an
independent dealer for $100 and leases it to a nonmember. S pays $90 to
the dealer for the product, and assigns to the dealer its $10 incentive
payment from B. Under their separate entity accounting methods, B would
deduct the $10 incentive payment in Year 1 and S would take a $90 basis
in the product. Assume that if S and B were divisions of a single
corporation, the $10 payment would not be deductible and the basis of
the property would be $100.
(b) Timing and attributes. Under paragraph (b)(1) of this section,
the incentive payment transaction is an intercompany transaction. Under
paragraph (b)(2)(iii) of this section, S has a $10 intercompany item not
yet taken into account under its separate entity method of accounting.
Under the matching rule, S takes its intercompany item into account to
reflect the difference between B's corresponding item taken into account
and the recomputed corresponding item. In Year 1 there is a $10
difference between B's $10 deduction taken into account and the $0
recomputed deduction. Accordingly, under the matching rule S must take
the $10 incentive payment into account as intercompany income in Year 1.
S's $10 of income and B's $10 deduction are ordinary items. S's basis in
the product is $100 rather than the $90 it would be under S's separate
entity method of accounting. S's additional $10 of basis in the product
is recovered based on subsequent events (e.g., S's cost recovery
deductions or its sale of the product).
Example 14. Source of income under section 863. (a) Intercompany
sale with no independent factory price. S manufactures inventory in the
United States, and recognizes $75 of income on sales to B in Year 1. B
distributes the inventory in Country Y and recognizes $25 of income on
sales to X, also in Year 1. Title passes from S to B, and from B to X,
in Country Y. There is no independent factory price (as defined in
regulations under section 863) for the sale from S to B. Under the
matching rule, S's $75 intercompany income and B's $25 corresponding
income are taken into account in Year 1. In determining the source of
income, S and B are treated as divisions of a single corporation, and
section 863 applies as if $100 of income were recognized from producing
in the United States and selling in Country Y. Assume that applying the
section 863 regulations on a single entity basis, $50 is treated as
foreign source income and $50 as U.S. source income. Assume further that
on a separate entity basis, S would have $37.50 of foreign source income
and $37.50 of U.S. source income, and that all of B's $25 of income
would be foreign source income. Thus, on a separate entity basis, S and
B would have $62.50 of combined foreign source income and $37.50 of U.S.
source income. Accordingly, under single entity treatment, $12.50 that
would be treated as foreign source income on a separate entity basis is
redetermined to be U.S. source income. Under paragraph (c)(1)(i) of this
section, attributes are redetermined only to the extent of the $12.50
necessary to achieve the same effect as a single entity determination.
Under paragraph (c)(4)(ii) of this section, the redetermined attribute
must be allocated between S and B using a reasonable method. For
example, it may be reasonable to recharacterize only S's foreign source
income as U.S. source income because only S would have any U.S. source
income on a separate entity basis. However, it may also be reasonable to
allocate the redetermined attribute between S and B in proportion to
their separate entity amounts of foreign source income (in a 3:2 ratio,
so that $7.50 of S's foreign source income is redetermined to be U.S.
source and $5 of B's foreign source income is redetermined to be U.S.
source), provided the same method is applied to all similar transactions
within the group.
(b) Intercompany sale with independent factory price. The facts are
the same as in paragraph (a) of this Example 14, except that an
independent factory price exists for the sale by S to B such that $70 of
S's $75 of income is attributable to the production function. Assume
that on a single entity basis, $70 is treated as U.S. source income
(because of the existence of the independent factory price) and $30 is
treated as foreign source income. Assume that on a separate entity
basis, $70 of S's income would be treated as U.S. source, $5 of S's
income would be treated as foreign source income, and all of B's $25
income would be treated as foreign source income. Because the results
are the same on a single entity basis and a separate entity basis, the
attributes are not redetermined under paragraph (c)(1)(i) of this
section.
(c) Sale of property reflecting intercompany services or
intangibles. S earns $10 of income performing services in the United
States for B. B capitalizes S's fees into the basis of property that it
manufactures in the United States and sells to an unrelated person in
Year 1 at a $90 profit, with title passing in Country Y. Under the
matching rule, S's $10 income and B's $90 income are taken into account
in Year 1. In determining the source of income, S and B are treated as
divisions of a single corporation, and section 863 applies as if $100
were earned from manufacturing in the United States and selling in
Country Y. Assume that on a single entity basis $50 is treated as
foreign source income and $50 is treated as U.S. source income. Assume
that on a separate entity basis, S would have $10 of U.S. source income,
and B would have $45 of foreign source income and $45 of U.S. source
income. Accordingly, under single entity treatment, $5 of income that
would be treated as U.S. source income on a separate
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entity basis is redetermined to be foreign source income. Under
paragraph (c)(1)(i) of this section, attributes are redetermined only to
the extent of the $5 necessary to achieve the same effect as a single
entity determination. Under paragraph (c)(4)(ii) of this section, the
redetermined attribute must be allocated between S and B using a
reasonable method. (If instead of performing services, S licensed an
intangible to B and earned $10 that would be treated as U.S. source
income on a separate entity basis, the results would be the same.)
Example 15. Section 1248. (a) Facts. On January 1 of Year 1, S forms
FT, a wholly owned foreign subsidiary, with a $10 contribution. During
Years 1 through 3, FT has earnings and profits of $40. None of the
earnings and profits is taxed as subpart F income under section 951, and
FT distributes no dividends to S during this period. On January 1 of
Year 4, S sells its FT stock to B for $50. While B owns FT, FT has a
deficit in earnings and profits of $10. On July 1 of Year 6, B sells its
FT stock for $70 to X, an unrelated foreign corporation.
(b) Timing. S's $40 of intercompany gain is taken into account in
Year 6 to reflect the difference between B's $20 of gain taken into
account and the $60 recomputed gain.
(c) Attributes. Under the matching rule, the attributes of S's
intercompany gain and B's corresponding gain are redetermined to have
the same effect on consolidated taxable income (and consolidated tax
liability) as if S and B were divisions of a single corporation. On a
single entity basis, there is $60 of gain and the portion which is
characterized as a dividend under section 1248 is determined on the
basis of FT's $30 of earnings and profits at the time of the sale of FT
to X (the sum of FT's $40 of earnings and profits while held by S and
FT's $10 deficit in earnings and profits while held by B). Therefore,
$30 of the $60 gain is treated as a dividend under section 1248. The
remaining $30 is treated as capital gain. On a separate entity basis,
all of S's $40 gain would be treated as a dividend under section 1248
and all of B's $20 gain would be treated as capital gain. Thus, as a
result of the single entity determination, $10 that would be treated as
a dividend under section 1248 on a separate entity basis is redetermined
to be capital gain. Under paragraph (c)(4)(ii) of this section, this
redetermined attribute must be allocated between S's intercompany item
and B's corresponding item by using a reasonable method. On a separate
entity basis, only S would have any amount treated as a dividend under
section 1248 available for redetermination. Accordingly, $10 of S's
income is redetermined to be not subject to section 1248, with the
result that $30 of S's intercompany gain is treated as a dividend and
the remaining $10 is treated as capital gain. All of B's corresponding
gain is treated as capital gain, as it would be on a separate entity
basis.
(d) B has loss. The facts are the same as in paragraph (a) of this
Example 15, except that FT has no earnings and profits or deficit in
earnings and profits while B owns FT, and B sells the FT stock to X for
$40. On a single entity basis, there is $30 of gain, and section 1248 is
applied on the basis of FT's $40 earnings and profits at the time of the
sale of FT to X. Under section 1248, the amount treated as a dividend is
limited to $30 (the amount of the gain). On a separate entity basis, S's
entire $40 gain would be treated as a dividend under section 1248, and
B's $10 loss would be a capital loss. B's $10 corresponding loss offsets
$10 of S's intercompany gain and, under paragraph (c)(4)(i) of this
section, the attributes of B's corresponding item control. Accordingly,
$10 of S's gain must be redetermined to be capital gain. B's $10 loss
remains a capital loss. (If, however, S sold FT to B at a loss and B
sold FT to X at a gain, it may be unreasonable for the attributes of B's
corresponding gain to control S's offsetting intercompany loss. If B's
attributes were to control, for example, the group could possibly claim
a larger foreign tax credit than would be available if S and B were
divisions of a single corporation.)
(d) Acceleration rule. S's intercompany items and B's corresponding
items are taken into account under this paragraph (d) to the extent they
cannot be taken into account to produce the effect of treating S and B
as divisions of a single corporation. For this purpose, the following
rules apply:
(1) S's items--(i) Timing. S takes its intercompany items into
account to the extent they cannot be taken into account to produce the
effect of treating S and B as divisions of a single corporation. The
items are taken into account immediately before it first becomes
impossible to achieve this effect. For this purpose, the effect cannot
be achieved--
(A) To the extent an intercompany item or corresponding item will
not be taken into account in determining the group's consolidated
taxable income (or consolidated tax liability) under the matching rule
(for example, if S or B becomes a nonmember, or if S's intercompany item
is no longer reflected in the difference between B's basis (or an amount
equivalent to basis) in property and the basis (or equivalent amount)
the property would have if S and B were divisions of a single
corporation); or
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(B) To the extent a nonmember reflects, directly or indirectly, any
aspect of the intercompany transaction (e.g., if B's cost basis in
property purchased from S is reflected by a nonmember under section 362
following a section 351 transaction).
(ii) Attributes. The attributes of S's intercompany items taken into
account under this paragraph (d)(1) are determined as follows:
(A) Sale, exchange, or distribution. If the item is from an
intercompany sale, exchange, or distribution of property, its attributes
are determined under the principles of the matching rule as if B sold
the property, at the time the item is taken into account under paragraph
(d)(1)(i) of this section, for a cash payment equal to B's adjusted
basis in the property (i.e., at no net gain or loss), to the following
person:
(1) Property leaves the group. If the property is owned by a
nonmember immediately after S's item is taken into account, B is treated
as selling the property to that nonmember. If the nonmember is related
for purposes of any provision of the Internal Revenue Code or
regulations to any party to the intercompany transaction (or any related
transaction) or to the common parent, the nonmember is treated as
related to B for purposes of that provision. For example, if the
nonmember is related to P within the meaning of section 1239(b), the
deemed sale is treated as being described in section 1239(a). See
paragraph (j)(6) of this section, under which property is not treated as
being owned by a nonmember if it is owned by the common parent after the
common parent becomes the only remaining member.
(2) Property does not leave the group. If the property is not owned
by a nonmember immediately after S's item is taken into account, B is
treated as selling the property to an affiliated corporation that is not
a member of the group.
(B) Other transactions. If the item is from an intercompany
transaction other than a sale, exchange, or distribution of property
(e.g., income from S's services capitalized by B), its attributes are
determined on a separate entity basis.
(2) B's items--(i) Attributes. The attributes of B's corresponding
items continue to be redetermined under the principles of the matching
rule, with the following adjustments:
(A) If S and B continue to join with each other in the filing of
consolidated returns, the attributes of B's corresponding items (and any
applicable holding periods) are determined by continuing to treat S and
B as divisions of a single corporation.
(B) Once S and B no longer join with each other in the filing of
consolidated returns, the attributes of B's corresponding items are
determined as if the S division (but not the B division) were
transferred by the single corporation to an unrelated person. Thus, S's
activities (and any applicable holding period) before the intercompany
transaction continue to affect the attributes of the corresponding items
(and any applicable holding period).
(ii) Timing. If paragraph (d)(1) of this section applies to S, B
nevertheless continues to take its corresponding items into account
under its accounting method. However, the redetermination of the
attributes of a corresponding item under this paragraph (d)(2) might
affect its timing.
(3) Examples. The acceleration rule of this paragraph (d) is
illustrated by the following examples.
Example 1. Becoming a nonmember--timing. (a) Facts. S owns land with
a basis of $70. On January 1 of Year 1, S sells the land to B for $100.
On July 1 of Year 3, P sells 60% of S's stock to X for $60 and, as a
result, S becomes a nonmember.
(b) Matching rule. Under the matching rule, none of S's $30 gain is
taken into account in Years 1 through 3 because there is no difference
between B's $0 gain or loss taken into account and the recomputed gain
or loss.
(c) Acceleration of S's intercompany items. Under the acceleration
rule of paragraph (d) of this section, S's $30 gain is taken into
account in computing consolidated taxable income (and consolidated tax
liability) immediately before the effect of treating S and B as
divisions of a single corporation cannot be produced. Because the effect
cannot be produced once S becomes a nonmember, S takes its $30 gain into
account in Year 3 immediately before becoming a nonmember. S's gain is
reflected under Sec. 1.1502-32 in P's basis in the S stock immediately
before P's sale of the stock. Under Sec. 1.1502-32, P's basis in the S
stock is increased by $30, and therefore P's
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gain is reduced (or loss is increased) by $18 (60% of $30). See also
Secs. 1.1502-33 and 1.1502-76(b). (The results would be the same if S
sold the land to B in an installment sale to which section 453 would
otherwise apply, because S must take its intercompany gain into account
under this section.)
(d) B's corresponding items. Notwithstanding the acceleration of S's
gain, B continues to take its corresponding items into account under its
accounting method. Thus, B's items from the land are taken into account
based on subsequent events (e.g., its sale of the land).
(e) Sale of B's stock. The facts are the same as in paragraph (a) of
this Example 1, except that P sells 60% of B's stock (rather than S
stock) to X for $60 and, as a result, B becomes a nonmember. Because the
effect of treating S and B as divisions of a single corporation cannot
be produced once B becomes a nonmember, S takes its $30 gain into
account under the acceleration rule immediately before B becomes a
nonmember. (The results would be the same if S sold the land to B in an
installment sale to which section 453 would otherwise apply, because S
must take its intercompany gain into account under this section.)
(f) Discontinue filing consolidated returns. The facts are the same
as in paragraph (a) of this Example 1, except that the P group receives
permission under Sec. 1.1502-75(c) to discontinue filing consolidated
returns beginning in Year 3. Under the acceleration rule, S takes its
$30 gain into account on December 31 of Year 2.
(g) No subgroups. The facts are the same as in paragraph (a) of this
Example 1, except that P simultaneously sells all of the stock of both S
and B to X (rather than 60% of S's stock), and S and B become members of
the X consolidated group. Because the effect of treating S and B as
divisions of a single corporation in the P group cannot be produced once
S and B become nonmembers, S takes its $30 gain into account under the
acceleration rule immediately before S and B become nonmembers.
(Paragraph (j)(5) of this section does not apply to treat the X
consolidated group as succeeding to the P group because the X group
acquired only the stock of S and B.) However, so long as S and B
continue to join with each other in the filing of consolidated returns,
B continues to treat S and B as divisions of a single corporation for
purposes of determining the attributes of B's corresponding items from
the land.
Example 2. Becoming a nonmember--attributes. (a) Facts. S holds land
for investment with a basis of $70. On January 1 of Year 1, S sells the
land to B for $100. B holds the land for sale to customers in the
ordinary course of business, and expends substantial resources over a
two-year period subdividing, developing, and marketing the land. On July
1 of Year 3, before B has sold any of the land, P sells 60% of S's stock
to X for $60 and, as a result, S becomes a nonmember.
(b) Attributes. Under the acceleration rule, the attributes of S's
gain are redetermined under the principles of the matching rule as if B
sold the land to an affiliated corporation that is not a member of the
group for a cash payment equal to B's adjusted basis in the land
(because the land continues to be held within the group). Thus, whether
S's gain is capital gain or ordinary income depends on the activities of
both S and B. Because S and B no longer join with each other in the
filing of consolidated returns, the attributes of B's corresponding
items (e.g., from its subsequent sale of the land) are redetermined
under the principles of the matching rule as if the S division (but not
the B division) were transferred by the single corporation to an
unrelated person at the time of P's sale of the S stock. Thus, B
continues to take into account the activities of S with respect to the
land before the intercompany transaction.
(c) Depreciable property. The facts are the same as in paragraph (a)
of this Example 2, except that the property sold by S to B is
depreciable property. Section 1239 applies to treat all of S's gain as
ordinary income because it is taken into account as a result of B's
deemed sale of the property to a affiliated corporation that is not a
member of the group (a related person within the meaning of section
1239(b)).
Example 3. Selling member's disposition of installment note. (a)
Facts. S owns land with a basis of $70. On January 1 of Year 1, S sells
the land to B in exchange for B's $110 note. The note bears a market
rate of interest in excess of the applicable Federal rate, and provides
for principal payments of $55 in Year 4 and $55 in Year 5. On July 1 of
Year 3, S sells B's note to X for $110.
(b) Timing. S's intercompany gain is taken into account under this
section, and not under the rules of section 453. Consequently, S's sale
of B's note does not result in its intercompany gain from the land being
taken into account (e.g., under section 453B). The sale does not prevent
S's intercompany items and B's corresponding items from being taken into
account in determining the group's consolidated taxable income under the
matching rule, and X does not reflect any aspect of the intercompany
transaction (X has its own cost basis in the note). S will take the
intercompany gain into account under the matching rule or acceleration
rule based on subsequent events (e.g., B's sale of the land). See also
paragraph (g) of this section for additional rules applicable to B's
note as an intercompany obligation.
Example 4. Cancellation of debt and attribute reduction under
section 108(b). (a) Facts. S holds land for investment with a basis of
$0. On January 1 of Year 1, S sells the land to B
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for $100. B also holds the land for investment. During Year 3, B is
insolvent and B's nonmember creditors discharge $60 of B's indebtedness.
Because of insolvency, B's $60 discharge is excluded from B's gross
income under section 108(a), and B reduces the basis of the land by $60
under sections 108(b) and 1017.
(b) Acceleration rule. As a result of B's basis reduction under
section 1017, $60 of S's intercompany gain will not be taken into
account under the matching rule (because there is only a $40 difference
between B's $40 basis in the land and the $0 basis the land would have
if S and B were divisions of a single corporation). Accordingly, S takes
$60 of its gain into account under the acceleration rule in Year 3. S's
gain is long-term capital gain, determined under paragraph (d)(1)(ii) of
this section as if B sold the land to an affiliated corporation that is
not a member of the group for $100 immediately before the basis
reduction.
(c) Purchase price adjustment. Assume instead that S sells the land
to B in exchange for B's $100 purchase money note, B remains solvent,
and S subsequently agrees to discharge $60 of the note as a purchase
price adjustment to which section 108(e)(5) applies. Under applicable
principles of tax law, $60 of S's gain and $60 of B's basis in the land
are eliminated and never taken into account. Similarly, the note is not
treated as satisfied and reissued under paragraph (g) of this section.
Example 5. Section 481. (a) Facts. S operates several trades or
businesses, including a manufacturing business. S receives permission to
change its method of accounting for valuing inventory for its
manufacturing business. S increases the basis of its ending inventory by
$100, and the related $100 positive section 481(a) adjustment is to be
taken into account ratably over six taxable years, beginning in Year 1.
During Year 3, S sells all of the assets used in its manufacturing
business to B at a gain. Immediately after the transfer, B does not use
the same inventory valuation method as S. On a separate entity basis,
S's sale results in an acceleration of the balance of the section 481(a)
adjustment to Year 3.
(b) Timing and attributes. Under paragraph (b)(2) of this section,
the balance of S's section 481(a) adjustment accelerated to Year 3 is
intercompany income. However, S's $100 basis increase before the
intercompany transaction eliminates the related difference for this
amount between B's corresponding items taken into account and the
recomputed corresponding items in subsequent periods. Because the
accelerated section 481(a) adjustment will not be taken into account in
determining the group's consolidated taxable income (and consolidated
tax liability) under the matching rule, the balance of S's section 481
adjustment is taken into account under the acceleration rule as ordinary
income at the time of the intercompany transaction. (If S's sale had not
resulted in accelerating S's section 481(a) adjustment on a separate
entity basis, S would have no intercompany income to be taken into
account under this section.)
(e) Simplifying rules--(1) Dollar-value LIFO inventory methods--(i)
In general. This paragraph (e)(1) applies if either S or B uses a
dollar-value LIFO inventory method to account for intercompany
transactions. Rather than applying the matching rule separately to each
intercompany inventory transaction, this paragraph (e)(1) provides
methods to apply an aggregate approach that is based on dollar-value
LIFO inventory accounting. Any method selected under this paragraph
(e)(1) must be applied consistently.
(ii) B uses dollar-value LIFO--(A) In general. If B uses a dollar-
value LIFO inventory method to account for its intercompany inventory
purchases, and includes all of its inventory costs incurred for a year
in its cost of goods sold for the year (that is, B has no inventory
increment for the year), S takes into account all of its intercompany
inventory items for the year. If B does not include all of its inventory
costs incurred for the year in its cost of goods sold for the year (that
is, B has an inventory increment for the year), S does not take all of
its intercompany inventory income or loss into account. The amount not
taken into account is determined under either the increment averaging
method of paragraph (e)(1)(ii)(B) of this section or the increment
valuation method of paragraph (e)(1)(ii)(C) of this section. Separate
computations are made for each pool of B that receives intercompany
purchases from S, and S's amount not taken into account is layered based
on B's LIFO inventory layers.
(B) Increment averaging method. Under this paragraph (e)(1)(ii)(B),
the amount not taken into account is the amount of S's intercompany
inventory income or loss multiplied by the ratio of the LIFO value of
B's current-year costs of its layer of increment to B's total inventory
costs incurred for the year under its LIFO inventory method. If B
includes more than its inventory costs incurred during any subsequent
year in its cost of goods sold (a decrement), S
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takes into account the intercompany inventory income or loss layers in
the same manner and proportion as B takes into account its inventory
decrements.
(C) Increment valuation method. Under this paragraph (e)(1)(ii)(C),
the amount not taken into account is the amount of S's intercompany
inventory income or loss for the appropriate period multiplied by the
ratio of the LIFO value of B's current-year costs of its layer of
increment to B's total inventory costs incurred in the appropriate
period under its LIFO inventory method. The principles of paragraph
(e)(1)(ii)(B) of this section otherwise apply. The appropriate period is
the period of B's year used to determine its current-year costs.
(iii) S uses dollar-value LIFO. If S uses a dollar-value LIFO
inventory method to account for its intercompany inventory sales, S may
use any reasonable method of allocating its LIFO inventory costs to
intercompany transactions. LIFO inventory costs include costs of prior
layers if a decrement occurs. For example, a reasonable allocation of
the most recent costs incurred during the consolidated return year can
be used to compute S's intercompany inventory income or loss for the
year if S has an inventory increment and uses the earliest acquisitions
costs method, but S must apportion costs from the most recent
appropriate layers of increment if an inventory decrement occurs for the
year.
(iv) Other reasonable methods. S or B may use a method not
specifically provided in this paragraph (e)(1) that is expected to
reasonably take into account intercompany items and corresponding items
from intercompany inventory transactions. However, if the method used
results, for any year, in a cumulative amount of intercompany inventory
items not taken into account by S that significantly exceeds the
cumulative amount that would not be taken into account under paragraph
(e)(1)(ii) or (iii) of this section, S must take into account for that
year the amount necessary to eliminate the excess. The method is
thereafter applied with appropriate adjustments to reflect the amount
taken into account.
(v) Examples. The inventory rules of this paragraph (e)(1) are
illustrated by the following examples.
Example 1. Increment averaging method. (a) Facts. Both S and B use a
double-extension, dollar-value LIFO inventory method, and both value
inventory increments using the earliest acquisitions cost valuation
method. During Year 2, S sells 25 units of product Q to B on January 15
at $10/unit. S sells another 25 units on April 15, on July 15, and on
September 15, at $12/unit. S's earliest cost of product Q is $7.50/unit
and S's most recent cost of product Q is $8.00/unit. Both S and B have
an inventory increment for the year. B's total inventory costs incurred
during Year 2 are $6,000 and the LIFO value of B's Year 2 layer of
increment is $600.
(b) Intercompany inventory income. Under paragraph (e)(1)(iii) of
this section, S must use a reasonable method of allocating its LIFO
inventory costs to intercompany transactions. Because S has an inventory
increment for Year 2 and uses the earliest acquisitions cost method, a
reasonable method of determining its intercompany cost of goods sold for
product Q is to use its most recent costs. Thus, its intercompany cost
of goods sold is $800 ($8.00 most recent cost, multiplied by 100 units
sold to B), and its intercompany inventory income is $350 ($1,150 sales
proceeds from B minus $800 cost).
(c) Timing. (i) Under the increment averaging method of paragraph
(e)(1)(ii)(B) of this section, $35 of S's $350 of intercompany inventory
income is not taken into account in Year 2, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY95.002
(ii) Thus, $315 of S's intercompany inventory income is taken into
account in Year 2 ($350 of total intercompany inventory income minus $35
not taken into account).
(d) S incurs a decrement. The facts are the same as in paragraph (a)
of this Example 1, except that in Year 2, S incurs a decrement equal to
50% of its Year 1 layer. Under paragraph (e)(1)(iii) of this section, S
must reasonably allocate the LIFO cost of the decrement to the cost of
goods sold to B to determine S's intercompany inventory income.
(e) B incurs a decrement. The facts are the same as in paragraph (a)
of this Example 1, except that B incurs a decrement in Year 2. S must
take into account the entire $350 of
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Year 2 intercompany inventory income because all 100 units of product Q
are deemed sold by B in Year 2.
Example 2. Increment valuation method. (a) The facts are the same as
in Example 1. In addition, B's use of the earliest acquisition's cost
method of valuing its increments results in B valuing its year-end
inventory using costs incurred from January through March. B's costs
incurred during the year are: $1,428 in the period January through
March; $1,498 in the period April through June; $1,524 in the period
July through September; and $1,550 in the period October through
December. S's intercompany inventory income for these periods is: $50 in
the period January through March ((25 x $10)-(25 x $8)); $100 in the
period April through June ((25 x $12)-(25 x $8)); $100 in the period
July through September ((25 x $12)-(25 x $8)); and $100 in the period
October through December ((25 x $12)-(25 x $8)).
(b) Timing. (i) Under the increment valuation method of paragraph
(e)(1)(ii)(C) of this section, $21 of S's $350 of intercompany inventory
income is not taken into account in Year 2, computed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY95.003
(ii) Thus, $329 of S's intercompany inventory income is taken into
account in Year 2 ($350 of total intercompany inventory income minus $21
not taken into account).
(c) B incurs a subsequent decrement. The facts are the same as in
paragraph (a) of this Example 2. In addition, assume that in Year 3, B
experiences a decrement in its pool that receives intercompany purchases
from S. B's decrement equals 20% of the base-year costs for its Year 2
layer. The fact that B has incurred a decrement means that all of its
inventory costs incurred for Year 3 are included in cost of goods sold.
As a result, S takes into account its entire amount of intercompany
inventory income from its Year 3 sales. In addition, S takes into
account $4.20 of its Year 2 layer of intercompany inventory income not
already taken into account (20% of $21).
Example 3. Other reasonable inventory methods. (a) Facts. Both S and
B use a dollar-value LIFO inventory method for their inventory
transactions. During Year 1, S sells inventory to B and to X. Under
paragraph (e)(1)(iv) of this section, to compute its intercompany
inventory income and the amount of this income not taken into account, S
computes its intercompany inventory income using the transfer price of
the inventory items less a FIFO cost for the goods, takes into account
these items based on a FIFO cost flow assumption for B's corresponding
items, and the LIFO methods used by S and B are ignored for these
computations. These computations are comparable to the methods used by S
and B for financial reporting purposes, and the book methods and results
are used for tax purposes. S adjusts the amount of intercompany
inventory items not taken into account as required by section 263A.
(b) Reasonable method. The method used by S is a reasonable method
under paragraph (e)(1)(iv) of this section if the cumulative amount of
intercompany inventory items not taken into account by S is not
significantly greater than the cumulative amount that would not be taken
into account under the methods specifically described in paragraph
(e)(1) of this section. If, for any year, the method results in a
cumulative amount of intercompany inventory items not taken into account
by S that significantly exceeds the cumulative amount that would not be
taken into account under the methods specifically provided, S must take
into account for that year the amount necessary to eliminate the excess.
The method is thereafter applied with appropriate adjustments to reflect
the amount taken into account (e.g., to prevent the amount from being
taken into account more than once).
(2) Reserve accounting--(i) Banks and thrifts. Except as provided in
paragraph (g)(3)(iv) of this section (deferral of items from an
intercompany obligation), a member's addition to, or reduction of, a
reserve for bad debts that is
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maintained under section 585 or 593 is taken into account on a separate
entity basis. For example, if S makes a loan to a nonmember and
subsequently sells the loan to B, any deduction for an addition to a bad
debt reserve under section 585 and any recapture income (or reduced bad
debt deductions) are taken into account on a separate entity basis
rather than as intercompany items or corresponding items taken into
account under this section. Any gain or loss of S from its sale of the
loan to B is taken into account under this section, however, to the
extent it is not attributable to recapture of the reserve.
(ii) Insurance companies--(A) Direct insurance. If a member provides
insurance to another member in an intercompany transaction, the
transaction is taken into account by both members on a separate entity
basis. For example, if one member provides life insurance coverage for
another member with respect to its employees, the premiums, reserve
increases and decreases, and death benefit payments are determined and
taken into account by both members on a separate entity basis rather
than taken into account under this section as intercompany items and
corresponding items.
(B) Reinsurance--(1) In general. Paragraph (e)(2)(ii)(A) of this
section does not apply to a reinsurance transaction that is an
intercompany transaction. For example, if a member assumes all or a
portion of the risk on an insurance contract written by another member,
the amounts transferred as reinsurance premiums, expense allowances,
benefit reimbursements, reimbursed policyholder dividends, experience
rating adjustments, and other similar items are taken into account under
the matching rule and the acceleration rule. For purposes of this
section, the assuming company is treated as B and the ceding company is
treated as S.
(2) Reserves determined on a separate entity basis. For purposes of
determining the amount of a member's increase or decrease in reserves,
the amount of any reserve item listed in section 807(c) or 832(b)(5)
resulting from a reinsurance transaction that is an intercompany
transaction is determined on a separate entity basis. But see section
845, under which the Commissioner may allocate between or among the
members any items, recharacterize any such items, or make any other
adjustments necessary to reflect the proper source and character of the
separate taxable income of a member.
(3) Consent to treat intercompany transactions on a separate entity
basis--(i) General rule. The common parent may request consent to take
into account on a separate entity basis items from intercompany
transactions other than intercompany transactions with respect to stock
or obligations of members. Consent may be granted for all items, or for
items from a class or classes of transactions. The consent is effective
only if granted in writing by the Internal Revenue Service. Unless
revoked with the written consent of the Internal Revenue Service, the
separate entity treatment applies to all affected intercompany
transactions in the consolidated return year for which consent is
granted and in all subsequent consolidated return years. Consent under
this paragraph (e)(3) does not apply for purposes of taking into account
losses and deductions deferred under section 267(f).
(ii) Time and manner for requesting consent. The request for consent
described in paragraph (e)(3)(i) of this section must be made in the
form of a ruling request. The request must be signed by the common
parent, include any information required by the Internal Revenue
Service, and be filed on or before the due date of the consolidated
return (not including extensions of time) for the first consolidated
return year to which the consent is to apply. The Internal Revenue
Service may impose terms and conditions for granting consent. A copy of
the consent must be attached to the group's consolidated returns (or
amended returns) as required by the terms of the consent.
(iii) Effect of consent on methods of accounting. A consent for
separate entity accounting under this paragraph (e)(3), and a revocation
of that consent, may require changes in members' methods of accounting
for intercompany transactions. Because the consent, or a revocation of
the consent, is effective for
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all intercompany transactions occurring in the consolidated return year
for which the consent or revocation is first effective, any change in
method is effected on a cut-off basis. Section 446(e) consent is granted
for any changes in methods of accounting for intercompany transactions
that are necessary solely to conform a member's methods to a binding
consent with respect to the group under this paragraph (e)(3) or the
revocation of that consent, provided the changes are made in the first
consolidated return year for which the consent or revocation under this
paragraph (e)(3) is effective. Therefore, section 446(e) consent must be
separately requested under applicable administrative procedures if a
member has failed to conform its practices to the separate entity
accounting provided under this paragraph (e)(3) or the revocation of
that treatment in the first consolidated return year for which the
consent to use separate entity accounting or revocation of that consent
is effective.
(iv) Consent to treat intercompany transactions on a separate entity
basis under prior law. A group that has received consent that is in
effect as of the first day of the first consolidated return year
beginning on or after July 12, 1995 to treat certain intercompany
transactions as provided in Sec. 1.1502-13(c)(3) of the regulations (as
contained in the 26 CFR part 1 edition revised as of April 1, 1995) will
be considered to have obtained the consent of the Commissioner to take
items from intercompany transactions into account on a separate entity
basis as provided in paragraph (e)(3)(i) of this section. This treatment
is applicable only to the items, class or classes of transactions for
which consent was granted under prior law.
(f) Stock of members--(1) In general. In addition to the general
rules of this section, the rules of this paragraph (f) apply to stock of
members.
(2) Intercompany distributions to which section 301 applies--(i) In
general. This paragraph (f)(2) provides rules for intercompany
transactions to which section 301 applies (intercompany distributions).
For purposes of determining whether a distribution is an intercompany
distribution, it is treated as occurring under the principles of the
entitlement rule of paragraph (f)(2)(iv) of this section. A distribution
is not an intercompany distribution to the extent it is deducted by the
distributing member. See, for example, section 1382(c)(1).
(ii) Distributee member. An intercompany distribution is not
included in the gross income of the distributee member (B). However,
this exclusion applies to a distribution only to the extent there is a
corresponding negative adjustment reflected under Sec. 1.1502-32 in B's
basis in the stock of the distributing member (S). For example, no
amount is included in B's gross income under section 301(c)(3) from a
distribution in excess of the basis of the stock of a subsidiary that
results in an excess loss account under Sec. 1.1502-32(a) which is
treated as negative basis under Sec. 1.1502-19. B's dividend received
deduction under section 243(a)(3) is determined without regard to any
intercompany distributions under this paragraph (f)(2) to the extent
they are not included in gross income. See Sec. 1.1502-26(b)
(applicability of the dividends received deduction to distributions not
excluded from gross income, such as a distribution from the common
parent to a subsidiary owning stock of the common parent).
(iii) Distributing member. The principles of section 311(b) apply to
S's loss, as well as gain, from an intercompany distribution of
property. Thus, S's loss is taken into account under the matching rule
if the property is subsequently sold to a nonmember. However, section
311(a) continues to apply to distributions to nonmembers (for example,
loss is not recognized).
(iv) Entitlement rule--(A) In general. For all Federal income tax
purposes, an intercompany distribution is treated as taken into account
when the shareholding member becomes entitled to it (generally on the
record date). For example, if B becomes entitled to a cash distribution
before it is made, the distribution is treated as made when B becomes
entitled to it. For this purpose, B is treated as entitled to a
distribution no later than the time the distribution is taken into
account under the Internal Revenue Code (e.g., under section 305(c)). To
the extent a
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distribution is not made, appropriate adjustments must be made as of the
date it was taken into account.
(B) Nonmember shareholders. If nonmembers own stock of the
distributing corporation at the time the distribution is treated as
occurring under this paragraph (f)(2)(iv), appropriate adjustments must
be made to prevent the acceleration of the distribution to members from
affecting distributions to nonmembers.
(3) Boot in an intercompany reorganization--(i) Scope. This
paragraph (f)(3) provides additional rules for an intercompany
transaction in which the receipt of money or other property
(nonqualifying property) results in the application of section 356. For
example, the distribution of stock of a lower-tier member to a higher-
tier member in an intercompany transaction to which section 355 would
apply but for the receipt of nonqualifying property is a transaction to
which this paragraph (f)(3) applies. This paragraph (f)(3) does not
apply if a party to the transaction becomes a member or nonmember as
part of the same plan or arrangement. For example, if S merges into a
nonmember in a transaction described in section 368(a)(1)(A), this
paragraph (f)(3) does not apply.
(ii) Treatment. Nonqualifying property received as part of a
transaction described in this paragraph (f)(3) is treated as received by
the member shareholder in a separate transaction. See, for example,
sections 302 and 311 (rather than sections 356 and 361). The
nonqualifying property is treated as taken into account immediately
after the transaction if section 354 would apply but for the fact that
nonqualifying property is received. It is treated as taken into account
immediately before the transaction if section 355 would apply but for
the fact that nonqualifying property is received. The treatment under
this paragraph (f)(3)(ii) applies for all Federal income tax purposes.
(4) Acquisition by issuer of its own stock. If a member acquires its
own stock, or an option to buy or sell its own stock, in an intercompany
transaction, the member's basis in that stock or option is treated as
eliminated for all purposes. Accordingly, S's intercompany items from
the stock or options of B are taken into account under this section if B
acquires the stock or options in an intercompany transaction (unless,
for example, B acquires the stock in exchange for successor property
within the meaning of paragraph (j)(1) of this section in a
nonrecognition transaction). For example, if B redeems its stock from S
in a transaction to which section 302(a) applies, S's gain from the
transaction is taken into account immediately under the acceleration
rule.
(5) Certain liquidations and distributions--(i) Netting allowed. S's
intercompany item from a transfer to B of the stock of another
corporation (T) is taken into account under this section in certain
circumstances even though the T stock is never held by a nonmember after
the intercompany transaction. For example, if S sells all of T's stock
to B at a gain, and T subsequently liquidates into B in a separate
transaction to which section 332 applies, S's gain is taken into account
under the matching rule. Under paragraph (c)(6)(ii) of this section, S's
intercompany gain taken into account as a result of a liquidation under
section 332 or a comparable nonrecognition transaction is not
redetermined to be excluded from gross income. Under this paragraph
(f)(5)(i), if S has both intercompany income or gain and intercompany
deduction or loss attributable to stock of the same corporation having
the same material terms, only the income or gain in excess of the
deduction or loss is subject to paragraph (c)(6)(ii) of this section.
This paragraph (f)(5)(i) applies only to a transaction in which B's
basis in its T stock is permanently eliminated in a liquidation under
section 332 or any comparable nonrecognition transaction, including--
(A) A merger of B into T under section 368(a);
(B) A distribution by B of its T stock in a transaction described in
section 355; or
(C) A deemed liquidation of T resulting from an election under
section 338(h)(10).
(ii) Elective relief--(A) In general. If an election is made
pursuant to this paragraph (f)(5)(ii), certain transactions are
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recharacterized to prevent S's items from being taken into account or to
provide offsets to those items. This paragraph (f)(5)(ii) applies only
if T is a member throughout the period beginning with S's transfer and
ending with the completion of the nonrecognition transaction.
(B) Section 332--(1) In general. If section 332 applies to T's
liquidation into B, and B transfers T's assets to a new member (new T)
in a transaction not otherwise pursuant to the same plan or arrangement
as the liquidation, the transfer is nevertheless treated for all Federal
income tax purposes as pursuant to the same plan or arrangement as the
liquidation. For example, if T liquidates into B, but B forms new T by
transferring substantially all of T's former assets to new T, S's
intercompany gain or loss generally is not taken into account solely as
a result of the liquidation if the liquidation and transfer would
qualify as a reorganization described in section 368(a). (Under
paragraph (j)(1) of this section, B's stock in new T would be a
successor asset to B's stock in T, and S's gain would be taken into
account based on the new T stock.)
(2) Time limitation and adjustments. The transfer of an asset to new
T not otherwise pursuant to the same plan or arrangement as the
liquidation is treated under this paragraph (f)(5)(ii)(B) as pursuant to
the same plan or arrangement only if B transfers it to new T pursuant to
a written plan, a copy of which is attached to a timely filed original
return (including extensions) for the year of T's liquidation, and the
transfer is completed within 12 months of the filing of that return.
Appropriate adjustments are made to reflect any events occurring before
the formation of new T and to reflect any assets not transferred to new
T as part of the same plan or arrangement. For example, if B retains an
asset in the reorganization, the asset is treated under paragraph (f)(3)
of this section as acquired by new T but distributed to B immediately
after the reorganization.
(3) Downstream merger, etc. The principles of this paragraph
(f)(5)(ii)(B) apply, with appropriate adjustments, if B's basis in the T
stock is eliminated in a transaction similar to a section 332
liquidation, such as a transaction described in section 368 in which B
merges into T. For example, if S and B are subsidiaries, and S sells all
of T's stock to B at a gain followed by B's merger into T in a separate
transaction described in section 368(a), S's gain is not taken into
account solely as a result of the merger if T (as successor to B) forms
new T with substantially all of T's former assets.
(C) Section 338(h)(10)--(1) In general. This paragraph (f)(5)(ii)(C)
applies to a deemed liquidation of T under section 332 as the result of
an election under section 338(h)(10). This paragraph (f)(5)(ii)(C) does
not apply if paragraph (f)(5)(ii)(B) of this section is applied to the
deemed liquidation. Under this paragraph, B is treated with respect to
each share of its T stock as recognizing as a corresponding item any
loss or deduction it would recognize (determined after adjusting stock
basis under Sec. 1.1502-32) if section 331 applied to the deemed
liquidation. For all other Federal income tax purposes, the deemed
liquidation remains subject to section 332.
(2) Limitation on amount of loss. The amount of B's loss or
deduction under this paragraph (f)(5)(ii)(C) is limited as follows--
(i) The aggregate amount of loss recognized with respect to T stock
cannot exceed the amount of S's intercompany income or gain that is in
excess of S's intercompany deduction or loss with respect to shares of T
stock having the same material terms as the shares giving rise to S's
intercompany income or gain; and
(ii) The aggregate amount of loss recognized under this paragraph
(f)(5)(ii)(C) from T's deemed liquidation cannot exceed the net amount
of deduction or loss (if any) that would be taken into account from the
deemed liquidation if section 331 applied with respect to all T shares.
(3) Asset sale, etc. The principles of this paragraph (f)(5)(ii)(C)
apply, with appropriate adjustments, if T transfers all of its assets to
a nonmember and completely liquidates in a transaction comparable to the
section 338(h)(10) transaction described in paragraph (f)(5)(ii)(C)(1)
of this section. For example, if S sells all of T's stock to B at a
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gain followed by T's merger into a nonmember in exchange for a cash
payment to B in a transaction treated for Federal income tax purposes as
T's sale of its assets to the nonmember and complete liquidation, the
merger is ordinarily treated as a comparable transaction.
(D) Section 355. If B distributes the T stock in an intercompany
transaction to which section 355 applies (including an intercompany
transaction to which 355 applies because of the application of paragraph
(f)(3) of this section), the redetermination of the basis of the T stock
under section 358 could cause S's gain or loss to be taken into account
under this section. This paragraph (f)(5)(ii)(D) applies to treat B's
distribution as subject to sections 301 and 311 (as modified by this
paragraph (f)), rather than section 355. The election will prevent S's
gain or loss from being taken into account immediately to the extent
matching remains possible, but B's gain or loss from the distribution
will also be taken into account under this section.
(E) Election. An election to apply this paragraph (f)(5)(ii) is made
in a separate statement entitled ``[Insert Name and Employer
Identification Number of Common Parent] HEREBY ELECTS THE APPLICATION OF
Sec. 1.1502-13(f)(5)(ii).'' The election must include a description of
S's intercompany transaction and T's liquidation (or other transaction).
It must specify which provision of Sec. 1.1502-13(f)(5)(ii) applies and
how it alters the otherwise applicable results under this section
(including, for example, the amount of S's intercompany items and the
amount deferred or offset as a result of this Sec. 1.1502-13(f)(5)(ii)).
A separate election must be made for each application of this paragraph
(f)(5)(ii). The election must be signed by the common parent and filed
with the group's income tax return for the year of T's liquidation (or
other transaction). The Commissioner may impose reasonable terms and
conditions to the application of this paragraph (f)(5)(ii) that are
consistent with the purposes of this section.
(6) Stock of common parent. In addition to the general rules of this
section, this paragraph (f)(6) applies to parent stock (P stock) and
positions in P stock held or entered into by another member. For this
purpose, P stock is any stock of the common parent held (directly or
indirectly) by another member or any stock of a member (the issuer) that
was the common parent if the stock was held (directly or indirectly) by
another member while the issuer was the common parent.
(i) Loss stock--(A) Recognized loss. Any loss recognized, directly
or indirectly, by a member with respect to P stock is permanently
disallowed and does not reduce earnings and profits. See Sec. 1.1502-
32(b)(3)(iii)(A) for a corresponding reduction in the basis of the
member's stock.
(B) Other cases. If a member, M, owns P stock, the stock is
subsequently owned by a nonmember, and, immediately before the stock is
owned by the nonmember, M's basis in the share exceeds its fair market
value, then, to the extent paragraph (f)(6)(i)(A) of this section does
not apply, M's basis in the share is reduced to the share's fair market
value immediately before the share is held by the nonmember. For
example, if M owns shares of P stock with a $100x basis and M becomes a
nonmember at a time when the P shares have a value of $60x, M's basis in
the P shares is reduced to $60x immediately before M becomes a
nonmember. Similarly, if M contributes the P stock to a nonmember in a
transaction subject to section 351, M's basis in the shares is reduced
to $60x immediately before the contribution. See Sec. 1.1502-
32(b)(3)(iii)(B) for a corresponding reduction in the basis of M's
stock.
(C) Waiver of built-in loss on P stock--(1) In general. If a
nonmember that owns P stock with a basis in excess of its fair market
value becomes a member of the P consolidated group in a qualifying cost
basis transaction, the group may make an irrevocable election to reduce
the basis of the P stock to its fair market value immediately before the
nonmember becomes a member of the P group. If the nonmember was a member
of another consolidated group immediately before becoming a member of
the P group, the reduction in basis is treated as occurring immediately
after it ceases to be a member
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of the prior group. A qualifying cost basis transaction is the purchase
(i.e., a transaction in which basis is determined under section 1012) by
members of the P consolidated group (while they are members) in a 12-
month period of an amount of the nonmember's stock satisfying the
requirements of section 1504(a)(2).
(2) Election. The election described in this paragraph (6)(i)(C)
must be made in a separate statement entitled ``ELECTION TO REDUCE BASIS
OF P STOCK UNDER Sec. 1.1502-13(f)(6).'' The statement must be filed
with the P consolidated group's return for the year in which the
nonmember becomes a member, and it must be signed by both P and the
nonmember. The statement must identify the fair market value of, and the
amount of the basis reduction in, the P stock.
(ii) Gain stock. If a member, M, would otherwise recognize gain on a
qualified disposition of P stock, then immediately before the qualified
disposition, M is treated as purchasing the P stock from P for fair
market value with cash contributed to M by P (or, if necessary, through
any intermediate members). A disposition is a qualified disposition only
if--
(A) The member acquires the P stock directly from the common parent
(P) through a contribution to capital or a transaction qualifying under
section 351(a) (or, if necessary, through a series of such transactions
involving only members);
(B) Pursuant to a plan, the member transfers the stock immediately
to a nonmember that is not related, within the meaning of section 267(b)
or 707(b), to any member of the group;
(C) No nonmember receives a substituted basis in the stock within
the meaning of section 7701(a)(42);
(D) The P stock is not exchanged for P stock;
(E) P neither becomes nor ceases to be the common parent as part of,
or in contemplation of, the disposition or plan; and
(F) M is neither a nonmember that becomes a member nor a member that
becomes a nonmember as part of, or in contemplation of, the disposition
or plan.
(iii) Mark-to-market of P stock. Paragraphs (f)(6)(i) and (ii) of
this section shall not apply to any gain or loss from a share of P stock
held by a member, M, if--
(A) M regularly trades in P stock (of the same class) with customers
in the ordinary course of its business as a dealer;
(B) The gain or loss on the share is taken into account by M
pursuant to section 475(a);
(C) M's basis in the share is not adjusted by reference to the basis
of any other property or by reference to income, gain, deduction, or
loss from other property; and
(D) Neither M nor any other member of the group has structured or
engaged in any transaction while a member (or in anticipation of
becoming a member), during the taxable year or in any year within the
preceding five taxable years that is open for assessment under section
6501, with a principal purpose of avoiding gain or creating loss on P
stock subject to section 475(a).
(iv) Options, warrants, and other positions--(A) In general. This
paragraph (f)(6) applies with appropriate adjustments to positions in P
stock to the extent that P's gain or loss from an equivalent position
would not be recognized under section 1032. Thus, if M purchases an
option to buy or sell P stock and sells the option at a loss, the loss
is permanently disallowed under paragraph (f)(6)(i)(A) of this section.
Similarly, if M is the grantor of such an option and becomes a
nonmember, then the principles of paragraph (f)(6)(i)(B) of this section
apply to the extent that M would recognize loss from cash settlement of
the option at its fair market value immediately before M becomes a
nonmember, and proper adjustments must be made in the amount of any gain
or loss subsequently realized from the position by M. If P grants M an
option to acquire P stock in a transaction meeting the requirements of
paragraph (f)(6)(ii) of this section, M is treated as having purchased
the option from P for fair market value with cash contributed to M by P.
(B) Mark-to-market of positions in P stock. For purposes of
paragraph (f)(6)(iii) of this section, gain or loss
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with respect to a position taken into account under section 1256(a) is
treated as taken into account under section 475(a) to the extent that
the gain or loss would be taken into account under the principles of
section 475.
(v) Effective date. This paragraph (f)(6) applies to gain or loss
taken into account on or after July 12, 1995, and to transactions
occurring on or after July 12, 1995. For example, if S sells P stock to
B at a loss prior to July 12, 1995, and B sells the P stock to a
nonmember after July 12, 1995, S's loss is disallowed because it is
taken into account after July 12, 1995. If a taxpayer takes a gain or
loss into account or engages in a transaction on or after July 12, 1995,
during a tax year ending prior to December 31, 1995, the taxpayer may
treat the gain or loss or the transaction under the rules published in
1995-32 I.R.B. 47, instead of under the rules of this paragraph (f)(6).
(7) Examples. The application of this section to intercompany
transactions with respect to stock of members is illustrated by the
following examples.
Example 1. Dividend exclusion and property distribution. (a) Facts.
S owns land with a $70 basis and $100 value. On January 1 of Year 1, P's
basis in S's stock is $100. During Year 1, S declares and makes a
dividend distribution of the land to P. Under section 311(b), S has a
$30 gain. Under section 301(d), P's basis in the land is $100. On July 1
of Year 3, P sells the land to X for $110.
(b) Dividend elimination and stock basis adjustments. Under
paragraph (b)(1) of this section, S's distribution to P is an
intercompany distribution. Under paragraph (f)(2)(ii) of this section,
P's $100 of dividend income is not included in gross income. Under
Sec. 1.1502-32, P's basis in S's stock is reduced from $100 to $0 in
Year 1.
(c) Matching rule and stock basis adjustments. Under the matching
rule (treating P as the buying member and S as the selling member), S
takes its $30 gain into account in Year 3 to reflect the $30 difference
between P's $10 gain taken into account and the $40 recomputed gain.
Under Sec. 1.1502-32, P's basis in S's stock is increased from $0 to $30
in Year 3.
(d) Loss property. The facts are the same as in paragraph (a) of
this Example 1, except that S has a $130 (rather than $70) basis in the
land. Under paragraph (f)(2)(iii) of this section, the principles of
section 311(b) apply to S's loss from the intercompany distribution.
Thus, S has a $30 loss that is taken into account under the matching
rule in Year 3 to reflect the $30 difference between P's $10 gain taken
into account and the $20 recomputed loss. (The results are the same
under section 267(f).) Under Sec. 1.1502-32, P's basis in S's stock is
reduced from $100 to $0 in Year 1, and from $0 to a $30 excess loss
account in Year 3. (If P had distributed the land to its shareholders,
rather than selling the land to X, P would take its $10 gain under
section 311(b) into account, and S would take its $30 loss into account
under the matching rule with $10 offset by P's gain and $20
recharacterized as a noncapital, nondeductible amount.)
(e) Entitlement rule. The facts are the same as in paragraph (a) of
this Example 1, except that, after P becomes entitled to the
distribution but before the distribution is made, S issues additional
stock to the public and becomes a nonmember. Under paragraph (f)(2)(i)
of this section, the determination of whether a distribution is an
intercompany distribution is made under the entitlement rule of
paragraph (f)(2)(iv) of this section. Treating S's distribution as made
when P becomes entitled to it results in the distribution being an
intercompany distribution. Under paragraph (f)(2)(ii) of this section,
the distribution is not included in P's gross income. S's $30 gain from
the distribution is intercompany gain that is taken into account under
the acceleration rule immediately before S becomes a nonmember. Thus,
there is a net $70 decrease in P's basis in its S stock under
Sec. 1.1502-32 ($100 decrease for the distribution and a $30 increase
for S's $30 gain). See also Sec. 1.1502-20(b) (additional stock basis
reductions applicable to certain deconsolidations). Under paragraph
(f)(2)(iv) of this section, P does not take the distribution into
account again under separate return rules when received, and P is not
entitled to a dividends received deduction.
Example 2. Excess loss accounts. (a) Facts. S owns all of T's only
class of stock with a $10 basis and $100 value. S has substantial
earnings and profits, and T has $10 of earnings and profits. On January
1 of Year 1, S declares and distributes a dividend of all of the T stock
to P. Under section 311(b), S has a $90 gain. Under section 301(d), P's
basis in the T stock is $100. During Year 3, T borrows $90 and declares
and makes a $90 distribution to P to which section 301 applies, and P's
basis in the T stock is reduced under Sec. 1.1502-32 from $100 to $10.
During Year 6, T has $5 of earnings that increase P's basis in the T
stock under Sec. 1.1502-32 from $10 to $15. On December 1 of Year 9, T
issues additional stock to X and, as a result, T becomes a nonmember.
(b) Dividend exclusion. Under paragraph (f)(2)(ii) of this section,
P's $100 of dividend income from S's distribution of the T stock, and
its $10 of dividend income from T's $90 distribution, are not included
in gross income.
[[Page 296]]
(c) Matching and acceleration rules. Under Sec. 1.1502-19(b)(1),
when T becomes a nonmember P must include in income the amount of its
excess loss account (if any) in T stock. P has no excess loss account in
the T stock. Therefore P's corresponding item from the deconsolidation
of T is $0. Treating S and P as divisions of a single corporation, the T
stock would continue to have a $10 basis after the distribution, and the
adjustments under Sec. 1.1502-32 for T's $90 distribution and $5 of
earnings would result in a $75 excess loss account. Thus, the recomputed
corresponding item from the deconsolidation is $75. Under the matching
rule, S takes $75 of its $90 gain into account in Year 9 as a result of
T becoming a nonmember, to reflect the difference between P's $0 gain
taken into account and the $75 recomputed gain. S's remaining $15 of
gain is taken into account under the matching and acceleration rules
based on subsequent events (for example, under the matching rule if P
subsequently sells its T stock, or under the acceleration rule if S
becomes a nonmember).
(d) Reverse sequence. The facts are the same as in paragraph (a) of
this Example 2, except that T borrows $90 and makes its $90 distribution
to S before S distributes T's stock to P. Under paragraph (f)(2)(ii) of
this section, T's $90 distribution to S ($10 of which is a dividend) is
not included in S's gross income. The corresponding negative adjustment
under Sec. 1.1502-32 reduces S's basis in the T stock from $10 to an $80
excess loss account. Under section 311(b), S has a $90 gain from the
distribution of T stock to P. Under section 301(d) P's initial basis in
the T stock is $10 (the stock's fair market value), and the basis
increases to $15 under Sec. 1.1502-32 as a result of T's earnings in
Year 6. The timing and attributes of S's gain are determined in the
manner provided in paragraph (c) of this Example 2. Thus, $75 of S's
gain is taken into account under the matching rule in Year 9 as a result
of T becoming a nonmember, and the remaining $15 is taken into account
under the matching and acceleration rules based on subsequent events.
(e) Partial stock sale. The facts are the same as in paragraph (a)
of this Example 2, except that P sells 10% of T's stock to X on December
1 of Year 9 for $1.50 (rather than T's issuing additional stock and
becoming a nonmember). Under the matching rule, S takes $9 of its gain
into account to reflect the difference between P's $0 gain taken into
account ($1.50 sale proceeds minus $1.50 basis) and the $9 recomputed
gain ($1.50 sale proceeds plus $7.50 excess loss account).
(f) Loss, rather than cash distribution. The facts are the same as
in paragraph (a) of this Example 2, except that T retains the loan
proceeds and incurs a $90 loss in Year 3 that is absorbed by the group.
The timing and attributes of S's gain are determined in the same manner
provided in paragraph (c) of this Example 2. Under Sec. 1.1502-32, the
loss in Year 3 reduces P's basis in the T stock from $100 to $10, and
T's $5 of earnings in Year 6 increase the basis to $15. Thus, $75 of S's
gain is taken into account under the matching rule in Year 9 as a result
of T becoming a nonmember, and the remaining $15 is taken into account
under the matching and acceleration rules based on subsequent events.
(The timing and attributes of S's gain would be determined in the same
manner provided in paragraph (d) of this Example 2 if T incurred the $90
loss before S's distribution of the T stock to P.)
(g) Stock sale, rather than stock distribution. The facts are the
same as in paragraph (a) of this Example 2, except that S sells the T
stock to P for $100 (rather than distributing the stock). The timing and
attributes of S's gain are determined in the same manner provided in
paragraph (c) of this Example 2. Thus, $75 of S's gain is taken into
account under the matching rule in Year 9 as a result of T becoming a
nonmember, and the remaining $15 is taken into account under the
matching and acceleration rules based on subsequent events.
Example 3. Intercompany reorganization. (a) Facts. P forms S and B
by contributing $200 to the capital of each. During Years 1 through 4, S
and B each earn $50, and under Sec. 1.1502-32 P adjusts its basis in the
stock of each to $250. (See Sec. 1.1502-33 for adjustments to earnings
and profits.) On January 1 of Year 5, the fair market value of S's
assets and its stock is $500, and S merges into B in a tax-free
reorganization. Pursuant to the plan of reorganization, P receives B
stock with a fair market value of $350 and $150 of cash.
(b) Treatment as a section 301 distribution. The merger of S into B
is a transaction to which paragraph (f)(3) of this section applies. P is
treated as receiving additional B stock with a fair market value of $500
and, under section 358, a basis of $250. Immediately after the merger,
$150 of the stock received is treated as redeemed, and the redemption is
treated under section 302(d) as a distribution to which section 301
applies. Because the $150 distribution is treated as not received as
part of the merger, section 356 does not apply and no basis adjustments
are required under section 358(a)(1)(A) and (B). Because B is treated
under section 381(c)(2) as receiving S's earnings and profits and the
redemption is treated as occurring after the merger, $100 of the
distribution is treated as a dividend under section 301 and P's basis in
the B stock is reduced correspondingly under Sec. 1.1502-32. The
remaining $50 of the distribution reduces P's basis in the B stock.
Section 301(c)(2) and Sec. 1.1502-32. Under paragraph (f)(2)(ii) of this
section, P's $100 of dividend income is not included in gross income.
Under Sec. 1.302-2(c), proper adjustments are made to P's basis in its B
stock to reflect its basis in the B stock
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redeemed, with the result that P's basis in the B stock is reduced by
the entire $150 distribution.
(c) Depreciated property. The facts are the same as in paragraph (a)
of this Example 3, except that property of S with a $200 basis and $150
fair market value is distributed to P (rather than cash of B). As in
paragraph (b) of this Example 3, P is treated as receiving additional B
stock in the merger and a $150 distribution to which section 301 applies
immediately after the merger. Under paragraph (f)(2)(iii) of this
section, the principles of section 311(b) apply to B's $50 loss and the
loss is taken into account under the matching and acceleration rules
based on subsequent events (e.g., under the matching rule if P
subsequently sells the property, or under the acceleration rule if B
becomes a nonmember). The results are the same under section 267(f).
(d) Divisive transaction. Assume instead that, pursuant to a plan, S
distributes the stock of a lower-tier subsidiary in a spin-off
transaction to which section 355 applies together with $150 of cash. The
distribution of stock is a transaction to which paragraph (f)(3) of this
section applies. P is treated as receiving the $150 of cash immediately
before the section 355 distribution, as a distribution to which section
301 applies. Section 356(b) does not apply and no basis adjustments are
required under section 358(a)(1) (A) and (B). Because the $150
distribution is treated as made before the section 355 distribution, the
distribution reduces P's basis in the S stock under Sec. 1.1502-32, and
the basis allocated under section 358(c) between the S stock and the
lower-tier subsidiary stock received reflects this basis reduction.
Example 4. Stock redemptions and distributions. (a) Facts. Before
becoming a member of the P group, S owns P stock with a $30 basis. On
January 1 of Year 1, P buys all of S's stock. On July 1 of Year 3, P
redeems the P stock held by S for $100 in a transaction to which section
302(a) applies.
(b) Gain under section 302. Under paragraph (f)(4) of this section,
P's basis in the P stock acquired from S is treated as eliminated. As a
result of this elimination, S's intercompany item will never be taken
into account under the matching rule because P's basis in the stock does
not reflect S's intercompany item. Therefore, S's $70 gain is taken into
account under the acceleration rule in Year 3. The attributes of S's
item are determined under paragraph (d)(1)(ii) of this section by
applying the matching rule as if P had sold the stock to an affiliated
corporation that is not a member of the group at no gain or loss.
Although P's corresponding item from a sale of its stock would have been
excluded from gross income under section 1032, paragraph (c)(6)(ii) of
this section prevents S's gain from being treated as excluded from gross
income; instead S's gain is capital gain.
(c) Gain under section 311. The facts are the same as in paragraph
(a) of this Example 4, except that S distributes the P stock to P in a
transaction to which section 301 applies (rather than the stock being
redeemed), and S has a $70 gain under section 311(b). The timing and
attributes of S's gain are determined in the manner provided in
paragraph (b) of this Example 4.
(d) Loss stock. The facts are the same as in paragraph (a) of this
Example 4, except that S has a $130 (rather than $30) basis in the P
stock and has a $30 loss under section 302(a). The limitation under
paragraph (c)(6)(ii) of this section does not apply to intercompany
losses. Thus, S's loss is taken into account in Year 3 as a noncapital,
nondeductible amount.
Example 5. Intercompany stock sale followed by section 332
liquidation. (a) Facts. S owns all of the stock of T, with a $70 basis
and $100 value, and T's assets have a $10 basis and $100 value. On
January 1 of Year 1, S sells all of T's stock to B for $100. On July 1
of Year 3, when T's assets are still worth $100, T distributes all of
its assets to B in an unrelated complete liquidation to which section
332 applies.
(b) Timing and attributes. Under paragraph (b)(3)(ii) of this
section, B's unrecognized gain or loss under section 332 is a
corresponding item for purposes of applying the matching rule. In Year 3
when T liquidates, B has $0 of unrecognized gain or loss under section
332 because B has a $100 basis in the T stock and receives a $100
distribution with respect to its T stock. Treating S and B as divisions
of a single corporation, the recomputed corresponding item would have
been $30 of unrecognized gain under section 332 because B would have
succeeded to S's $70 basis in the T stock. Thus, under the matching
rule, S's $30 intercompany gain is taken into account in Year 3 as a
result of T's liquidation. Under paragraph (c)(1)(i) of this section,
the attributes of S's gain and B's corresponding item are redetermined
as if S and B were divisions of a single corporation. Although S's gain
ordinarily would be redetermined to be treated as excluded from gross
income to reflect the nonrecognition of B's gain under section 332, S's
gain remains capital gain because B's unrecognized gain under section
332 is not permanently and explicitly disallowed under the Code. See
paragraph (c)(6)(ii) of this section. However, relief may be elected
under paragraph (f)(5)(ii) of this section.
(c) Intercompany sale at a loss. The facts are the same as in
paragraph (a) of this Example 5, except that S has a $130 (rather than
$70) basis in the T stock. The limitation under paragraph (c)(6)(ii) of
this section does not apply to intercompany losses. Thus, S's
intercompany loss is taken into account in Year 3 as a noncapital,
nondeductible
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amount. However, relief may be elected under paragraph (f)(5)(ii) of
this section.
Example 6. Intercompany stock sale followed by section 355
distribution. (a) Facts. S owns all of the stock of T with a $70 basis
and a $100 value. On January 1 of Year 1, S sells all of T's stock to M
for $100. On June 1 of Year 6, M distributes all of its T stock to its
nonmember shareholders in a transaction to which section 355 applies. At
the time of the distribution, M has a basis in T stock of $100 and T has
a value of $150.
(b) Timing and attributes. Under paragraph (b)(3)(ii) of this
section, M's $50 gain not recognized on the distribution under section
355 is a corresponding item. Treating S and M as divisions of a single
corporation, the recomputed corresponding item would be $80 of
unrecognized gain under section 355 because M would have succeeded to
S's $70 basis in the T stock. Thus, under the matching rule, S's $30
intercompany gain is taken into account in Year 6 as a result of the
distribution. Under paragraph (c)(1)(i) of this section, the attributes
of S's intercompany item and M's corresponding item are redetermined to
produce the same effect on consolidated taxable income as if S and M
were divisions of a single corporation. Although S's gain ordinarily
would be redetermined to be treated as excluded from gross income to
reflect the nonrecognition of M's gain under section 355(c), S's gain
remains capital gain because M's unrecognized gain under section 355(c)
is not permanently and explicitly disallowed under the Code. See
paragraph (c)(6)(ii) of this section. Because M's distribution of the T
stock is not an intercompany transaction, relief is not available under
paragraph (f)(5)(ii) of this section.
(c) Section 355 distribution within the group. The facts are the
same as under paragraph (a) of this Example 6, except that M distributes
the T stock to B (another member of the group), and B takes a $75 basis
in the T stock under section 358. Under paragraph (j)(2) of this
section, B is a successor to M for purposes of taking S's intercompany
gain into account, and therefore both M and B might have corresponding
items with respect to S's intercompany gain. To the extent it is
possible, matching with respect to B's corresponding items produces the
result most consistent with treating S, M, and B as divisions of a
single corporation. See paragraphs (j)(3) and (j)(4) of this section.
However, because there is only $5 difference between B's $75 basis in
the T stock and the $70 basis the stock would have if S, M, and B were
divisions of a single corporation, only $5 can be taken into account
under the matching rule with respect to B's corresponding items. (This
$5 is taken into account with respect to B's corresponding items based
on subsequent events.) The remaining $25 of S's $30 intercompany gain is
taken into account in Year 6 under the matching rule with respect to M's
corresponding item from its distribution of the T stock. The attributes
of S's remaining $25 of gain are determined in the same manner as in
paragraph (b) of this Example 6.
(d) Relief elected. The facts are the same as in paragraph (c) of
this Example 6 except that P elects relief pursuant to paragraph
(f)(5)(ii)(D) of this section. As a result of the election, M's
distribution of the T stock is treated as subject to sections 301 and
311 instead of section 355. Accordingly, M recognizes $50 of
intercompany gain from the distribution, B takes a basis in the stock
equal to its fair market value of $150, and S and M take their
intercompany gains into account with respect to B's corresponding items
based on subsequent events. (None of S's gain is taken into account in
Year 6 as a result of M's distribution of the T stock.)
(g) Obligations of members--(1) In general. In addition to the
general rules of this section, the rules of this paragraph (g) apply to
intercompany obligations.
(2) Definitions. For purposes of this section--
(i) Obligation of a member. An obligation of a member is--
(A) Any obligation of the member constituting indebtedness under
general principles of Federal income tax law (for example, under
nonstatutory authorities, or under section 108, section 163, section
171, or section 1275), but not an executory obligation to purchase or
provide goods or services; and
(B) Any security of the member described in section 475(c)(2)(D) or
(E), and any comparable security with respect to commodities, but not if
the security is a position with respect to the member's stock. See
paragraphs (f)(4) and (6) of this section for special rules applicable
to positions with respect to a member's stock.
(ii) Intercompany obligations. An intercompany obligation is an
obligation between members, but only for the period during which both
parties are members.
(3) Deemed satisfaction and reissuance of intercompany obligations--
(i) Application--(A) In general. If a member realizes an amount (other
than zero) of income, gain, deduction, or loss, directly or indirectly,
from the assignment or extinguishment of all or part of its remaining
rights or obligations under an intercompany obligation, the intercompany
obligation is treated for all
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Federal income tax purposes as satisfied under paragraph (g)(3)(ii) of
this section and, if it remains outstanding, reissued under paragraph
(g)(3)(iii) of this section. Similar principles apply under this
paragraph (g)(3) if a member realizes any such amount, directly or
indirectly, from a comparable transaction (for example, a marking-to-
market of an obligation or a bad debt deduction), or if an intercompany
obligation becomes an obligation that is not an intercompany obligation.
(B) Exceptions. This paragraph (g)(3) does not apply to an
obligation if any of the following applies:
(1) The obligation became an intercompany obligation by reason of an
event described in Sec. 1.108-2(e) (exceptions to the application of
section 108(e)(4)).
(2) The amount realized is from reserve accounting under section 585
or section 593 (see paragraph (g)(3)(iv) of this section for special
rules).
(3) The amount realized is from the conversion of an obligation into
stock of the obligor.
(4) Treating the obligation as satisfied and reissued will not have
a significant effect on any person's Federal income tax liability for
any year. For this purpose, obligations issued in connection with the
same transaction or related transactions are treated as a single
obligation. However, this paragraph (g)(3)(i)(B)(4) does not apply to
any obligation if the aggregate effect of this treatment for all
obligations in a year would be significant.
(ii) Satisfaction--(A) General rule. If a creditor member sells
intercompany debt for cash, the debt is treated as satisfied by the
debtor immediately before the sale for the amount of the cash. For other
transactions, similar principles apply to treat the intercompany debt as
satisfied immediately before the transaction. Thus, if the debt is
transferred for property, it is treated as satisfied for an amount
consistent with the amount for which the debt is deemed reissued under
paragraph (g)(3)(iii) of this section, and the basis of the property is
also adjusted to reflect that amount. If this paragraph (g)(3) applies
because the debtor or creditor becomes a nonmember, the obligation is
treated as satisfied for cash in an amount equal to its fair market
value immediately before the debtor or creditor becomes a nonmember.
Similar principles apply to intercompany obligations other than debt.
(B) Timing and attributes. For purposes of applying the matching
rule and the acceleration rule--
(1) Paragraph (c)(6)(ii) of this section (limitation on treatment of
intercompany income or gain as excluded from gross income) does not
apply to prevent any intercompany income or gain from being excluded
from gross income; and
(2) Any gain or loss from an intercompany obligation is not subject
to section 108(a), section 354 or section 1091.
(iii) Reissuance. If a creditor member sells intercompany debt for
cash, the debt is treated as a new debt (with a new holding period)
issued by the debtor immediately after the sale for the amount of cash.
For other transactions, if the intercompany debt remains outstanding,
similar principles apply to treat the debt as reissued immediately after
the transaction. Thus, if the debt is transferred for property, it is
treated as new debt issued for the property. See, for example, section
1273(b)(3) or section 1274. If this paragraph (g)(3) applies because the
debtor or creditor becomes a nonmember, the debt is treated as new debt
issued for an amount of cash equal to its fair market value immediately
after the debtor or creditor becomes a nonmember. Similar principles
apply to intercompany obligations other than debt.
(iv) Bad debt reserve. A member's deduction under section 585 or
section 593 for an addition to its reserve for bad debts with respect to
an intercompany obligation is not taken into account, and is not treated
as realized under this paragraph (g)(3) until the intercompany
obligation becomes an obligation that is not an intercompany obligation,
or, if earlier, the redemption or cancellation of the intercompany
obligation.
(4) Deemed satisfaction and reissuance of obligations becoming
intercompany obligations--(i) Application--(A) In general. This
paragraph (g)(4) applies if an obligation that is not an intercompany
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obligation becomes an intercompany obligation.
(B) Exceptions. This paragraph (g)(4) does not apply to an
obligation if--
(1) The obligation becomes an intercompany obligation by reason of
an event described in Sec. 1.108-2(e) (exceptions to the application of
section 108(e)(4)); or
(2) Treating the obligation as satisfied and reissued will not have
a significant effect on any person's Federal income tax liability for
any year. For this purpose, obligations issued in connection with the
same transaction or related transactions are treated as a single
obligation. However, this paragraph (g)(4)(i)(B)(2) does not apply to
any obligation if the aggregate effect of this treatment for all
obligations in a year would be significant.
(ii) Intercompany debt. If this paragraph (g)(4) applies to an
intercompany debt--
(A) Section 108(e)(4) does not apply;
(B) The debt is treated for all Federal income tax purposes,
immediately after it becomes an intercompany debt, as satisfied and a
new debt issued to the holder (with a new holding period) in an amount
determined under the principles of Sec. 1.108-2(f);
(C) The attributes of all items taken into account from the
satisfaction are determined on a separate entity basis, rather than by
treating S and B as divisions of a single corporation;
(D) Any intercompany gain or loss taken into account is treated as
not subject to section 354 or section 1091; and
(E) Solely for purposes of Sec. 1.1502-32(b)(4) and the effect of
any election under that provision, any loss taken into account under
this paragraph (g)(4) by a corporation that becomes a member as a result
of the transaction in which the obligation becomes an intercompany
obligation is treated as a loss carryover from a separate return
limitation year.
(iii) Other intercompany obligations. If this paragraph (g)(4)
applies to an intercompany obligation other than debt, the principles of
paragraph (g)(4)(ii) of this section apply to treat the intercompany
obligation as satisfied and reissued for an amount of cash equal to its
fair market value immediately after the obligation becomes an
intercompany obligation.
(5) Examples. The application of this section to obligations of
members is illustrated by the following examples.
Example 1. Interest on intercompany debt. (a) Facts. On January 1 of
Year 1, B borrows $100 from S in return for B's note providing for $10
of interest annually at the end of each year, and repayment of $100 at
the end of Year 5. B fully performs its obligations. Under their
separate entity methods of accounting, B accrues a $10 interest
deduction annually under section 163, and S accrues $10 of interest
income annually under section 61(a)(4).
(b) Matching rule. Under paragraph (b)(1) of this section, the
accrual of interest on B's note is an intercompany transaction. Under
the matching rule, S takes its $10 of income into account in each of
Years 1 through 5 to reflect the $10 difference between B's $10 of
interest expense taken into account and the $0 recomputed expense. S's
income and B's deduction are ordinary items. (Because S's intercompany
item and B's corresponding item would both be ordinary on a separate
entity basis, the attributes are not redetermined under paragraph
(c)(1)(i) of this section.)
(c) Original issue discount. The facts are the same as in paragraph
(a) of this Example 1, except that B borrows $90 (rather than $100) from
S in return for B's note providing for $10 of interest annually and
repayment of $100 at the end of Year 5. The principles described in
paragraph (b) of this Example 1 for stated interest also apply to the
$10 of original issue discount. Thus, as B takes into account its
corresponding expense under section 163(e), S takes into account its
intercompany income. S's income and B's deduction are ordinary items.
(d) Tax-exempt income. The facts are the same as in paragraph (a) of
this Example 1, except that B's borrowing from S is allocable under
section 265 to B's purchase of state and local bonds to which section
103 applies. The timing of S's income is the same as in paragraph (b) of
this Example 1. Under paragraph (c)(4)(i) of this section, the
attributes of B's corresponding item of disallowed interest expense
control the attributes of S's offsetting intercompany interest income.
Paragraph (c)(6)(ii) of this section does not prevent the
redetermination of S's intercompany item as excluded from gross income,
because section 265 permanently and explicitly disallows B's
corresponding deduction. Accordingly, S's intercompany income is treated
as excluded from gross income.
Example 2. Intercompany debt becomes nonintercompany debt. (a)
Facts. On January 1 of Year 1, B borrows $100 from S in return for B's
note providing for $10 of interest annually at the end of each year, and
repayment
[[Page 301]]
of $100 at the end of Year 20. As of January 1 of Year 3, B has paid the
interest accruing under the note and S sells B's note to X for $70,
reflecting a change in the value of the note as a result of increases in
prevailing market interest rates. B is never insolvent within the
meaning of section 108(d)(3).
(b) Deemed satisfaction. Under paragraph (g)(3) of this section, B's
note is treated as satisfied for $70 immediately before S's sale to X.
As a result of the deemed satisfaction of the obligation for less than
its adjusted issue price, B takes into account $30 of discharge of
indebtedness income under section 61(a)(12). On a separate entity basis,
S's $30 loss would be a capital loss under section 1271(a)(1). Under the
matching rule, however, the attributes of S's intercompany item and B's
corresponding item must be redetermined to produce the same effect as if
the transaction had occurred between divisions of a single corporation.
B's corresponding item completely offsets S's intercompany item in
amount. Accordingly, under paragraph (c)(4)(i) of this section, the
attributes of B's $30 of discharge of indebtedness income control the
attributes of S's loss. Thus, S's loss is treated as ordinary loss.
(c) Deemed reissuance. Under paragraph (g)(3) of this section, B is
also treated as reissuing, directly to X, a new note with a $70 issue
price and a $100 stated redemption price at maturity. The new note is
not an intercompany obligation, it has a $70 issue price and $100 stated
redemption price at maturity, and the $30 of original issue discount
will be taken into account by B and X under sections 163(e) and 1272.
(d) Creditor deconsolidation. The facts are the same as in paragraph
(a) of this Example 2, except that P sells S's stock to X (rather than
S's selling the note of B). Under paragraph (g)(3) of this section, the
note is treated as satisfied by B for its $70 fair market value
immediately before S becomes a nonmember, and B is treated as reissuing
a new note to S immediately after S becomes a nonmember. The results for
S's $30 of loss and B's discharge of indebtedness income are the same as
in paragraph (b) of this Example 2. The new note is not an intercompany
obligation, it has a $70 issue price and $100 stated redemption price at
maturity, and the $30 of original issue discount will be taken into
account by B and S under sections 163(e) and 1272.
(e) Debtor deconsolidation. The facts are the same as in paragraph
(a) of this Example 2, except that P sells B's stock to X (rather than
S's selling the note of B). The results are the same as in paragraph (d)
of this Example 2.
(f) Appreciated note. The facts are the same as in paragraph (a) of
this Example 2, except that S sells B's note to X for $130 (rather than
$70), reflecting a decline in prevailing market interest rates. Under
paragraph (g)(3) of this section, B's note is treated as satisfied for
$130 immediately before S's sale of the note to X. Under Sec. 1.163-
7(c), B takes into account $30 of repurchase premium. On a separate
entity basis, S's $30 gain would be a capital gain under section
1271(a)(1), and B's $30 premium deduction would be an ordinary
deduction. Under the matching rule, however, the attributes of S's
intercompany item and B's corresponding item must be redetermined to
produce the same effect as if the transaction had occurred between
divisions of a single corporation. Under paragraph (c)(4)(i) of this
section, the attributes of B's corresponding premium deduction control
the attributes of S's intercompany gain. Accordingly, S's gain is
treated as ordinary income. B is also treated as reissuing a new note
directly to X which is not an intercompany obligation. The new note has
a $130 issue price and a $100 stated redemption price at maturity. Under
Sec. 1.61-12(c), B's $30 premium income under the new note is taken into
account over the life of the new note.
Example 3. Loss or bad debt deduction with respect to intercompany
debt. (a) Facts. On January 1 of Year 1, B borrows $100 from S in return
for B's note providing for $10 of interest annually at the end of each
year, and repayment of $100 at the end of Year 5. In Year 3, S sells B's
note to P for $60. B is never insolvent within the meaning of section
108(d)(3). Assume B's note is not a security within the meaning of
section 165(g)(2).
(b) Deemed satisfaction and reissuance. Under paragraph (g)(3) of
this section, B is treated as satisfying its note for $60 immediately
before the sale, and reissuing a new note directly to P with a $60 issue
price and a $100 stated redemption price at maturity. On a separate
entity basis, S's $40 loss would be a capital loss, and B's $40 income
would be ordinary income. Under the matching rule, however, the
attributes of S's intercompany item and B's corresponding item must be
redetermined to produce the same effect as if the transaction had
occurred between divisions of a single corporation. Under paragraph
(c)(4)(i) of this section, the attributes of B's corresponding discharge
of indebtedness income control the attributes of S's intercompany loss.
Accordingly, S's loss is treated as ordinary loss.
(c) Partial bad debt deduction. The facts are the same as in
paragraph (a) of this Example 3, except that S claims a $40 partial bad
debt deduction under section 166(a)(2) (rather than selling the note to
P). The results are the same as in paragraph (b) of this Example 3. B's
note is treated as satisfied and reissued with a $60 issue price. S's
$40 intercompany deduction and B's $40 corresponding income are both
ordinary.
(d) Insolvent debtor. The facts are the same as in paragraph (a) of
this Example 3, except that B is insolvent within the meaning of section
108(d)(3) at the time that S sells the
[[Page 302]]
note to P. On a separate entity basis, S's $40 loss would be capital,
B's $40 income would be excluded from gross income under section 108(a),
and B would reduce attributes under section 108(b) or section 1017.
However, under paragraph (g)(3)(ii)(B) of this section, section 108(a)
does not apply to B's income to characterize it as excluded from gross
income. Accordingly, the attributes of S's intercompany loss and B's
corresponding income are redetermined in the same manner as in paragraph
(b) of this Example 3.
Example 4. Nonintercompany debt becomes intercompany debt. (a)
Facts. On January 1 of Year 1, B borrows $100 from X in return for B's
note providing for $10 of interest annually at the end of each year, and
repayment of $100 at the end of Year 5. As of January 1 of Year 3, B has
fully performed its obligations, but the note's fair market value is
$70. On January 1 of Year 3, P buys all of X's stock. B is solvent
within the meaning of section 108(d)(3).
(b) Deemed satisfied and reissuance. Under paragraph (g)(4) of this
section, B is treated as satisfying its indebtedness for $70 (determined
under the principles of Sec. 1.108-2(f)(2)) immediately after X becomes
a member. Both X's $30 capital loss under section 1271(a)(1) and B's $30
of discharge of indebtedness income under section 61(a)(12) are taken
into account in determining consolidated taxable income for Year 3.
Under paragraph (g)(4)(ii)(C) of this section, the attributes of items
resulting from the satisfaction are determined on a separate entity
basis. But see section 382 and Sec. 1.1502-15 (as appropriate). B is
also treated as reissuing a new note. The new note is an intercompany
obligation, it has a $70 issue price and $100 stated redemption price at
maturity, and the $30 of original issue discount will be taken into
account by B and X in the same manner as provided in paragraph (c) of
Example 1 of this paragraph (g)(5).
(c) Election to file consolidated returns. Assume instead that B
borrows $100 from S during Year 1, but the P group does not file
consolidated returns until Year 3. Under paragraph (g)(4) of this
section, B's indebtedness is treated as satisfied and a new note
reissued immediately after the debt becomes intercompany debt. The
satisfaction and reissuance are deemed to occur on January 1 of Year 3,
for the fair market value of the note (determined under the principles
of Sec. 1.108-2(f)(2)) at that time.
Example 5. Notional principal contracts. (a) Facts. On April 1 of
Year 1, M1 enters into a contract with counterparty M2 under which, for
a term of five years, M1 is obligated to make a payment to M2 each April
1, beginning in Year 2, in an amount equal to the London Interbank
Offered Rate (LIBOR), as determined on the immediately preceding April
1, multiplied by a $1,000 notional principal amount. M2 is obligated to
make a payment to M1 each April 1, beginning in Year 2, in an amount
equal to 8% multiplied by the same notional principal amount. LIBOR is
7.80% on April 1 of Year 1. On April 1 of Year 2, M2 owes $2 to M1.
(b) Matching rule. Under Sec. 1.446-3(d), the net income (or net
deduction) from a notional principal contract for a taxable year is
included in (or deducted from) gross income. Under Sec. 1.446-3(e), the
ratable daily portion of M2's obligation to M1 as of December 31 of Year
1 is $1.50 ($2 multiplied by 275/365). Under the matching rule, M1's net
income for Year 1 of $1.50 is taken into account to reflect the
difference between M2's net deduction of $1.50 taken into account and
the $0 recomputed net deduction. Similarly, the $.50 balance of the $2
of net periodic payments made on April 1 of Year 2 is taken into account
for Year 2 in M1's and M2's net income and net deduction from the
contract. In addition, the attributes of M1's intercompany income and
M2's corresponding deduction are redetermined to produce the same effect
as if the transaction had occurred between divisions of a single
corporation. Under paragraph (c)(4)(i) of this section, the attributes
of M2's corresponding deduction control the attributes of M1's
intercompany income. (Although M1 is the selling member with respect to
the payment on April 1 of Year 2, it might be the buying member in a
subsequent period if it owes the net payment.)
(c) Dealer. The facts are the same as in paragraph (a) of this
Example 5, except that M2 is a dealer in securities, and the contract
with M1 is not inventory in the hands of M2. Under section 475, M2 must
mark its securities to market at year-end. Assume that under section
475, M2's loss from marking to market the contract with M1 is $100.
Under paragraph (g)(3) of this section, M2 is treated as making a $100
payment to M1 to terminate the contract immediately before section 475
is applied. M1's $100 of income from the termination payment is taken
into account under the matching rule to reflect M2's deduction under
Sec. 1.446-3(h). The attributes of M1's intercompany income and M2's
corresponding deduction are redetermined to produce the same effect as
if the transaction had occurred between divisions of a single
corporation. Under paragraph (c)(4)(i) of this section, the attributes
of M2's corresponding deduction control the attributes of M1's
intercompany income. Accordingly, M1's income is treated as ordinary
income. Paragraph (g)(3) of this section also provides that, immediately
after section 475 would apply, a new contract is treated as reissued
with an upfront payment of $100. Under Sec. 1.446-3(f), the deemed $100
up front payment by M1 to M2 is taken into account over the term of the
new contract in a manner reflecting the economic substance of the
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contract (for example, allocating the payment in accordance with the
forward rates of a series of cash-settled forward contracts that reflect
the specified index and the $1,000 notional principal amount). (The
timing of taking items into account is the same if M1, rather than M2,
is the dealer subject to the mark-to-market requirement of section 475
at year-end. However in this case, because the attributes of the
corresponding deduction control the attributes of the intercompany
income, M1's income from the deemed termination payment might be
ordinary or capital.)
(h) Anti-avoidance rules--(1) In general. If a transaction is
engaged in or structured with a principal purpose to avoid the purposes
of this section (including, for example, by avoiding treatment as an
intercompany transaction), adjustments must be made to carry out the
purposes of this section.
(2) Examples. The anti-avoidance rules of this paragraph (h) are
illustrated by the following examples. The examples set forth below do
not address common law doctrines or other authorities that might apply
to recast a transaction or to otherwise affect the tax treatment of a
transaction. Thus, in addition to adjustments under this paragraph (h),
the Commissioner can, for example, apply the rules of section 269 or
Sec. 1.701-2 to disallow a deduction or to recast a transaction.
Example 1. Sale of a partnership interest. (a) Facts. S owns land
with a $10 basis and $100 value. B has net operating losses from
separate return limitation years (SRLYs) subject to limitation under
Sec. 1.1502-21(c). Pursuant to a plan to absorb the losses without
limitation by the SRLY rules, S transfers the land to an unrelated,
calendar-year partnership in exchange for a 10% interest in the capital
and profits of the partnership in a transaction to which section 721
applies. The partnership does not have a section 754 election in effect.
S later sells its partnership interest to B for $100. In the following
year, the partnership sells the land to X for $100. Because the
partnership does not have a section 754 election in effect, its $10
basis in the land does not reflect B's $100 basis in the partnership
interest. Under section 704(c), the partnership's $90 built-in gain is
allocated to B, and B's basis in the partnership interest increases to
$190 under section 705. In a later year, B sells the partnership
interest to a nonmember for $100.
(b) Adjustments. Under Sec. 1.1502-21(c), the partnership's $90
built-in gain allocated to B ordinarily increases the amount of B's SRLY
limitation, and B's $90 loss from its sale of the partnership interest
ordinarily is not subject to limitation under the SRLY rules. Because
the contribution of property to the partnership and the sale of the
partnership interest were part of a plan a principal purpose of which
was to achieve a reduction in consolidated tax liability by creating
offsetting gain and loss for B while deferring S's intercompany gain,
B's allocable share of the partnership's gain from its sale of the land
is treated under paragraph (h)(1) of this section as not increasing the
amount of B's SRLY limitation.
Example 2. Transitory status as an intercompany obligation. (a)
Facts. P historically has owned 70% of X's stock and the remaining 30%
is owned by unrelated shareholders. On January 1 of Year 1, S borrows
$100 from X in return for S's note requiring $10 of interest annually at
the end of each year, and repayment of $100 at the end of Year 20. As of
January 1 of Year 3, the P group has substantial net operating loss
carryovers, and the fair market value of S's note falls to $70 due to an
increase in prevailing market interest rates. X is not permitted under
section 166(a)(2) to take into account a $30 loss with respect to the
note. Pursuant to a plan to permit X to take into account its $30 loss
without disposing of the note, P acquires an additional 10% of X's
stock, causing X to become a member, and P subsequently resells the 10%
interest. X's $30 loss with respect to the note is a net unrealized
built-in loss within the meaning of Sec. 1.1502-15.
(b) Adjustments. Under paragraph (g)(4) of this section, X
ordinarily would take into account its $30 loss as a result of the note
becoming an intercompany obligation, and S would take into account $30
of discharge of indebtedness income. Under Sec. 1.1502-22, X's loss is
not combined with items of the other members and the loss would be
carried to X's separate return years as a result of X becoming a
nonmember. However, the transitory status of S's indebtedness to X as an
intercompany obligation is structured with a principal purpose to
accelerate the recognition of X's loss. Thus, S's note is treated under
paragraph (h)(1) of this section as not becoming an intercompany
obligation.
Example 3. Corporate mixing bowl. (a) Facts. M1 and M2 are
subsidiaries of P. M1 operates a manufacturing business on land it
leases from M2. The land is the only asset held by M2. P intends to
dispose of the M1 business, including the land owned by M2; P's basis in
the M1 stock is equal to the stock's fair market value. M2's land has a
value of $20 and a basis of $0 and P has a $0 basis in the stock of M2.
In Year 1, with a principal purpose of avoiding gain from the sale of
the land (by transferring the land to M1 with a carry-over basis without
affecting P's basis in the stock of M1 or M2), M1 and M2 form
corporation T; M1 contributes cash in exchange for 80% of the T stock
and M2 contributes the land in
[[Page 304]]
exchange for 20% of the stock. In Year 3, T liquidates, distributing $20
cash to M2 and the land (plus $60 cash) to M1. Under Sec. 1.1502-34,
section 332 applies to both M1 and M2. Under section 337, T recognizes
no gain or loss from its liquidating distribution of the land to M1. T
has neither gain nor loss on its distribution of cash to M2. In Year 4,
P sells all of the stock of M1 to X and liquidates M2.
(b) Adjustments. A principal purpose for the formation and
liquidation of T was to avoid gain from the sale of M2's land. Thus,
under paragraph (h)(1) of this section, M2 must take $20 of gain into
account when the stock of M1 is sold to X.
Example 4. Partnership mixing bowl. (a) Facts. M1 owns a self-
created intangible asset with a $0 basis and a fair market value of
$100. M2 owns land with a basis of $100 and a fair market value of $100.
In Year 1, with a principal purpose of creating basis in the intangible
asset (which would be eligible for amortization under section 197), M1
and M2 form partnership PRS; M1 contributes the intangible asset and M2
contributes the land. X, an unrelated person, contributes cash to PRS in
exchange for a substantial interest in the partnership. PRS uses the
contributed assets in legitimate business activities. Five years and six
months later, PRS liquidates, distributing the land to M1, the
intangible to M2, and cash to X. The group reports no gain under
sections 707(a)(2)(B) and 737(a) and claims that M2's basis in the
intangible asset is $100 under section 732 and that the asset is
eligible for amortization under section 197.
(b) Adjustments. A principal purpose of the formation and
liquidation of PRS was to create additional amortization without an
offsetting increase in consolidated taxable income by avoiding treatment
as an intercompany transaction. Thus, under paragraph (h)(1) of this
section, appropriate adjustments must be made.
Example 5. Sale and leaseback. (a) Facts. S operates a factory with
a $70 basis and $100 value, and has loss carryovers from SRLYs. Pursuant
to a plan to take into account the $30 unrealized gain while continuing
to operate the factory, S sells the factory to X for $100 and leases it
back on a long-term basis. In the transaction, a substantial interest in
the factory is transferred to X. The sale and leaseback are not
recharacterized under general principles of Federal income tax law. As a
result of S's sale to X, the $30 gain is taken into account and
increases S's SRLY limitation.
(b) No adjustments. Although S's sale was pursuant to a plan to
accelerate the $30 gain, it is not subject to adjustment under paragraph
(h)(1) of this section. The sale is not treated as engaged in or
structured with a principal purpose to avoid the purposes of this
section.
(i) [Reserved]
(j) Miscellaneous operating rules. For purposes of this section--
(1) Successor assets. Any reference to an asset includes, as the
context may require, a reference to any other asset the basis of which
is determined, directly or indirectly, in whole or in part, by reference
to the basis of the first asset.
(2) Successor persons--(i) In general. Any reference to a person
includes, as the context may require, a reference to a predecessor or
successor. For this purpose, a predecessor is a transferor of assets to
a transferee (the successor) in a transaction--
(A) To which section 381(a) applies;
(B) In which substantially all of the assets of the transferor are
transferred to members in a complete liquidation;
(C) In which the successor's basis in assets is determined (directly
or indirectly, in whole or in part) by reference to the basis of the
transferor, but the transferee is a successor only with respect to the
assets the basis of which is so determined; or
(D) Which is an intercompany transaction, but only with respect to
assets that are being accounted for by the transferor in a prior
intercompany transaction.
(ii) Intercompany items. If the assets of a predecessor are acquired
by a successor member, the successor succeeds to, and takes into account
(under the rules of this section), the predecessor's intercompany items.
If two or more successor members acquire assets of the predecessor, the
successors take into account the predecessor's intercompany items in a
manner that is consistently applied and reasonably carries out the
purposes of this section and applicable provisions of law.
(3) Multiple triggers. If more than one corresponding item can cause
an intercompany item to be taken into account under the matching rule,
the intercompany item is taken into account in connection with the
corresponding item most consistent with the treatment of members as
divisions of a single corporation. For example, if S sells a truck to B,
its intercompany gain from the sale is not taken into account by
reference to B's depreciation if the depreciation is capitalized under
section 263A as part of B's cost for a building;
[[Page 305]]
instead, S's gain relating to the capitalized depreciation is taken into
account when the building is sold or as it is depreciated. Similarly, if
B purchases appreciated land from S and transfers the land to a lower-
tier member in exchange for stock, thereby duplicating the basis of the
land in the basis of the stock, items with respect to both the stock and
the land can cause S's intercompany gain to be taken into account; if
the lower-tier member becomes a nonmember as a result of the sale of its
stock, the attributes of S's intercompany gain are determined with
respect to the land rather than the stock.
(4) Multiple or successive intercompany transactions. If a member's
intercompany item or corresponding item affects the accounting for more
than one intercompany transaction, appropriate adjustments are made to
treat all of the intercompany transactions as transactions between
divisions of a single corporation. For example, if S sells property to
M, and M sells the property to B, then S, M, and B are treated as
divisions of a single corporation for purposes of applying the rules of
this section. Similar principles apply with respect to intercompany
transactions that are part of the same plan or arrangement. For example,
if S sells separate properties to different members as part of the same
plan or arrangement, all of the participating members are treated as
divisions of a single corporation for purposes of determining the
attributes (which might also affect timing) of the intercompany items
and corresponding items from each of the properties.
(5) Acquisition of group--(i) Scope. This paragraph (j)(5) applies
only if a consolidated group (the terminating group) ceases to exist as
a result of--
(A) The acquisition by a member of another consolidated group of
either the assets of the common parent of the terminating group in a
reorganization described in section 381(a)(2), or the stock of the
common parent of the terminating group; or
(B) The application of the principles of Sec. 1.1502-75(d)(2) or
(d)(3).
(ii) Application. If the terminating group ceases to exist under
circumstances described in paragraph (j)(5)(i) of this section, the
surviving group is treated as the terminating group for purposes of
applying this section to the intercompany transactions of the
terminating group. For example, intercompany items and corresponding
items from intercompany transactions between members of the terminating
group are taken into account under the rules of this section by the
surviving group. This treatment does not apply, however, to members of
the terminating group that are not members of the surviving group
immediately after the terminating group ceases to exist (for example,
under section 1504(a)(3) relating to reconsolidation, or section 1504(c)
relating to includible insurance companies).
(6) Former common parent treated as continuation of group. If a
group terminates because the common parent is the only remaining member,
the common parent succeeds to the treatment of the terminating group for
purposes of applying this section so long as it neither becomes a member
of an affiliated group filing separate returns nor becomes a corporation
described in section 1504(b). For example, if the only subsidiary of the
group liquidates into the common parent in a complete liquidation to
which section 332 applies, or the common parent merges into the
subsidiary and the subsidiary is treated as the common parent's
successor under paragraph (j)(2)(i) of this section, the taxable income
of the surviving corporation is treated as the group's consolidated
taxable income in which the intercompany and corresponding items must be
included. See Sec. 1.267(f)-1 for additional rules applicable to
intercompany losses or deductions.
(7) Becoming a nonmember. For purposes of this section, a member is
treated as becoming a nonmember if it has a separate return year
(including another group's consolidated return year). A member is not
treated as having a separate return year if its items are treated as
taken into account in computing the group's consolidated taxable income
under paragraph (j)(5) or (6) of this section.
(8) Recordkeeping. Intercompany and corresponding items must be
reflected on permanent records (including work papers). See also section
6001, requiring
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records to be maintained. The group must be able to identify from these
permanent records the amount, location, timing, and attributes of the
items, so as to permit the application of the rules of this section for
each year.
(9) Examples. The operating rules of this paragraph (j) are
illustrated generally throughout this section, and by the following
examples.
Example 1. Intercompany sale followed by section 351 transfer to
member. (a) Facts. S holds land for investment with a basis of $70. On
January 1 of Year 1, S sells the land to M for $100. M also holds the
land for investment. On July 1 of Year 3, M transfers the land to B in
exchange for all of B's stock in a transaction to which section 351
applies. Under section 358, M's basis in the B stock is $100. B holds
the land for sale to customers in the ordinary course of business and,
under section 362(b), B's basis in the land is $100. On December 1 of
Year 5, M sells 20% of the B stock to X for $22. In an unrelated
transaction on July 1 of Year 8, B sells 20% of the land for $22.
(b) Definitions. Under paragraph (b)(1) of this section, S's sale of
the land to M and M's transfer of the land to B are both intercompany
transactions. S is the selling member and M is the buying member in the
first intercompany transaction, and M is the selling member and B is the
buying member in the second intercompany transaction. M has no
intercompany items under paragraph (b)(2) of this section. Because B
acquired the land in an intercompany transaction, B's items from the
land are corresponding items to be taken into account under this
section. Under the successor asset rule of paragraph (j)(1) of this
section, references to the land include references to M's B stock. Under
the successor person rule of paragraph (j)(2) of this section,
references to M include references to B with respect to the land.
(c) Timing and attributes resulting from the stock sale. Under
paragraph (c)(3) of this section, M is treated as owning and selling B's
stock for purposes of the matching rule even though, as divisions, M
could not own and sell stock in B. Under paragraph (j)(3) of this
section, both M's B stock and B's land can cause S's intercompany gain
to be taken into account under the matching rule. Thus, S takes $6 of
its gain into account in Year 5 to reflect the $6 difference between M's
$2 gain taken into account from its sale of B stock and the $8
recomputed gain. Under paragraph (j)(4) of this section, the attributes
of this gain are determined by treating S, M, and B as divisions of a
single corporation. Under paragraph (c)(1) of this section, S's $6 gain
and M's $2 gain are treated as long-term capital gain. The gain would be
capital on a separate entity basis (assuming that section 341 does not
apply), and this treatment is not inconsistent with treating S, M, and B
as divisions of a single corporation because the stock sale and
subsequent land sale are unrelated transactions and B remains a member
following the sale.
(d) Timing and attributes resulting from the land sale. Under
paragraph (j)(3) of this section, S takes $6 of its gain into account in
Year 8 under the matching rule to reflect the $6 difference between B's
$2 gain taken into account from its sale of an interest in the land and
the $8 recomputed gain. Under paragraph (j)(4) of this section, the
attributes of this gain are determined by treating S, M, and B as
divisions of a single corporation and taking into account the activities
of S, M, and B with respect to the land. Thus, both S's gain and B's
gain might be ordinary income as a result of B's activities. (If B
subsequently sells the balance of the land, S's gain taken into account
is limited to its remaining $18 of intercompany gain.)
(e) Sale of successor stock resulting in deconsolidation. The facts
are the same as in paragraph (a) of this Example 1, except that M sells
60% of the B stock to X for $66 on December 1 of Year 5 and B becomes a
nonmember. Under the matching rule, M's sale of B stock results in $18
of S's gain being taken into account (to reflect the difference between
M's $6 gain taken into account and the $24 recomputed gain). Under the
acceleration rule, however, the entire $30 gain is taken into account
(to reflect B becoming a nonmember, because its basis in the land
reflects M's $100 cost basis from the prior intercompany transaction).
Under paragraph (j)(4) of this section, the attributes of S's gain are
determined by treating S, M, and B as divisions of a single corporation.
Because M's cost basis in the land will be reflected by B as a
nonmember, all of S's gain is treated as from the land (rather than a
portion being from B's stock), and B's activities with respect to the
land might therefore result in S's gain being ordinary income.
Example 2. Intercompany sale of member stock followed by
recapitalization. (a) Facts. Before becoming a member of the P group, S
owns P stock with a basis of $70. On January 1 of Year 1, P buys all of
S's stock. On July 1 of Year 3, S sells the P stock to M for $100. On
December 1 of Year 5, P acquires M's original P stock in exchange for
new P stock in a recapitalization described in section 368(a)(1)(E).
(b) Timing and attributes. Although P's basis in the stock acquired
from M is eliminated under paragraph (f)(4) of this section, the new P
stock received by M is exchanged basis property (within the meaning of
section 7701(a)(44)) having a basis under section 358 equal to M's basis
in the original P stock. Under the successor asset rule of paragraph
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(j)(1) of this section, references to M's original P stock include
references to M's new P stock. Because it is still possible to take S's
intercompany item into account under the matching rule with respect to
the successor asset, S's gain is not taken into account under the
acceleration rule as a result of the basis elimination under paragraph
(f)(4) of this section. Instead, the gain is taken into account based on
subsequent events with respect to M's new P stock (for example, a
subsequent distribution or redemption of the new stock).
Example 3. Back-to-back intercompany transactions--matching. (a)
Facts. S holds land for investment with a basis of $70. On January 1 of
Year 1, S sells the land to M for $90. M also holds the land for
investment. On July 1 of Year 3, M sells the land for $100 to B, and B
holds the land for sale to customers in the ordinary course of business.
During Year 5, B sells all of the land to customers for $105.
(b) Timing. Under paragraph (b)(1) of this section, S's sale of the
land to M and M's sale of the land to B are both intercompany
transactions. S is the selling member and M is the buying member in the
first intercompany transaction, and M is the selling member and B is the
buying member in the second intercompany transaction. Under paragraph
(j)(4) of this section, S, M and B are treated as divisions of a single
corporation for purposes of determining the timing of their items from
the intercompany transactions. See also paragraph (j)(2) of this section
(B is treated as a successor to M for purposes of taking S's
intercompany gain into account). Thus, S's $20 gain and M's $10 gain are
both taken into account in Year 5 to reflect the difference between B's
$5 gain taken into account with respect to the land and the $35
recomputed gain (the gain that B would have taken into account if the
intercompany sales had been transfers between divisions of a single
corporation, and B succeeded to S's $70 basis).
(c) Attributes. Under paragraphs (j)(4) of this section, the
attributes of the intercompany items and corresponding items of S, M,
and B are also determined by treating S, M, and B as divisions of a
single corporation. For example, the attributes of S's and M's
intercompany items are determined by taking B's activities into account.
Example 4. Back-to-back intercompany transactions--acceleration. (a)
Facts. During Year 1, S performs services for M in exchange for $10 from
M. S incurs $8 of employee expenses. M capitalizes the $10 cost of S's
services under section 263 as part of M's cost to acquire real property
from X. Under its separate entity method of accounting, S would take its
income and expenses into account in Year 1. M holds the real property
for investment and, on July 1 of Year 5, M sells it to B at a gain. B
also holds the real property for investment. On December 1 of Year 8,
while B still owns the real property, P sells all of M's stock to X and
M becomes a nonmember.
(b) M's items. M takes its gain into account immediately before it
becomes a nonmember. Because the real property stays in the group, the
acceleration rule redetermines the attributes of M's gain under the
principles of the matching rule as if B sold the real property to an
affiliated corporation that is not a member of the group for a cash
payment equal to B's adjusted basis in the real property, and S, M, and
B were divisions of a single corporation. Thus, M's gain is capital
gain.
(c) S's items. Under paragraph (b)(2)(ii) of this section, S
includes the $8 of expenses in determining its $2 intercompany income.
In Year 1, S takes into account $8 of income and $8 of expenses. Under
paragraph (j)(4) of this section, appropriate adjustments must be made
to treat both S's performance of services for M and M's sale to B as
occurring between divisions of a single corporation. Thus, S's $2 of
intercompany income is not taken into account as a result of M becoming
a nonmember, but instead will be taken into account based on subsequent
events (e.g., under the matching rule based on B's sale of the real
property to a nonmember, or under the acceleration rule based on P's
sale of the stock of S or B to a nonmember). See the successor person
rules of paragraph (j)(2) of this section (B is treated as a successor
to M for purposes of taking S's intercompany income into account).
(d) Sale of S's stock. The facts are the same as in paragraph (a) of
this Example 4, except that P sells all of S's stock (rather than M's
stock) and S becomes a nonmember on July 1 of Year 5. S's remaining $2
of intercompany income is taken into account immediately before S
becomes a nonmember. Because S's intercompany income is not from an
intercompany sale, exchange, or distribution of property, the attributes
of the intercompany income are determined on a separate entity basis.
Thus, S's $2 of intercompany income is ordinary income. M does not take
any of its intercompany gain into account as a result of S becoming a
nonmember.
(e) Intercompany income followed by intercompany loss. The facts are
the same as in paragraph (a) of this Example 4, except that M sells the
real property to B at a $1 loss (rather than a gain). M takes its $1
loss into account under the acceleration rule immediately before M
becomes a nonmember. But see Sec. 1.267(f)-1 (which might further defer
M's loss if M and B remain in a controlled group relationship after M
becomes a nonmember). Under paragraph (j)(4) of this section appropriate
adjustments must be made to treat the group as if both intercompany
transactions occurred between divisions of a single corporation.
Accordingly, P's sale of M stock also results in S taking into account
$1 of intercompany income as capital gain to
[[Page 308]]
offset M's $1 of corresponding capital loss. The remaining $1 of S's
intercompany income is taken into account based on subsequent events.
Example 5. Successor group. (a) Facts. On January 1 of Year 1, B
borrows $100 from S in return for B's note providing for $10 of interest
annually at the end of each year, and repayment of $100 at the end of
Year 20. As of January 1 of Year 3, B has paid the interest accruing
under the note. On that date, X acquires all of P's stock and the former
P group members become members of the X consolidated group.
(b) Successor. Under paragraph (j)(5) of this section, although B's
note ceases to be an intercompany obligation of the P group, the note is
not treated as satisfied and reissued under paragraph (g) of this
section as a result of X's acquisition of P stock. Instead, the X
consolidated group succeeds to the treatment of the P group for purposes
of paragraph (g) of this section, and B's note is treated as an
intercompany obligation of the X consolidated group.
(c) No subgroups. The facts are the same as in paragraph (a) of this
Example 5, except that X simultaneously acquires the stock of S and B
from P (rather than X acquiring all of P's stock). Paragraph (j)(5) of
this section does not apply to X's acquisitions. Unless an exception
described in paragraph (g)(3)(i)(B) applies, B's note is treated as
satisfied immediately before S and B become nonmembers, and reissued
immediately after they become members of the X consolidated group. The
amount at which the note is satisfied and reissued under paragraph
(g)(3) of this section is based on the fair market value of the note at
the time of P's sales to X. Paragraph (g)(4) of this section does not
apply to the reissued B note in the X consolidated group, because the
new note is always an intercompany obligation of the X consolidated
group.
Example 6. Liquidation--80% distributee. (a) Facts. X has had
preferred stock described in section 1504(a)(4) outstanding for several
years. On January 1 of Year 1, S buys all of X's common stock for $60,
and B buys all of X's preferred stock for $40. X's assets have a $0
basis and $100 value. On July 1 of Year 3, X distributes all of its
assets to S and B in a complete liquidation. Under Sec. 1.1502-34,
section 332 applies to both S and B. Under section 337, X has no gain or
loss from its liquidating distribution to S. Under sections 336 and
337(c), X has a $40 gain from its liquidating distribution to B. B has a
$40 basis under section 334(a) in the assets received from X, and S has
a $0 basis under section 334(b) in the assets received from X.
(b) Intercompany items from the liquidation. Under the matching
rule, X's $40 gain from its liquidating distribution to B is not taken
into account under this section as a result of the liquidation (and
therefore is not yet reflected under Secs. 1.1502-32 and 1.1502-33).
Under the successor person rule of paragraph (j)(2)(i) of this section,
S and B are both successors to X. Under section 337(c), X recognizes
gain or loss only with respect to the assets distributed to B. Under
paragraph (j)(2)(ii) of this section, to be consistent with the purposes
of this section, S succeeds to X's $40 intercompany gain. The gain will
be taken into account by S under the matching and acceleration rules of
this section based on subsequent events. (The allocation of the
intercompany gain to S does not govern the allocation of any other
attributes.)
Example 7. Liquidation--no 80% distributee. (a) Facts. X has only
common stock outstanding. On January 1 of Year 1, S buys 60% of X's
stock for $60, and B buys 40% of X's stock for $40. X's assets have a $0
basis and $100 value. On July 1 of Year 3, X distributes all of its
assets to S and B in a complete liquidation. Under Sec. 1.1502-34,
section 332 applies to both S and B. Under sections 336 and 337(c), X
has a $100 gain from its liquidating distributions to S and B. Under
section 334(b), S has a $60 basis in the assets received from X and B
has a $40 basis in the assets received from X.
(b) Intercompany items from the liquidation. Under the matching
rule, X's $100 intercompany gain from its liquidating distributions to S
and B is not taken into account under this section as a result of the
liquidation (and therefore is not yet reflected under Secs. 1.1502-32
and 1.1502-33). Under the successor person rule of paragraph (j)(2)(i)
of this section, S and B are both successors to X. Under paragraph
(j)(2)(ii) of this section, to be consistent with the purposes of this
section, S succeeds to X's $40 intercompany gain with respect to the
assets distributed to B, and B succeeds to X's $60 intercompany gain
with respect to the assets distributed to S. The gain will be taken into
account by S and B under the matching and acceleration rules of this
section based on subsequent events. (The allocation of the intercompany
gain does not govern the allocation of any other attributes.)
(k) Cross references--(1) Section 108. See Sec. 1.108-3 for the
treatment of intercompany deductions and losses as subject to attribute
reduction under section 108(b).
(2) Section 263A(f). See section 263A(f) and Sec. 1.263A-9(g)(5) for
special rules regarding interest from intercompany transactions.
(3) Section 267(f). See section 267(f) and Sec. 1.267(f)-1 for
special rules applicable to certain losses and deductions from
transactions between members of a controlled group.
(4) Section 460. See Sec. 1.460-4(j) for special rules regarding the
application of
[[Page 309]]
section 460 to intercompany transactions.
(5) Section 469. See Sec. 1.469-1(h) for special rules regarding the
application of section 469 to intercompany transactions.
(6) Sec. 1.1502-80. See Sec. 1.1502-80 for the non-application of
certain Internal Revenue Code rules.
(l) Effective dates--(1) In general. This section applies with
respect to transactions occurring in years beginning on or after July
12, 1995. If both this section and prior law apply to a transaction, or
neither applies, with the result that items may be duplicated, omitted,
or eliminated in determining taxable income (or tax liability), or items
may be treated inconsistently, prior law (and not this section) applies
to the transaction. For example, S's and B's items from S's sale of
property to B which occurs in a consolidated return year beginning
before July 12, 1995, are taken into account under prior law, even
though B may dispose of the property in a consolidated return year
beginning on or after July 12, 1995. Similarly, an intercompany
distribution to which a shareholder becomes entitled in a consolidated
return year beginning before July 12, 1995, but which is distributed in
a consolidated return year beginning on or after that date is taken into
account under prior law (generally when distributed), because this
section generally takes dividends into account when the shareholder
becomes entitled to them but this section does not apply at that time.
If application of prior law to S's deferred gain or loss from a deferred
intercompany transaction (as defined under prior law) occurring in a
consolidated return year beginning prior to July 12, 1995, would be
affected by an intercompany transaction (as defined under this section)
occurring in a consolidated return year beginning on or after July 12,
1995, S's deferred gain or loss continues to be taken into account as
provided under prior law, and the items from the subsequent intercompany
transaction are taken into account under this section. Appropriate
adjustments must be made to prevent items from being duplicated,omitted,
or eliminated in determining taxable income as a result of the
application of both this section and prior law to the successive
transactions, and to ensure the proper application of prior law.
(2) Avoidance transactions. This paragraph (l)(2) applies if a
transaction is engaged in or structured on or after April 8, 1994, with
a principal purpose to avoid the rules of this section (and instead to
apply prior law). If this paragraph (l)(2) applies, appropriate
adjustments must be made in years beginning on or after July 12, 1995,
to prevent the avoidance, duplication, omission, or elimination of any
item (or tax liability), or any other inconsistency with the rules of
this section. For example, if S is a dealer in real property and sells
land to B on March 16, 1995 with a principal purpose of converting any
future appreciation in the land to capital gain, B's gain from the sale
of the land on May 11, 1997 might be characterized as ordinary income
under this paragraph (l)(2).
(3) Election for certain stock elimination transactions--(i) In
general. A group may elect pursuant to this paragraph (l)(3) to apply
this section (including the elections available under paragraph
(f)(5)(ii) of this section) to stock elimination transactions to which
prior law would otherwise apply. If an election is made, this section,
and not prior law, applies to determine the timing and attributes of S's
and B's gain or loss from stock with respect to all stock elimination
transactions.
(ii) Stock elimination transactions. For purposes of this paragraph
(l)(3), a stock elimination transaction is a transaction in which stock
transferred from S to B--
(A) Is cancelled or redeemed on or after July 12, 1995;
(B) Is treated as cancelled in a liquidation pursuant to an election
under section 338(h)(10) with respect to a qualified stock purchase with
an acquisition date on or after July 12, 1995;
(C) Is distributed on or after July 12, 1995; or
(D) Is exchanged on or after July 12, 1995 for stock of a member
(determined immediately after the exchange) in a transaction that would
cause S's gain or loss from the transfer to be taken into account under
prior law.
(iii) Time and manner of making election. An election under this
paragraph
[[Page 310]]
(l)(3) is made by attaching to a timely filed original return (including
extensions) for the consolidated return year including July 12, 1995 a
statement entitled ``[Insert Name and Employer Identification Number of
Common Parent] HEREBY ELECTS THE APPLICATION OF Sec. 1.1502-13(l)(3).''
See paragraph (f)(5)(ii)(E) of this section for the manner of electing
the relief provisions of paragraph (f)(5)(ii) of this section.
(4) Prior law. For transactions occurring in S's years beginning
before July 12, 1995, see the applicable regulations issued under
section 1502. See Secs. 1.1502-13, 1.1502-13T, 1.1502-14, 1.1502-14T,
1.1502-31, and 1.1502-32 (as contained in the 26 CFR part 1 edition
revised as of April 1, 1995).
(5) Consent to adopt method of accounting. For intercompany
transactions occurring in a consolidated group's first taxable year
beginning on or after July 12, 1995, the Commissioner's consent under
section 446(e) is hereby granted for any changes in methods of
accounting that are necessary solely by reason of the timing rules of
this section. Changes in method of accounting for these transactions are
to be effected on a cut-off basis.
[T.D. 8597, 60 FR 36685, July 18, 1995, as amended by T.D. 8660, 61 FR
10449, 10450, Mar. 14, 1996; T.D. 8677, 61 FR 33323, June 27, 1996; T.D.
8660, 62 FR 12097, Mar. 14, 1997; T.D. 8677, 62 FR 12542, Mar. 17, 1997;
T.D. 8823, 64 FR 36099, July 2, 1999]
Sec. 1.1502-15 SRLY limitation on built-in losses.
(a) SRLY limitation. Except as provided in paragraph (f) of this
section (relating to built-in losses of the common parent) and paragraph
(g) of this section (relating to an overlap with section 382), built-in
losses are subject to the SRLY limitation under Secs. 1.1502-21(c) and
1.1502-22(c) (including applicable subgroup principles). Built-in losses
are treated as deductions or losses in the year recognized, except for
the purpose of determining the amount of, and the extent to which the
built-in loss is limited by, the SRLY limitation for the year in which
it is recognized. Solely for such purpose, a built-in loss is treated as
a hypothetical net operating loss carryover or net capital loss
carryover arising in a SRLY, instead of as a deduction or loss in the
year recognized. To the extent that a built-in loss is allowed as a
deduction under this section in the year it is recognized, it offsets
any consolidated taxable income for the year before any loss carryovers
or carrybacks are allowed as a deduction. To the extent not so allowed,
it is treated as a separate net operating loss or net capital loss
carryover or carryback arising in the year of recognition and, under
Sec. 1.1502-21(c) or 1.1502-22(c), the year of recognition is treated as
a SRLY.
(b) Built-in losses--(1) Defined. If a corporation has a net
unrealized built-in loss under section 382(h)(3) (as modified by this
section) on the day it becomes a member of the group (whether or not the
group is a consolidated group), its deductions and losses are built-in
losses under this section to the extent they are treated as recognized
built-in losses under section 382(h)(2)(B) (as modified by this
section). This paragraph (b) generally applies separately with respect
to each member, but see paragraph (c) of this section for circumstances
in which it is applied on a subgroup basis.
(2) Operating rules. Solely for purposes of applying paragraph
(b)(1) of this section, the principles of Sec. 1.1502-94(c) apply with
appropriate adjustments, including the following:
(i) Stock acquisition. A corporation is treated as having an
ownership change under section 382(g) on the day the corporation becomes
a member of a group, and no other events (e.g., a subsequent ownership
change under section 382(g) while it is a member) are treated as causing
an ownership change.
(ii) Asset acquisition. In the case of an asset acquisition by a
group, the assets and liabilities acquired directly from the same
transferor (whether corporate or non-corporate, foreign or domestic)
pursuant to the same plan are treated as the assets and liabilities of a
corporation that becomes a member of the group (and has an ownership
change) on the date of the acquisition.
(iii) Recognized built-in gain or loss. A loss that is included in
the determination of net unrealized built-in gain or loss and that is
recognized but disallowed or deferred (e.g., under Sec. 1.1502-20 or
section 267) is not treated as a
[[Page 311]]
built-in loss unless and until the loss would be allowed during the
recognition period without regard to the application of this section.
Section 382(h)(1)(B)(ii) does not apply to the extent it limits the
amount of recognized built-in loss that may be treated as a pre-change
loss to the amount of the net unrealized built-in loss.
(c) Built-in losses of subgroups--(1) In general. In the case of a
subgroup, the principles of paragraph (b) of this section apply to the
subgroup, and not separately to its members. Thus, the net unrealized
built-in loss and recognized built-in loss for purposes of paragraph (b)
of this section are based on the aggregate amounts for each member of
the subgroup.
(2) Members of subgroups. A subgroup is composed of those members
that have been continuously affiliated with each other for the 60
consecutive month period ending immediately before they become members
of the group in which the loss is recognized. A member remains a member
of the subgroup until it ceases to be affiliated with the loss member.
For this purpose, the principles of Sec. 1.1502-21(c)(2)(iv) through
(vi) apply with appropriate adjustments.
(3) Coordination of 60 month affiliation requirement with the
overlap rule. If one or more corporations become members of a group and
are included in the determination of a net unrealized built-in loss that
is subject to the overlap rule described in paragraph (g)(1) of this
section, then for purposes of paragraph (c)(2) of this section, such
corporations that become members of the group are treated as having been
affiliated for 60 consecutive months with the common parent of the group
and are also treated as having been affiliated with any other members
who have been affiliated or are treated as having been affiliated with
the common parent at such time. The corporations are treated as having
been affiliated with such other members for the same period of time that
those members have been affiliated or are treated as having been
affiliated with the common parent. If two or more corporations become
members of the group at the same time, but this paragraph (c)(3) does
not apply to every such corporation, then immediately after the
corporations become members of the group, and solely for purposes of
paragraph (c)(2) of this section, the corporations to which this
paragraph (c)(3) applies are treated as having not been previously
affiliated with the corporations to which this paragraph (c)(3) does not
apply. If the common parent has become the common parent of an existing
group within the previous five year period in a transaction described in
Sec. 1.1502-75(d)(2)(ii) or (3), the principles of Secs. 1.1502-91(g)(6)
and 1.1502-96(a)(2)(iii) shall apply.
(4) Built-in amounts. Solely for purposes of determining whether the
subgroup has a net unrealized built-in loss or whether it has a
recognized built-in loss, the principles of Sec. 1.1502-91(g) and (h)
apply with appropriate adjustments.
(d) Examples. For purposes of the examples in this section, unless
otherwise stated, all groups file consolidated returns, all corporations
have calendar taxable years, the facts set forth the only corporate
activity, value means fair market value and the adjusted basis of each
asset equals its value, all transactions are with unrelated persons, and
the application of any limitation or threshold under section 382 is
disregarded. The principles of this section are illustrated by the
following examples:
Example 1. Determination of recognized built-in loss. (i) Individual
A owns all of the stock of P and T. T has two depreciable assets. Asset
1 has an unrealized loss of $55 (basis $75, value $20), and asset 2 has
an unrealized gain of $20 (basis $30, value $50). P acquires all the
stock of T from Individual A during Year 1, and T becomes a member of
the P group. P's acquisition of T is not an ownership change as defined
by section 382(g). Paragraph (g) of this section does not apply because
there is not an overlap of the application of the rules contained in
paragraph (a) of this section and section 382.
(ii) Under paragraph (b)(2)(i) of this section, and solely for
purposes of applying paragraph (b)(1) of this section, T is treated as
having an ownership change under section 382(g) on becoming a member of
the P group. Under paragraph (b)(1) of this section, none of T's $55 of
unrealized loss is treated as a built-in loss unless T has a net
unrealized built-in loss under section 382(h)(3) on becoming a member of
the P group.
(iii) Under section 382(h)(3)(A), T has a $35 net unrealized built-
in loss on becoming a
[[Page 312]]
member of the P group (($55)+$20=($35)). Assume that this amount exceeds
the threshold requirement in section 382(h)(3)(B). Under section
382(h)(2)(B), the entire amount of T's $55 unrealized loss is treated as
a built-in loss to the extent it is recognized during the 5-year
recognition period described in section 382(h)(7). Under paragraph
(b)(2)(iii) of this section, the restriction under section
382(h)(1)(B)(ii), which limits the amount of recognized built-in loss
that is treated as pre-change loss to the amount of the net unrealized
built-in loss, is inapplicable for this purpose. Consequently, the
entire $55 of unrealized loss (not just the $35 net unrealized loss) is
treated under paragraph (b)(1) of this section as a built-in loss to the
extent it is recognized within 5 years of T's becoming a member of the P
group. Under paragraph (a) of this section, a built-in loss is subject
to the SRLY limitation under Sec. 1.1502-21(c)(1).
(iv) Under paragraph (b)(2)(ii) of this section, the built-in loss
would similarly be subject to a SRLY limitation under Sec. 1.1502-
21(c)(1) if T transferred all of its assets and liabilities to a
subsidiary of the P group in a single transaction described in section
351. To the extent the built-in loss is recognized within 5 years of T's
transfer, all of the items contributed by the acquiring subsidiary to
consolidated taxable income (and not just the items attributable to the
assets and liabilities transferred by T) are included for purposes of
determining the SRLY limitation under Sec. 1.1502-21(c)(1).
Example 2. Actual application of section 382 not relevant. (i)
Individual A owns all of the stock of P, and Individual B owns all of
the stock of T. T has two depreciable assets. Asset 1 has an unrealized
loss of $25 (basis $75, value $50), and asset 2 has an unrealized gain
of $20 (basis $30, value $50). P buys 55 percent of the stock of T in
January of Year 1, resulting in an ownership change of T under section
382(g). During March of Year 2, P buys the 45 percent balance of the T
stock, and T becomes a member of the P group.
(ii) Although T has an ownership change for purposes of section 382
in Year 1 and not Year 2, T's joining the P group in Year 2 is treated
as an ownership change under section 382(g) solely for purposes of this
section. Consequently, for purposes of this section, whether T has a net
unrealized built-in loss under section 382(h)(3) is determined as if the
day T joined the P group were a change date.
Example 3. Determination of a recognized built-in loss of a
subgroup. (i) Individual A owns all of the stock of P, S, and M. P and M
are each the common parent of a consolidated group. During Year 1, P
acquires all of the stock of S from Individual A, and S becomes a member
of the P group. P's acquisition of S is not an ownership change as
defined by section 382(g). At the beginning of Year 7, M acquires all of
the stock of P from Individual A, and P and S become members of the M
group. M's acquisitions of P and S are also not ownership changes as
defined by section 382(g). At the time of M's acquisition of the P
stock, P has (disregarding the stock of S) a $10 net unrealized built-in
gain (two depreciable assets, asset 1 with a basis of $35 and a value of
$55, and asset 2 with a basis of $55 and a value of $45), and S has a
$75 net unrealized built-in loss (two depreciable assets, asset 3 with a
basis of $95 and a value of $10, and asset 4 with a basis of $10 and a
value of $20).
(ii) Under paragraph (c) of this section, P and S compose a subgroup
on becoming members of the M group because P and S were continuously
affiliated for the 60 month period ending immediately before they became
members of the M group. Consequently, paragraph (b) of this section does
not apply to P and S separately. Instead, their separately computed
unrealized gains and losses are aggregated for purposes of determining
whether, and the extent to which, any unrealized loss is treated as
built-in loss under this section and is subject to the SRLY limitation
under Sec. 1.1502-21(c).
(iii) Under paragraph (c) of this section, the P subgroup has a net
unrealized built-in loss on the day P and S become members of the M
group, determined by treating the day they become members as a change
date. The net unrealized built-in loss is the aggregate of P's net
unrealized built-in gain of $10 and S's net unrealized built-in loss of
$75, or an aggregate net unrealized built-in loss of $65. (The stock of
S owned by P is disregarded for purposes of determining the net
unrealized built-in loss. However, any loss allowed on the sale of the
stock within the recognition period is taken into account in determining
recognized loss.) Assume that the $65 net unrealized built-in loss
exceeds the threshold requirement under section 382(h)(3)(B).
(iv) Under paragraphs (b)(1), (b)(2)(iii), and (c) of this section,
a loss recognized during the 5-year recognition period on an asset of P
or S held on the day that P and S became members of the M group is a
built-in loss except to the extent the group establishes that such loss
exceeds the amount by which the adjusted basis of such asset on the day
the member became a member exceeded the fair market value of such asset
on that same day. If P sells asset 2 for $45 in Year 7 and recognizes a
$10 loss, the entire $10 loss is treated as a built-in loss under
paragraphs (b)(2)(iii) and (c) of this section. If S sells asset 3 for
$10 in Year 7 and recognizes an $85 loss, the entire $85 loss is treated
as a built-in loss under paragraphs (b)(2)(iii) and (c) of this section
(not just the $55 balance of the P subgroup's $65 net unrealized built-
in loss).
(v) The determination of whether P and S constitute a SRLY subgroup
for purposes of loss carryovers and carrybacks, and the extent to which
built-in losses are not allowed
[[Page 313]]
under the SRLY limitation, is made under Sec. 1.1502-21(c).
Example 4. Computation of SRLY limitation. (i) Individual A owns all
of the stock of P, the common parent of a consolidated group. During
Year 1, Individual A forms T by contributing $300, and T sustains a $100
net operating loss. During Year 2, T's assets decline in value to $100.
At the beginning of Year 3, P acquires all the stock of T from
Individual A, and T becomes a member of the P group with a net
unrealized built-in loss of $100. P's acquisition of T is not an
ownership change as defined by section 382(g). Assume that $100 exceeds
the threshold requirements of section 382(h)(3)(B). During Year 3, T
recognizes its unrealized built-in loss as a $100 ordinary loss. The
members of the P group contribute the following net income to the
consolidated taxable income of the P group (disregarding T's recognized
built-in loss and any consolidated net operating loss deduction under
Sec. 1.1502-21) for Years 3 and 4:
------------------------------------------------------------------------
Year 3 Year 4 Total
------------------------------------------------------------------------
P group (without T) $100 $100 $200
T............................................ 60 40 100
CTI.......................................... 160 140 300
------------------------------------------------------------------------
(ii) Under paragraph (b) of this section, T's $100 ordinary loss in
Year 3 (not taken into account in the consolidated taxable income
computations above) is a built-in loss. Under paragraph (a) of this
section, the built-in loss is treated as a net operating loss carryover
for purposes of determining the SRLY limitation under Sec. 1.1502-21(c).
(iii) For Year 3, Sec. 1.1502-21(c) limits T's $100 built-in loss
and $100 net operating loss carryover from Year 1 to the aggregate of
the P group's consolidated taxable income through Year 3, determined by
reference to only T's items. For this purpose, consolidated taxable
income is determined without regard to any consolidated net operating
loss deductions under Sec. 1.1502-21(a).
(iv) The P group's consolidated taxable income through Year 3 is $60
when determined by reference to only T's items. Under Sec. 1.1502-21(c),
the SRLY limitation for Year 3 is therefore $60.
(v) Under paragraph (a) of this section, the $100 built-in loss is
treated as a current deduction for all purposes other than determination
of the SRLY limitation under Sec. 1.1502-21(c). Consequently, a
deduction for the built-in loss is allowed in Year 3 before T's loss
carryover from Year 1 is allowed, but only to the extent of the $60 SRLY
limitation. None of T's Year 1 loss carryover is allowed because the
built-in loss ($100) exceeds the SRLY limitation for Year 3.
(vi) The $40 balance of the built-in loss that is not allowed in
Year 3 because of the SRLY limitation is treated as a $40 net operating
loss arising in Year 3 that is carried to other years in accordance with
the rules of Sec. 1.1502-21(b). The $40 net operating loss is treated
under paragraph (a) of this section and Sec. 1.1502-21(c)(1)(ii) as a
loss carryover or carryback from Year 3 that arises in a SRLY, and is
subject to the rules of Sec. 1.1502-21 (including Sec. 1.1502-21(c))
rather than this section. See also Sec. 1.1502-21(c)(1)(iii) Example 4.
(vii) The facts are the same as in paragraphs (i) through (vi) of
this Example 4, except that T has an additional built-in loss when it
joins the P group which is recognized in Year 4. For purposes of
determining the SRLY limitation for this additional loss in Year 4 (or
any subsequent year), the $60 of built-in loss allowed as a deduction in
Year 3 is treated under paragraph (a) of this section as a deduction in
Year 3 that reduces the P group's consolidated taxable income when
determined by reference to only T's items.
Example 5. Built-in loss exceeding consolidated taxable income in
the year recognized. (i) Individual A owns all of the stock of P and T.
During Year 1, P acquires all the stock of T from Individual A, and T
becomes a member of the P group. P's acquisition of T was not an
ownership change as defined by section 382(g). At the time of
acquisition, T has a noncapital asset with an unrealized loss of $45
(basis $100, value $55), which exceeds the threshold requirements of
section 382(h)(3)(B). During Year 2, T sells its asset for $55 and
recognizes the unrealized built-in loss. The P group has $10 of
consolidated taxable income in Year 2, computed by disregarding T's
recognition of the $45 built-in loss and the consolidated net operating
loss deduction, while the consolidated taxable income would be $25 if
determined by reference to only T's items (other than the $45 loss).
(ii) T's $45 loss is recognized in Year 2 and, under paragraph (b)
of this section, constitutes a built-in loss. Under paragraph (a) of
this section and Sec. 1.1502-21(c)(1)(ii), the loss is treated as a net
operating loss carryover to Year 2 for purposes of applying the SRLY
limitation under Sec. 1.1502-21(c).
(iii) For Year 2, T's SRLY limitation is the aggregate of the P
group's consolidated taxable income through Year 2 determined by
reference to only T's items. For this purpose, consolidated taxable
income is determined by disregarding any built-in loss that is treated
as a net operating loss carryover, and any consolidated net operating
loss deductions under Sec. 1.1502-21(a). Consolidated taxable income so
determined is $25.
(iv) Under Sec. 1.1502-21(c), $25 of the $45 built-in loss could be
deducted in Year 2. Because the P group has only $10 of consolidated
taxable income (determined without regard to the $45), the $25 loss
creates a consolidated net operating loss of $15. This loss is carried
back or forward under the rules of Sec. 1.1502-21(b) and absorbed under
the rules of Sec. 1.1502-21(a). This loss is not treated as arising in a
[[Page 314]]
SRLY (see Sec. 1.1502-21(c)(1)(ii)) and therefore is not subject to the
SRLY limitation under Sec. 1.1502-21(c) in any consolidated return year
of the group to which it is carried. The remaining $20 is treated as a
loss carryover arising in a SRLY and is subject to the limitation of
Sec. 1.1502-21(c) in the year to which it is carried.
(e) Predecessors and successors. For purposes of this section, any
reference to a corporation or member includes, as the context may
require, a reference to a successor or predecessor, as defined in
Sec. 1.1502-1(f)(4).
(f) Built-in losses recognized by common parent of group-- (1)
General rule. Paragraph (a) of this section does not apply to any loss
recognized by the group on an asset held by the common parent on the
date the group is formed. Following an acquisition described in
Sec. 1.1502-75(d)(2) or (3), references to the common parent are to the
corporation that was the common parent immediately before the
acquisition.
(2) Anti-avoidance rule. If a corporation that becomes a common
parent of a group acquires assets with a net unrealized built-in loss in
excess of the threshold requirement of section 382(h)(3)(B) (and thereby
increases its net unrealized built-in loss or decreases its net
unrealized built-in gain) prior to, and in anticipation of, the
formation of the group, paragraph (f)(1) of this section does not apply.
(g) Overlap with section 382--(1) General rule. The limitations
provided in Secs. 1.1502-21(c) and 1.1502-22(c) do not apply to
recognized built-in losses or to loss carryovers or carrybacks
attributable to recognized built-in losses when the application of
paragraph (a) of this section results in an overlap with the application
of section 382.
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in section 382, the
regulations thereunder, and Secs. 1.1502-90 through 1.1502-99 apply.
(ii) Overlap--(A) An overlap of the application of paragraph (a) of
this section and the application of section 382 with respect to built-in
losses occurs if a corporation becomes a member of a consolidated group
(the SRLY event) within six months of the change date of an ownership
change giving rise to a section 382(a) limitation that would apply with
respect to the corporation's recognized built-in losses (the section 382
event). Except as provided in paragraph (g)(3) of this section,
application of the overlap rule does not require that the size and
composition of the corporation's net unrealized built-in loss is the
same on the date of the section 382 event and the SRLY event.
(B) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in Sec. 1.1502-91(d)(2) with respect
to built-in losses, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 382 event before SRLY event. If a
SRLY event occurs on the same date as a section 382 event or within the
six month period beginning on the date of the section 382 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event. Paragraph (g)(1) of this section does not
apply, however, if a corporation that would otherwise be subject to the
overlap rule acquires assets from a person other than a member of the
group with a net unrealized built-in loss in excess of the threshold
requirement of section 382(h)(3)(B) (and thereby increases its net
unrealized built-in loss) after the section 382 event, and before the
SRLY event.
(ii) SRLY event before section 382 event. If a section 382 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this section
applies starting with the first tax year that begins after the section
382 event. However, paragraph (g)(1) of this section does not apply at
any time if a corporation that otherwise would be subject to paragraph
(g)(1) of this section transfers assets with an unrealized built-in loss
to another member of the group after the SRLY event, but before the
section 382 event, unless the corporation recognizes the built-in loss
upon the transfer.
(4) Subgroup rules. In general, in the case of built-in losses for
which there is a SRLY subgroup and the corporations joining the group at
the time of the SRLY event also constitute a loss subgroup (as defined
in Sec. 1.1502-91(d)(2)), the principles of this paragraph (g) apply to
the SRLY subgroup, and not separately to its members. However,
[[Page 315]]
paragraph (g)(1) of this section applies with respect to built-in losses
only if--
(i) All members of the SRLY subgroup with respect to those built-in
losses are also included in a loss subgroup (as defined in Sec. 1.1502-
91(d)(2)); and
(ii) All members of a loss subgroup (as defined in Sec. 1.1502-
91(d)(2)) are also members of a SRLY subgroup with respect to those
built-in losses.
(5) Asset acquisitions. Notwithstanding the application of this
paragraph (g), paragraph (a) of this section applies to asset
acquisitions by the corporation that occurs after the latter of the SRLY
event and the section 382 event. See, paragraph (b)(2)(ii) of this
section.
(6) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Determination of subgroup. (i) Individual A owns all of
the stock of P, P1, and S. In Year 1, P acquires all of the stock of P1,
and they file a consolidated return. In Year 3, P acquires all of the
stock of S, and S joins the P group. Individual B, unrelated to
Individual A, owns all of the stock of M and K, each the common parent
of a consolidated group. Individual C, unrelated to either Individual A
or Individual B, owns all of the stock of T.
(ii) At the beginning of Year 7, M acquires all of the stock of P
from Individual A, and, as a result, P, P1, and S become members of the
M group. At the time of M's acquisition of the P stock, P has a $15 net
unrealized built-in loss (disregarding the stock of P1), P1 has a net
unrealized built-in gain of $10, and S has a net unrealized built-in
gain of $5.
(iii) During Year 8, M acquires all of the stock of T, and T joins
the M group. At the time of M's acquisition of the T stock, T had an
unrealized built-in loss of $15. At the beginning of Year 9, K acquires
all of the stock of M from Individual B, and the members of the M
consolidated group including P, P1, S, and T become members of the K
group. At the time of K's acquisition of the M stock, M has
(disregarding the stock of P and T) a $15 net unrealized built-in loss,
P has a $20 net unrealized built-in loss (disregarding the stock of P1),
P1 has a net unrealized built-in gain of $5, S has a net unrealized
built-in loss of $35, and T has a $15 net unrealized built-in loss.
(iv) M's acquisition of P in Year 7 results in P, P1, and S becoming
members of the M group (the SRLY event). Under paragraph (c) of this
section, P and P1 compose a SRLY built-in loss subgroup because they
have been affiliated for the 60 consecutive month period immediately
preceding joining the M group. S is not a member of the subgroup because
on becoming a member of the M group it had not been continuously
affiliated with P and P1 for the 60 month period ending immediately
before it became a member of the M group. Consequently, Sec. 1.1502-15
applies to S separately from the P and P1 subgroup.
(v) Assuming that the $5 net unrealized built-in loss of the P/P1
subgroup exceeds the threshold requirement under section 382(h)(3)(B),
M's acquisition of P resulted in an ownership change of P and P1 within
the meaning of section 382(g) that subjects P and P1 to a limitation
under section 382(a) (the section 382 event). Because, with respect to P
and P1, the SRLY event and the change date of the section 382 event
occur on the same date and because the loss subgroup and SRLY subgroup
are coextensive, there is an overlap of the application of the SRLY
rules and the application of section 382.
(vi) S was not a loss corporation because it did not have a net
operating loss carryover, or a net unrealized built-in loss, and
therefore, M's acquisition of P did not result in an ownership change of
S within the meaning of section 382(g). S, therefore is not subject to
the overlap rule of paragraph (g) of this section.
(vii) M's acquisition of T resulted in T becoming a member of the M
group (the SRLY event). Assuming that T's $15 net unrealized built-in
loss exceeds the threshold requirement under section 382(h)(3)(B), M's
acquisition of T also resulted in an ownership change of T within the
meaning of section 382(g) that subjects T to a limitation under section
382(a) (the section 382 event). Because, with respect to T, the SRLY
event and the change date of the section 382 event occur on the same
date, there is an overlap of the application of the SRLY rules and the
application of section 382 within the meaning of paragraph (g) of this
section.
(viii) K's acquisition of M results in the members of the M
consolidated group, including T, P, P1, and S, becoming members of the K
group (the SRLY event). Because T, P, and P1 were each included in the
determination of a net unrealized built-in loss that was subject to the
overlap rule described in paragraph (g)(1) of this section when they
each became members of the M group, they are deemed under paragraph
(c)(3) of this section to have been continuously affiliated with M for
the 60 month period ending immediately before becoming a member of the M
group, notwithstanding their actual affiliation history. As a result, M,
T, P, and P1 compose a SRLY built-in loss subgroup under paragraph
(c)(2) of this section. K's acquisition of M is not subject to paragraph
(g) of this section because it does not result in a section 382 event.
(ix) S, however, is not a member of the subgroup under paragraph
(c)(2) of this section. Because S was not included in the determination
of a net unrealized built-in loss
[[Page 316]]
that was subject to the overlap rule described in paragraph (g)(1) of
this section when it joined the M group, S is treated as becoming an
affiliate of M on the date it joined the M group. Furthermore, under
paragraph (c)(3) of this section, S is deemed to have begun its
affiliation with P and P1 on the date it joined the M group.
Consequently, Sec. 1.1502-15 applies to S separately to the extent its
built-in loss is recognized within the recognition period.
Example 2. Post-overlap acquisition of assets. (i) Individual A owns
all of the stock of P, the common parent of a consolidated group. B, an
individual unrelated to Individual A, owns all of the stock of T. T has
two depreciable assets. Asset 1 has an unrealized built-in loss of $25
(basis $75, value $50), and asset 2 has an unrealized built-in gain of
$20 (basis $30, value $50). During Year 3, P buys all of the stock of T
from Individual B. On January 1, Year 4, P contributes $80 cash and
Individual A contributes asset 3, a depreciable asset, with a net
unrealized built-in loss of $45 (basis $65, value $20), in exchange for
T stock in a transaction that is described in section 351.
(ii) P's acquisition of T results in T becoming a member of the P
group (the SRLY event) and also results in an ownership change of T,
within the meaning of section 382(g), that gives rise to a limitation
under section 382(a) (the section 382 event).
(iii) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application of
the SRLY rules and the application of section 382. Consequently, under
paragraph (g) of this section, the limitation under paragraph (a) of
this section does not apply to T's net unrealized built-in loss when it
joined the P group.
(iv) Individual A's Year 4 contribution of a depreciable asset
occurred after T was a member of the P group. Assuming that the amount
of the net unrealized built-in loss exceeds the threshold requirement of
section 382(h)(3)(B), the sale of asset 3 within the recognition period
is subject to the SRLY limitation of paragraphs (a) and (b)(2)(ii) of
this section.
Example 3. Overlap rule. (i) Individual A owns all of the stock of
P, the common parent of a consolidated group. B, an individual unrelated
to Individual A, owns all of the stock of T. T has two depreciable
assets. Asset 1 has an unrealized loss of $55 (basis $75, value $20),
and asset 2 has an unrealized gain of $30 (basis $30, value $60). On
February 28 of Year 2, P purchases 55% of T from Individual B. On June
30, of Year 2, P purchases an additional 35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T that gives rise to a
section 382(a) limitation. The June 30 purchase of 35% of T results in T
becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382, and
paragraph (a) of this section does not apply. Therefore, the SRLY
limitation does not apply to any of the $55 loss in asset 1 recognized
by T after T joined the P group. See Sec. 1.1502-94 for rules relating
to the application of section 382 with respect to T's $25 unrealized
built-in loss.
Example 4. Overlap rule-Fluctuation in value. (i) The facts are the
same as in Example 3, except that by June 30, of Year 2, asset 1 had
declined in value by a further $10. Thus asset 1 had an unrealized loss
of $65 (basis $75, value $10), and asset 2 had an unrealized gain of $30
(basis $30, value $60).
(ii) Because paragraph (a) of this section does not apply, the
further decrease in asset 1's value is disregarded. Consequently, the
results are the same as in Example 3.
(h) Effective date--(1) In general. This section generally applies
to built-in losses recognized in taxable years for which the due date
(without extensions) of the consolidated return is after June 25, 1999.
However--
(i) In the event that paragraphs (f)(1) and (g)(1) of this section
do not apply to a particular built-in loss in the current group, then
solely for purposes of applying paragraph (a) of this section to
determine a limitation with respect to that built-in loss and with
respect to which the SRLY register (consolidated taxable income
determined by reference to only the member's (or subgroup's) items of
income, gain, deduction, or loss) began in a taxable year for which the
due date of the return was on or before June 25, 1999, paragraph (c)(3)
of this section shall not apply; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 382(a) as amended by the Tax Reform
Act of 1986 applies shall constitute a section 382 event.
(2) Prior periods. For certain taxable years ending on or before
June 25, 1999, see Sec. 1.1502-15T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
[T.D. 8823, 64 FR 36101, July 2, 1999; 64 FR 41784, Aug. 2, 1999]
[[Page 317]]
Sec. 1.1502-16 Mine exploration expenditures.
(a) Section 617--(1) In general. If the aggregate amount of the
expenditures to which section 617(a) applies, paid or incurred with
respect to mines or deposits located outside the United States (as
defined in section 638 and the regulations thereunder), does not exceed:
(i) $400,000 minus
(ii) All amounts deducted or deferred during the taxable year and
all preceding taxable years under section 617 or section 615 of the
Internal Revenue Code of 1954 and section 23(ff) of the Internal Revenue
Code of 1939 by corporations which are members of the group during the
taxable year (and individuals or corporations which have transferred any
mineral property to any such member within the meaning of section
617(g)(2)(B)) for taxable years ending after December 31, 1950 and prior
to the taxable year, then the deduction under section 617 with respect
to such foreign expenditures and paragraph (c) of Sec. 1.1502-12 for
each member shall be no greater than an allocable portion of such amount
hereinafter referred to as the ``consolidated foreign exploration
limitation.'' Such allocable portion shall be determined under
subparagraph (2) of this paragraph. If the amount of such expenditures
exceeds the consolidated foreign exploration limitation, no deduction
shall be allowed with respect to such excess.
(2) Allocable portion of limitation. A member's allocable portion of
the consolidated foreign exploration limitation for a consolidated
return year shall be:
(i) The amount allocated by the common parent pursuant to an
allocation plan adopted by the consolidated group, but in no event shall
a member be allocated more than the amount it could have deducted had it
filed a separate return. Such allocation plan must include a statement
which also contains the total foreign exploration expenditures of each
member which could have been deducted under section 617 if the member
had filed a separate return. Such plan must be attached to a
consolidated return filed on or before the due date of such return
(including extensions of time), and may not be changed after such date,
or
(ii) If no plan is filed in accordance with subdivision (i) of this
subparagraph, then the portion of the consolidated foreign exploration
limitation allocable to each member incurring such expenditures is an
amount equal to such limitation multiplied by a fraction, the numerator
of which is the amount of foreign exploration expenditures which could
have been deducted under section 617 by such member had it filed a
separate return and the denominator of which is the aggregate of such
amounts for all members of the group.
(b) Section 615--(1) In general. If the aggregate amount of the
expenditures, to which section 615(a) applies, which are paid or
incurred by the members of the group during any consolidated return year
exceeds the lesser of:
(i) $100,000, or
(ii) $400,000 minus all such expenditures deducted (or deferred) by
corporations which are members of the group during the taxable year (and
individuals or corporations which have transferred any mineral property
to any such member within the meaning of section 615(c)(2)(B)) for
taxable years ending after December 31, 1950, and prior to the taxable
year, then the deduction (or amount deferrable) under section 615 and
paragraph (c) of Sec. 1.1502-12 for each member shall be no greater than
an allocable portion of such lesser amount, hereinafter referred to as
the ``consolidated exploration limitation''. Such allocable portion
shall be determined under subparagraph (2) of this paragraph.
(2) Allocable portion of limitation. A member's allocable portion of
the consolidated exploration limitation for a consolidated return year
shall be:
(i) The amount allocated by the common parent pursuant to an
allocation plan adopted by the consolidated group, but in no event shall
a member be allocated more than the amount it could have deducted (or
deferred) had it filed a separate return. Such allocation plan must
include a statement which also contains the total exploration
expenditures of each member for the taxable year, and the expenditures
of each member which could have been
[[Page 318]]
deducted (or deferred) under section 615 if the member had filed a
separate return. Such plan must be attached to a consolidated return
filed on or before the due date of such return (including extensions of
time), and may not be changed after such date, or
(ii) If no plan is filed in accordance with subdivision (i) of this
subparagraph, then the portion of the consolidated exploration
limitation allocable to each member incurring such expenditures is an
amount equal to such limitation multiplied by a fraction, the numerator
of which is the amount which could have been deducted (or deferred)
under section 615 by such member had it filed a separate return and the
denominator of which is the aggregate of such amounts for all members of
the group.
(c) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). Corporation X and its wholly owned subsidiaries,
corporations Y and Z, file a consolidated return for the calendar year
1971. None of the corporations have incurred exploration expenditures
described in section 617 in previous years. During 1971, X incurred
foreign exploration expenditures of $30,000, Y of $20,000, and Z of
$40,000. The amount of foreign exploration expenditures deductible under
section 617 for purposes of computing separate taxable income under
Sec. 1.1502-12 will be the amount actually expended by each corporation.
Example (2). Assume the same facts as in example (1) except that
prior to 1971, X, Y, and Z had deducted (or deferred) under section 615
and 617 a total of $300,000 of exploration expenditures. During 1971,
with respect to deposits located outside the United States X incurred
exploration expenditures of $25,000, Y of $75,000, and Z of $125,000.
The consolidated exploration limitation under paragraph (a) of this
section with respect to the foreign deposits (there is no limitation
with respect to the domestic expenditures) is $100,000. X may allocate
the $100,000 in any manner among the three members, except that X may
not be allocated more than $25,000 nor Y more than $75,000, the amount
actually expended by X and Y and which they could have deducted had they
each filed a separate return. If the allocation is not made in
accordance with paragraph (a)(2)(i) of this section, the $100,000
limitation will be allocated under paragraph (a)(2)(ii) of this section
as follows:
----------------------------------------------------------------------------------------------------------------
Allocable
Corporation Expenditure Fraction Limitation portion
----------------------------------------------------------------------------------------------------------------
25,000
X............................................................ $25,000 ------ x $100,000= $12,500
200,000
75,000
Y............................................................ $75,000 ------ x $100,000= $37,500
200,000
100,000
Z............................................................ $125,000 ------ x $100,000= $50,000
200,000
----------------------------------------------------------------------------------------------------------------
The denominator of $200,000 was calculated as follows:
X=$25,000
Y=$75,000
Z=$100,000 (maximum amount allowed if filed separately)
Total $200,000.
Example (3). Assume the same facts as in example (2) and that on
January 1, 1971, X acquired all of the stock of corporation T which
prior to its taxable year beginning January 1, 1971, had previously
deducted (or deferred) $310,000 of exploration expenditures. Assume
further that in 1971 X incurred $25,000 of foreign exploration
expenditures, Y $50,000, T $50,000, and Z none. A consolidated return is
filed for 1971. None of the expenditures may be deducted under section
617 since the consolidated exploration limitation is zero. The
limitation is zero since the aggregate amount of previously deducted (or
deferred) exploration expenditures by the members of the group exceeds
$400,000. (The total of such expenditures is $410,000, of which $310,000
is attributable to T and, assuming the allocation of the limitation in
example (2) is made under paragraph (a)(2)(ii) of this section, $12,500
is attributable to X, $37,500 to Y, and $50,000 to Z.
Example (4). Assume the same facts as in example (3) except that on
December 31, 1971, X sold all of the stock in Z to an unrelated party.
The consolidated exploration limitation for 1972 will be $40,000,
computed by subtracting from $400,000, the aggregate amount of
previously deducted (or deferred) exploration expenditures incurred by
the members of the group prior to 1972. (The total of such expenditures
is $360,000, of which $12,500 is attributable to X, $37,500 to Y and
$310,000 to
[[Page 319]]
T.) Amounts previously deducted (or deferred) by Z are not taken into
account since it was not a member of the group at any time during 1972.
Amounts previously deducted (or deferred) by Z shall be taken into
account by it for subsequent separate return years.
[T.D. 7192, 37 FR 12949, June 30, 1972]
Sec. 1.1502-17 Methods of accounting.
(a) General rule. The method of accounting to be used by each member
of the group shall be determined in accordance with the provisions of
section 446 as if such member filed a separate return. For treatment of
depreciable property after a transfer within the group, see paragraph
(g) of Sec. 1.1502-12.
(b) Adjustments required if method of accounting changes--(1)
General rule. If a member of a group changes its method of accounting
for a consolidated return year, the terms and conditions prescribed by
the Commissioner under section 446(e), including section 481(a) where
applicable, shall apply to the member. If the requirements of section
481(b) are met because applicable adjustments under section 481(a) are
substantial, the increase in tax for any prior year shall be computed
upon the basis of a consolidated return or a separate return, whichever
was filed for such prior year.
(2) Changes in method of accounting for intercompany transactions.
If a member changes its method of accounting for intercompany
transactions for a consolidated return year, the change in method
generally will be effected on a cut-off basis.
(c) Anti-avoidance rules--(1) General rule. If one member (B)
directly or indirectly acquires an activity of another member (S), or
undertakes S's activity, with the principal purpose to avail the group
of an accounting method that would be unavailable (or would be
unavailable without securing consent from the Commissioner) if S and B
were treated as divisions of a single corporation, B must use the
accounting method for the acquired or undertaken activity determined
under paragraph (c)(2) of this section or must secure consent from the
Commissioner under applicable administrative procedures to use a
different method.
(2) Treatment as divisions of a single corporation. B must use the
method of accounting that would be required if B acquired the activity
from S in a transaction to which section 381 applied. Thus, the
principles of section 381 (c)(4) and (c)(5) apply to resolve any
conflicts between the accounting methods of S and B, and the acquired or
undertaken activity is treated as having the accounting method used by
S. Appropriate adjustments are made to treat all acquisitions or
undertakings that are part of the same plan or arrangement as a single
acquisition or undertaking.
(d) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. Separate return treatment generally. X and its wholly-
owned subsidiary Y filed separate returns for their calendar years
ending December 31, 1965. During calendar year 1965, X employed an
accrual method of accounting, established a reserve for bad debts, and
elected under section 171 to amortize bond premiums with respect to its
fully taxable bonds. During calendar year 1965, Y employed the cash
receipts and disbursements method, used the specific charge-off method
with respect to its bad debts, and did not elect to amortize bond
premiums under section 171 with respect to its bonds. X and Y filed a
consolidated return for 1966. For 1966 X and Y must continue to compute
income under their respective methods of accounting (unless a change in
method under section 446 is made).
Example 2. Adopting methods. Corporation P is a member of a
consolidated group. P provides consulting services to customers under
various agreements. For one type of customer, P's agreements require
payment only when the contract is completed (payment-on-completion
contracts). P uses an overall accrual method of accounting. Accordingly,
P takes its income from consulting contracts into account when earned,
received, or due, whichever is earlier. With the principal purpose to
avoid seeking the consent of the Commissioner to change its method of
accounting for the payment-on-completion contracts to the cash method, P
forms corporation S, and S begins to render services to those customers
subject to the payment-on-completion contracts. P continues to render
services to those customers not subject to these contracts.
(b) Under paragraph (c) of this section, S must account for the
consulting income under the payment-on-completion contracts on an
accrual method rather than adopting the cash method contemplated by P.
Example 3. Changing inventory sub-method. (a) Corporation P is a
member of a consolidated group. P operates a manufacturing
[[Page 320]]
business that uses dollar-value LIFO, and has built up a substantial
LIFO reserve. P has historically manufactured all its inventory and has
used one natural business unit pool. P begins purchasing goods identical
to its own finished goods from a foreign supplier, and is concerned that
it must establish a separate resale pool under Sec. 1.472-8(c). P
anticipates that it will begin to purchase, rather than manufacture, a
substantial portion of its inventory, resulting in a recapture of most
of its LIFO reserve because of decrements in its manufacturing pool.
With the principal purpose to avoid the decrements, P forms corporation
S in Year 1. S operates as a distributor to nonmembers, and P sells all
of its existing inventories to S. S adopts LIFO, and elects dollar-value
LIFO with one resale pool. Thereafter, P continues to manufacture and
purchase inventory, and to sell it to S for resale to nonmembers. P's
intercompany gain from sales to S is taken into account under
Sec. 1.1502-13. S maintains its Year 1 base dollar value of inventory so
that P will not be required to take its intercompany items (which
include the effects of the LIFO reserve recapture) into account.
(b) Under paragraph (c) of this section, S must maintain two pools
(manufacturing and resale) to the same extent that P would be required
to maintain those pools under Sec. 1.472-8 if it had not formed S.
(e) Effective dates. Paragraph (b) of this section applies to
changes in method of accounting effective for years beginning on or
after July 12, 1995. For changes in method of accounting effective for
years beginning before that date, see Sec. 1.1502-17 (as contained in
the 26 CFR part 1 edition revised as of April 1, 1995). Paragraphs (c)
and (d) apply with respect to acquisitions occurring or activities
undertaken in years beginning on or after July 12, 1995.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8597, 60 FR
36708, July 18, 1995]
Sec. 1.1502-18 Inventory adjustment.
(a) Definition of intercompany profit amount. For purposes of this
section, the term ``intercompany profit amount'' for a taxable year
means an amount equal to the profits of a corporation (other than those
profits which such corporation has elected not to defer pursuant to
Sec. 1.1502- 13(c)(3) or which have been taken into account pursuant to
Sec. 1.1502-13(f)(1)(viii)) arising in transactions with other members
of the group with respect to goods which are, at the close of such
corporation's taxable year, included in the inventories of any member of
the group. See Sec. 1.1502-13(c)(2) with respect to the determination of
profits. See the last sentence of Sec. 1.1502-13(f)(1)(i) for rules for
determining which goods are considered to be disposed of outside the
group and therefore not included in inventories of members.
(b) Addition of initial inventory amount to taxable income. If a
corporation:
(1) Is a member of a group filing a consolidated return for the
taxable year,
(2) Was a member of such group for its immediately preceding taxable
year, and
(3) Filed a separate return for such preceding year,
then the intercompany profit amount of such corporation for such
separate return year (hereinafter referred to as the ``initial inventory
amount'') shall be added to the income of such corporation for the
consolidated return year (or years) in which the goods to which the
initial inventory amount is attributable are disposed of outside the
group or such corporation becomes a nonmember. Such amount shall be
treated as gain from the sale or exchange of property which is neither a
capital asset nor property described in section 1231.
(c) Recovery of initial inventory amount--(1) Unrecovered inventory
amount. The term ``unrecovered inventory amount'' for any consolidated
return year means the lesser of:
(i) The intercompany profit amount for such year, or
(ii) The initial inventory amount.
However, if a corporation ceases to be a member of the group during a
consolidated return year, its unrecovered inventory amount for such year
shall be considered to be zero.
(2) Recovery during consolidated return years. (i) To the extent
that the unrecovered inventory amount of a corporation for a
consolidated return year is less than such amount for its immediately
preceding year, such decrease shall be treated for such year by such
corporation as a loss from the sale or exchange of property which is
neither a
[[Page 321]]
capital asset nor property described in section 1231.
(ii) To the extent that the unrecovered inventory amount for a
consolidated return year exceeds such amount for the preceding year,
such increase shall be treated as gain from the sale or exchange of
property which is neither a capital asset nor property described in
section 1231.
(3) Recovery during first separate return year. For the first
separate return year of a member following a consolidated return year,
the unrecovered inventory amount for such consolidated return year
(minus any part of the initial inventory amount which has not been added
to income pursuant to paragraph (b) of this section) shall be treated as
a loss from the sale or exchange of property which is neither a capital
asset nor property described in section 1231.
(4) Acquisition of group. For purposes of this section, a member of
a group shall not become a nonmember or be considered as filing a
separate return solely because of a termination of the group
(hereinafter referred to as the ``terminating group'') resulting from:
(i) The acquisition by a nonmember corporation of (a) the assets of
the common parent in a reorganization described in subparagraph (A),
(C), or (D) (but only if the requirements of subparagraphs (A) and (B)
of section 354(b)(1) are met) of section 368 (a)(1), or (b) stock of the
common parent, or
(ii) The acquisition (in a transaction to which Sec. 1.1502-75(d)(3)
applies) by a member of (a) the assets of a nonmember corporation in a
reorganization referred to in subdivision (i) of this subparagraph, or
(b) stock of a nonmember corporation,
if all the members of the terminating group (other than such common
parent if its assets are acquired) immediately before the acquisition
are members immediately after the acquisition of another group
(hereinafter referred to as the ``succeeding group'') which files a
consolidated return for the first taxable year ending after the date of
acquisition. The members of the succeeding group shall succeed to any
initial inventory amount and to any unrecovered inventory amount of
members of the terminating group. This subparagraph shall not apply with
respect to acquisitions occurring before August 25, 1971.
(d) Examples. The provisions of paragraphs (a), (b), and (c) of this
section may be illustrated by the following examples:
Example (1). Corporations P, S, and T report income on the basis of
a calendar year. Such corporations file separate returns for 1965. P
manufactures widgets which it sells to both S and T, who act as
distributors. The inventories of S and T at the close of 1965 are
comprised of widgets which they purchased from P and with respect to
which P derived profits of $5,000 and $8,000, respectively. P, S, and T
file a consolidated return for 1966. During 1966, P sells widgets to S
and T with respect to which it derives profits of $7,000 and $10,000,
respectively. The inventories of S and T as of December 31, 1966, are
comprised of widgets on which P derived net profits of $4,000 and
$8,000, respectively. P's initial inventory amount is $13,000, P's
intercompany profit amount for 1965 (such $13,000 amount is the profits
of P with respect to goods sold to S and T and included in their
inventories at the close of 1965). Assuming that S and T identify their
goods on a first-in, first-out basis, the entire opening inventory
amount of $13,000 is added to P's income for 1966 as gain from the sale
or exchange of property which is neither a capital asset nor properly
described in section 1231, since the goods to which the initial
inventory amount is attributable were disposed of in 1966 outside the
group. However, since P's unrecovered inventory amount for 1966, $12,000
(the intercompany profit amount for the year, which is less than the
initial inventory amount), is less than the unrecovered inventory amount
for 1965, $13,000, this decrease of $1,000 is treated by P for 1966 as a
loss from the sale or exchange of property which is neither a capital
asset nor property described in section 1231.
Example (2). Assume the same facts as in example (1) and that at the
close of 1967, a consolidated return year, the inventories of S and T
are comprised of widgets on which P derived profits of $5,000 and
$3,000, respectively. Since P's unrecovered inventory amount for 1967,
$8,000, is less than $12,000, the unrecovered inventory amount for 1966,
this decrease of $4,000 is treated by P for 1967 as a loss from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231.
Example (3). Assume the same facts as in examples (1) and (2) and
that in 1968, a consolidated return year, P's intercompany profit amount
is $11,000. P will report $3,000 (the excess of $11,000, P's unrecovered
inventory amount for 1968, over $8,000, P's unrecovered inventory amount
for 1967) for 1968
[[Page 322]]
as a gain from the sale or exchange of property which is neither a
capital asset nor property described in section 1231.
Example (4). Assume the same facts as in examples (1), (2), and (3)
and that in 1969 P, S, and T file separate returns. P will report
$11,000 (its unrecovered inventory amount for 1968, $11,000, minus the
portion of the initial inventory amount which has not been added to
income during 1966, 1967, and 1968, zero) as a loss from the sale or
exchange of property which is neither a capital asset nor property
described in section 1231.
Example (5). Corporations P and S file a consolidated return for the
first time for the calendar year 1966. P manufactures machines and sells
them to S, which sells them to users throughout the country. At the
close of 1965, S has on hand 20 machines which it purchased from P and
with respect to which P derived profits of $3,500. During 1966, P sells
6 machines to S on which it derives profits of $1,300, and S sells 5
machines which it had on hand at the beginning of the year (S
specifically identifies the machines which it sells) and on which P had
derived profits of $900. P's initial inventory amount is $3,500, of
which $900 is added to P's income in 1966 as gain from the sale or
exchange of property which is neither a capital asset nor property
described in section 1231, since such $900 amount is attributable to
goods disposed of in 1966 outside the group, which goods were included
in S's inventory at the close of 1965. If P and S continue to file
consolidated returns, the remaining $2,600 of the initial inventory
amount will be added to P's income as the machines on which such profits
were derived are disposed of outside the group.
Example (6). Assume that in example (5) S had elected to inventory
its goods under section 472 (relating to last-in, first-out
inventories). None of P's initial inventory amount of $3,500 would be
added to P's income in 1966, since none of the goods to which such
amount is attributable would be considered to be disposed of during such
year under the last-in, first-out method of identifying inventories.
(e) Section 381 transfer. If a member of the group is a transferor
or distributor of assets to another member of the group within the
meaning of section 381(a), then the acquiring corporation shall be
treated as succeeding to the initial inventory amount of the transferor
or distributor corporation to the extent that as of the date of
distribution or transfer such amount has not yet been added to income.
Such amount shall then be added to the acquiring corporation's income
under the provisions of paragraph (b) of this section. For purposes of
applying paragraph (c) of this section:
(1) The initial inventory amount of the transferor or distributor
corporation shall be added to such amount of the acquiring corporation
as of the close of the acquiring corporation's taxable year in which the
date of distribution or transfer occurs, and
(2) The unrecovered inventory amount of the transferor or
distributor corporation for its taxable year preceding the taxable year
of the group in which the date of distribution or transfer occurs shall
be added to such amount of the acquiring corporation.
(f) Transitional rules for years before 1966--(1) In general. If:
(i) A group filed a consolidated return for the taxable year
immediately preceding the first taxable year to which this section
applies,
(ii) Any member of such group made an opening adjustment to its
inventory pursuant to paragraph (b) of Sec. 1.1502-39A (as contained in
the 26 CFR edition revised as of April 1, 1996), and
(iii) Paragraph (c) of Sec. 1.1502-39A (as contained in the 26 CFR
edition revised as of April 1, 1996), has not been applicable for any
taxable year subsequent to the taxable year for which such adjustment
was made,
then subparagraphs (2) and (3) of this paragraph shall apply.
(2) Closing adjustment to inventory. (i) For the first consolidated
return year to which this section applies, the increase in inventory
prescribed in paragraph (c) of Sec. 1.1502-39A (as contained in the 26
CFR edition revised as of April 1, 1996), shall be made as if such year
were a separate return year.
(ii) For the first separate return year of a member to which this
section applies, the adjustment to inventory (whether an increase or a
decrease) prescribed in paragraph (c) of Sec. 1.1502-39A (as contained
in the 26 CFR edition revised as of April 1, 1996), minus any adjustment
already made pursuant to subdivision (i) of this subparagraph, shall be
made to the inventory of such member.
(3) Addition and recovery of initial inventory amount. Each selling
member shall treat as an initial inventory amount its share of the net
amount by which the inventories of all members
[[Page 323]]
are increased pursuant to subparagraph (2)(i) of this paragraph for the
first taxable year to which this section applies. A member's share shall
be such net amount multiplied by a fraction, the numerator of which is
its initial inventory amount (computed under paragraph (b) as if such
taxable year were its first consolidated return year), and the
denominator of which is the sum of such initial inventory amounts of all
members. Such initial inventory amount shall be added to the income of
such selling member and shall be recovered at the time and in the manner
prescribed in paragraphs (b) and (c) of this section.
(4) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. (i) Corporations P, S, and T file consolidated returns for
calendar 1966, having filed consolidated returns continuously since
1962. P is a wholesale distributor of groceries selling to chains of
supermarkets, including those owned by S and T. The opening inventories
of S and T for 1962 were reduced by $40,000 and $80,000, respectively,
pursuant to paragraph (b) of Sec. 1.1502-39A (as contained in the 26 CFR
edition revised as of April 1, 1996). At the close of 1965, S and T have
on hand in their inventories goods on which P derived profits of $80,000
and $90,000, respectively. The inventories of S and T at the close of
1966 include goods which they purchased from P during the year on which
P derived profits of $85,000 and $105,000, respectively.
(ii) The opening inventories of S and T for 1966, the first year to
which this section applies, are increased by $40,000 and $80,000,
respectively, pursuant to the provisions of subparagraph (2)(i) of this
paragraph. P will take into account (as provided in paragraphs (b) and
(c) of this section) an initial inventory amount of $120,000 as of the
beginning of 1966, the net amount by which the inventories of S and T
were increased in such year. Since the increases in the inventories of S
and T are the maximum allowable under paragraph (c) of Sec. 1.1502-39A
(as contained in the 26 CFR edition revised as of April 1, 1996) (i.e.,
the amount by which such inventories were originally decreased), no
further adjustments will be made pursuant to subparagraph (2)(ii) of
this paragraph to such inventories in the event that separate returns
are subsequently filed.
(5) Election not to eliminate. If a group filed a consolidated
return for the taxable year immediately preceding the first taxable year
to which this section applies, and for such preceding year the members
of the group did not eliminate gain or loss on intercompany inventory
transactions pursuant to the adoption under Sec. 1.1502-31A(b)(1) (as
contained in the 26 CFR edition revised as of April 1, 1996) of a
consistent accounting practice taking into account such gain or loss,
then for purposes of this section each member shall be treated as if it
had filed a separate return for such immediately preceding year.
(g) Transitional rules for years beginning on or after July 12,
1995. Paragraphs (a) through (f) of this section do not apply for
taxable years beginning on or after July 12, 1995. Any remaining
unrecovered inventory amount of a member under paragraph (c) of this
section is recovered in the first taxable year beginning on or after
July 12, 1995, under the principles of paragraph (c)(3) of this section
by treating the first taxable year as the first separate return year of
the member. The unrecovered inventory amount can be recovered only to
the extent it was previously included in taxable income. The principles
of this section apply, with appropriate adjustments, to comparable
amounts under paragraph (f) of this section.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR
762, Jan. 4, 1973; T.D. 8597, 60 FR 36709, July 18, 1995: T.D. 8677, 61
FR 33323, June 27, 1996]
Sec. 1.1502-19 Excess loss accounts.
(a) In general--(1) Purpose. This section provides rules for a
member (P) to include in income its excess loss account in the stock of
another member (S). The purpose of the excess loss account is to
recapture in consolidated taxable income P's negative adjustments with
respect to S's stock (e.g., under Sec. 1.1502-32 from S's deductions,
losses, and distributions), to the extent the negative adjustments
exceed P's basis in the stock.
(2) Excess loss accounts--(i) In general. P's basis in S's stock is
adjusted under the consolidated return regulations and other rules of
law. Negative adjustments may exceed P's basis in S's stock. The
resulting negative amount is P's excess loss account in S's stock. For
example:
[[Page 324]]
(A) Once P's negative adjustments under Sec. 1.1502-32 exceed its
basis in S's stock, the excess is P's excess loss account in the S
stock. If P has further adjustments, they first increase or decrease the
excess loss account.
(B) If P forms S by transferring property subject to liabilities in
excess of basis, Sec. 1.1502-80(d) provides for the nonapplicability of
section 357(c) and the resulting negative basis under section 358 is P's
excess loss account in the S stock.
(ii) Treatment as negative basis. P's excess loss account is treated
for all Federal income tax purposes as basis that is a negative amount,
and a reference to P's basis in S's stock includes a reference to P's
excess loss account.
(3) Application of other rules of law. The rules of this section are
in addition to other rules of law. See, e.g., Secs. 1.1502-32
(investment adjustment rules establishing and adjusting excess loss
accounts) and 1.1502-80(d) (nonapplicability of section 357(c)). The
provisions of this section and other rules of law must not be applied to
recapture the same amount more than once. For purposes of this section,
the definitions in Sec. 1.1502-32 apply.
(b) Excess loss account taken into account as income or gain--(1)
General rule. If P is treated under this section as disposing of a share
of S's stock, P takes into account its excess loss account in the share
as income or gain from the disposition. Except as provided in paragraph
(b)(4) of this section, the disposition is treated as a sale or exchange
for purposes of determining the character of the income or gain.
(2) Nonrecognition or deferral--(i) In general. P's income or gain
under paragraph (b)(1) of this section is subject to any nonrecognition
or deferral rules applicable to the disposition. For example, if S
liquidates and the exchange of P's stock in S is subject to section 332,
or P transfers all of its assets (including S's stock) to S in a
reorganization to which section 361(a) applies, P's income or gain from
the excess loss account is not recognized under these rules.
(ii) Nonrecognition or deferral inapplicable. If P's income or gain
under paragraph (b)(1) of this section is from a disposition described
in paragraph (c)(1) (ii) or (iii) of this section (relating to
deconsolidations and worthlessness), the income or gain is taken into
account notwithstanding any nonrecognition or deferral rules (even if
the disposition is also described in paragraph (c)(1)(i) of this
section). For example, if P transfers S's stock to a nonmember in a
transaction to which section 351 applies, P's income or gain from the
excess loss account is taken into account.
(3) Tiering up in chains. If the stock of more than one subsidiary
is disposed of in the same transaction, the income or gain under this
section is taken into account in the order of the tiers, from the lowest
to the highest.
(4) Insolvency--(i) In general. Gain under this section is treated
as ordinary income to the extent of the amount by which S is insolvent
(within the meaning of section 108(d)(3)) immediately before the
disposition. For this purpose S's liabilities include any amount to
which preferred stock would be entitled if S were liquidated immediately
before the disposition, and any former liabilities that were discharged
to the extent the discharge was treated as tax-exempt income under
Sec. 1.1502-32(b)(3)(ii)(C) (special rule for discharges).
(ii) Reduction for amount of distributions. The amount treated as
ordinary income under this paragraph (b)(4) is reduced to the extent it
exceeds the amount of P's excess loss account redetermined without
taking into account S's distributions to P to which Sec. 1.1502-
32(b)(2)(iv) applies.
(c) Disposition of stock. For purposes of this section:
(1) In general. P is treated as disposing of a share of S's stock:
(i) Transfer, cancellation, etc. At the time--
(A) P transfers or otherwise ceases to own the share for Federal
income tax purposes, even if no gain or loss is taken into account; or
(B) P takes into account gain or loss (in whole or in part) with
respect to the share.
(ii) Deconsolidation. At the time--
(A) P becomes a nonmember, or a nonmember determines its basis in
the share (or any other asset) by reference
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to P's basis in the share, directly or indirectly, in whole or in part
(e.g., under section 362); or
(B) S becomes a nonmember, or P's basis in the share is reflected,
directly or indirectly, in whole or in part, in the basis of any asset
other than member stock (e.g., under section 1071).
(iii) Worthlessness. At the time--
(A) Substantially all of S's assets are treated as disposed of,
abandoned, or destroyed for Federal income tax purposes (e.g., under
section 165(a) or Sec. 1.1502-80(c), or, if S's asset is stock of a
lower-tier member, the stock is treated as disposed of under this
paragraph (c)). An asset of S is not considered to be disposed of or
abandoned to the extent the disposition is in complete liquidation of S
or is in exchange for consideration (other than relief from
indebtedness);
(B) An indebtedness of S is discharged, if any part of the amount
discharged is not included in gross income and is not treated as tax-
exempt income under Sec. 1.1502-32(b)(3)(ii)(C); or
(C) A member takes into account a deduction or loss for the
uncollectibility of an indebtedness of S, and the deduction or loss is
not matched in the same tax year by S's taking into account a
corresponding amount of income or gain from the indebtedness in
determining consolidated taxable income.
(2) Becoming a nonmember. A member is treated as becoming a
nonmember if it has a separate return year (including another group's
consolidated return year). For example, S may become a nonmember if it
issues additional stock to nonmembers, but S does not become a nonmember
as a result of its complete liquidation. A disposition under paragraph
(c)(1)(ii) of this section must be taken into account in the
consolidated return of the group. For example, if a group ceases under
Sec. 1.1502-75(c) to file a consolidated return as of the close of its
consolidated return year, the disposition under paragraph (c)(1)(ii) of
this section is treated as occurring immediately before the close of the
year. If S becomes a nonmember because P sells S's stock to a nonmember,
P's sale is a disposition under both paragraphs (c)(1) (i) and (ii) of
this section. If a group terminates under Sec. 1.1502-75(d) because the
common parent is the only remaining member, the common parent is not
treated as having a deconsolidation event under paragraph (c)(1)(ii) of
this section.
(3) Exception for acquisition of group--(i) Application. This
paragraph (c)(3) applies only if a consolidated group (the terminating
group) ceases to exist as a result of--
(A) The acquisition by a member of another consolidated group of
either the assets of the common parent of the terminating group in a
reorganization described in section 381(a)(2), or the stock of the
common parent of the terminating group; or
(B) The application of the principles of Sec. 1.1502-75(d)(2) or
(d)(3).
(ii) General rule. Paragraph (c)(1)(ii) of this section does not
apply solely by reason of the termination of a group in a transaction to
which this paragraph (c)(3) applies, if there is a surviving group that
is, immediately thereafter, a consolidated group. Instead, the surviving
group is treated as the terminating group for purposes of applying this
section to the terminating group. This treatment does not apply,
however, to members of the terminating group that are not members of the
surviving group immediately after the terminating group ceases to exist
(e.g., under section 1504(a)(3) relating to reconsolidation, or section
1504(c) relating to includible insurance companies).
(d) Special allocation of basis adjustments or determinations. If a
member has an excess loss account in shares of a class of S's stock at
the time of a basis adjustment or determination under the Internal
Revenue Code with respect to other shares of the same class of S's stock
owned by the member, the adjustment or determination is allocated first
to equalize and eliminate that member's excess loss account. For
example, if P owns 50 shares of S's only class of stock with a $100
basis and 50 shares with a $100 excess loss account, and P contributes
$200 to S without receiving additional shares, the contribution first
eliminates P's excess loss account, then increases P's basis in each
share by $1. (If P transfers the $200 in exchange for an additional 100
shares of
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S's stock in a transaction to which section 351 applies, P's excess loss
account is first eliminated, and P's basis in the additional shares is
$100.) See Sec. 1.1502-32(c) for similar allocations of investment
adjustments to prevent or eliminate excess loss accounts.
(e) Anti-avoidance rule. If any person acts with a principal purpose
contrary to the purposes of this section, to avoid the effect of the
rules of this section or apply the rules of this section to avoid the
effect of any other provision of the consolidated return regulations,
adjustments must be made as necessary to carry out the purposes of this
section.
(f) Predecessors and successors. For purposes of this section, any
reference to a corporation (or to a share of the corporation's stock)
includes a reference to a successor or predecessor (or to a share of
stock of a predecessor or successor), as the context may require.
(g) Examples. For purposes of the examples in this section, unless
otherwise stated, P owns all 100 shares of the only class of S's stock
and S owns all 100 shares of the only class of T's stock, the stock is
owned for the entire year, T owns no stock of lower-tier members, the
tax year of all persons is the calendar year, all persons use the
accrual method of accounting, the facts set forth the only corporate
activity, all transactions are between unrelated persons, and tax
liabilities are disregarded. The principles of this section are
illustrated by the following examples.
Example 1. Taxable disposition of stock. (a) Facts. P has a $150
basis in S's stock, and S has a $100 basis in T's stock. For Year 1, P
has $500 of ordinary income, S has no income or loss, and T has a $200
ordinary loss. S sells T's stock to a nonmember for $60 at the close of
Year 1.
(b) Analysis. Under paragraph (c) of this section, the sale is a
disposition of T's stock at the close of Year 1 (the day of the sale).
Under Sec. 1.1502-32(b), T's loss results in S having a $100 excess loss
account in T's stock immediately before the sale. Under paragraph (b)(1)
of this section, S takes into account the $100 excess loss account as an
additional $100 of gain from the sale. Consequently, S takes into
account a $160 gain from the sale in determining the group's
consolidated taxable income. Under Sec. 1.1502-32(b), T's $200 loss and
S's $160 gain result in a net $40 decrease in P's basis in S's stock as
of the close of Year 1, from $150 to $110.
(c) Intercompany sale followed by sale to nonmember. The facts are
the same as in paragraph (a) of this Example 1, except that S sells T's
stock to P for $60 at the close of Year 1, and P sells T's stock to a
nonmember at a gain at the beginning of Year 5. Under paragraph (c) of
this section, S's sale is treated as a disposition of T's stock at the
close of Year 1 (the day of the sale). Under Sec. 1.1502-13 and
paragraph (b)(2) of this section, S's $160 gain from the sale is
deferred and taken into account in Year 5 as a result of P's sale of the
T stock. Under Sec. 1.1502-32(b), the absorption of T's $200 loss in
Year 1 results in P having a $50 excess loss account in S's stock at the
close of Year 1. In Year 5, S's $160 gain taken into account eliminates
P's excess loss account in S's stock and increases P's basis in the
stock to $110.
(d) Intercompany distribution followed by sale to a nonmember. The
facts are the same as in paragraph (a) of this Example 1, except that
the value of the T stock is $60 and S declares and distributes a
dividend of all of the T stock to P at the close of Year 1, and P sells
the T stock to a nonmember at a gain at the beginning of Year 5. Under
paragraph (c) of this section, S's distribution is treated as a
disposition of T's stock at the close of Year 1 (the day of the
distribution). S's $100 excess loss account in T's stock is treated as
additional gain under section 311(b) from the distribution. Under
section 301(d), P's basis in the T stock is $60. Under Sec. 1.1502-13,
and paragraph (b)(2) of this section, S's $160 gain from the
distribution is deferred and taken into account in Year 5 as a result of
P's sale of the T stock. Under Sec. 1.1502-32(b), T's $200 loss and S's
$60 distribution result in P having a $110 excess loss account in S's
stock at the close of Year 1. In Year 5, S's $160 gain taken into
account eliminates P's excess loss account in S's stock and increases
P's basis in the stock to $50.
Example 2. Basis determinations under the Internal Revenue Code in
intercompany reorganizations. (a) Facts. P owns all of the stock of S
and T. P has a $150 basis in S's stock and a $100 excess loss account in
T's stock. P transfers T's stock to S without receiving additional S
stock, in a transaction to which section 351 applies.
(b) Analysis. Under paragraph (c) of this section, P's transfer is
treated as a disposition of T's stock. Under section 351 and paragraph
(b)(2) of this section, P does not recognize gain from the disposition.
Under section 358 and paragraph (a)(2)(ii) of this section, P's $100
excess loss account in T's stock decreases P's $150 basis in S's stock
to $50. In addition, S takes a $100 excess loss account in T's stock
under section 362. (If P had received additional S stock, paragraph (d)
of this section would not apply to shift basis from P's original S stock
because the basis
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of the original stock is not adjusted or determined as a result of the
contribution; but paragraph (d) would apply to shift basis if P had
transferred S's stock to T in exchange for additional T stock, because
the basis of the additional T stock would be determined when P has an
excess loss account in its original T stock.)
(c) Intercompany merger. The facts are the same as in paragraph (a)
of this Example 2, except that T merges into S in a reorganization
described in section 368(a)(1)(A) (and in section 368(a)(1)(D)), and P
receives no additional S stock in the reorganization. Under section 354
and paragraph (b)(2) of this section, P does not recognize gain. Under
section 358 and paragraph (a)(2)(ii) of this section, P's $100 excess
loss account in T's stock decreases P's $150 basis in the S stock to
$50. (Similarly, if S merges into T and P does not receive additional T
stock, P's $150 basis in S's stock eliminates P's excess loss account in
T's stock, and increases P's basis in T's stock to $50.)
(d) Liquidation of only subsidiary. Assume instead that P and S are
the only members of the P group, P has a $100 excess loss account in S's
stock, and S liquidates in a transaction to which section 332 applies.
Under paragraph (c)(2) of this section, the liquidation is not a
deconsolidation event under paragraph (c)(1)(ii) of this section merely
because P is the only remaining member. Under section 332 and paragraph
(b)(2) of this section, P does not recognize gain. Under section 334(b),
P succeeds to S's basis in the assets it receives from S in the
liquidation. (P would also not recognize gain if P transferred all of
its assets (including S's stock) to S in a reorganization to which
section 361(a) applied, because S would be a successor to P under
paragraph (f) of this section.)
Example 3. Section 355 distribution of stock with an excess loss
account. (a) Facts. P has a $30 excess loss account in S's stock, and S
has a $90 excess loss account in T's stock. S distributes the T stock to
P in a transaction to which section 355 applies, and neither P nor S
recognizes any gain or loss. At the time of the distribution, the T
stock represents 33% of the value of the S stock. Following the
distribution, P's basis in the S stock is allocated under Sec. 1.358-2
in proportion to the fair market values of the S stock and the T stock.
(b) Analysis. Under paragraph (c) of this section, S's distribution
of the T stock is treated as a disposition. Under section 355(c) and
paragraph (b)(2) of this section, S does not recognize any gain from the
distribution. Under section 358, S's excess loss account in the T stock
is eliminated, and P's $30 excess loss account in the S stock is treated
as basis allocated between the S stock and the T stock based on their
relative values. Consequently, P has a $20 excess loss account in the S
stock and a $10 excess loss account in the T stock. (If P had a $30
basis rather than a $30 excess loss account in the S stock, S would not
recognize gain, its excess loss account in the T stock would be
eliminated, and P's basis in the stock of S and T would be $20 and $10,
respectively.)
(c) Section 355 distribution to nonmember. The facts are the same as
in paragraph (a) of this Example 3, except that P also distributes the T
stock to its shareholders in a transaction to which section 355 applies.
Under paragraph (c) of this section, P's distribution is treated as a
disposition of T's stock. Under paragraph (b)(2) of this section,
because P's disposition is described in paragraph (c)(1)(ii) of this
section, P's $10 excess loss account in the T stock must be taken into
account at the time of the distribution, notwithstanding the
nonrecognition rules of section 355(c).
Example 4. Deconsolidation of a member. (a) Facts. P has a $50
excess loss account in S's stock, and S has a $100 excess loss account
in T's stock. T issues additional stock to a nonmember and, as a
consequence, T becomes a nonmember.
(b) Analysis. Under paragraph (c)(2) of this section, S is treated
as disposing of each of its shares of T's stock immediately before T
becomes a nonmember. Under paragraph (b)(1) of this section, S takes
into account its $100 excess loss account as gain from the sale or
exchange of T's stock. Under Sec. 1.1502-32(b) of this section, S's $100
gain eliminates P's excess loss account in S's stock and increases P's
basis in S's stock to $50.
(c) Deconsolidation of a higher-tier member. The facts are the same
as in paragraph (a) of this Example 4, except that S (rather than T)
issues the stock and, as a consequence, both S and T become nonmembers.
Under paragraph (c)(2) of this section, P is treated as disposing of S's
stock and S is treated as disposing of T's stock immediately before S
and T become nonmembers. Under Sec. 1.1502-32(b) and paragraph (b)(3) of
this section, because S and T become nonmembers in the same transaction
and T is the lower-tier member, S is first treated under paragraph
(b)(1) of this section as taking into account its $100 excess loss
account as gain from the sale or exchange of T's stock. Under
Sec. 1.1502-32(b), S's $100 gain eliminates P's excess loss account in
S's stock and increases P's basis in S's stock to $50 immediately before
S becomes a nonmember. Thus, only S's $100 gain is taken into account in
the determination of the group's consolidated taxable income.
(d) Intercompany gain and deconsolidation. The facts are the same as
in paragraph (c) of this Example 4, except that T has $30 of gain that
is deferred under Sec. 1.1502-13 and taken into account in determining
consolidated taxable income immediately before T becomes a nonmember.
Under Sec. 1.1502-32(b), T's $30 gain decreases S's excess loss account
in
[[Page 328]]
T's stock from $100 to $70 immediately before S is treated as disposing
of T's stock. Under paragraph (b)(1) of this section, S is treated as
taking into account its $70 excess loss account as gain from the
disposition of T's stock. Under Sec. 1.1502-32(b), S's $70 gain from the
excess loss account and T's $30 deferred gain that is taken into account
eliminate P's $50 excess loss account in S's stock and increase P's
basis in S's stock to $50 immediately before S becomes a nonmember.
Example 5. Worthlessness. (a) Facts. P forms S with a $150
contribution, and S borrows $150. For Year 1, S has a $50 ordinary loss
that is carried over as part of the group's consolidated net operating
loss. For Year 2, P has $160 of ordinary income, and S has a $160
ordinary loss. Under Sec. 1.1502-32(b), S's loss results in P having a
$10 excess loss account in S's stock. During Year 3, the value of S's
assets (without taking S's liabilities into account) continues to
decline and S's stock becomes worthless within the meaning of section
165(g) (without taking into account Sec. 1.1502-80(c)). For Year 4, S
has $10 of ordinary income.
(b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, P is
not treated as disposing of S's stock in Year 3 solely because S's stock
becomes worthless within the meaning of section 165(g) (taking S's
liabilities into account). In addition, because S's stock is not treated
as worthless, section 382(g)(4)(D) does not prevent the Year 1
consolidated net operating loss carryover from offsetting S's $10 of
income in Year 4.
(c) Discharge of indebtedness. The facts are the same as in
paragraph (a) of this Example 5, except that, instead of S's stock
becoming worthless within the meaning of section 165(g), S's creditor
discharges $40 of S's indebtedness during Year 3, S is insolvent by more
than $40 before the discharge, the discharge is excluded from the P
group's gross income under section 108(a), and $40 of the $50
consolidated net operating loss carryover attributable to S is
eliminated under section 108(b). Under Sec. 1.1502- 32(b)(3)(ii)(C), S's
$40 of discharge income is treated as tax-exempt income because there is
a corresponding decrease under Sec. 1.1502-32(b)(3)(iii) for elimination
of the loss carryover. Under paragraph (c)(1)(iii)(B) of this section, P
is treated as disposing of S's stock if the amount discharged is not
included in gross income and is not treated as tax-exempt income under
Sec. 1.1502-32(b)(3)(ii)(C). Because the discharge is treated as tax-
exempt income, P is not treated as disposing of S's stock by reason of
the discharge.
Example 6. Avoiding worthlessness. (a) Facts. P forms S with a $100
contribution and S borrows $150. For Years 1 through 5, S has a $210
ordinary loss that is absorbed by the group. Under Sec. 1.1502-32(b),
S's loss results in P having a $110 excess loss account in S's stock. S
defaults on the indebtedness, but the creditor does not discharge the
debt (or initiate collection procedures). At the beginning of Year 6, S
ceases any substantial operations with respect to the assets, but
maintains their ownership with a principal purpose to avoid P's taking
into account its excess loss account in S's stock.
(b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, P's
excess loss account on each of its shares of S's stock ordinarily is
taken into account at the time substantially all of S's assets are
treated as disposed of, abandoned, or destroyed for Federal income tax
purposes. Under paragraph (e) of this section, however, S's assets are
not taken into account at the beginning of Year 6 for purposes of
applying paragraph (c)(1)(iii)(A) of this section. Consequently, S is
treated as worthless at the beginning of Year 6, and P's $110 excess
loss account is taken into account.
(h) Effective date--(1) Application. This section applies with
respect to determinations of the basis of (including an excess loss
account in) the stock of a member in consolidated return years beginning
on or after January 1, 1995. If this section applies, basis (and excess
loss accounts) must be determined or redetermined as if this section
were in effect for all years (including, for example, the consolidated
return years of another consolidated group to the extent adjustments
during those consolidated return years are still reflected). Any such
determination or redetermination does not, however, affect any prior
period.
(2) Dispositions of stock before effective date--(i) In general. If
P was treated as disposing of stock of S in a tax year beginning before
January 1, 1995 (including, for example, a deemed disposition because S
was worthless) under the rules of this section then in effect, the
amount of P's income, gain, deduction, or loss, and the stock basis
reflected in that amount, are not redetermined under paragraph (h)(1) of
this section. See paragraph (h)(3) of this section for the applicable
rules.
(ii) Intercompany amounts. For purposes of this paragraph (h)(2), a
disposition does not include a transaction to which Sec. 1.1502-13,
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead,
the transaction is deemed to occur as the income, gain, deduction, or
loss (if any) is taken into account.
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(3) Prior law. For prior determinations, see prior regulations under
section 1502 as in effect with respect to the determination. See, e.g.,
Sec. 1.1502-19 as contained in the 26 CFR part 1 edition revised as of
April 1, 1994.
[T.D. 8560, 59 FR 41677, Aug. 15, 1994, as amended by T.D. 8597, 62 FR
12097, Mar. 14, 1997]
Sec. 1.1502-20 Disposition or deconsolidation of subsidiary stock.
(a) Loss disallowance--(1) General rule. No deduction is allowed for
any loss recognized by a member with respect to the disposition of stock
of a subsidiary. See also Secs. 1.1502-11(c) (stock losses attributable
to certain pre-1966 distributions) and 1.1502-80(c) (deferring the
treatment of stock of members as worthless under section 165(g)).
(2) Disposition. Disposition means any event in which gain or loss
is recognized, in whole or in part.
(3) Coordination with loss deferral and other disallowance rules--
(i) In general. Loss with respect to the stock of a subsidiary may be
deferred or disallowed under other applicable provisions of the Code and
regulations, including section 267(f). Paragraph (a)(1) of this section
does not apply to loss that is disallowed under any other provision. If
loss is deferred under any other provision, paragraph (a)(1) of this
section applies when the loss is taken into account. However, if an
overriding event described in paragraph (a)(3)(ii) of this section
occurs before the deferred loss is taken into account, paragraph (a)(1)
of this section applies to the loss immediately before the event occurs
even though the loss may not be taken into account until a later time.
Any loss not disallowed under paragraph (a)(1) of this section is
subject to disallowance or deferral under other applicable provisions of
the Code and regulations.
(ii) Overriding events. For purposes of paragraph (a)(3)(i) of this
section, the following are overriding events:
(A) The stock ceases to be owned by a member of the consolidated
group.
(B) The stock is canceled or redeemed (regardless of whether it is
retired or held as treasury stock).
(C) The stock is treated as disposed of under Sec. 1.1502-
19(c)(1)(ii)(B) or (c)(1)(iii).
(4) Netting. Paragraph (a) (1) of this section does not apply to
loss with respect to the disposition of stock of a subsidiary, to the
extent that, as a consequence of the same plan or arrangement, gain is
taken into account by members with respect to stock of the same
subsidiary having the same material terms. If the gain to which this
paragraph (a)(4) applies is less than the amount of the loss with
respect to the disposition of the subsidiary's stock, the gain is
applied to offset loss with respect to each share disposed of as a
consequence of the same plan or arrangement in proportion to the amount
of the loss deduction that would have been disallowed under paragraph
(a)(1) of this section with respect to such share before the application
of this paragraph (a)(4). If the same item of gain could be taken into
account more than once in limiting the application of paragraphs (a)(1)
and (b)(1) of this section, the item is taken into account only once.
(5) Examples. For purposes of the examples in this section, unless
otherwise stated, all corporations have only one class of stock
outstanding, all groups file consolidated returns on a calendar-year
basis, the facts set forth the only corporate activity, all transactions
are between unrelated persons, and tax liabilities are disregarded. The
basis of each asset is the same for determining earnings and profits
adjustments and taxable income. References to the investment adjustment
system are references to the rules of Secs. 1.1502-19, 1.1502-32 and
1.1502-33. The principles of this paragraph (a) are illustrated by the
following examples.
Example 1. Loss attributable to recognized built-it gain. P buys all
the stock of T for $100, and T becomes a member of the P group. T has an
asset with a basis of $0 and a value of $100. T sells the asset for
$100. Under the investment adjustment system, P's basis in the T stock
increases to $200. Five years later, P sells all the T stock for $100
and recognizes a loss of $100. Under paragraph (a)(1) of this section,
no deduction is allowed to P for the $100 loss.
Example 2. Effect of post-acquisition appreciation. P buys all the
stock of T for $100, and T becomes a member of the P group. T has an
asset with a basis of $0 and a value of $100. T sells the asset for
$100. Under the investment adjustment system, P's basis in the T
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stock increases to $200. T reinvests the proceeds of the sale in an
asset that appreciates in value to $180. Five years after the sale, P
sells all the stock of T for $180 and recognizes a $20 loss. Under
paragraph (a)(1) of this section, no deduction is allowed to P for the
$20 loss.
Example 3. Disallowance of duplicated loss. P forms S with a
contribution of $100 in exchange for all of the S stock, and S becomes a
member of the P group. S has an operating loss of $60. The group is
unable to use the loss, and the loss becomes a consolidated net
operating loss carryover attributable to S. Five years later, P sells
the stock of S for $40, recognizing a $60 loss. Under paragraph (a)(1)
of this section, P's $60 loss on the sale of the S stock is disallowed.
(See paragraph (g) of this section for the elective reattribution of S's
$60 net operating loss to P in connection with the sale.)
Example 4. Deemed asset sale election. (i) P forms S with a
contribution of $100 in exchange for all of the S stock, and S becomes a
member of the P group. S buys an asset for $100, and the value of the
asset declines to $40. P sells all the S stock to P1 for $40. Under
paragraph (a)(1) of this section, P's $60 loss on the sale of the S
stock is disallowed.
(ii) If P and P1 instead elect deemed asset sale treatment under
section 338 (h) (10), S is treated as selling all of its assets, and no
loss is recognized by P on its sale of the S stock. As a result of the
recharacterization of the stock sale as an asset sale, the $60 loss in
the asset is recognized. Under section 338 (h)(10), S's $60 loss is
included in the consolidated return of the P group, and S is treated as
liquidating into P under section 332 following the deemed asset sale.
Paragraph (a)(1) of this section does not apply to S's $60 loss.
Example 5. Gain and loss recognized with respect to stock as a
consequence of the same plan or arrangement. P, the common parent of a
group, owns 50 shares of the stock of T with an aggregate basis of $50,
and S, a wholly owned subsidiary of P, owns the remaining 50 shares of
T's stock with an aggregate basis of $100. All of the stock has the same
terms. P and S sell all the T stock to the public for $140 pursuant to a
single public offering. P therefore recognizes a gain of $20 and S
recognizes a loss of $30. For purposes of paragraph (a)(4) of this
section, the gain and loss recognized by P and S is considered to be a
consequence of the same plan or arrangement. Accordingly, the amount of
S's $30 loss disallowed under paragraph (a)(1) of this section is
limited to $10 (the $30 reduced by P's $20 gain).
Example 6. Deferred loss and recognized gain. (i) P is the common
parent of a consolidated group, S is a wholly owned subsidiary of P, and
T is a recently purchased, wholly owned subsidiary of S. S has a $100
basis in the T stock, and T has an asset with a basis of $40 and a value
of $100. T sells the asset for $100, recognizing a $60 gain. Under the
investment adjustment system, S's basis in the T stock increases from
$100 to $160. S sells its T stock to P for $100 in an intercompany
transaction, recognizing a $60 intercompany loss that is deferred under
section 267(f) and Sec. 1.1502-13. P subsequently sells all the stock of
T for $100 to X, a member of the same controlled group (as defined in
section 267(f)) as P but not a member of the P consolidated group.
(ii) Under paragraph (a)(3)(i) of this section, the application of
paragraph (a)(1) of this section to S's $60 intercompany loss on the
sale of its T stock to P is deferred, because S's intercompany loss is
deferred under section 267(f) and Sec. 1.1502-13. P's sale of the T
stock to X ordinarily would result in S's intercompany loss being taken
into account under the matching rule of Sec. 1.1502-13(c). The deferred
loss is not taken into account under Sec. 1.267(f)-1, however, because
P's sale to X (a member of the same controlled group as P) is a second
intercompany transaction for purposes of section 267(f). Nevertheless,
paragraph (a)(3)(ii) of this section provides that paragraph (a)(1) of
this section applies to the intercompany loss as a result of P's sale to
X because the T stock ceases to be owned by a member of the P
consolidated group. Thus, the loss is disallowed under paragraph (a)(1)
of this section immediately before P's sale and is therefore never taken
into account under section 267(f).
(iii) The facts are the same as in (i) of this Example, except that
S is liquidated after its sale of the T stock to P, but before P's sale
of the T stock to X, and P sells the T stock to X for $110. Under
Secs. 1.1502-13(j) and 1.267(f)-1(b), P succeeds to S's intercompany
loss as a result of S's liquidation. Thus, paragraph (a)(3)(i) of this
section continues to defer the application of paragraph (a)(1) of this
section until P's sale to X. Under paragraph (a)(4) of this section, the
amount of S's $60 intercompany loss disallowed under paragraph (a)(1) of
this section is limited to $50 because P's $10 gain on the disposition
of the T stock is taken into account as a consequence of the same plan
or arrangement.
(iv) The facts are the same as in (i) of this Example, except that P
sells the T stock to A, a person related to P within the meaning of
section 267(b)(2). Although S's intercompany loss is ordinarily taken
into account under the matching rule of Sec. 1.1502-13(c) as a result of
P's sale, Sec. 1.267(f)-1(c)(2)(ii) provides that none of the
intercompany loss is taken into account because A is a nonmember that is
related to P under section 267(b). Under paragraph (a)(3)(i) of this
section, paragraph (a)(1) of this section does not apply to loss that is
disallowed under any other provision. Because Sec. 1.267(f)-1(c)(2)(ii)
and section 267(d) provide that the benefit of the intercompany loss is
retained by A if the property is later disposed of at a gain, the
intercompany loss is not disallowed for purposes of paragraph
[[Page 331]]
(a)(3)(i) of this section. Thus, the intercompany loss is disallowed
under paragraph (a)(1) of this section immediately before P's sale and
is therefore never taken into account under section 267(d).
(b) Basis reduction on deconsolidation--(1) General rule. If a
member's basis in a share of stock of a subsidiary exceeds its value
immediately before a deconsolidation of the share, the basis of the
share is reduced at that time to an amount equal to its value. If both a
disposition and a deconsolidation occur with respect to a share in the
same transaction, paragraph (a) of this section applies and, to the
extent necessary to effectuate the purposes of this section, this
paragraph (b) applies following the application of paragraph (a) of this
section.
(2) Deconsolidation. Deconsolidation means any event that causes a
share of stock of a subsidiary that remains outstanding to be no longer
owned by a member of any consolidated group of which the subsidiary is
also a member.
(3) Value. Value means fair market value.
(4) Netting. Paragraph (b)(1) of this section does not apply to
reduce the basis of stock of a subsidiary, to the extent that, as a
consequence of the same plan or arrangement as that giving rise to the
deconsolidation, gain is taken into account by members with respect to
stock of the same subsidiary having the same material terms. If the gain
to which this paragraph (b)(4) applies is less than the amount of basis
reduction with respect to shares of the subsidiary's stock, the gain is
applied to offset basis reduction with respect to each share
deconsolidated as a consequence of the same plan or arrangement in
proportion to the amount of the reduction that would have been required
under paragraph (b)(1) of this section with respect to such share before
the application of this paragraph (b)(4). If the same item of gain could
be taken into account more than once in limiting the application of
paragraphs (a)(1) and (b)(1) of this section, the time is taken into
account only once.
(5) Loss within 2 years after basis reduction--(i) In general. If a
share is deconsolidated and a direct or indirect disposition of the
share occurs within 2 years after the date of the deconsolidation, a
separate statement entitled ``Statement Pursuant to Section Sec. 1.1502-
20(b)(5)'' must be filed with the taxpayer's return for the year of
disposition. If the taxpayer fails to file the statement as required, no
deduction is allowed for any loss recognized with respect to the
disposition. A disposition after the 2-year period described in this
paragraph (b)(5) that is pursuant to an agreement, option, or other
arrangement entered into within the 2-year period is treated as a
disposition within the 2-year period for purposes of this section.
(ii) Contents of statement. The statement required under paragraph
(b)(5)(i) of this section must contain--
(A) The name and employer identification number (E.I.N.) of the
subsidiary.
(B) The amount of prior basis reduction (if any) with respect to the
stock of the subsidiary under paragraph (b)(1) of this section.
(C) The basis of the stock of the subsidiary immediately before the
disposition.
(D) The amount realized on the disposition.
(E) The amount of the loss recognized on the disposition.
(6) Examples. The principles of this paragraph (b) are illustrated
by the following examples.
Example 1. Simultaneous application of loss disallowance rule and
basis reduction rule to stock of the same subsidiary. (i) P buys all the
stock of T for $100, and T becomes a member of the P group. T has an
asset with a basis of $0 and a value of $100. T sells the asset for
$100. Under the investment adjustment system, P's basis in the T stock
increases to $200. Five years later, P sells 60 shares of T stock for
$60 and recognizes $60 loss on the sale. The sale causes a
deconsolidation of the remaining 40 shares of T stock held by P.
(ii) P's $60 loss on the sale of T stock is disallowed under
paragraph (a)(1) of this section. Under paragraph (b)(1) of this
section, P must reduce the basis of the 40 shares of T stock it
continues to own from $80 to $40, the value of the shares immediately
before the deconsolidation.
(iii) Although P's disposition of the 60 shares also causes a
deconsolidation of these shares, paragraph (b)(1) of this section
provides that, if both paragraph (a) and paragraph (b) of this section
apply to a share in the same transaction, paragraph (a) of this section
applies first and this paragraph (b)
[[Page 332]]
applies only to the extent necessary to effectuate the purposes of this
section. Under paragraph (a)(1) of this section, P's $60 loss on the
sale of the 60 shares is disallowed. Under the facts of this example, it
is not necessary to also apply this paragraph (b) to the 60 shares in
order to effectuate the purposes of this section.
Example 2. Deconsolidation of subsidiary stock on contribution to a
partnership. (i) P buys all the stock of T for $100, and T becomes a
member of the P group. T has an asset with a basis of $0 and a value of
$100. T sells the asset for $100. Under the investment adjustment
system, P's basis in the T stock increases to $200. Five years later, P
transfers all the stock of T to partnership M in exchange for a
partnership interest in M, in a transaction to which section 721
applies.
(ii) At the time of the exchange, P's basis in the T stock is $200
and the T stock's value is $100. Under paragraph (b) of this section,
the transfer to M causes a deconsolidation of the T stock, and P must
reduce its basis in the T stock, immediately before the transfer to M,
from $200 to the stock's $100 value at the time of the transfer. As a
result, P has a basis of $100 in its interest in M, and M has a basis of
$100 in the stock of T.
Example 3. Simultaneous application of loss disallowance and basis
reduction to stock of different subsidiaries. (i) P owns all the stock
of S, which in turn owns all the stock of S1, and S and S1 are members
of the P group. P's basis in the S stock is $100 and S's basis in the S1
stock is $100. S1 buys all the stock of T for $100, and T becomes a
member of the P group. T has an asset with a basis of $0 and a value of
$100. T sells the asset for $100. Under the investment adjustment
system, S1's basis in the T stock, S's basis in the S1 stock, and P's
basis in the S stock each increase from $100 to $200. S then sells all
the S1 stock for $100 and recognizes a loss of $100.
(ii) Under paragraph (a)(1) of this section, S's $100 loss on the
sale of the S1 stock is disallowed.
(iii) If S1 and T are not members of a consolidated group
immediately after the sale of the stock of S1, the T stock is
deconsolidated and, under paragraph (b)(1) of this section, S1 must
reduce the basis of the T stock to its $100 value immediately before the
sale.
(iv) If S1 and T are members of a consolidated group immediately
after the sale of the S1 stock, the T stock is not deconsolidated, and
no reduction is required under paragraph (b)(1) of this section.
Example 4. Extending the time period for dispositions. (i) In Year
1, P, the common parent of a group, buys all 100 shares of the stock of
T for $100. T's only asset has a basis of $0 and a value of $100. T
sells the asset for $100. Under the investment adjustment system, P's
basis in the T stock increases from $100 to $200. At the beginning of
Year 5, P causes T to issue 30 additional shares of stock to the public
for $30. This issuance causes a deconsolidation of the T stock owned by
P, and paragraph (b)(1) of this section requires P to reduce its basis
in the T stock from $200 to $100.
(ii) Within 2 years after the date of the basis reduction, P agrees
to sell all of its T stock for $90 at the end of Year 7. Under paragraph
(b)(5) of this section, P's disposition of the T stock at the end of
Year 7 is treated as occurring within the 2-year period following the
basis reduction, because the disposition is pursuant to an agreement
reached within 2 years after the basis reduction. Accordingly, P's $10
loss may not be deducted unless P files the statement required under
paragraph (b)(5) of this section. This result is reached whether or not
the agreement is in writing. P's disposition would also have been
treated as occurring within the 2-year period if the disposition were
pursuant to an option issued within the period.
Example 5. Deferred loss and subsequent basis reduction. (i) P is
the common parent of a consolidated group, S is a wholly owned
subsidiary of P, and T is a recently purchased, wholly owned subsidiary
of S. S has a $100 basis in the T stock, and T has an asset with a basis
of $40 and a value of $100. T sells the asset for $100, recognizing $60
of gain. Under the investment adjustment system, S's basis in the T
stock increases from $100 to $160. S sells its T stock to P for $100 in
an intercompany transaction, recognizing a $60 intercompany loss that is
deferred under section 267(f) and Sec. 1.1502-13. T issues 30 additional
shares of stock to the public for $30 which causes a deconsolidation of
the T stock owned by P.
(ii) Under paragraph (a)(3)(i) of this section, the application of
paragraph (a)(1) of this section to S's intercompany loss on the sale of
its T stock to P is deferred because S's loss is deferred under section
267(f) and Sec. 1.1502-13. Because the fair market value of the T stock
owned by P is $100 immediately before the deconsolidation and P has a
$100 basis in the stock at that time, no basis reduction is required
under paragraph (b)(1) of this section.
(iii) T's issuance of additional shares to the public results in S's
intercompany loss being taken into account under the acceleration rule
of Sec. 1.1502-13(d) because there is no difference between P's $100
basis in the T stock and the $100 basis the T stock would have had if P
and S had been divisions of a single corporation. S's loss taken into
account is disallowed under paragraph (a)(1) of this section.
Example 6. Gain and basis reduction with respect to the same plan or
arrangement. (i) P, the common parent of a group, owns 50 shares of T
stock with an aggregate basis of $50, and S, a wholly owned subsidiary
of P, owns the remaining 50 shares of T stock with an aggregate basis of
$100. All of the stock
[[Page 333]]
has the same terms. P sells all of its T stock to the public for $70 and
recognizes a $20 gain. The sale causes a deconsolidation of S's 50
shares of T stock.
(ii) Under paragraph (b)(1) of this section, S must reduce the basis
of its 50 shares of T stock from $100 to $70, the value of the shares
immediately before the deconsolidation. However, under paragraph (b)(4)
of this section, because P's $20 gain is recognized as a consequence of
the same plan or arrangement as that giving rise to the deconsolidation,
S's basis reduction is eliminated to the extent of $20. Thus, S must
reduce the basis of its T stock from $100 to $90.
Example 7. Netting allocated between loss disallowance and basis
reduction. (i) P is the common parent of a group and S is its wholly
owned subsidiary. P and S each own 50 shares of T stock and each has an
aggregate basis of $50. All of the stock has the same terms. S recently
purchased its T stock from S1, a lower tier subsidiary, in an
intercompany transaction in which S1 recognized a $30 intercompany gain
that was deferred under Sec. 1.1502-13. T has an asset with a basis of
$0 and a value of $100. T sells the asset for $100, recognizing $100 of
gain. Under the investment adjustment system, P and S each increase the
basis of their T stock to $100. S sells all of its T stock to the public
for $50 and recognizes a $50 loss. The sale causes a deconsolidation of
P's T stock.
(ii) S's $50 loss on the sale of T stock is disallowed under
paragraph (a)(1) of this section. Under paragraph (b)(1) of this
section, P must reduce its $100 basis in the T stock to the $50 value
immediately before the deconsolidation.
(iii) Under the matching rule of Sec. 1.1502-13, S's sale of its T
stock results in S1's $30 intercompany gain being taken into account.
Under paragraphs (a)(4) and (b)(4) of this section, the gain may be
taken into account by P and S in limiting the application of paragraphs
(a)(1) and (b)(1) of this section, but it may be taken into account only
once. Under paragraph (a)(4) of this section, S may apply the gain to
decrease the amount of loss disallowed under paragraph (a)(1) of this
section from $50 to $20. None of the gain remains to decrease the $50 of
P's basis reduction under paragraph (b)(1) of this section. (P may
instead apply the gain to decrease the basis reduction under paragraph
(b)(1) of this section instead of S decreasing its disallowed loss, but
if the T stock is sold within 2 years, the statement described in
paragraph (b)(5) of this section must be filed if a deduction is to be
allowed for any loss recognized on the disposition.)
(c) Allowable loss--(1) General rule. The amount of loss disallowed
under paragraph (a)(1) of this section and the amount of basis reduction
under paragraph (b)(1) of this section with respect to a share of stock
shall not exceed the sum of the following amounts--
(i) Extraordinary gain dispositions. The amount of income or gain
(or its equivalent), net of directly related expenses, that is allocated
to the share from extraordinary gain dispositions.
(ii) Positive investment adjustments. The amount of the positive
adjustment (if any) with respect to the share under Sec. 1.1502-32 for
each consolidated return year, but only to the extent the amount exceeds
the amount described in paragraph (c)(1)(i) of this section for the
year.
(iii) Duplicated loss. The amount of duplicated loss with respect to
the share.
(2) Operating rules. For purposes of applying paragraph (c)(1) of
this section--
(i) Extraordinary gain dispositions. An ``extraordinary gain
disposition'' is--
(A) An actual or deemed disposition of--
(1) A capital asset as defined in section 1221 (determined without
the application of any other rules of law).
(2) Property used in a trade or business as defined in section
1231(b) (determined without the application of any holding period
requirement).
(3) An asset described in section 1221 (1), (3), (4), or (5), if
substantially all the assets in such category from the same trade or
business are disposed of in one transaction (or series of related
transactions).
(4) Assets disposed of in an applicable asset acquisition under
section 1060(c).
(B) A positive section 481(a) adjustment.
(C) A discharge of indebtedness.
(D) Any other event (or item) identified in guidance published in
the Internal Revenue Bulletin.
An extraordinary gain disposition is taken into account under
paragraph (c)(1)(i) of this section only if it occurs on or after
November 19, 1990. For this purpose, federal income taxes may be
directly related to extraordinary gain dispositions only to the extent
of the excess (if any) of the group's income tax liability actually
imposed under subtitle A of the Internal Revenue Code for the taxable
year of the extraordinary gain dispositions over the group's income tax
liability for the
[[Page 334]]
taxable year redetermined by not taking into account the extraordinary
gain dispositions. For this purpose, the group's income tax liability
actually imposed and its redetermined income tax liability are
determined without taking into account the foreign tax credit under
section 27(a) of the Code.
(ii) Positive investment adjustments. For purposes of paragraph
(c)(1)(ii) of this section, a positive adjustment under Sec. 1.1502-32
is the sum of the amounts under Sec. 1.1502-32(b)(2) (i) through (iii)
for the consolidated return year (the adjustment determined without
taking distributions into account). However, amounts included in any
loss carryover are taken into account in the year they arise rather than
the year absorbed.
(iii) Applicable amounts. Amounts are described in paragraphs
(c)(1)(i) and (ii) of this section only to the extent they are reflected
in the basis of the share, directly or indirectly, immediately before
the disposition or deconsolidation. For this purpose, an amount is
reflected in the basis of a share if the share's basis would have been
different without the amount. However, amounts included in any loss
carryover are taken into account in the year they arise rather than the
year absorbed.
(iv) Related party rule. The amounts described in paragraphs (c)(1)
(i) and (ii) of this section are not reduced or eliminated by reason of
an acquisition of the share from a person related within the meaning of
section 267(b) or section 707(b)(1), substituting ``10 percent'' for
``50 percent'' each place that it appears, even if the share is not
transferred basis property as defined in section 7701 (a)(43).
(v) Pre-September 13, 1991 positive investment adjustments--(A) In
general. The amount determined under paragraph (c)(1)(ii) of this
section is limited for tax years of the subsidiary ending on or before
September 13, 1991. The amount may not exceed the net increase, if any,
in the basis of the share from--
(1) The date the share was first acquired by a member (whether or
not a member at that time); to
(2) The end of the last taxable year ending on or before September
13, 1991 (or, if earlier, the date of the disposition or
deconsolidation). If the share is transferred basis property (within the
meaning of section 7701 (a)(43) from a prior consolidated group, the
date under paragraph (c)(2)(v)(A)(1) of this section is the date the
share was first acquired by a member of the prior group. For purposes of
this paragraph (c)(2)(v)(A), an increase in an excess loss account is
treated as a decrease in stock basis and a decrease in an excess loss
account is treated as an increase in stock basis.
(B) Cessation of netting. If a lower amount would result under
paragraph (c)(1)(ii) of this section by determining the amount under
this paragraph (c)(2)(v) as of the end of an earlier taxable year ending
after December 31, 1986--
(1) The amount under this paragraph (c)(2)(v) is determined as of
the earlier year end; and
(2) The amount determined under paragraph (c)(1)(ii) of this section
is not limited for tax years of the subsidiary ending after the earlier
year end.
(vi) Duplicated loss. ``Duplicated loss'' is determined immediately
after a disposition or deconsolidation, and equals the excess (if any)
of--
(A) The sum of--
(1) The aggregate adjusted basis of the assets of the subsidiary
other than any stock and securities that the subsidiary owns in another
subsidiary, and
(2) Any losses attributable to the subsidiary and carried to the
subsidiary's first taxable year following the disposition or
deconsolidation, and
(3) Any deferred deductions (such as deductions deferred under
section 469) of the subsidiary, over
(B) The sum of--
(1) The value of the subsidiary's stock, and
(2) Any liabilities of the subsidiary, and
(3) Any other relevant items.
The amounts determined under this paragraph (c)(2)(vi) with respect
to a subsidiary include its allocable share of corresponding amounts
with respect to all lower tier subsidiaries. If 80 percent or more in
value of the stock of a subsidiary is acquired by purchase in a single
transaction (or in a series of related transactions during any 12-month
[[Page 335]]
period), the value of the subsidiary's stock may not exceed the purchase
price of the stock divided by the percentage of the stock (by value) so
purchased. For this purpose, stock is acquired by purchase if the
transferee is not related to the transferor within the meaning of
sections 267(b) and 707(b)(1), substituting ``10 percent'' for ``50
percent'' each place that it appears, and the transferee's basis in the
stock is determined wholly by reference to the consideration paid for
such stock.
(vii) Disallowance amounts applied only once. The amounts described
in paragraph (c)(1) of this section are not applied more than once to
disallow a loss, reduce basis, or reattribute loss under this section.
(3) Statement of allowed loss. Paragraph (c)(1) of this section
applies only if the separate statement required under this paragraph
(c)(3) is filed with the taxpayer's return for the year of the
disposition or deconsolidation. The statement must be entitled ``ALLOWED
LOSS UNDER SECTION 1.1502-20(c)'' and must contain--
(i) The name and employer identification number (E.I.N.) of the
subsidiary.
(ii) The basis of the stock of the subsidiary immediately before the
disposition or deconsolidation.
(iii) The amount realized on the disposition and the amount of fair
market value on the deconsolidation.
(iv) The amount of the deduction not disallowed under paragraph
(a)(1) of this section by reason of this paragraph (c) and the amount of
basis not reduced under paragraph (b)(1) of this section by reason of
this paragraph (c).
(v) The amount of loss disallowed under paragraph (a)(1) of this
section and the amount of basis reduced under paragraph (b)(1) of this
section.
(4) Examples. For purposes of the examples in this paragraph, unless
otherwise stated, the group files the statement required under paragraph
(c)(3) of this section. The principles of this paragraph (c) are
illustrated by the following examples.
Example 1. Allowable loss attributable to lost built-in gain. (i)
Individual A forms T. P buys all the stock of T from A for $100, and T
becomes a member of the P group. T has a capital asset with a basis of
$0 and a value of $100. The value of the asset declines, and T sells the
asset for $40. Under the investment adjustment system, P's basis in the
T stock increases to $140. P then sells all the stock of T for $40 and
recognizes a loss of $100.
(ii) The amount of the $100 loss disallowed under paragraph (a)(1)
of this section may not exceed the amount determined under paragraph
(c)(1) of this section. Under paragraphs (c)(2) (i) and (iii) of this
section, T's $40 gain is from an extraordinary gain disposition and the
amount is reflected in the basis of the T stock under Sec. 1.1502-32
immediately before the disposition. Thus, the gain is described in
paragraph (c)(1)(i) of this section. Because this amount is the only
amount described in paragraph (c)(1) of this section, the amount of P's
$100 loss that is disallowed under paragraph (a)(1) of this section is
limited to $40. (No amount is described in paragraph (c)(1)(ii) of this
section because the amount of T's positive investment adjustments does
not exceed the amount included under paragraph (c)(1)(i) of this
section.)
(iii) The results would be the same if the asset, instead of being
owned by T, is owned by a partnership in which T is a partner and T is
allocated the $40 of gain under section 704(b). Under paragraphs (c)(2)
(i) and (iii) of this section, T's $40 gain is from an extraordinary
gain disposition, and the gain is reflected in the basis of the T stock
under Sec. 1.1502-32 immediately before the disposition.
Example 2. Extraordinary gain dispositions. (i) Individual A forms
T. P buys all the stock of T from A for $100 in Year 1, and T becomes a
member of the P group. T owns a capital asset, asset 1, with a basis of
$0 and a value of $100. T sells asset 1 for $100 in Year 1 and invests
the proceeds in a trade or business asset, asset 2. For Year 2, asset 2
produces $30 of gross operating income and $20 of cost recovery
deductions. On December 31 of Year 2, asset 2 has an $80 adjusted basis
and T disposes of asset 2 for $85; however, because T incurs $20 of
expenses directly related to the sale of asset 2, the disposition
produces a $15 loss that is taken into account in the determination of
taxable income or loss under Sec. 1.1502-32(b)(2)(i) (the loss offsets
T's $10 of operating income for Year 2, as well as $5 of operating
income of P in that year). Under the investment adjustment system, P's
basis in the T stock increases by $95, to $195, because T has $110 of
income and a $15 loss. P sells the T stock for $95 in Year 5 and
recognizes a $100 loss.
(ii) Under paragraphs (c)(2) (i) and (iii) of this section, the $100
gain from the disposition of asset 1 is from an extraordinary gain
disposition and is reflected in the basis of the T stock. Thus, the gain
is described in paragraph (c)(1)(i) of this section. The sale of asset 2
is not taken into account under paragraph (c)(1)(i) of this section
because, net of
[[Page 336]]
directly related expenses, T does not have income or gain from the sale.
(No amount is described under paragraph (c)(1)(ii) of this section
because T's positive investment adjustments are taken into account under
paragraph (c)(1)(i) of this section.) Because the $100 amount described
under paragraph (c)(1)(i) of this section equals P's $100 loss from the
disposition of the T stock, all of the loss is disallowed.
Example 3. Positive investment adjustments. (i) Individual A forms
T. S, a member of the P group, buys all the stock of T from A for $100,
and T becomes a member of the P group. T has an asset with a basis of $0
and a value of $100. The asset earns $100 of operating income in Year 1
and declines in value to $0. T invests the operating income in another
asset that produces a $25 operating loss for Year 2. Under the
investment adjustment system, S's basis in the T stock increases to $200
at the end of Year 1, and decreases to $175 at the end of Year 2. S
sells all the stock of T for $75 in Year 5 and recognizes a loss of
$100.
(ii) Under paragraph (c)(1)(ii) of this section, the $100 of income
from Year 1 is a positive investment adjustment. The amount is not
reduced by the $25 operating loss for Year 2. Because the $100 amount
described under paragraph (c)(1)(ii) of this section equals S's $100
loss from the disposition of the T stock, all of the loss is disallowed.
Example 4. Treatment of net operating income as attributable to
built-in gain. (i) Individual A forms T. P buys all the stock of T from
A for $100, and T becomes a member of the P group. T has a capital asset
with a basis of $0 and a value of $100. The asset declines in value to
$40. The asset earns $100 of operating income unrelated to its $60
decline in value. Under the investment adjustment system, P's basis in
the T stock increases to $200. P then sells all the stock of T for $140
(the asset worth $40 and $100 cash) and recognizes a loss of $60.
(ii) The $100 adjustment to the basis of the T stock is an amount
described in paragraph (c)(1)(ii) of this section. Because this amount
exceeds the amount of loss otherwise disallowed under paragraph (a)(1)
of this section, P's entire $60 loss from the disposition of T stock is
disallowed.
Example 5. Carryover basis transactions--amounts attributable to
separate return years. (i) Individual A forms T. S purchases all the
stock of T from A for $100, and T becomes a member of the S group. T has
a capital asset with a basis of $0 and a value of $100. T sells the
asset for $100. Under the investment adjustment system, S's basis in the
T stock increases to $200. P buys all of the stock of S for $100, and
both S and T become members of the P group. S then sells the T stock for
$100 and recognizes a loss of $100.
(ii) Under paragraph (c)(2)(iii) of this section, the $100
adjustment to S's basis in the T stock while a member of the S group is
an amount described in paragraph (c)(1)(i) of this section with respect
to the P group because it continues to be reflected in the basis of the
T stock immediately before the stock is disposed of. Because this amount
equals the loss otherwise disallowed under paragraph (a)(1) of this
section, S's $100 loss from the disposition of T stock is disallowed.
Example 6. Cost basis for subsidiary stock. (i) In Year 1,
individual A forms T. T's assets appreciate in value from $0 to $100,
and T recognizes $100 of gain in an extraordinary gain disposition. T
reinvests the sale proceeds in assets that appreciate in value to $150.
In Year 3, A sells all of the T stock to P for $150, and T becomes a
member of the P group. While a member of the P group, T's assets decline
in value to $130 and P sells the T stock in Year 7 for $130 and
recognizes a $20 loss.
(ii) Although T has a $100 gain from extraordinary gain
dispositions, the gain is not reflected in P's basis in the T stock
within the meaning of paragraph (c)(2)(iii) of this section. P's basis
reflects the stock's value at the time of P's purchase, and is
determined without regard to whether T recognized the gain before the
purchase. Thus, no part of T's gain is described in paragraph (c)(1) of
this section, and no part of the $20 loss is disallowed under paragraph
(a) of this section. (For rules that apply if A and P are related
persons, see paragraph (c)(2)(iv) of this section.)
Example 7. Adjustments to stock basis under applicable rules of law.
(i) Individual A forms T, and T's assets subsequently appreciate. T
borrows $100 on a nonrecourse basis secured by the appreciated assets. P
buys all of the stock of T from A for $150. After becoming a member of
the P group, T has a $100 operating loss that is absorbed in the
determination of consolidated taxable income and P's basis in the T
stock is reduced to $50 under Sec. 1.1502-32. Because T's assets have
declined in value, T's creditors discharge $60 of T's indebtedness. The
$60 discharge is not included in T's gross income under section 108(a),
but no attributes are reduced under section 108(b).
(ii) Under paragraph (c)(2)(i) of this section, the discharge of
indebtedness is an extraordinary gain disposition. Under Sec. 1.1502-
32(b)(3)(ii), however, the $60 discharge of indebtedness is not treated
as tax-exempt income that increases P's basis in the T stock.
Consequently, under paragraph (c)(2)(iii) of this section, T's discharge
of indebtedness income is not reflected in P's basis in the T stock.
Thus, there is no amount under paragraph (c)(1) of this section.
(iii) The facts are the same as in paragraph (i) of this Example,
except that $60 of T's operating loss is not absorbed and is included in
a consolidated net operating loss that is carried over under
Sec. Sec. 1.1502-21A or 1.1502-21,
[[Page 337]]
and the $60 is eliminated from the carryover under section 108(b) as a
result of T's discharge of indebtedness. The absorption of $40 of T's
loss reduces P's basis in the T stock from $150 to $110. The $60
discharge of indebtedness is treated as tax-exempt income that increases
P's basis in the T stock, and the $60 attribute reduction is treated as
a noncapital, nondeductible expense that reduces P's basis in the T
stock. Thus, P's basis in T's stock remains $110 following the discharge
and attribute reduction. Because P's basis is $110, rather than $50, the
discharge of indebtedness income is reflected in P's basis for purposes
of paragraph (c)(2)(iii) of this section. Thus, the amount under
paragraph (c)(1)(i) of this section is $60.
Example 8. Duplicated loss. (i) Individual A forms T with a
contribution of $100 in exchange for all of the T stock. Individual B
forms T1 with a contribution of land that has a $90 basis and $100
value. T buys all the stock of T1 from B for $100. P buys all the stock
of T from A for $100, and both T and T1 become members of the P group.
The value of T1's land declines to $40. P sells all of the T stock for
$40 and recognizes a loss of $60.
(ii) Under paragraph (c)(1)(iii) of this section, P's amount of
duplicated loss is $50. This is computed under paragraph (c)(2)(vi) of
this section immediately after the disposition as the excess of--
(A) The $90 aggregate adjusted basis of the assets of T and T1
(other than stock and securities of T1 owned by T), over
(B) The $40 fair market value of the T stock (determined under
paragraph (c)(2)(vi) of this section). Because this amount is the only
amount described in paragraph (c)(1) of this section, the amount of P's
$60 loss disallowed under paragraph (a)(1) of this section is limited to
$50.
(iii) The result would be the same if the value of T1's property did
not decline and T1 instead had an operating loss of $60 (attributable to
borrowed funds) which the P group was unable to use. In that case, the
$50 excess of the sum of--
(A) The $90 aggregate adjusted basis of the assets of T and T1
(other than stock and securities of members of the P group), plus the
$60 net operating loss attributable to T1 and carried to its first
taxable year following the disposition, over
(B) The sum of the $40 fair market value of the T stock, plus the
$60 of T1 liabilities, is an amount described in paragraph (c)(2)(vi) of
this section. (See paragraph (g) of this section for the elective
reattribution of T1's $60 net operating loss to P in connection with the
sale.)
Example 9. Intercompany stock sales.
(i) P is the common parent of a consolidated group, S is a wholly
owned subsidiary of P, and T is a wholly owned recently purchased
subsidiary of S. S has a $100 basis in the T stock, and T has a capital
asset with a basis of $0 and a value of $100. T's asset declines in
value to $60. Before T has any positive investment adjustments or
extraordinary gain dispositions, S sells its T stock to P for $60. T's
asset reappreciates and is sold for $100, and T recognizes $100 of gain.
Under the investment adjustment system, P's basis in the T stock
increases to $160. P then sells all of the T stock for $100 and
recognizes a loss of $60.
(ii) S's sale of the T stock to P is an intercompany transaction.
Thus, S's $40 loss is deferred under section 267(f) and Sec. 1.1502-13.
Under paragraph (a)(3) of this section, the application of paragraph
(a)(1) of this section to S's $40 loss is deferred until the loss is
taken into account. Under the matching rule of Sec. 1.1502-13(c), the
loss is taken into account to reflect the difference for each year
between P's corresponding items taken into account and P's recomputed
corresponding items (the corresponding items that P would take into
account for the year if S and P were divisions of a single corporation).
If S and P were divisions of a single corporation and the intercompany
sale were a transfer between the divisions, P would succeed to S's $100
basis and would have a $200 basis in the T stock at the time it sells
the T stock ($100 of initial basis plus $100 under the investment
adjustment system). S's $40 loss is taken into account at the time of
P's sale of the T stock to reflect the $40 difference between the $60
loss P takes into account and P's recomputed $100 loss.
(iii) Under the matching rule of Sec. 1.1502-13(c), the attributes
of S's $40 loss and P's $60 loss are redetermined to produce the same
effect on consolidated taxable income (and consolidated tax liability)
as if S and P were divisions of a single corporation. Under Sec. 1.1502-
13(b)(6), attributes of the losses include whether they are disallowed
under this section. Because the amount described in paragraph (c)(1) of
this section is $100, both S's $40 loss and P's $60 loss are disallowed.
(d) Successors--(1) General rule. This section applies, to the
extent necessary to effectuate the purposes of this section, to any
property the basis of which is determined, directly or indirectly, in
whole or in part, by reference to the basis of a subsidiary's stock.
(2) Examples. The principles of this paragraph (d) are illustrated
by the following examples.
Example 1. Status of successor as member. (i) P, the common parent
of a group, buys all the stock of T for $100. T's only asset has a basis
of $0 and a value of $100. T sells the asset for $100, and buys another
asset for $100. Under the investment adjustment system, P's basis in the
T stock increases to
[[Page 338]]
$200, and the earnings and profits of P increase by $100. P later
transfers all the stock of T to an unrelated consolidation group in
exchange for 10 percent of the stock of X, the common parent of that
group, in a transaction described in section 368(a)(1)(B). At the time
of the exchange, the value of the X stock received by P is $80.
(ii) Under section 358, P has a basis of $200 in the X stock it
receives in exchange for T. Under section 362, X has a $200 basis in the
T stock.
(iii) Neither paragraph (a)(1) nor (b)(1) of this section applies to
the stock of T on P's transfer of the stock to the X group, because no
gain or loss is recognized on the transfer, and the transfer is not a
deconsolidation of the stock of T under paragraph (b)(2) of this
section.
(iv) The X stock owned by P after the reorganization is a successor
interest to the T stock because P's basis in the X stock is determined
by reference to P's basis in the T stock. The purposes of this section
require that the reorganization exchange be treated as a deconsolidation
event with respect to P's interest in the X stock. Because X is not a
member of the P group, a failure to reduce the basis of the X stock
owned by P to its fair market value would permit the P group to
recognize and deduct the loss attributable to the T stock. However,
because T is a member of the X group, a reduction in the basis of the T
stock is not necessary to prevent the X group from recognizing and
deducting the loss arising in the P group. The transfer of T stock to X
therefore constitutes a deconsolidation of the X stock but not the T
stock. Therefore, P must reduce its basis in the X stock from $200 to
its $80 value at that time. However, X's basis in the T stock remains
$200.
Example 2. Continued application after deconsolidation. (i) P, the
common parent of a group, buys all the stock of T for $100. T's only
asset has a basis of $0 and a value of $100. T sells the asset for $100,
and buys another asset for $100. Under the investment adjustment system,
P's basis in the T stock increases to $200. P later transfers all the
stock of T to partnership M in exchange for a partnership interest in M,
in a transaction to which section 721 applies. The value of the T stock
immediately before the transfer to M is $100. Less than 2 years later, P
sells its interest in M for $80.
(ii) Under paragraph (b)(1) of this section, because the stock of T
is deconsolidated on the transfer to M, immediately before the transfer
to M, P reduces its basis in the T stock to the stock's $100 value
immediately before the transfer. As a result, P has a basis of $100 in
its interest in M, and M has a basis of $100 in the T stock.
(iii) When P sells its interest in M for $80, it recognizes a $20
loss. Because the basis of P's interest in M is determined by reference
to P's basis in the T stock, and the reporting requirements could
otherwise be circumvented, P's partnership interest in M is a successor
interest to the T stock. Under paragraph (b)(5) of this section, P is
required to file a statement with its return for the year of its
disposition of its interest in M in order to deduct its loss. If P does
not file the required statement described in paragraph (b)(5) of this
section, P's loss on the disposition of its interest in M is disallowed.
(e) Anti-avoidance rules--(1) General rule. The rules of
Sec. 1.1502-20 must be applied in a manner that is consistent with and
reasonably carries out their purposes. If a taxpayer acts with a view to
avoid the effect of the rules of this section, adjustments must be made
as necessary to carry out their purposes.
(2) Anti-stuffing rule--(i) Application. This paragraph (e)(2)
applies if--
(A) A transfer of any asset (including stock and securities) on or
after March 9, 1990 is followed within 2 years by a direct or indirect
disposition or a deconsolidation of stock, and
(B) The transfer is with a view to avoiding, directly or indirectly,
in whole or in part--
(1) The disallowance of loss on the disposition or the basis
reduction on the deconsolidation of stock of a subsidiary, or
(2) The recognition of unrealized gain following the transfer.
A disposition or deconsolidation after the 2-year period described
in this paragraph (e)(2)(i) that is pursuant to an agreement, option, or
other arrangement entered into within the 2-year period is treated as a
disposition or deconsolidation within the 2-year period for purposes of
this section.
(ii) Basis reduction. If this paragraph (e)(2) applies, the basis of
the stock is reduced, immediately before the disposition or
deconsolidation, to cause the disallowance of loss, the reduction of
basis, or the recognition of gain, otherwise avoided by reason of the
transfer.
(3) Examples. The principles of this paragraph (e) are illustrated
by the following examples.
Example 1. Shifting of value. (i) P buys all the stock of T for
$100, and T becomes a member of the P group. T has an asset with a basis
of $0 and a value of $100. With the view described in paragraph (e)(1)
of this section, P transfers land with a value of $100
[[Page 339]]
and a basis of $100 to T in exchange for preferred stock with a $200
redemption price and liquidation preference. The $100 redemption premium
(the excess of the $200 redemption price over the $100 issue price)
ultimately increases the value of the preferred stock from $100 to $200
(and decreases the value of the common stock). T sells the built-in gain
asset for $100, and P's aggregate basis in S's common and preferred
stock increases to $300. In addition, as a result of a cumulative
redetermination under Sec. 1.1502-32(c)(4), P's basis in the T preferred
stock increases from $100 to $200 and P's basis in the common stock
remains $100. P subsequently sells the common stock at a loss.
(ii) Under section 305, the redemption premium is treated as a
distribution of property to which section 301 and Sec. 1.1502-13(f)(2)
apply. Under Secs. 1.1502-13 and 1.1502-32, P's aggregate basis in the
preferred and common stock is unaffected by the deemed distributions.
(iii) P's loss on the sale of the common stock is disallowed under
paragraph (e)(1) of this section. This disallowance prevents the
preferred stock from shifting value and stock basis adjustments from the
common stock to avoid the disallowance of loss under this section.
Example 2. Basic stuffing case. (i) In Year 1, P buys all the stock
of T for $100, and T becomes a member of the P group. T has an asset
with a basis of $0 and a value of $100. T sells the asset for $100.
Under the investment adjustment system, P's basis in the T stock
increases from $100 to $200. In Year 5, P transfers to T an asset with a
basis of $0 and a value of $100 in a transaction to which section 351
applies, with the view described in paragraph (e)(2)(i) of this section.
In Year 6, P sells all the stock of T for $200.
(ii) Under paragraph (e)(2)(ii) of this section, P must reduce the
basis in its T stock by $100 immediately before the sale. This basis
reduction causes a $100 gain to be recognized on the sale.
(iii) The $100 basis reduction also would be required if the T stock
is deconsolidated in Year 6 instead of being sold. P must reduce the
basis in its T stock by $100 immediately before the deconsolidation.
(iv) The $100 basis reduction also would be required if the P stock
were acquired at the beginning of Year 6 by the M consolidated group,
even though the asset transfer took place outside the M group. Paragraph
(e)(2)(i) of this section requires only that the transferor have the
view at the time of the transfer.
Example 3. Stacking rules. (i) In Year 1, P buys all the stock of T
for $100, and T becomes a member of the P group. T has an asset with a
basis of $0 and a value of $100. T sells the asset for $100. Under the
investment adjustment system, P's basis in the T stock increases from
$100 to $200. In Year 5, when the value of the T stock remains $100, P
transfers to T an asset with a basis of $0 and a value of $100 in a
transaction to which section 351 applies, with the view described in
paragraph (e)(2)(i) of this section. Thereafter, the value of the
contributed asset declines to $10. In Year 6, P sells all the T stock
for $110 and recognizes a $90 loss.
(ii) Because the transferred asset declined in value by $90, the
transfer enabled P to avoid the disallowance of loss by the sale of T
only to the extent of $10. Under paragraph (e)(2)(ii) of this section, P
must reduce the basis in its T stock immediately before the sale to
cause recognition of gain in an amount equal to the loss disallowance
otherwise avoided by reason of the transfer. The amount of this basis
reduction is $100, causing a $10 gain to be recognized on the sale.
(iii) The facts are the same as in (i) of this Example, except that
the transferred asset does not decline in value and that T reinvests the
$100 in proceeds from the asset sale in another asset that appreciates
in value to $190. In Year 6, P sells T for $290. Because the new asset
appreciated in value by $90, the transfer enabled P to avoid the
disallowance of loss on the sale of T only to the extent of $10. Under
paragraph (e)(2)(ii) of this section, P must reduce the basis in its T
stock immediately before the sale to cause recognition of gain in an
amount equal to the loss disallowance otherwise avoided by reason of the
transfer. The amount of this basis reduction is $10, causing a $100 gain
to be recognized on the sale.
Example 4. Contribution of built-in loss asset. (i) In Year 1, P
forms S with a contribution of $100 in exchange for all of S's stock,
and S becomes a member of the P group. S buys an asset for $100, and the
asset appreciates in value to $200. P then buys all the stock of T for
$100, and T becomes a member of the P group. T has an asset with a basis
of $0 and a value of $100. T sells the asset for $100, and under the
investment adjustment system P's basis in the T stock increases from
$100 to $200. In Year 5, when the value of the T stock remains $100, P
transfers the T stock to S in a transaction to which section 351
applies, with the view described in paragraph (e)(2)(i) of this section.
The transfer causes P's basis in the S stock to increase from $100 to
$300 and the value of S to increase from $200 to $300. In Year 6, P
sells the S stock for $300.
(ii) Under paragraph (e)(2)(ii) of this section, P must reduce the
basis in its S stock immediately before the sale to cause recognition of
gain in an amount equal to the gain recognition otherwise avoided by
reason of the transfer. The amount of this basis reduction is $100,
causing a $100 gain to be recognized on the sale.
Example 5. Absence of a view. (i) In Year 1, P buys all the stock of
T for $100, and T becomes a member of the P group. T has 2 historic
assets, asset 1 with a basis of $40 and
[[Page 340]]
value of $90, and asset 2 with a basis of $60 and value of $10. In Year
2, T sells asset 1 for $90. Under the investment adjustment system, P's
basis in the T stock increases from $100 to $150. Asset 2 is not
essential to the operation of T's business, and T distributes asset 2 to
P in Year 5 with a view to having the group retain its $50 loss inherent
in the asset. Under Sec. 1.1502-13(f)(2), and the application of the
principles of this rule in section 267(f), T has a $50 intercompany loss
that is deferred. Under Sec. 1.1502-32(b)(3)(iv), the distribution
reduces P's basis in the T stock by $10 to $140 in Year 5. In Year 6, P
sells all the T stock for $90. Under the acceleration rule of
Sec. 1.1502-13(d), and the application of the principles of this rule in
section 267(f), T's intercompany loss is ordinarily taken into account
immediately before P's sale of the T stock. Assuming that the loss is
absorbed by the group, P's basis in T's stock would be reduced from $140
to $90 under Sec. 1.1502-32(b)(3)(i), and there would be no gain or loss
from the stock disposition. (Alternatively, if the loss is not absorbed
and the loss is reattributed to P under paragraph (g) of this section,
the reattribution would reduce P's basis in T's stock from $140 to $90.)
(ii) A $50 loss is reflected both in T's basis in asset 2 and in P's
basis in the T stock. Because the distribution results in the loss with
respect to asset 2 being taken into account before the corresponding
loss reflected in the T stock, and asset 2 is an historic asset of T,
the distribution is not with the view described in paragraph (e)(2) of
this section.
Example 6. Extending the time period for dispositions. (i) In Year
1, P buys all the stock of T for $100, and T becomes a member of the P
group. T has an asset with a basis of $0 and a value of $100. T sells
the asset for $100. Under the investment adjustment system, P's basis in
the T stock increases from $100 to $200. At the beginning of Year 5, P
transfers to T an asset with a basis of $0 and a value of $100 in a
transaction to which section 351 applies, with the view described in
paragraph (e)(2)(i) of this section. Within 2 years, P agrees to sell
all the stock of T for $200 at the end of Year 7.
(ii) Under paragraph (e)(2) (i) of this section, P's disposition of
the T stock at the end of Year 7 is treated as occurring within the 2-
year period following P's transfer of the asset to T, because the
disposition is pursuant to an agreement reached within 2 years after the
transfer. Accordingly, under paragraph (e)(2)(ii) of this section, P
must reduce the basis in its T stock by $100 immediately before the
sale. This result is reached whether or not the agreement is in writing.
P's disposition would also have been treated as occurring within the 2-
year period if the disposition were pursuant to an option issued within
the period.
(f) No tiering up of certain adjustments--(1) General rule. If the
basis of stock of a subsidiary (S) owned by a another member (P) is
reduced under this section on the deconsolidation of the S stock, no
corresponding adjustment is made under Sec. 1.1502-32 to the basis of
the stock of P if there is a disposition or deconsolidation of the P
stock in the same transaction. If there is a disposition or
deconsolidation in the same transaction of less than all the stock of P,
appropriate adjustments must be made under Sec. 1.1502-32 with respect
to P (and any higher-tier members).
(2) Example. The principles of this paragraph (f) are illustrated by
the following example.
Example. (i) P, the common parent of a group, owns all the stock of
S, S owns all the stock of S1, and S1 owns all the stock of S2. P's
basis in the S stock is $100, S's basis in the S1 stock is $100, and
S1's basis in the S2 stock is $100. In Year 1, S2 buys all the stock of
T for $100. T has an asset with a basis of $0 and a value of $100. In
Year 2, T sells the asset for $100. Under the investment adjustment
system, the basis of each subsidiary's stock increases from $100 to
$200. In Year 6, S sells all the stock of S1 for $100 to A, an
individual, and recognizes a loss of $100. S1, S2, and T are not members
of a consolidated group immediately after the sale because the new S1
group does not file a consolidated return for its first tax year.
(ii) Under paragraph (a)(1) of this section, no deduction is allowed
to S for its loss from the sale of the S1 stock. Under Sec. 1.1502-
32(b)(3)(iii), S's disallowed loss is treated as a noncapital,
nondeductible expense for Year 6 that reduces P's basis in the S stock.
(Under Sec. 1.1502-33, S's earnings and profits for Year 6 are reduced
by the amount of S's disallowed loss for earnings and profits purposes
and, under Sec. 1.1502-33(b), this reduction is reflected in P's
earnings and profits.)
(iii) Under paragraphs (b)(1) and (f)(1) of this section, because
the stock of T and S2 are deconsolidated as a result of S's sale of the
S1 stock, the basis of their stock must be reduced immediately before
the sale from $200 to $100 (the value immediately before the
deconsolidation). Under Sec. 1.1502-32(b)(3)(iii), the basis reductions
are treated as noncapital, nondeductible expenses for Year 6. Under
paragraph (f)(2) of this section, however, because the S2 stock is
deconsolidated in the same transaction, the basis reduction to the T
stock does not tier up under Sec. 1.1502-32(a)(3). Similarly, because
the S1 stock is disposed of in the same transaction, the basis reduction
to the S2 stock also does not tier up. (Comparable treatment
[[Page 341]]
applies for purposes of earnings and profits under Sec. 1.1502-33.)
(g) Reattribution of subsidiary's losses to common parent--(1)
Reattribution rule. If a member disposes of stock of a subsidiary and
the member's loss would be disallowed under paragraph (a)(1) of this
section, the common parent may make an irrevocable election to
reattribute to itself any portion of the net operating loss carryovers
and net capital loss carryovers attributable to the subsidiary (and any
lower tier subsidiary) without regard to the order in which they were
incurred. The amount reattributed may not exceed the amount of loss that
would be disallowed if no election is made under this paragraph (g). For
this purpose, the amount of loss that would be disallowed is determined
by applying paragraph (c)(1) of this section (without taking into
account the requirement under paragraph (c)(3) of this section that a
statement be filed) and by not taking the reattribution into account.
The amount of loss that would be disallowed and the losses that may be
reattributed are determined immediately after the disposition, but the
reattribution is deemed to be made immediately before the disposition.
The common parent succeeds to the reattributed losses as if the losses
were succeeded to in a transaction described in section 381(a). Any
owner shift of the subsidiary (including any deemed owner shift
resulting from section 382(g)(4)(D) or 382(l)(3)) in connection with the
disposition is not taken into account under section 382 with respect to
the reattributed losses. See Sec. 1.1502-96(d) for rules relating to
section 382 and the reattribution of losses under this paragraph (g).
(2) Insolvency limitation. If the subsidiary whose losses are to be
reattributed, or any higher tier subsidiary, is insolvent within the
meaning of section 108(d)(3) at the time of the disposition, losses of
the subsidiary may be reattributed only to the extent they exceed the
sum of the separate insolvencies of any subsidiaries (taking into
account only the subsidiary and its higher tier subsidiaries) that are
insolvent. For purposes of determining insolvency, liabilities owed to
higher tier members are not taken into account, and stock of a
subsidiary that is limited and preferred as to dividends and that is not
owned by higher tier members is treated as a liability to the extent of
the amount of preferred distributions to which the stock would be
entitled if the subsidiary were liquidated on the date of the
disposition.
(3) Examples. The principles of this paragraph (g) are illustrated
by the following examples.
Example 1. Basic reattribution case. (i) P, the common parent of a
group, forms S with a $100 contribution. For Year 1, S has a $60
operating loss that is not absorbed and is included in the group's
consolidated net operating loss that is carried over under
Sec. Sec. 1.1502-21A or 1.1502-21. Under Sec. 1.1502-32(b)(3)(i), P's
basis in the S stock is not reduced to reflect S's loss because the loss
is not absorbed. Under Sec. 1.1502-33(b), S's deficit in earnings and
profits is reflected in P's earnings and profits even though the loss is
not absorbed for tax purposes. During Year 2, S's remaining assets
appreciate in value and P sells the S stock for $55. But for an election
to reattribute losses under paragraph (g) of this section, P would have
a $45 loss from the sale that would be disallowed.
(ii) P elects under paragraph (g)(1) of this section to reattribute
to itself $45 of S's losses (the maximum amount permitted). As a result,
$45 of the $60 net operating loss carryover attributable to S is
reattributed to P. This reattributed loss may be included in the net
operating loss carryover to subsequent consolidated return years of the
P group. P succeeds to these losses as if the losses were succeeded to
in a transaction described in section 381(a) and they retain their
character as ordinary losses. The remaining $15 of net operating loss
carryover attributable to S is carried over to the first separate return
year of S.
(iii) Under Sec. 1.1502-32(b)(3)(iii), the reattribution of $45 of
loss is a noncapital, nondeductible expense that reduces P's basis in
the S stock from $100 to $55 immediately before the disposition.
Consequently, P does not recognize any gain or loss from the
disposition.
(iv) Assume that $20 of S's losses arose in Year 1 and $40 in Year
2, and that P elects to reattribute all $40 from Year 2 and $5 from Year
1. P succeeds to these losses as if the losses were succeeded to in a
transaction described in section 381(a), and the losses retain their
character as ordinary losses arising in Years 1 and 2. The losses
continue to be subject to any limitations originally applicable to S,
but P succeeds to them and may absorb the losses independently of S.
(For example, P's use of the Year 2 losses does not depend on S's use of
the Year 1 losses that were not reattributed to P.)
[[Page 342]]
Example 2. Lower tier subsidiary. (i) P, the common parent of a
group, forms S with a $100 contribution. S then forms T with a $40
contribution and T borrows $60. For Year 1, S has a $30 operating loss
and T has a $55 operating loss. The losses are not absorbed and are
included in the group's consolidated net operating loss that is carried
over under Sec. Sec. 1.1502-21A or 1.1502-21. Under Sec. 1.1502-
32(b)(3)(i), P's basis in the S stock, and S's basis in the T stock, are
not reduced to reflect the S and T losses because the group is unable to
absorb the losses. (Under Sec. 1.1502-33(b), the deficits in earnings
and profits of S and T are tiered up for earnings and profits purposes
even though not absorbed for tax purposes.) During Year 2, P sells the S
stock for $30 ($100 invested, minus S's $30 loss and $40 unrealized loss
from its investment in the T stock). But for an election to reattribute
losses under paragraph (g) of this section, P would have a $70 loss from
the sale, which would be disallowed.
(ii) S's $30 portion of the net operating loss carryover may be
reattributed to P under paragraph (g)(1) of this section. Because T is
insolvent by $15, paragraph (g)(2) of this section provides that only
$40 of its $55 portion of the net operating loss carryover may be
reattributed to P under paragraph (g)(1) of this section. There is no
limitation, however, on which $40 of T's $55 loss may be reattributed.
(iii) P elects under paragraph (g)(1) of this section to reattribute
to itself $40 of T's losses (the maximum amount permitted). P does not
elect, however, to reattribute to itself any of S's losses. As a result,
$40 of the $85 net operating loss carryover is reattributed to P. This
reattributed loss may be included in the net operating loss carryover to
subsequent consolidated return years of the P group. Of the $45
remaining net operating loss carryover, the $15 attributable to T and
$30 attributable to S are carried over to their first separate return
years.
(iv) Under Sec. 1.1502-32(b)(3)(iii), the reattribution of loss is a
noncapital, nondeductible expense that reduces P's basis in the S stock
to $60 immediately before the disposition. Consequently, P recognizes
only a $30 loss from the disposition of its S stock ($30 sale proceeds
and $60 basis), and this loss is disallowed.
Example 3. Separate return limitation year losses. (i) P, the common
parent of a group, buys the stock of S for $100. S has a net operating
loss carryover of $40 from a separate return limitation year, and assets
with a value and basis of $100. The assets of S decline in value by $40,
and P sells all the stock of S for $60. But for an election to
reattribute losses under this paragraph (g), P would have a $40 loss on
the sale of S that would be disallowed.
(ii) S's $40 loss carryover from a separate return limitation year
may be reattributed to P under paragraph (g)(1) of this section.
(iii) P elects under paragraph (g)(1) of this section to reattribute
to itself S's $40 (loss the maximum amount permitted). Following the
reattribution, the loss is included in the net operating loss carryover
to subsequent consolidated return years of the P group.
(iv) Under Sec. 1.1502-32(b)(3)(iii), the reattribution of loss is a
noncapital, nondeductible expense that reduces P's basis in the S stock
to $60 immediately before the disposition. Consequently, P recognizes no
gain or loss from the disposition of its S stock. For P's treatment of
the $40 reattributed loss, see Sec. 1.1502-1(f).
(4) Time and manner of making the election--(i) In general. The
election described in paragraph (g)(1) of this section must be made in a
separate statement entitled ``this is an election under Sec. 1.1502-
20(g)(1) To reattribute losses of [insert names and employer
identification numbers (E.I.N.) of each subsidiary whose losses are
reattributed] to [insert name and employer identification number of
common parent].'' The statement must include the following information--
(A) For each subsidiary, the amount of each net operating loss and
net capital loss, and the year in which each arose, that is reattributed
to the common parent;
(B) If a subsidiary ceases to be a member, the name and employer
identification number of the person acquiring the subsidiary's stock;
and
(C) If the common parent is reattributing to itself all or any part
of a section 382 limitation pursuant to Sec. 1.1502-96(d)(5), the
information required by paragraph (g)(4)(ii) of this section.
The statement must be signed by the common parent, and by each
subsidiary with respect to which loss is reattributed under this
paragraph (g) that does not remain a member of the common parent's group
immediately following the disposition. The statement must be filed with
the group's income tax return for the tax year of the disposition and a
copy of the statement must be retained by the subsidiary. If the
acquirer is a subsidiary in a consolidated group, the name and employer
identification number of the common parent of the group must be included
in
[[Page 343]]
the statement, and a copy of the statement must also be delivered to the
common parent.
(ii) Reattribution of section 382 limitation. The information
required by this paragraph (g)(4)(ii) is a separate list for each
subsidiary (or a separate list for two or more subsidiaries that are
members of a loss subgroup whose pre-change subgroup losses are being
reattributed) with respect to which an apportionment of a separate
section 382 limitation or subgroup section 382 limitation is being made,
setting forth--
(A) The name and E.I.N. of the subsidiary (or subsidiaries that were
members of a loss subgroup);
(B) A statement entitled ``THIS IS AN ELECTION UNDER Sec. 1.1502-
96(d)(5) TO APPORTION ALL OR PART OF [insert A SEPARATE or A SUBGROUP or
BOTH A SEPARATE AND A SUBGROUP] SECTION 382 LIMITATION TO [insert name
and E.I.N. of the common parent]'';
(C) The date of the ownership change giving rise to the separate
section 382 limitation or subgroup section 382 limitation that is being
apportioned;
(D) The amount of the separate (or subgroup) section 382 limitation
for the taxable year in which the reattribution occurs (determined
without reference to any apportionment under this section or
Sec. 1.1502-95(c));
(E) The amount of each net operating loss carryover or capital loss
carryover, and the year in which it arose, of the subsidiary (or
subsidiaries) that is subject to the separate section 382 limitation or
subgroup section 382 limitation that is being apportioned to the common
parent, and the amount of the value element and adjustment element of
that limitation that is apportioned to the common parent.
(iii) Filing of subsidiary's copy of statement. The subsidiary whose
losses are reattributed (or the common parent of any consolidated group
that acquires the subsidiary or lower tier subsidiary) must attach its
copy of the statement described in paragraph (g)(5)(i) of this section
to its income return for the first tax year ending after the due date,
including extensions, of the return in which the election required by
paragraph (g)(5)(i) of this section is to be filed.
(h) Effective dates--(1) General rule. Except as otherwise provided
in this paragraph (h), this section applies with respect to dispositions
and deconsolidations on or after February 1, 1991. For this purpose,
dispositions deferred under Sec. 1.1502-13 are deemed to occur at the
time the deferred gain or loss is taken into account unless the stock
was deconsolidated before February 1, 1991. If stock of a subsidiary
became worthless during a taxable year including February 1, 1991, the
disposition with respect to the stock is treated as occurring on the
date the stock became worthless.
(2) Election to accelerate effective date--(i) In general. A group
may make an irrevocable election to apply this section to all its
members, instead of Sec. 1.337(d)-2, with respect to all dispositions
and deconsolidations on or after November 19, 1990.
(ii) Time and manner of making the election--in general. The
election described in paragraph (h)(2)(i) of this section must be made
in a separate statement entitled ``this is an election under
Sec. 1.1502-20(h)(2) to accelerate the application of Sec. 1.1502-20 to
the consolidated group of which [insert name and employer identification
number of common parent] is the common parent.'' The statement must be
signed by the common parent and filed with the group's income tax return
for the tax year of the first disposition or deconsolidation to which
the election applies. If the separate statement required under this
paragraph (h) (2) (ii) is to be filed with a return the due date
(including extensions) of which is before April 16, 1991, the statement
may be filed with an amended return for the year of the disposition or
deconsolidation. Any other filings required under this Sec. 1.1502-20,
such as the statement required under Sec. 1.1502-20(c)(3), which
ordinarily cannot be made with an amended return, must be made at such
time and in such manner as permitted by the Commissioner.
(3) Binding contract rule. For purposes of this paragraph (h), if a
disposition or deconsolidation is pursuant to a binding written contract
entered into before March 9, 1990, and in continuous effect until the
disposition or deconsolidation, the date the contract
[[Page 344]]
became binding is treated as the date of the disposition or
deconsolidation.
(4) Application of Sec. 1.1502-20T to certain transactions--(i) In
general. If a group files the certification described in paragraph
(h)(4)(ii) of this section, it may apply Sec. 1.1502-20T (as contained
in the CFR edition revised as of April 1, 1990), to all of its members
with respect to all dispositions and deconsolidations by the certifying
group to which Sec. 1.1502-20T otherwise applied by its terms
occurring--
(A) On or after March 9, 1990 (but only if not pursuant to a binding
contract described in Sec. 1.337(d)-1T(e)(2) (as contained in the CFR
edition revised as of April 1, 1990) that was entered into before March
9, 1990); and
(B) Before November 19, 1990 (or thereafter, if pursuant to a
binding contract described in Sec. 1.1502-20T(g)(3) that was entered
into on or after March 9, 1990 and before November 19, 1990).
The certification under this paragraph (h)(4)(i) with respect to the
application of Sec. 1.1502-20T to any transaction described in this
paragraph (h)(4)(i) may not be withdrawn and, if the certification is
filed, Sec. 1.1502-20T must be applied to all such transactions on all
returns (including amended returns) on which such transactions are
included.
(ii) Time and manner of filing certification. The certification
described in paragraph (h)(4)(i) of this section must be made in a
separate statement entitled ``[insert name and employer identification
number of common parent] hereby certifies under Sec. 1.1502-20 (h)(4)
that the group of which it is the common parent is applying Sec. 1.1502-
20T to all transactions to which that section otherwise applied by its
terms.'' The statement must be signed by the common parent and filed
with the group's income tax return for the taxable year of the first
disposition or deconsolidation to which the certification applies. If
the separate statement required under this paragraph (h)(4) is to be
filed with a return the due date (including extensions) of which is
before November 16, 1991, the statement may be filed with an amended
return for the year of the disposition or deconsolidation that is filed
within 180 days after September 13, 1991. Any other filings required
under Sec. 1.1502-20T, such as the statement required under Sec. 1.1502-
20T(f)(5), may be made with the amended return, regardless of whether
Sec. 1.1502-20T permits such filing by amended return.
(5) Cross reference. For transitional loss limitation rules, see
Secs. 1.337(d)-1 and 1.337(d)-2.
[T.D. 8364, 56 FR 47392, Sept. 19, 1991; 57 FR 53550, Nov. 12, 1992, as
amended by T.D. 8560, 59 FR 41680, Aug. 15, 1994; T.D. 8597, 60 FR
36709, July 18, 1995; T.D. 8677, 61 FR 33323, June 27, 1996; T.D. 8597,
62 FR 12098, Mar. 14, 1997; T.D. 8823, 64 FR 36099, July 2, 1999; T.D.
8824, 64 FR 36127, July 2, 1999]
Computation of Consolidated Items
Sec. 1.1502-21 Net operating losses.
(a) Consolidated net operating loss deduction. The consolidated net
operating loss deduction (or CNOL deduction) for any consolidated return
year is the aggregate of the net operating loss carryovers and
carrybacks to the year. The net operating loss carryovers and carrybacks
consist of--
(1) Any CNOLs (as defined in paragraph (e) of this section) of the
consolidated group; and
(2) Any net operating losses of the members arising in separate
return years.
(b) Net operating loss carryovers and carrybacks to consolidated
return and separate return years. Net operating losses of members
arising during a consolidated return year are taken into account in
determining the group's CNOL under paragraph (e) of this section for
that year. Losses taken into account in determining the CNOL may be
carried to other taxable years (whether consolidated or separate) only
under this paragraph (b).
(1) Carryovers and carrybacks generally. The net operating loss
carryovers and carrybacks to a taxable year are determined under the
principles of section 172 and this section. Thus, losses permitted to be
absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they arose, and losses carried from
taxable years ending on the same date, and which are available to offset
consolidated taxable income for the year, generally are absorbed on
[[Page 345]]
a pro rata basis. Additional rules provided under the Internal Revenue
Code or regulations also apply. See, e.g., section 382(l)(2)(B) (if
losses are carried from the same taxable year, losses subject to
limitation under section 382 are absorbed before losses that are not
subject to limitation under section 382). See Example 2 of paragraph
(c)(1)(iii) of this section for an illustration of pro rata absorption
of losses subject to a SRLY limitation.
(2) Carryovers and carrybacks of CNOLs to separate return years--(i)
In general. If any CNOL that is attributable to a member may be carried
to a separate return year of the member, the amount of the CNOL that is
attributable to the member is apportioned to the member (apportioned
loss) and carried to the separate return year. If carried back to a
separate return year, the apportioned loss may not be carried back to an
equivalent, or earlier, consolidated return year of the group; if
carried over to a separate return year, the apportioned loss may not be
carried over to an equivalent, or later, consolidated return year of the
group. For rules permitting the reattribution of losses of a subsidiary
to the common parent when loss is disallowed on the disposition of
subsidiary stock, see Sec. 1.1502-20(g).
(ii) Special rules--(A) Year of departure from group. If a
corporation ceases to be a member during a consolidated return year, net
operating loss carryovers attributable to the corporation are first
carried to the consolidated return year, and only the amount so
attributable that is not absorbed by the group in that year is carried
to the corporation's first separate return year. For rules concerning a
member departing a subgroup, see paragraph (c)(2)(vii) of this section.
(B) Offspring rule. In the case of a member that has been a member
continuously since its organization (determined without regard to
whether the member is a successor to any other corporation), the CNOL
attributable to the member is included in the carrybacks to consolidated
return years before the member's existence. If the group did not file a
consolidated return for a carryback year, the loss may be carried back
to a separate return year of the common parent under paragraph (b)(2)(i)
of this section, but only if the common parent was not a member of a
different consolidated group or of an affiliated group filing separate
returns for the year to which the loss is carried or any subsequent year
in the carryback period. Following an acquisition described in
Sec. 1.1502-75(d)(2) or (3), references to the common parent are to the
corporation that was the common parent immediately before the
acquisition.
(iii) Equivalent years. Taxable years are equivalent if they bear
the same numerical relationship to the consolidated return year in which
a CNOL arises, counting forward or backward from the year of the loss.
For example, in the case of a member's third taxable year (which was a
separate return year) that preceded the consolidated return year in
which the loss arose, the equivalent year is the third consolidated
return year preceding the consolidated return year in which the loss
arose. See paragraph (b)(3)(iii) of this section for certain short
taxable years that are disregarded in making this determination.
(iv) Amount of CNOL attributable to a member. The amount of a CNOL
that is attributable to a member is determined by a fraction the
numerator of which is the separate net operating loss of the member for
the year of the loss and the denominator of which is the sum of the
separate net operating losses for that year of all members having such
losses. For this purpose, the separate net operating loss of a member is
determined by computing the CNOL by reference to only the member's items
of income, gain, deduction, and loss, including the member's losses and
deductions actually absorbed by the group in the taxable year (whether
or not absorbed by the member).
(v) Examples. For purposes of the examples in this section, unless
otherwise stated, all groups file consolidated returns, all corporations
have calendar taxable years, the facts set forth the only corporate
activity, value means fair market value and the adjusted basis of each
asset equals its value, all transactions are with unrelated persons, and
the application of any limitation or threshold under section 382 is
[[Page 346]]
disregarded. The principles of this paragraph (b)(2) are illustrated by
the following examples:
Example 1. Offspring rule. (i) During Year 1, Individual A forms P
and T, and they each file a separate return. P forms S on March 15 of
Year 2, and P and S file a consolidated return. P acquires all the stock
of T from Individual A at the beginning of Year 3, and T becomes a
member of the P group. P's acquisition of T is not an ownership change
within the meaning of section 382. P, S, and T sustain a $1,100 CNOL in
Year 3 and, under paragraph (b)(2)(iv) of this section, the loss is
attributable $200 to P, $300 to S, and $600 to T.
(ii) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL that
is attributable to P and S ($200 + $300) may be carried to P's separate
return in Year 1. Even though S was not in existence in Year 1, the $300
amount of the CNOL attributable to S may be carried back to P's separate
return in Year 1 because S (unlike T) has been a member of the P group
since its organization and P is a qualified parent under paragraph
(b)(2)(ii)(B) of this section. To the extent not absorbed in that year,
the loss may then be carried to the P group's return in Year 2. The $600
amount of the CNOL attributable to T is a net operating loss carryback
to T's separate return in Year 1, and if not absorbed in Year 1, then to
Year 2.
Example 2. Departing members. (i) The facts are the same as in
Example 1. In addition, on June 15 of Year 4, P sells all the stock of
T. The P group's consolidated return for Year 4 includes the income of T
through June 15. T files a separate return for the period from June 16
through December 31.
(ii) $600 of the Year 3 CNOL attributable to T is apportioned to T
and is carried back to its separate return in Year 1. To the extent the
$600 is not absorbed in T's separate return in Year 1 or Year 2, it is
carried to the consolidated return in Year 4 before being carried to T's
separate return in Year 4. Any portion of the loss not absorbed in T's
Year 1 or Year 2 or in the P group's Year 4 is then carried to T's
separate return in Year 4.
Example 3. Offspring rule following acquisition. (i) Individual A
owns all of the stock of P, the common parent of a consolidated group.
In Year 1, B, an individual unrelated to Individual A, forms T. P
acquires all of the stock of T at the beginning of Year 3, and T becomes
a member of the P group. The P group has $200 of consolidated taxable
income in Year 2, and $300 of consolidated taxable income in Year 3
(computed without regard to the CNOL deduction). At the beginning of
Year 4, T forms a subsidiary, Y, in a transaction described in section
351. The P group has a $300 consolidated net operating loss in Year 4,
and under paragraph (b)(2)(iv) of this section, the loss is attributable
entirely to Y.
(ii) Even though Y was not in existence in Year 2, $300, the amount
of the consolidated net operating loss attributable to Y, may be carried
back to the P group's Year 2 consolidated return under paragraph
(b)(2)(ii)(B) of this section because Y has been a member of the P group
since its organization. To the extent not absorbed in that year, the
loss may then be carried to the P group's consolidated return in Year 3.
(3) Special rules--(i) Election to relinquish carryback. A group may
make an irrevocable election under section 172(b)(3) to relinquish the
entire carryback period with respect to a CNOL for any consolidated
return year. Except as provided in paragraph (b)(3)(ii)(B) of this
section, the election may not be made separately for any member (whether
or not it remains a member), and must be made in a separate statement
entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-21(b)(3)(i) TO WAIVE
THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION 172(b)(3) FOR THE
[insert consolidated return year] CNOLs OF THE CONSOLIDATED GROUP OF
WHICH [insert name and employer identification number of common parent]
IS THE COMMON PARENT.'' The statement must be signed by the common
parent and filed with the group's income tax return for the consolidated
return year in which the loss arises.
(ii) Special elections--(A) Groups that include insolvent financial
institutions. For rules applicable to relinquishing the entire carryback
period with respect to losses attributable to insolvent financial
institutions, see Sec. 301.6402-7 of this chapter.
(B) Acquisition of member from another consolidated group. If one or
more members of a consolidated group becomes a member of another
consolidated group, the acquiring group may make an irrevocable election
to relinquish, with respect to all consolidated net operating losses
attributable to the member, the portion of the carryback period for
which the corporation was a member of another group, provided that any
other corporation joining the acquiring group that was affiliated with
the member immediately before it joined the acquiring group is also
included in the waiver. This election is not a yearly election and
applies to all losses that would otherwise be subject
[[Page 347]]
to a carryback to a former group under section 172. The election must be
made in a separate statement entitled ``THIS IS AN ELECTION UNDER
SECTION 1.1502-21(b)(3)(ii)(B) TO WAIVE THE PRE-[insert first taxable
year for which the member (or members) was not a member of another
group] CARRYBACK PERIOD FOR THE CNOLs attributable to [insert names and
employer identification number of members].'' The statement must be
filed with the acquiring consolidated group's original income tax return
for the year the corporation (or corporations) became a member, and it
must be signed by the common parent and each of the members to which it
applies.
(iii) Short years in connection with transactions to which section
381(a) applies. If a member distributes or transfers assets to a
corporation that is a member immediately after the distribution or
transfer in a transaction to which section 381(a) applies, the
transaction does not cause the distributor or transferor to have a short
year within the consolidated return year of the group in which the
transaction occurred that is counted as a separate year for purposes of
determining the years to which a net operating loss may be carried.
(iv) Special status losses. [Reserved]
(c) Limitations on net operating loss carryovers and carrybacks from
separate return limitation years--(1) SRLY limitation--(i) General rule.
Except as provided in paragraph (g) of this section (relating to an
overlap with section 382), the aggregate of the net operating loss
carryovers and carrybacks of a member arising (or treated as arising) in
SRLYs that are included in the CNOL deductions for all consolidated
return years of the group under paragraph (a) of this section may not
exceed the aggregate consolidated taxable income for all consolidated
return years of the group determined by reference to only the member's
items of income, gain, deduction, and loss. For this purpose--
(A) Consolidated taxable income is computed without regard to CNOL
deductions;
(B) Consolidated taxable income takes into account the member's
losses and deductions (including capital losses) actually absorbed by
the group in consolidated return years (whether or not absorbed by the
member);
(C) In computing consolidated taxable income, the consolidated
return years of the group include only those years, including the year
to which the loss is carried, that the member has been continuously
included in the group's consolidated return, but exclude--
(1) For carryovers, any years ending after the year to which the
loss is carried; and
(2) For carrybacks, any years ending after the year in which the
loss arose; and
(D) The treatment under Sec. 1.1502-15 of a built-in loss as a
hypothetical net operating loss carryover in the year recognized is
solely for purposes of determining the limitation under this paragraph
(c) with respect to the loss in that year and not for any other purpose.
Thus, for purposes of determining consolidated taxable income for any
other losses, a built-in loss allowed under this section in the year it
arises is taken into account.
(ii) Losses treated as arising in SRLYs. If a net operating loss
carryover or carryback did not arise in a SRLY but is attributable to a
built-in loss (as defined under Sec. 1.1502-15), the carryover or
carryback is treated for purposes of this paragraph (c) as arising in a
SRLY if the built-in loss was not allowed, after application of the SRLY
limitation, in the year it arose. For an illustration, see Sec. 1.1502-
15(d), Example 5. But see Sec. 1.1502-15(g)(1).
(iii) Examples. The principles of this paragraph (c)(1) are
illustrated by the following examples:
Example 1. Determination of SRLY limitation. (i) Individual A owns
P. In Year 1, Individual A forms T, and T sustains a $100 net operating
loss that is carried forward. P acquires all the stock of T at the
beginning of Year 2, and T becomes a member of the P group. The P group
has $300 of consolidated taxable income in Year 2 (computed without
regard to the CNOL deduction). Such consolidated taxable income would be
$70 if determined by reference to only T's items.
(ii) T's $100 net operating loss carryover from Year 1 arose in a
SRLY. See Sec. 1.1502-1(f)(2)(iii). P's acquisition of T was not an
ownership change as defined by section
[[Page 348]]
382(g). Thus, the $100 net operating loss carryover is subject to the
SRLY limitation in paragraph (c)(1) of this section. The SRLY limitation
for Year 2 is consolidated taxable income determined by reference to
only T's items, or $70. Thus, $70 of the loss is included under
paragraph (a) of this section in the P group's CNOL deduction for Year
2.
(iii) The facts are the same as in paragraph (i) of this Example 1,
except that such consolidated taxable income (computed without regard to
the CNOL deduction and by reference to only T's items) for Year 2 is a
loss (a CNOL) of $370. Because the SRLY limitation may not exceed the
consolidated taxable income determined by reference to only T's items,
and such items aggregate to a CNOL, T's $100 net operating loss
carryover from Year 1 is not allowed under the SRLY limitation in Year
2. Moreover, if consolidated taxable income (computed without regard to
the CNOL deduction and by reference to only T's items) did not exceed
$370 in Year 3, the carryover would still be restricted under paragraph
(c) of this section in Year 3, because the aggregate consolidated
taxable income for all consolidated return years of the group computed
by reference to only T's items would not be a positive amount.
Example 2. Net operating loss carryovers. (i) In Year 1, Individual
A forms P, and P sustains a $40 net operating loss that is carried
forward. P has no income in Year 2. Individual A also owns T which
sustains a net operating loss of $50 in Year 2 that is carried forward.
P acquires the stock of T from Individual A during Year 3, but T is not
a member of the P group for each day of the year. P and T file separate
returns and sustain net operating losses of $120 and $60, respectively,
for Year 3. The P group files consolidated returns beginning in Year 4.
During Year 4, the P group has $160 of consolidated taxable income
(computed without regard to the CNOL deduction). Such consolidated
taxable income would be $70 if determined by reference to only T's
items. These results are summarized as follows:
----------------------------------------------------------------------------------------------------------------
Separate Separate Separate/ Consolidated
-------------------------------- affiliated ---------------
----------------
Year 1 Year 2 Year 3 Year 4
----------------------------------------------------------------------------------------------------------------
P............................................... $ (40) $0 $ (120) $90
T............................................... 0 (50) (60) 70
---------------
CTI............................................. .............. .............. .............. 160
----------------------------------------------------------------------------------------------------------------
(ii) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to
the P group. See Sec. 1.1502-1(f)(2)(i). Thus, P's $40 net operating
loss arising in Year 1 and $120 net operating loss arising in Year 3 are
not subject to the SRLY limitation under paragraph (c) of this section.
Under the principles of section 172, paragraph (b) of this section
requires that the loss arising in Year 1 be the first loss absorbed by
the P group in Year 4. Absorption of this loss leaves $120 of the
group's consolidated taxable income available for offset by other loss
carryovers.
(iii) T's Year 2 and Year 3 are SRLYs with respect to the P group.
See Sec. 1.1502-1(f)(2)(ii). P's acquisition of T was not an ownership
change as defined by section 382(g). Thus, T's $50 net operating loss
arising in Year 2 and $60 net operating loss arising in Year 3 are
subject to the SRLY limitation. Under paragraph (c)(1) of this section,
the SRLY limitation for Year 4 is $70, and under paragraph (b) of this
section, T's $50 loss from Year 2 must be included under paragraph (a)
of this section in the P group's CNOL deduction for Year 4. The
absorption of this loss leaves $70 of the group's consolidated taxable
income available for offset by other loss carryovers.
(iv) P and T each carry over net operating losses to Year 4 from a
taxable year ending on the same date (Year 3). The losses carried over
from Year 3 total $180. Under paragraph (b) of this section, the losses
carried over from Year 3 are absorbed on a pro rata basis, even though
one arises in a SRLY and the other does not. However, the group cannot
absorb more than $20 of T's $60 net operating loss arising in Year 3
because its $70 SRLY limitation for Year 4 is reduced by T's $50 Year 2
SRLY loss already included in the CNOL deduction for Year 4. Thus, the
absorption of Year 3 losses is as follows:
Amount of P's Year 3 losses absorbed = $120/($120 + $20) x $70 =
$60.
Amount of T's Year 3 losses absorbed = $20/($120 + $20) x $70 =
$10.
(v) The absorption of $10 of T's Year 3 loss further reduces T's
SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by the
$60 net operating loss already included in the CNOL deductions for Year
4 under paragraph (a) of this section).
(vi) P carries its remaining $60 Year 3 net operating loss and T
carries its remaining $50 Year 3 net operating loss over to Year 5.
Assume that, in Year 5, the P group has $90 of consolidated taxable
income (computed without regard to the CNOL deduction). The group's CTI
determined by reference to only T's items is a CNOL of $4. For Year 5,
the CNOL deduction is $66, which includes $60 of P's Year 3 loss and $6
of T's Year 3 loss (the
[[Page 349]]
aggregate consolidated taxable income for Years 4 and 5 determined by
reference to T's items, or $66, reduced by T's SRLY losses actually
absorbed by the group in Year 4, or $60).
Example 3. Net operating loss carrybacks. (i) P owns all of the
stock of S and T. The members of the P group contribute the following to
the consolidated taxable income of the P group for Years 1, 2, and 3:
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Total
----------------------------------------------------------------------------------------------------------------
P............................................... $100 $60 $80 $240
S............................................... 20 20 30 70
T............................................... 30 10 (50) (10)
CTI............................................. 150 90 60 300
----------------------------------------------------------------------------------------------------------------
(ii) P sells all of the stock of T to Individual A at the beginning
of Year 4. For its Year 4 separate return year, T has a net operating
loss of $30.
(iii) T's Year 4 is a SRLY with respect to the P group. See
Sec. 1.1502-1(f)(1). T's $30 net operating loss carryback to the P group
from Year 4 is not allowed under paragraph (c) of this section to be
included in the CNOL deduction under paragraph (a) of this section for
Year 1, 2, or 3, because the P group's consolidated taxable income would
not be a positive amount if determined by reference to only T's items
for all consolidated return years through Year 4 (without regard to the
$30 net operating loss). The $30 loss is carried forward to T's Year 5
and succeeding taxable years as provided under the Internal Revenue
Code.
Example 4. Computation of SRLY limitation for built-in losses
treated as net operating loss carryovers. (i) Individual A owns P. In
Year 1, Individual A forms T by contributing $300 and T sustains a $100
net operating loss. During Year 2, T's assets decline in value by $100.
At the beginning of Year 3, P acquires all the stock of T from
Individual A, and T becomes a member of the P group in a transaction
that does not result in an ownership change under section 382(g). At the
time of the acquisition, T has a $100 net unrealized built-in loss,
which exceeds the threshold requirements of section 382(h)(3)(B). During
Year 3, T recognizes its unrealized loss as a $100 ordinary loss. The
members of the P group contribute the following to the consolidated
taxable income of the P group for Years 3 and 4 (computed without regard
to T's recognition of its unrealized loss and any CNOL deduction under
this section):
------------------------------------------------------------------------
Year 3 Year 4 Total
------------------------------------------------------------------------
P group (without T).......................... $100 $100 $200
T............................................ 60 40 100
CTI.......................................... 160 140 300
------------------------------------------------------------------------
(ii) Under Sec. 1.1502-15(a), T's $100 of ordinary loss in Year 3
constitutes a built-in loss that is subject to the SRLY limitation under
paragraph (c) of this section. The amount of the limitation is
determined by treating the deduction as a net operating loss carryover
from a SRLY. The built-in loss is therefore subject to a $60 SRLY
limitation for Year 3. The built-in loss is treated as a net operating
loss carryover solely for purposes of determining the extent to which
the loss is not allowed by reason of the SRLY limitation, and for all
other purposes the loss remains a loss arising in Year 3. Consequently,
under paragraph (b) of this section, the $60 allowed under the SRLY
limitation is absorbed by the P group before T's $100 net operating loss
carryover from Year 1 is allowed.
(iii) Under Sec. 1.1502-15(a), the $40 balance of the built-in loss
that is not allowed in Year 3 because of the SRLY limitation is treated
as a $40 net operating loss arising in Year 3 that is subject to the
SRLY limitation because, under paragraph (c)(1)(ii) of this section,
Year 3 is treated as a SRLY, and is carried to other years in accordance
with the rules of paragraph (b) of this section. The SRLY limitation for
Year 4 is the P group's consolidated taxable income for Year 3 and Year
4 determined by reference to only T's items and without regard to the
group's CNOL deductions ($60 + $40), reduced by T's loss actually
absorbed by the group in Year 3 ($60). The SRLY limitation for Year 4 is
$40.
(iv) Under paragraph (c) of this section and the principles of
section 172(b), $40 of T's $100 net operating loss carryover from Year 1
is included in the CNOL deduction under paragraph (a) of this section in
Year 4.
Example 5. Dual SRLY registers and accounting for SRLY losses
actually absorbed. (i) In Year 1, T sustains a $100 net operating loss
and a $50 net capital loss. At the beginning of Year 2, T becomes a
member of the P group in a transaction that does not result in an
ownership change under section 382(g). Both of T's carryovers from Year
1 are subject to SRLY limits under this paragraph (c) and Sec. 1.1502-
22(c). The members of the P group contribute the following to the
consolidated taxable income for Years 2 and 3 (computed without regard
to T's CNOL deduction under this section or net capital loss carryover
under Sec. 1.1502-22):
------------------------------------------------------------------------
P T
------------------------------------------------------------------------
Year 1 (SRLY)
------------------------------------------------------------------------
Ordinary.............................................. ....... (100)
Capital............................................... ....... (50)
[[Page 350]]
Year 2
------------------------------------------------------------------------
Ordinary.............................................. 30 60
Capital............................................... 0 (20)
Year 3
------------------------------------------------------------------------
Ordinary.............................................. 10 40
Capital............................................... 0 30
------------------------------------------------------------------------
(ii) For Year 2, the group computes separate SRLY limits for each of
T's SRLY carryovers from Year 1. The group determines its ability to use
its capital loss carryover before it determines its ability to use its
ordinary loss carryover. Under section 1212, because the group has no
Year 2 capital gain, it cannot absorb any capital losses in Year 2. T's
Year 1 net capital loss and the group's Year 2 consolidated net capital
loss (all of which is attributable to T) are carried over to Year 3.
(iii) Under this section, the aggregate amount of T's $100 net
operating loss carryover from Year 1 that may be included in the CNOL
deduction of the group for Year 2 may not exceed $60--the amount of the
consolidated taxable income computed by reference only to T's items,
including losses and deductions to the extent actually absorbed (i.e.,
$60 of T's ordinary income for Year 2). Thus, the group may include $60
of T's ordinary loss carryover from Year 1 in its Year 2 CNOL deduction.
T carries over its remaining $40 of its Year 1 loss to Year 3.
(iv) For Year 3, the group again computes separate SRLY limits for
each of T's SRLY carryovers from Year 1. The group has consolidated net
capital gain (without taking into account a net capital loss carryover
deduction) of $30. Under Sec. 1.1502-22(c), the aggregate amount of T's
$50 capital loss carryover from Year 1 that may be included in computing
the group's consolidated net capital gain for all years of the group
(here Years 2 and 3) may not exceed $30 (the aggregate consolidated net
capital gain computed by reference only to T's items, including losses
and deductions actually absorbed (i.e., $30 of capital gain in Year 3)).
Thus, the group may include $30 of T's Year 1 capital loss carryover in
its computation of consolidated net capital gain for Year 3, which
offsets the group's capital gains for Year 3. T carries over its
remaining $20 of its Year 1 loss to Year 4. The group carries over the
Year 2 consolidated net capital loss to Year 4.
(v) Under this section, the aggregate amount of T's net operating
loss carryover from Year 1 that may be included in the CNOL deduction of
the group for Years 2 and 3 may not exceed $100, which is the amount of
the aggregate consolidated taxable income for Years 2 and 3 determined
by reference only to T's items, including losses and deductions actually
absorbed (i.e., $60 of ordinary income in Year 2 plus $40 of ordinary
income, $30 of capital gain, and $30 of SRLY capital losses actually
absorbed in Year 3). The group included $60 of T's ordinary loss
carryover in its Year 2 CNOL deduction. It may include the remaining $40
of the carryover in its Year 3 CNOL deduction.
(2) SRLY subgroup limitation. In the case of a net operating loss
carryover or carryback for which there is a SRLY subgroup, the
principles of paragraph (c)(1) of this section apply to the SRLY
subgroup, and not separately to its members. Thus, the contribution to
consolidated taxable income and the net operating loss carryovers and
carrybacks arising (or treated as arising) in SRLYs that are included in
the CNOL deductions for all consolidated return years of the group under
paragraph (a) of this section are based on the aggregate amounts of
income, gain, deduction, and loss of the members of the SRLY subgroup
for the relevant consolidated return years (as provided in paragraph
(c)(1)(i)(C) of this section). For an illustration of aggregate amounts
during the relevant consolidated return years following the year in
which a member of a SRLY subgroup ceases to be a member of the group,
see paragraph (c)(2)(viii) Example 4 of this section. A SRLY subgroup
may exist only for a carryover or carryback arising in a year that is
not a SRLY (and is not treated as a SRLY under paragraph (c)(1)(ii) of
this section) with respect to another group (the former group), whether
or not the group is a consolidated group, or for a carryover that was
subject to the overlap rule described in paragraph (g) of this section
or Sec. 1.1502-15(g) with respect to another group (the former group). A
separate SRLY subgroup is determined for each such carryover or
carryback. A consolidated group may include more than one SRLY subgroup,
and a member may be a member of more than one SRLY subgroup. Solely for
purposes of determining the members of a SRLY subgroup with respect to a
loss:
(i) Carryovers. In the case of a carryover, the SRLY subgroup is
composed of the member carrying over the loss (the loss member) and each
other member that was a member of the former group that becomes a member
of the group at the same time as the loss member. A member remains a
member
[[Page 351]]
of the SRLY subgroup until it ceases to be affiliated with the loss
member. The aggregate determination described in paragraph (c)(1) of
this section and this paragraph (c)(2) includes the amounts of income,
gain, deduction, and loss of each member of the SRLY subgroup for the
consolidated return years during which it remains a member of the SRLY
subgroup. For an illustration of the aggregate determination of a SRLY
subgroup, see paragraph (c)(2)(viii) Example 2 of this section.
(ii) Carrybacks. In the case of a carryback, the SRLY subgroup is
composed of the member carrying back the loss (the loss member) and each
other member of the group from which the loss is carried back that has
been continuously affiliated with the loss member from the year to which
the loss is carried through the year in which the loss arises.
(iii) Built-in losses. In the case of a built-in loss, the SRLY
subgroup is composed of the member recognizing the loss (the loss
member) and each other member that was part of the subgroup with respect
to the loss determined under Sec. 1.1502-15(c)(2) immediately before the
members became members of the group. The principles of paragraphs
(c)(2)(i) and (ii) of this section apply to determine the SRLY subgroup
for the built-in loss that is, under paragraph (c)(1)(ii) of this
section, treated as arising in a SRLY with respect to the group in which
the loss is recognized. For this purpose and as the context requires, a
reference in paragraphs (c)(2)(i) and (ii) of this section to a group or
former group is a reference to the subgroup determined under
Sec. 1.1502-15(c)(2).
(iv) Principal purpose of avoiding or increasing a SRLY limitation.
The members composing a SRLY subgroup are not treated as a SRLY subgroup
if any of them is formed, acquired, or availed of with a principal
purpose of avoiding the application of, or increasing any limitation
under, this paragraph (c). Any member excluded from a SRLY subgroup, if
excluded with a principal purpose of so avoiding or increasing any SRLY
limitation, is treated as included in the SRLY subgroup.
(v) Coordination with other limitations. This paragraph (c)(2) does
not allow a net operating loss to offset income to the extent
inconsistent with other limitations or restrictions on the use of
losses, such as a limitation based on the nature or activities of
members. For example, any dual consolidated loss may not reduce the
taxable income to an extent greater than that allowed under section
1503(d) and Sec. 1.1503-2. See also Sec. 1.1502-47(q) (relating to
preemption of rules for life-nonlife groups).
(vi) Anti-duplication. If the same item of income or deduction could
be taken into account more than once in determining a limitation under
this paragraph (c), or in a manner inconsistent with any other provision
of the Internal Revenue Code or regulations incorporating this paragraph
(c), the item of income or deduction is taken into account only once and
in such manner that losses are absorbed in accordance with the ordering
rules in paragraph (b) of this section and the underlying purposes of
this section.
(vii) Corporations that leave a SRLY subgroup. If a loss member
ceases to be affiliated with a SRLY subgroup, the amount of the member's
remaining SRLY loss from a specific year is determined by multiplying
the aggregate of the unabsorbed net operating loss carryovers of the
SRLY subgroup from that year by a fraction, the numerator of which is
the net operating loss carryover for that year that the member leaving
the subgroup had when it became a member of the group, and the
denominator of which is the aggregate of the net operating loss
carryovers of the members of the SRLY subgroup for that year when they
joined the group. The unabsorbed net operating loss carryovers of the
SRLY subgroup are those carryovers that have not been absorbed by the
group as of the end of the taxable year in which the loss member leaves
the group.
(viii) Examples. The principles of this paragraph (c)(2) are
illustrated by the following examples:
Example 1. Members of SRLY subgroups. (i) Individual A owns all of
the stock of P, S, T and M. P and M are each the common parent of a
consolidated group. During Year 1, P sustains a $50 net operating loss.
At the beginning of Year 2, P acquires all the stock of S at a time when
the aggregate basis of S's assets exceeds their aggregate value by $70,
and S becomes a member of the P group. At
[[Page 352]]
the beginning of Year 3, P acquires all the stock of T, T has a $60 net
operating loss carryover at the time of the acquisition, and T becomes a
member of the P group. During Year 4, S forms S1 and T forms T1, each by
contributing assets with built-in gains which are, in the aggregate,
material. S1 and T1 become members of the P group. During Year 7, M
acquires all of the stock of P, and the members of the P group become
members of the M group for the balance of Year 7. The $50 and $60 loss
carryovers of P and T are carried to Year 7 of the M group, and the
value and basis of S's assets did not change after it became a member of
the former P group. None of the transactions described above resulted in
an ownership change under section 382(g).
(ii) Under paragraph (c)(2) of this section, a separate SRLY
subgroup is determined for each loss carryover and built-in loss. In the
P group, P's $50 loss carryover is not treated as arising in a SRLY. See
Sec. 1.1502-1(f). Consequently, the carryover is not subject to
limitation under paragraph (c) of this section in the P group.
(iii) In the M group, P's $50 loss carryover is treated as arising
in a SRLY and is subject to the limitation under paragraph (c) of this
section. A SRLY subgroup with respect to that loss is composed of
members which were members of the P group, the group as to which the
loss was not a SRLY. The SRLY subgroup is composed of P, the member
carrying over the loss, and each other member of the P group that became
a member of the M group at the same time as P. A member of the SRLY
subgroup remains a member until it ceases to be affiliated with P. For
Year 7, the SRLY subgroup is composed of P, S, T, S1, and T1.
(iv) In the P group, S's $70 unrealized loss, if recognized within
the 5-year recognition period after S becomes a member of the P group,
is subject to limitation under paragraph (c) of this section. See
Sec. 1.1502-15 and paragraph (c)(1)(ii) of this section. Because S was
not continuously affiliated with P, T, or T1 for 60 consecutive months
prior to joining the P group, these corporations cannot be included in a
SRLY subgroup with respect to S's unrealized loss in the P group. See
paragraph (c)(2)(iii) of this section. As a successor to S, S1 is
included in a subgroup with S in the P group, and, because 100 percent
of S1's stock is owned directly by corporations that were members of the
SRLY subgroup when the members of the SRLY subgroup became members of
the P group, its net positive income is not excluded from the
consolidated taxable income of the P group that may be offset by the
built-in loss. See paragraph (f) of this section.
(v) In the M group, S's $70 unrealized loss, if recognized within
the 5-year recognition period after S becomes a member of the M group,
is subject to limitation under paragraph (c) of this section. Prior to
becoming a member of the M group, S had been continuously affiliated
with P (but not T or T1) for 60 consecutive months, and S1 is a
successor that has remained continuously affiliated with S. Those
members had a net unrealized built-in loss immediately before they
became members of the group under Sec. 1.1502-15(c). Consequently, in
Year 7, S, S1, and P compose a subgroup in the M group with respect to
S's unrealized loss. Because S1 was a member of the SRLY subgroup when
it became a member of the M group and also because 100 percent of S1's
stock is owned directly by corporations that were members of the SRLY
subgroup when the members of the SRLY subgroup became members of the M
group, its net positive income is not excluded from the consolidated
taxable income of the M group that may be offset by the recognized
built-in loss. See paragraph (f) of this section.
(vi) In the P group, T's $60 loss carryover arose in a SRLY and is
subject to limitation under paragraph (c) of this section. P, S, and S1
were not members of the group in which T's loss arose, and T's loss
carryover was not subject to the overlap rule described in paragraph (g)
of this section with respect to the P group (the former group). Thus, P,
S, and S1 are not members of a SRLY subgroup with respect to the T
carryover in the P group. See paragraph (c)(2)(i) of this section. As a
successor to T, T1 is included in a SRLY subgroup with T in the P group,
and, because 100 percent of T1's stock is owned directly by corporations
that were members of the SRLY subgroup when the members of the SRLY
subgroup became members of the P group, its net positive income is not
excluded from the consolidated taxable income of the P group that may be
offset by the carryover. See paragraph (f) of this section.
(vii) In the M group, T's $60 loss carryover arose in a SRLY and is
subject to limitation under paragraph (c) of this section. T and T1
remain the only members of a SRLY subgroup with respect to the
carryover. Because T1 was a member of the SRLY subgroup when it became a
member of the M group and also because 100 percent of T1's stock is
owned directly by corporations that were members of the SRLY subgroup
when the members of the SRLY subgroup became members of the M group, its
net positive income is not excluded from the consolidated taxable income
of the M group that may be offset by the carryover. See paragraph (f) of
this section.
Example 2. Computation of SRLY subgroup limitation. (i) Individual A
owns all of the stock of S, T, P and M. P and M are each the common
parent of a consolidated group. In Year 2, P acquires all the stock of S
and T from Individual A, and S and T become members of the P group. For
Year 3, the P group has a $45 CNOL, which is attributable to P,
[[Page 353]]
and which P carries forward. M is the common parent of another group. At
the beginning of Year 4, M acquires all of the stock of P, and the
former members of the P group become members of the M group. None of the
transactions described above resulted in an ownership change under
section 382(g).
(ii) P's year to which the loss is attributable, Year 3, is a SRLY
with respect to the M group. See Sec. 1.1502-1(f)(1). However, P, S, and
T compose a SRLY subgroup with respect to the Year 3 loss under
paragraph (c)(2)(i) of this section because Year 3 is not a SRLY (and is
not treated as a SRLY) with respect to the P group. P's loss is carried
over to the M group's Year 4 and is therefore subject to the SRLY
subgroup limitation in paragraph (c)(2) of this section.
(iii) In Year 4, the M group has $10 of consolidated taxable income
(computed without regard to the CNOL deduction for Year 4). Such
consolidated taxable income would be $45 if determined by reference to
only the items of P, S, and T, the members included in the SRLY subgroup
with respect to P's loss carryover. Therefore, the SRLY subgroup
limitation under paragraph (c)(2) of this section for P's net operating
loss carryover from Year 3 is $45. Because the M group has only $10 of
consolidated taxable income in Year 4, however, only $10 of P's net
operating loss carryover is included in the CNOL deduction under
paragraph (a) of this section in Year 4.
(iv) In Year 5, the M group has $100 of consolidated taxable income
(computed without regard to the CNOL deduction for Year 5). Neither P,
S, nor T has any items of income, gain, deduction, or loss in Year 5.
Although the members of the SRLY subgroup do not contribute to the $100
of consolidated taxable income in Year 5, the SRLY subgroup limitation
for Year 5 is $35 (the sum of SRLY subgroup consolidated taxable income
of $45 in Year 4 and $0 in Year 5, less the $10 net operating loss
carryover actually absorbed by the M group in Year 4). Therefore, $35 of
P's net operating loss carryover is included in the CNOL deduction under
paragraph (a) of this section in Year 5.
Example 3. Inclusion in more than one SRLY subgroup. (i) Individual
A owns all of the stock of S, T, P and M. S, P, and M are each the
common parent of a consolidated group. At the beginning of Year 1, S
acquires all the stock of T from Individual A, and T becomes a member of
the S group. For Year 1, the S group has a CNOL of $10, all of which is
attributable to S and is carried over to Year 2. At the beginning of
Year 2, P acquires all the stock of S, and S and T become members of the
P group. For Year 2, the P group has a CNOL of $35, all of which is
attributable to P and is carried over to Year 3. At the beginning of
Year 3, M acquires all of the stock of P, and the former members of the
P group become members of the M group. None of the transactions
described above resulted in an ownership change under section 382(g).
(ii) P's and S's net operating losses arising in SRLYs with respect
to the M group are subject to limitation under paragraph (c) of this
section. P, S, and T compose a SRLY subgroup for purposes of determining
the limitation for P's $35 net operating loss carryover arising in Year
2 because, under paragraph (c)(2)(i) of this section, Year 2 is not a
SRLY with respect to the P group. Similarly, S and T compose a SRLY
subgroup for purposes of determining the limitation for S's $10 net
operating loss carryover arising in Year 1 because Year 1 is not a SRLY
with respect to the S group.
(iii) S and T are members of both the SRLY subgroup with respect to
P's losses and the SRLY subgroup with respect to S's losses. Under
paragraph (c)(2) of this section, S's and T's items cannot be included
in the determination of the SRLY subgroup limitation for both SRLY
subgroups for the same consolidated return year; paragraph (c)(2)(vi) of
this section requires the M group to consider the items of S and T only
once so that the losses are absorbed in the order of the taxable years
in which they were sustained. Because S's loss was incurred in Year 1,
while P's loss was incurred in Year 2, the items will be added in the
determination of the consolidated taxable income of the S and T SRLY
subgroup to enable S's loss to be absorbed first. The taxable income of
the P, S, and T SRLY subgroup is then computed by including the
consolidated taxable income for the S and T SRLY subgroup less the
amount of any net operating loss carryover of S that is absorbed after
applying this section to the S subgroup for the year.
Example 4. Corporation ceases to be affiliated with a SRLY subgroup.
(i) Individual A owns all of the stock of P, and M. P and S are members
of the P group and the P group has a CNOL of $30 in Year 1, all of which
is attributable to P and carried over to Year 2. At the beginning of
Year 2, M acquires all of the stock of P, and P and S become members of
the M group. P and S compose a SRLY subgroup with respect to P's net
operating loss carryover. For Year 2, consolidated taxable income of the
M group determined by reference to only the items of P (and without
regard to the CNOL deduction for Year 2) is $40. However, such
consolidated taxable income of the M group determined by reference to
the items of both P and S is a loss of $20. Thus, the SRLY subgroup
limitation under paragraph (c)(2) of this section prevents the M group
from including any of P's net operating loss carryover in the CNOL
deduction under paragraph (a) of this section in Year 2, and P carries
the Year 1 loss to Year 3.
(ii) At the end of Year 2, P sells all of the S stock, and S ceases
to be a member of the M group and the P subgroup. For Year 3,
consolidated taxable income of the M group is
[[Page 354]]
$50 (determined without regard to the CNOL deduction for Year 3), and
such consolidated taxable income would be $10 if determined by reference
to only items of P. However, the limitation under paragraph (c) of this
section for Year 3 for P's net operating loss carryover still prevents
the M group from including any of P's loss in the CNOL deduction under
paragraph (a) of this section. The limitation results from the inclusion
of S's items for Year 2 in the determination of the SRLY subgroup
limitation for Year 3 even though S ceased to be a member of the M group
(and the P subgroup) at the end of Year 2. Thus, the M group's
consolidated taxable income determined by reference to only the SRLY
subgroup members' items for all consolidated return years of the group
through Year 3 (determined without regard to the CNOL deduction) is not
a positive amount.
(ix) Application to other than loss carryovers. Paragraph (g) of
this section and the phrase ``or for a carryover that was subject to the
overlap rule described in paragraph (g) of this section or Sec. 1.1502-
15(g) with respect to another group (the former group)'' in paragraph
(c)(2) of this section apply only to net operating loss carryovers and
net capital loss carryovers, and not with respect to other tax
attributes, such as credits. Accordingly, as the context may require, if
another regulation references this section and such other regulation
does not concern net operating loss carryovers or net capital loss
carryovers, then such reference does not include a reference to such
paragraph or phrase.
(d) Coordination with consolidated return change of ownership
limitation and transactions subject to old section 382--(1) Consolidated
return changes of ownership. If a consolidated return change of
ownership occurred before January 1, 1997, the principles of
Sec. 1.1502-21A(d) apply to determine the amount of the aggregate of the
net operating losses attributable to old members of the group that may
be included in the consolidated net operating loss deduction under
paragraph (a) of this section. For this purpose, Sec. 1.1502-1(g) is
applied by treating that date as the end of the year of change.
(2) Old section 382. The principles of Sec. 1.1502-21A(e) apply to
disallow or reduce the amount of a net operating loss carryover of a
member as a result of a transaction subject to old section 382.
(e) Consolidated net operating loss. Any excess of deductions over
gross income, as determined under Sec. 1.1502-11(a) (without regard to
any consolidated net operating loss deduction), is also referred to as
the consolidated net operating loss (or CNOL).
(f) Predecessors and successors--(1) In general. For purposes of
this section, any reference to a corporation, member, common parent, or
subsidiary, includes, as the context may require, a reference to a
successor or predecessor, as defined in Sec. 1.1502-1(f)(4).
(2) Limitation on SRLY subgroups--(i) General rule. Except as
provided in paragraph (f)(2)(ii) of this section, if a successor's items
of income and gain exceed the successor's items of deduction and loss
(net positive income), then the net positive income attributable to the
successor is excluded from the computation of the consolidated taxable
income of a SRLY subgroup.
(ii) Exceptions. A successor's net positive income is not excluded
from the consolidated taxable income of a SRLY subgroup if--
(A) The successor acquires substantially all the assets and
liabilities of its predecessor, and the predecessor ceases to exist;
(B) The successor was a member of the SRLY subgroup when the SRLY
subgroup members became members of the group;
(C) 100 percent of the stock of the successor is owned directly by
corporations that were members of the SRLY subgroup when the SRLY
subgroup members became members of the group; or
(D) The Commissioner so determines.
(g) Overlap with section 382--(1) General rule. The limitation
provided in paragraph (c) of this section does not apply to net
operating loss carryovers (other than a hypothetical carryover described
in paragraph (c)(1)(i)(D) of this section and a carryover described in
paragraph (c)(1)(ii) of this section) when the application of paragraph
(c) of this section results in an overlap with the application of
section 382. For a similar rule applying in the case of net operating
loss carryovers described in paragraphs (c)(1)(i)(D) and (c)(1)(ii) of
this section, see Sec. 1.1502-15(g).
[[Page 355]]
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in section 382, the
regulations thereunder, and Secs. 1.1502-90 through 1.1502-99 apply.
(ii) Overlap. (A) An overlap of the application of paragraph (c) of
this section and the application of section 382 with respect to a net
operating loss carryover occurs if a corporation becomes a member of a
consolidated group (the SRLY event) within six months of the change date
of an ownership change giving rise to a section 382(a) limitation with
respect to that carryover (the section 382 event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this
section occurs with respect to net operating loss carryovers of a
corporation whose SRLY event occurs within the six month period
beginning on the date of a section 382 event, then an overlap is treated
as also occurring with respect to that corporation's net operating loss
carryover that arises within the period beginning with the section 382
event and ending with the SRLY event.
(C) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in Sec. 1.1502-91(d)(1) with respect
to a carryover, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 382 event before SRLY event. If a
SRLY event occurs on the same date as a section 382 event or within the
six month period beginning on the date of the section 382 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
(ii) SRLY event before section 382 event. If a section 382 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this section
applies starting with the first tax year that begins after the section
382 event.
(4) Subgroup rules. In general, in the case of a net operating loss
carryover for which there is a SRLY subgroup and a loss subgroup (as
defined in Sec. 1.1502-91(d)(1)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members. However,
paragraph (g)(1) of this section applies--
(i) With respect to a carryover described in paragraph (g)(2)(ii)(A)
of this section only if--
(A) All members of the SRLY subgroup with respect to that carryover
are also included in a loss subgroup with respect to that carryover; and
(B) All members of a loss subgroup with respect to that carryover
are also members of a SRLY subgroup with respect to that carryover; and
(ii) With respect to a carryover described in paragraph
(g)(2)(ii)(B) of this section only if all members of the SRLY subgroup
for that carryover are also members of a SRLY subgroup that has net
operating loss carryovers described in paragraph (g)(2)(ii)(A) of this
section that are subject to the overlap rule of paragraph (g)(1) of this
section.
(5) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Overlap--Simultaneous Acquisition. (i) Individual A owns
all of the stock of P, which in turn owns all of the stock of S. P and S
file a consolidated return. In Year 2, B, an individual unrelated to
Individual A, forms T which incurs a $100 net operating loss for that
year. At the beginning of Year 3, S acquires T.
(ii) S's acquisition of T results in T becoming a member of the P
group (the SRLY event) and also results in an ownership change of T,
within the meaning of section 382(g), that gives rise to a limitation
under section 382(a) (the section 382 event) with respect to the T
carryover.
(iii) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application of
the SRLY rules and the application of section 382.
(iv) Consequently, under this paragraph (g), in Year 3 the SRLY
limitation does not apply to the Year 2 $100 net operating loss.
Example 2. Overlap--Section 382 event before SRLY event. (i)
Individual A owns all of the stock of P, which in turn owns all of the
stock of S. P and S file a consolidated return. In Year 1, B, an
individual unrelated to Individual A, forms T which incurs a $100 net
operating loss for that year. On February 28 of Year 2, S purchases 55%
of T from Individual B. On June 30, of Year 2, S purchases an additional
35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T, under section 382(g),
that gives rise to a section 382(a) limitation with respect to the T
carryover. The June 30 purchase of 35% of T results in T becoming a
[[Page 356]]
member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382.
(iv) Consequently, under paragraph (g) of this section, in Year 2
the SRLY limitation does not apply to the Year 1 $100 net operating
loss.
Example 3. No overlap--Section 382 event before SRLY event. (i) The
facts are the same as in Example 2 except that Individual B does not
sell the additional 35% of T to S until September 30, Year 2.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T, under section 382(g),
that gives rise to a section 382(a) limitation with respect to the T
carryover. The September 30 purchase of 35% of T results in T becoming a
member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event did not occur within six months of the
change date of the section 382 event, there is no overlap of the
application of the SRLY rules and the application of section 382.
Consequently, the Year 1 net operating loss is subject to a SRLY
limitation and a section 382 limitation.
Example 4. Overlap--SRLY event before section 382 event. (i) P and S
file a consolidated return. S has owned 40% of T for 6 years. For Year
6, T has a net operating loss of $500 that is carried forward. On March
31, Year 7, S acquires an additional 40% of T, and on August 31, Year 7,
S acquires the remaining 20% of T.
(ii) The March 31 purchase of 40% of T results in T becoming a
member of the P group and is therefore a SRLY event. The August 31
purchase of 20% of T is a section 382 event because it results in an
ownership change of T, under section 382(g), that gives rise to a
section 382(a) limitation with respect to the T carryover.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382 within
the meaning of this paragraph (g).
(iv) Under this paragraph (g), the SRLY rules of paragraph (c) of
this section will apply to the Year 7 tax year. Beginning in Year 8 (the
year after the section 382 event), any unabsorbed portion of the Year 6
net operating loss will not be subject to a SRLY limitation.
Example 5. Overlap--Coextensive subgroups. (i) Individual A owns all
of the stock of S, which in turn owns all of the stock of T. S and T
file a consolidated return beginning in Year 1. B, an individual
unrelated to Individual A, owns all of the stock of P, the common parent
of a consolidated group. In Year 2, the S group has a $200 consolidated
net operating loss which is carried forward, of which $100 is
attributable to S, and $100 is attributable to T. At the beginning of
Year 3, the P group acquires all of the stock of S from Individual A.
(ii) P's acquisition of S results in S and T becoming members of the
P group (the SRLY event). With respect to the Year 2 net operating loss
carryover, S and T compose a SRLY subgroup under paragraph (c)(2) of
this section.
(iii) S and T also compose a loss subgroup under Sec. 1.1502-
91(d)(1) with respect to the Year 2 net operating loss carryover. P's
acquisition also results in an ownership change of S, the subgroup
parent, within the meaning of section 382(g), that gives rise to a
limitation under section 382(a) (the section 382 event) with respect to
the Year 2 carryover.
(iv) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application of
the SRLY rules and the application of section 382 within the meaning of
paragraph (g) of this section. Because the SRLY subgroup and the loss
subgroup are coextensive, under paragraph (g) of this section, the SRLY
limitation does not apply to the Year 2 $200 net operating loss.
Example 6. No overlap--Different subgroups. (i) Individual B owns
all of the stock of P, the common parent of a consolidated group. P owns
all of the stock of S and all of the stock of T. Individual A owns all
of the stock of X, the common parent of another consolidated group. In
Year 1, the P group has a $200 consolidated net operating loss, of which
$100 is attributable to S and $100 is attributable to T. At the
beginning of Year 3, the X group acquires all of the stock of S and T
from P and does not make an election under Sec. 1.1502-91(d)(4)
(concerning an election to treat the loss subgroup parent requirement as
having been satisfied).
(ii) X's acquisition of S and T results in S and T becoming members
of the X group (the SRLY event). With respect to the Year 1 net
operating loss, S and T compose a SRLY subgroup under paragraph (c)(2)
of this section.
(iii) S and T do not bear (and are not treated as bearing) a section
1504(a)(1) relationship. Therefore S and T do not qualify as a loss
subgroup under Sec. 1.1502-91(d)(1). X's acquisition of S and T results
in separate ownership changes of S and T, that give rise to separate
limitations under section 382(a) (the section 382 events) with respect
to each of S and T's Year 1 net operating loss carryovers. See
Sec. 1.1502-94.
(iv) The SRLY event and the change dates of the section 382 events
occur on the same date. However, paragraph (g)(1) of this section does
not apply because the SRLY subgroup (composed of S and T) is not
coextensive with a loss subgroup with respect to the Year 1 carryovers.
Consequently, the Year 1
[[Page 357]]
net operating loss is subject to both a SRLY subgroup limitation and
also separate section 382 limitations for each of S and T.
Example 7. No overlap--Different subgroups. (i) Individual A owns
all of the stock of T and all of the stock of S, the common parent of a
consolidated group. B, an individual unrelated to Individual A, owns all
of the stock of P, the common parent of another consolidated group. In
Year 1, T has a net operating loss of $100 that is carried forward. At
the end of Year 2, S acquires all of the stock of T from Individual A.
In Year 3, the S group sustains a $200 consolidated net operating loss
that is carried forward. In Year 8, the P group acquires all of the
stock of S from Individual A.
(ii) S's acquisition of T in Year 1 results in T becoming a member
of the S group. The acquisition, however, did not result in an ownership
change under section 382(g). As a result, T's Year 1 net operating loss
is subject to SRLY within the S group. At the end of Year 7,
Sec. 1.1502-96(a) treats T's Year 1 net operating loss as not having
arisen in a SRLY with respect to the S group. Section 1.1502-96(a),
however, applies only for purposes of Secs. 1.1502-91 through 1.1502-96
and Sec. 1.1502-98 but not for purposes of this section. See
Sec. 1.1502-96(a)(5).
(iii) P's acquisition of S in Year 8 results in S and T becoming
members of the P group (the SRLY event). With respect to the Year 1 net
operating loss, S and T do not compose a SRLY subgroup under paragraph
(c)(2) of this section.
(iv) S and T compose a loss subgroup under Sec. 1.1502-91(d)(1) with
respect to the Year 1 net operating loss carryover. P's acquisition of S
results in an ownership change of the loss subgroup, within the meaning
of section 382(g), that gives rise to a subgroup limitation under
section 382(a) (the section 382 event) with respect to that carryover.
(v) The SRLY event and the change date of the section 382 event
occur on the same date. However, under paragraph (g)(4) of this section,
because the SRLY subgroup and the loss subgroup are not coextensive, T's
Year 1 net operating loss carryover is subject to a SRLY limitation.
(vi) With respect to the Year 3 net operating loss carryover, S and
T compose both a SRLY subgroup and a loss subgroup under Sec. 1.1502-
91(d)(1). Thus, paragraph (g)(1) of this section applies, and the S
group's Year 3 net operating loss carryover is not subject to a SRLY
limitation.
Example 8. SRLY after overlap. (i) Individual A owns all of the
stock of R and M, each the common parent of a consolidated group. B, an
individual unrelated to Individual A, owns all of the stock of D. In
Year 1, D incurs a $100 net operating loss that is carried forward. At
the beginning of Year 3, R acquires all of the stock of D. In Year 5, M
acquires all of the stock of R in a transaction that did not result in
an ownership change of R.
(ii) R's Year 3 acquisition of D results in D becoming a member of
the R group (the SRLY event) and also results in an ownership change of
D, that gives rise to a limitation under section 382(a) (the section 382
event) with respect to D's net operating loss carryover.
(iii) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application of
paragraph (c) of this section and section 382 with respect to D's net
operating loss. Consequently, under this paragraph (g), D's Year 1 $100
net operating loss is not subject to a SRLY limitation in the R group.
(iv) M's Year 5 acquisition of R results in R and D becoming members
of the M group (the SRLY event), but does not result in an ownership
change of R or D that gives rise to a limitation under section 382(a).
Because there is no section 382 event, the application of the SRLY rules
and section 382 do not overlap. Consequently, D's Year 1 $100 net
operating loss is subject to a SRLY limitation in the M group.
(v) Because D's Year 1 net operating loss carryover was subject to
the overlap rule of paragraph (g) of this section when it joined the R
group, under Sec. 1.1502-21(c)(2), the SRLY subgroup with respect to
that carryover includes all of the members of the R group that joined
the M group at the same time as D.
Example 9. Overlap--Interim losses. (i) Individual A owns all of the
stock of P and S, each the common parent of a consolidated group. S owns
all of the stock of T, its only subsidiary. B, an individual unrelated
to Individual A, owns all of the stock of M, the common parent of a
consolidated group. In Year 1, the S group has a $100 consolidated net
operating loss. On January 1 of Year 2, P acquires all of the stock of S
from Individual A. On December 31 of Year 2, M acquires 51% of the stock
of P from Individual A. On May 31 of Year 3, M acquires the remaining
49% of the stock of P from Individual A. The P group, for the Year 3
period prior to June 1, had a $50 consolidated net operating loss, and
under paragraph (b)(2)(iv) of this section, the loss is attributable
entirely to S. Other than the losses described above, the P group does
not have any other consolidated net operating losses.
(ii) In the P group, S's $100 loss carryover is treated as arising
in a SRLY and is subject to the limitation under paragraph (c) of this
section. A SRLY subgroup with respect to that loss is composed of S and
T, the members which were members of the S group as to which the loss
was not a SRLY.
(iii) M's December 31 purchase of 51% of P is a section 382 event
because it results in an ownership change of the S loss subgroup that
gives rise to a section 382(a) limitation (the
[[Page 358]]
section 382 event) with respect to the Year 1 net operating loss
carryover. The purchase, however, does not result in an ownership change
of P because it is not a loss corporation under section 382(k)(1). M's
May 31 purchase of 49% of P results in P, S, and T becoming members of
the M group and is therefore a SRLY event.
(iv) With respect to the Year 1 net operating loss, S and T compose
a SRLY subgroup under paragraph (c)(2) of this section and a loss
subgroup under Sec. 1.1502-91(d)(1). The loss subgroup does not include
P because the only loss at the time of the section 382 event was subject
to SRLY with respect to the P group. See Sec. 1.1502-91(d)(1).
(v) Because the SRLY event occured within six months of the change
date of the section 382 event and the SRLY subgroup and loss subgroup
are coextensive with respect to the Year 1 net operating loss carryover,
there is an overlap of the application of the SRLY rules and the
application of section 382 within the meaning of paragraph (g) of this
section. Thus, the SRLY limitation does not apply to that carryover.
(vi) The Year 3 net operating loss, which arose between the section
382 event and the SRLY event, is a net operating loss described in
paragraph (g)(2)(ii)(B) of this section because it is the net operating
loss of a corporation whose SRLY event occurs within the six month
period beginning on the date of a section 382 event.
(vii) With respect to the Year 3 net operating loss, P, S, and T
compose a SRLY subgroup under paragraph (c)(2) of this section. Because
P, a member of the SRLY subgroup for the Year 3 carryover, is not also a
member of a SRLY subgroup that has net operating loss carryovers
described in paragraph (g)(2)(ii)(A) of this section (the Year 1 net
operating loss), the Year 3 carryover is subject to a SRLY limitation in
the M group. See paragraph (g)(4)(ii) of this section.
(h) Effective date--(1) In general. This section generally applies
to taxable years for which the due date (without extensions) of the
consolidated return is after June 25, 1999. However--
(i) In the event that paragraph (g)(1) of this section does not
apply to a particular net operating loss carryover in the current group,
then solely for purposes of applying paragraph (c) of this section to
determine a limitation with respect to that carryover and with respect
to which the SRLY register (consolidated taxable income determined by
reference to only the member's or subgroup's items of income, gain,
deduction, or loss) began in a taxable year for which the due date of
the return was on or before June 25, 1999, paragraph (c)(2) of this
section shall be applied without regard to the phrase ``or for a
carryover that was subject to the overlap rule described in paragraph
(g) of this section or Sec. 1.1502-15(g) with respect to another group
(the former group)''; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 382(a), as amended by the Tax Reform
Act of 1986, applies shall constitute a section 382 event.
(2) SRLY limitation. Except in the case of those members (including
members of a SRLY subgroup) described in paragraph (h)(3) of this
section, a group does not take into account a consolidated taxable year
beginning before January 1, 1997, in determining the aggregate of the
consolidated taxable income under paragraph (c)(1) of this section
(including for purposes of Sec. 1.1502-15 and Sec. 1.1502-22(c)) for the
members (or SRLY subgroups).
(3) Prior retroactive election. A consolidated group that applied
the rules of Sec. 1.1502-21T(g)(3) in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, to all consolidated
return years ending on or after January 29, 1991, and beginning before
January 1, 1997, does not take into account a consolidated taxable year
beginning before January 29, 1991, in determining the aggregate of the
consolidated taxable income under paragraph (c)(1) of this section
(including for purposes of Sec. 1.1502-15 and Sec. 1.1502-22(c)) for the
members (or SRLY subgroups).
(4) Offspring rule. Paragraph (b)(2)(ii)(B) of this section applies
to net operating losses arising in taxable years ending on or after June
25, 1999.
(5) Waiver of carrybacks. Paragraph (b)(3)(ii)(B) of this section
(relating to the waiver of carrybacks for acquired members) applies to
acquisitions occurring after June 25, 1999.
(6) Prior periods. For certain taxable years ending on or before
June 25, 1999, see Sec. 1.1502-21T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
[T.D. 8823, 64 FR 36105, July 2, 1999; 64 FR 41784, Aug. 2, 1999]
[[Page 359]]
Sec. 1.1502-22 Consolidated capital gain and loss.
(a) Capital gain. The determinations under section 1222, including
capital gain net income, net long-term capital gain, and net capital
gain, with respect to members during consolidated return years are not
made separately. Instead, consolidated amounts are determined for the
group as a whole. The consolidated capital gain net income for any
consolidated return year is determined by reference to--
(1) The aggregate gains and losses of members from sales or
exchanges of capital assets for the year (other than gains and losses to
which section 1231 applies);
(2) The consolidated net section 1231 gain for the year (determined
under Sec. 1.1502-23); and
(3) The net capital loss carryovers or carrybacks to the year.
(b) Net capital loss carryovers and carrybacks--(1) In general. The
determinations under section 1222, including net capital loss and net
short-term capital loss, with respect to members during consolidated
return years are not made separately. Instead, consolidated amounts are
determined for the group as a whole. Losses included in the consolidated
net capital loss may be carried to consolidated return years, and, after
apportionment, may be carried to separate return years. The net capital
loss carryovers and carrybacks consist of--
(i) Any consolidated net capital losses of the group; and
(ii) Any net capital losses of the members arising in separate
return years.
(2) Carryovers and carrybacks generally. The net capital loss
carryovers and carrybacks to a taxable year are determined under the
principles of section 1212 and this section. Thus, losses permitted to
be absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they were sustained, and losses
carried from taxable years ending on the same date, and which are
available to offset consolidated capital gain net income, generally are
absorbed on a pro rata basis. Additional rules provided under the
Internal Revenue Code or regulations also apply, as well as the SRLY
limitation under paragraph (c) of this section. See, e.g., section
382(l)(2)(B).
(3) Carryovers and carrybacks of consolidated net capital losses to
separate return years. If any consolidated net capital loss that is
attributable to a member may be carried to a separate return year under
the principles of Sec. 1.1502-21(b)(2), the amount of the consolidated
net capital loss that is attributable to the member is apportioned and
carried to the separate return year (apportioned loss).
(4) Special rules--(i) Short years in connection with transactions
to which section 381(a) applies. If a member distributes or transfers
assets to a corporation that is a member immediately after the
distribution or transfer in a transaction to which section 381(a)
applies, the transaction does not cause the distributor or transferor to
have a short year within the consolidated return year of the group in
which the transaction occurred that is counted as a separate year for
purposes of determining the years to which a net capital loss may be
carried.
(ii) Special status losses. [Reserved]
(c) Limitations on net capital loss carryovers and carrybacks from
separate return limitation years. The aggregate of the net capital
losses of a member arising (or treated as arising) in SRLYs that are
included in the determination of consolidated capital gain net income
for all consolidated return years of the group under paragraph (a) of
this section may not exceed the aggregate of the consolidated capital
gain net income for all consolidated return years of the group
determined by reference to only the member's items of gain and loss from
capital assets as defined in section 1221 and trade or business assets
defined in section 1231(b), including the member's losses actually
absorbed by the group in the taxable year (whether or not absorbed by
the member). The principles of Sec. 1.1502-21(c) (including the SRLY
subgroup principles under Sec. 1.1502-21(c)(2)) apply with appropriate
adjustments for purposes of applying this paragraph (c).
(d) Coordination with respect to consolidated return change of
ownership limitation occurring in consolidated return years beginning
before January 1, 1997. If
[[Page 360]]
a consolidated return change of ownership occurred before January 1,
1997, the principles of Sec. 1.1502-22A(d) apply to determine the amount
of the aggregate of the net capital loss attributable to old members of
the group (as those terms are defined in Sec. 1.1502-1(g)), that may be
included in the net capital loss carryover under paragraph (b) of this
section. For this purpose, Sec. 1.1502-1(g) is applied by treating that
date as the end of the year of change.
(e) Consolidated net capital loss. Any excess of losses over gains,
as determined under paragraph (a) of this section (without regard to any
carryovers or carrybacks), is also referred to as the consolidated net
capital loss.
(f) Predecessors and successors. For purposes of this section, the
principles of Sec. 1.1502-21(f) apply with appropriate adjustments.
(g) Overlap with section 383--(1) General rule. The limitation
provided in paragraph (c) of this section does not apply to net capital
loss carryovers ((other than a hypothetical carryover like those
described in Sec. 1.1502-21(c)(1)(i)(D) and a carryover like those
described in Sec. 1.1502-21(c)(1)(ii)) when the application of paragraph
(c) of this section results in an overlap with the application of
section 383. For a similar rule applying in the case of net capital loss
carryovers like those described in Secs. 1.1502-21(c)(1)(i)(D) and
(c)(1)(ii), see Sec. 1.1502-15(g).
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in sections 382 and 383, the
regulations thereunder, and Secs. 1.1502-90 through 1.1502-99 apply.
(ii) Overlap. (A) An overlap of the application of paragraph (c) of
this section and the application of section 383 with respect to a net
capital loss carryover occurs if a corporation becomes a member of the
consolidated group (the SRLY event) within six months of the change date
of an ownership change giving rise to a section 382 limitation with
respect to that carryover (the section 383 event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this
section occurs with respect to net capital loss carryovers of a
corporation whose SRLY event occurs within the six month period
beginning on the date of a section 383 event, then an overlap is treated
as also occurring with respect to that corporation's net capital loss
carryover that arises within the period beginning with the section 383
event and ending with the SRLY event.
(C) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in Sec. 1.1502-91(d)(1) with respect
to a carryover, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 383 event before SRLY event. If a
SRLY event occurs on the same date as a section 383 event or within the
six month period beginning on the date of the section 383 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
(ii) SRLY event before section 383 event. If a section 383 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this section
applies starting with the first tax year that begins after the section
383 event.
(4) Subgroup rules. In general, in the case of a net capital loss
carryover for which there is a SRLY subgroup and a loss subgroup (as
defined in Sec. 1.1502-91(d)(1)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members. However,
paragraph (g)(1) of this section applies--
(i) With respect to a carryover described in paragraph (g)(2)(ii)(A)
of this section only if--
(A) All members of the SRLY subgroup with respect to that carryover
are also included in a loss subgroup with respect to that carryover; and
(B) All members of a loss subgroup with respect to that carryover
are also members of a SRLY subgroup with respect to that carryover; and
(ii) With respect to a carryover described in paragraph
(g)(2)(ii)(B) of this section only if all members of the SRLY subgroup
for that carryover are also members of a SRLY subgroup that has net
capital loss carryovers described in paragraph (g)(2)(ii)(A) of this
section that are subject to the overlap rule of paragraph (g)(1) of this
section.
(h) Effective date--(1) In general. This section generally applies
to taxable
[[Page 361]]
years for which the due date (without extensions) of the consolidated
return is after June 25, 1999. However--
(i) In the event that paragraph (g)(1) of this section does not
apply to a particular net capital loss carryover in the current group,
then solely for purposes of applying paragraph (c) of this section to
determine a limitation with respect to that carryover and with respect
to which the SRLY register (consolidated taxable income determined by
reference to only the member's or subgroup's items of income, gain,
deduction, or loss) began in a taxable year for which the due date of
the return was on or before June 25, 1999, the principles of
Sec. 1.1502-21(c)(2) shall be applied without regard to the phrase ``or
for a carryover that was subject to the overlap rule described in
paragraph (g) of this section or Sec. 1.1502-15(g) with respect to
another group (the former group)''; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 383, as amended by the Tax Reform Act
of 1986, applies and which results in a section 382 limitation shall
constitute a section 383 event.
(2) Prior periods. For certain taxable years ending on or before
June 25, 1999, see Sec. 1.1502-22T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
[T.D. 8823, 64 FR 36114, July 2, 1999]
Sec. 1.1502-23 Consolidated net section 1231 gain or loss.
(a) In general. Net section 1231 gains and losses of members arising
during consolidated return years are not determined separately. Instead,
the consolidated net section 1231 gain or loss is determined under this
section for the group as a whole.
(b) Example. The following example illustrates the provisions of
this section:
Example. Use of SRLY registers with net gains and net losses under
section 1231. (i) In Year 1, T sustains a $20 net capital loss. At the
beginning of Year 2, T becomes a member of the P group. T's capital loss
carryover from Year 1 is subject to SRLY limits under Sec. 1.1502-22(c).
The members of the P group contribute the following to the consolidated
taxable income for Year 2 (computed without regard to T's net capital
loss carryover under Sec. 1.1502-22):
------------------------------------------------------------------------
P T
------------------------------------------------------------------------
Year 1 (SRLY)
------------------------------------------------------------------------
Ordinary.............................................. ....... .......
Capital............................................... ....... (20)
Year 2
------------------------------------------------------------------------
Ordinary.............................................. 10 20
Capital............................................... 70 0
Sec. 1231............................................ (60) 30
------------------------------------------------------------------------
(ii) Under section 1231, if the section 1231 losses for any taxable
year exceed the section 1231 gains for such taxable year, such gains and
losses are treated as ordinary gains or losses. Because the P group's
section 1231 losses, $(60), exceed the section 1231 gains, $30, the P
group's net loss is treated as an ordinary loss. T's net section 1231
gain has the same character as the P group's consolidated net section
1231 loss, so T's $30 of section 1231 income is treated as ordinary
income for purposes of applying Sec. 1.1502-22(c). Under Sec. 1.1502-
22(c), the group's consolidated net capital gain determined by reference
only to T's items is $0. None of T's capital loss carryover from Year 1
may be taken into account in Year 2.
(c) Recapture of ordinary loss. [Reserved]
(d) Effective date--(1) In general. This section applies to gains
and losses arising in the determination of consolidated net section 1231
gain or loss for taxable years for which the due date (without
extensions) of the consolidated return is after June 25, 1999.
(2) Application to prior periods. See Sec. 1.1502-21(h)(3) for rules
applicable to groups that applied the rules of this section to
consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997.
[T.D. 8823, 64 FR 36115, July 2, 1999; 64 FR 41784, Aug. 2, 1999]
Sec. 1.1502-24 Consolidated charitable contributions deduction.
(a) Determination of amount of consolidated charitable contributions
deduction. The deduction allowed by section 170 for the taxable year
shall be the lesser of:
(1) The aggregate deductions of the members of the group allowable
under section 170 (determined without regard to section 170(b)(2)), plus
the consolidated charitable contribution carryovers to such year, or
[[Page 362]]
(2) Five percent of the adjusted consolidated taxable income as
determined under paragraph (c) of this section.
(b) Carryover of excess charitable contributions. The consolidated
charitable contribution carryovers to any consolidated return year shall
consist of any excess consolidated charitable contributions of the
group, plus any excess charitable contributions of members of the group
arising in separate return years of such members, which may be carried
over to the taxable year under the principles of section 170(b) (2) and
(3). However, such consolidated carryovers shall not include any excess
charitable contributions apportioned to a corporation for a separate
return year pursuant to paragraph (e) of Sec. 1.1502-79.
(c) Adjusted consolidated taxable income. For purposes of this
section, the adjusted consolidated taxable income of the group for any
consolidated return year shall be the consolidated taxable income
computed without regard to this section, section 242, section 243(a) (2)
and (3), Sec. 1.1502-25, Sec. 1.1502-26, and Sec. 1.1502-27, and without
regard to any consolidated net operating or net capital loss carrybacks
to such year.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966]
Sec. 1.1502-26 Consolidated dividends received deduction.
(a) In general. (1) The consolidated dividends received deduction
for the taxable year shall be the lesser of:
(i) The aggregate of the deduction of the members of the group
allowable under sections 243(a)(1), 244(a), and 245 (computed without
regard to the limitations provided in section 246(b)), or
(ii) 85 percent of the consolidated taxable income computed without
regard to the consolidated net operating loss deduction, consolidated
section 247 deduction, the consolidated dividends received deduction,
and any consolidated net capital loss carryback to the taxable year.
Subdivision (ii) of this subparagraph shall not apply for any
consolidated return year for which there is a consolidated net operating
loss. (See Sec. Sec. 1.1502-21(e) or 1.1502-21A(f), as appropriate for
the definition of a consolidated net operating loss.)
(2) If any member computes a deduction under section 593(b)(2) for a
taxable year beginning after July 11, 1969, and ending before August 30,
1975, the deduction otherwise computed under this section shall be
reduced by an amount determined by multiplying the deduction (determined
without regard to this sentence and without regard to dividends received
by the common parent if such parent does not use the percentage of
income method provided by section 593(b)(2)) by the applicable
percentage of the member with the highest applicable percentage
(determined under subparagraphs (A) and (B) of section 593(b)(2)).
(3) For taxable years ending on or after August 30, 1975, the
deduction otherwise computed under this section shall be reduced by the
sum of the amounts determined under paragraph (a)(4) of this section for
each member that is a thrift institution that computes a deduction under
section 593(b)(2).
(4) For each thrift institution, the amount determined under this
subparagraph is the product of:
(i) The portion of the deduction determined with regard to the sum
of the dividends received by: (A) The thrift institution, and (B) any
member in which that thrift institution owns, directly and with the
application of paragraph (a)(5) of this section, 5 percent or more of
the stock on any day during the consolidated return year, and
(ii) The thrift institution's applicable percentage determined under
subparagraphs (A) and (B) of section 593(b)(2).
For purposes of this subparagraph, dividends allocated to a thrift
institution under Sec. 1.596-1(c) shall be considered received by the
thrift institution.
(5) For purposes of paragraph (a)(4)(i) of this section, a member
owning stock of another member (the ``second member'') shall be
considered as owning its proportionate share of any stock of a member
owned by the second member. Stock considered as being owned by reason of
the preceding sentence shall, for purposes of applying that sentence, be
treated as actually owned. The proportionate share of stock in a member
owned by another member is the proportion which the value of the stock
so
[[Page 363]]
owned bears to the value of all the outstanding stock in the member. For
purposes of this paragraph the term ``stock'' includes nonvoting stock
which is limited and preferred as to dividends.
(6) For purposes of paragraph (a)(4)(i) of this section, if two or
more thrift institutions that are both members of the group each owns 5
percent or more of the same member's stock, the member's stock will be
considered to be owned only by the thrift institution with the highest
applicable percentage.
(b) Intercompany dividends. The deduction determined under paragraph
(a) of this section is determined without taking into account
intercompany dividends to the extent that, under Sec. 1.1502-13(f)(2),
they are not included in gross income. See Sec. 1.1502-13 for additional
rules relating to intercompany dividends.
(c) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). Corporations P, S, and S-1 filed a consolidated return
for the calendar year 1966 showing consolidated taxable income of
$100,000 (determined without regard to the consolidated net operating
loss deduction, consolidated dividends received deduction, and the
consolidated section 247 deduction). Such corporations received
dividends during such year from nonmember domestic corporations as
follows:
Dividends
Corporation:
P......................................................... $6,000
S......................................................... 10,000
S-1....................................................... 34,000
-----------
Total................................................... 50,000
The dividends received deduction allowable to each member under section
243(a)(1) (computed without regard to the limitation in section 246(b))
is as follows: P has $5,100 (85 percent of $6,000), S has $8,500 (85
percent of $10,000), and S-1 has $28,900 (85 percent of $34,000), or a
total of $42,500. Since $42,500 is less than $85,000 (85 percent of
$100,000), the consolidated dividends received deduction is $42,500.
Example (2). Assume the same facts as in example (1) except that
consolidated taxable income (computed without regard to the consolidated
net operating loss deduction, consolidated dividends received deduction,
and the consolidated section 247 deduction) was $40,000. The aggregate
of the dividends received deductions, $42,500, computed without regard
to section 246(b), results in a consolidated net operating loss of
$2,500. See section 172(d)(6). Therefore, paragraph (a)(2) of this
section does not apply and the consolidated dividends received deduction
is $42,500.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7631, 44 FR
40497, July 11, 1979; T.D. 8597, 60 FR 36710, July 18, 1995; T.D. 8677,
61 FR 33323, June 27, 1996; T.D. 8823, 64 FR 36099, July 2, 1999]
Sec. 1.1502-27 Consolidated section 247 deduction.
(a) Amount of deduction. The consolidated section 247 deduction for
the taxable year shall be an amount computed as follows:
(1) First, determine the amount which is the lesser of:
(i) The aggregate of the dividends paid (within the meaning of
section 247(a)) during such year by members of the group which are
public utilities (within the meaning of section 247(b)(1)) on preferred
stock (within the meaning of section 247(b)(2)), other than dividends
paid to other members of the group, or
(ii) The aggregate of the taxable income (or loss) (as determined
under paragraph (b) of this section) of each such member which is a
public utility.
(2) Then, multiply the amount determined under subparagraph (1) of
this paragraph by the fraction specified in section 247(a)(2).
(b) Computation of taxable income. For purposes of paragraph
(a)(1)(ii) of this section, the taxable income (or loss) of a member of
the group described in paragraph (a)(1)(i) shall be determined under
Sec. 1.1502-12, adjusted for the following items taken into account in
the computation of consolidated taxable income:
(1) The portion of the consolidated net operating loss deduction,
the consolidated charitable contributions deduction, and the
consolidated dividends received deduction, attributable to such member;
(2) Such member's capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) (determined without
regard to any net capital loss carryover or carryback attributable to
such member);
(3) Such member's net capital loss and section 1231 net loss,
reduced by
[[Page 364]]
the portion of the consolidated net capital loss attributable to such
member; and
(4) The portion of any consolidated net capital loss carryover or
carryback attributable to such member which is absorbed in the taxable
year.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980]
Basis, Stock Ownership, and Earnings and Profits Rules
Sec. 1.1502-30 Stock basis after certain triangular reorganizations.
(a) Scope. This section provides rules for determining the basis of
the stock of an acquiring corporation as a result of a triangular
reorganization. The definitions and nomenclature contained in
Sec. 1.358-6 apply to this section.
(b) General rules--(1) Forward triangular merger, triangular C
reorganization, or triangular B reorganization. P adjusts its basis in
the stock of S as a result of a forward triangular merger, triangular C
reorganization, or triangular B reorganization under Sec. 1.358-6(c) and
(d), except that Sec. 1.358-6 (c)(1)(ii) and (d)(2) do not apply.
Instead, P adjusts such basis by taking into account the full amount
of--
(i) T liabilities assumed by S or the amount of liabilities to which
the T assets acquired by S are subject, and
(ii) The fair market value of any consideration not provided by P
pursuant to the plan of reorganization.
(2) Reverse triangular merger. If P adjusts its basis in the T stock
acquired as a result of a reverse triangular merger under Sec. 1.358-6
(c)(2)(i) and (d), Sec. 1.358-6 (c)(1)(ii) and (d)(2) do not apply.
Instead, P adjusts such basis by taking into account the full amount
of--
(i) T liabilities deemed assumed by S or the amount of liabilities
to which the T assets deemed acquired by S are subject, and
(ii) The fair market value of any consideration not provided by P
pursuant to the plan of reorganization.
(3) Excess loss accounts. Negative adjustments under this section
may exceed P's basis in its S or T stock. The resulting negative amount
is P's excess loss account in its S or T stock. See Sec. 1.1502-19 for
rules treating excess loss accounts as negative basis, and treating
references to stock basis as including references to excess loss
accounts.
(4) Application of other rules of law. The rules for this section
are in addition to other rules of law. See Sec. 1.1502-80(d) for the
non-application of section 357(c) to P.
(5) Examples. The rules of this paragraph (b) are illustrated by the
following examples. For purposes of these examples, P, S, and T are
domestic corporations, P and S file consolidated returns, P owns all of
the only class of S stock, the P stock exchanged in the transaction
satisfies the requirements of the applicable triangular reorganization
provisions, the facts set forth the only corporate activity, and tax
liabilities are disregarded.
Example 1. Liabilities.(a) Facts. T has assets with an aggregate
basis of $60 and fair market value of $100. T's assets are subject to
$70 of liabilities. Pursuant to a plan, P forms S with $5 of cash (which
S retains), and T merges into S. In the merger, the T shareholders
receive P stock worth $30 in exchange for their T stock. The transaction
is a reorganization to which sections 368 (a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6, P adjusts its $5 basis in
the S stock as if P had acquired the T assets with a carryover basis
under section 362 and transferred these assets to S in a transaction in
which P determines its basis in the S stock under section 358. Under the
rules of this section, the limitation described in Sec. 1.358-
6(c)(1)(ii) does not apply. Thus, P adjusts its basis in the S stock by
-$10 (the aggregate adjusted basis of T's assets decreased by the amount
of liabilities to which the T assets are subject). Consequently, as a
result of the reorganization, P has an excess loss account of $5 in its
S stock.
Example 2. Consideration not provided by P. (a) Facts. T has assets
with an aggregate basis of $10 and fair market value of $100 and no
liabilities. S is an operating company with substantial assets that has
been in existence for several years. P has a $5 basis in its S stock.
Pursuant to a plan, T merges into S and the T shareholders receive $70
of P stock provided by P pursuant to the plan of reorganization and $30
of cash provided by S in exchange for their T stock. The transaction is
a reorganization to which sections 368 (a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6, P adjusts its $5 basis in
the S stock as if P had acquired the T assets with a carryover basis
under section 362 and transferred these assets to S in a transaction in
which P determines its basis in the S stock under section
[[Page 365]]
358. Under the rules of this section, the limitation described in
Sec. 1.358-6(d)(2) does not apply. Thus, P adjusts its basis in the S
stock by -$20 (the aggregate adjusted basis of T's assets decreased by
the fair market value of the consideration provided by S). As a result
of the reorganization, P has an excess loss account of $15 in its S
stock.
(c) Appreciated asset. The facts are the same as in paragraph (a) of
this Example 2, except that in the reorganization S provides an asset
with a $20 adjusted basis and $30 fair market value instead of $30 cash.
The basis is adjusted in the same manner as in paragraph (b) of this
Example 2. In addition, because S recognizes a $10 gain from the asset
under section 1001, P's basis in its S stock is increased under
Sec. 1.1502-32(b) by S's $10 gain. Consequently, as a result of the
reorganization, P has an excess loss account of $5 in its S stock. (The
results would be the same if the appreciated asset provided by S was P
stock with respect to which S recognized gain. See Sec. 1.1032-2(c)).
Example 3. Reverse triangular merger. (a) Facts. T has assets with
an aggregate basis of $60 and fair market value of $100. T's assets are
subject to $70 of liabilities. P owns all of the only class of S stock.
P has a $5 basis in its S stock. Pursuant to a plan, S merges into T
with T surviving. In the merger, the T shareholders exchange their T
stock for $2 cash from P and $28 worth of P stock provided by P pursuant
to the plan. The transaction is a reorganization to which sections 368
(a)(1)(A) and (a)(2)(E) apply.
(b) Basis adjustment. Under Sec. 1.358-6, P's basis in the T stock
acquired equals its $5 basis in its S stock immediately before the
transaction adjusted by the $60 basis in the T assets deemed
transferred, and the $70 of liabilities to which the T assets are
subject. Under the rules of this section, the limitation described in
Sec. 1.358-6(c)(1)(ii) does not apply. Consequently, P has an excess
loss account of $5 in its T stock as a result of the transaction.
(c) Effective date. This section applies to reorganizations
occurring on or after December 21, 1995.
[T.D. 8648, 60 FR 66082, Dec. 21, 1995]
Sec. 1.1502-31 Stock basis after a group structure change.
(a) In general--(1) Overview. If one corporation (P) succeeds
another corporation (T) under the principles of Sec. 1.1502-75(d) (2) or
(3) as the common parent of a consolidated group in a group structure
change, the basis of members in the stock of the former common parent
(or the stock of a successor) is adjusted or determined under this
section. See Sec. 1.1502-33(f)(1) for the definition of group structure
change. For example, if P owns all of the stock of another corporation
(S), and T merges into S in a group structure change that is a
reorganization described in section 368(a)(2)(D) in which P becomes the
common parent of the T group, P's basis in S's stock must be adjusted to
reflect the change in S's assets and liabilities. The rules of this
section coordinate with the earnings and profits adjustments required
under Sec. 1.1502-33(f)(1), generally conforming the results of
transactions in which the T group continues under Sec. 1.1502-75 with P
as the common parent. By preserving in P the relationship between T's
earnings and profits and asset basis, these adjustments limit possible
distortions under section 1502 (e.g., in the deconsolidation rules for
earnings and profits under Sec. 1.1502-33(e), and the continued filing
requirements under Sec. 1.1502-75(a)). This section applies whether or
not T continues to exist after the group structure change.
(2) Application of other rules of law. The rules of this section are
in addition to other rules of law. The provisions of this section and
other rules of law must not have the effect of duplicating an amount in
P's basis in S's stock.
(b) General rules. Except as otherwise provided in this section--
(1) Asset acquisitions. If a corporation acquires the former common
parent's assets (and any liabilities assumed or to which the assets are
subject) in a group structure change, the basis of members in the stock
of the acquiring corporation is adjusted immediately after the group
structure change to reflect the acquiring corporation's allocable share
of the former common parent's net asset basis as determined under
paragraph (c) of this section. For example, if S acquires all of T's
assets in a group structure change that is a reorganization described in
section 368(a)(2)(D), P's basis in S's stock is adjusted to reflect T's
net asset basis. If P owned some of T's stock before the group structure
change, the results would be the same because P's basis in the T stock
is not taken into account in determining P's basis in S's stock. If T's
net asset basis is a negative amount, it reduces P's basis in S's stock
and, if the reduction exceeds P's
[[Page 366]]
basis in S's stock, the excess is P's excess loss account in S's stock.
See Sec. 1.1502-19 for rules treating P's excess loss account as
negative basis, and treating a reference to P's basis in S's stock as
including an excess loss account.
(2) Stock acquisitions. If a corporation acquires stock of the
former common parent in a group structure change, the basis of the
members in the former common parent's stock immediately after the group
structure change (including any stock of the former common parent owned
before the group structure change) is redetermined in accordance with
the results for an asset acquisition described in paragraph (b)(1) of
this section. For example, if all of T's stock is contributed to P in a
group structure change to which section 351 applies, P's basis in T's
stock is T's net asset basis, rather than the amount determined under
section 362. Similarly, if S merges into T in a group structure change
described in section 368(a)(2)(E), P's basis in T's stock is the basis
that P would have in S's stock under paragraph (b)(1) of this section if
T had merged into S in a group structure change described in section
368(a)(2)(D).
(c) Net asset basis. The former common parent's net asset basis is
the basis it would have in the stock of a newly formed subsidiary, if--
(1) The former common parent transferred its assets (and any
liabilities assumed or to which the assets are subject) to the
subsidiary in a transaction to which section 351 applies;
(2) The former common parent and the subsidiary were members of the
same consolidated group (see Sec. 1.1502-80(d) for the non-application
of section 357(c) to the transfer); and
(3) The asset basis taken into account is each asset's basis
immediately after the group structure change (e.g., taking into account
any income or gain recognized in the group structure change and
reflected in the asset's basis).
(d) Additional adjustments. In addition to the adjustments in
paragraph (b) of this section, the following adjustments are made:
(1) Consideration not provided by P. The basis is reduced to reflect
the fair market value of any consideration not provided by the member.
For example, if S acquires T's assets in a group structure change
described in section 368(a)(2)(D), and S provides an appreciated asset
(e.g., stock of P) as partial consideration in the transaction, P's
basis in S's stock is reduced by the fair market value of the asset.
(2) Allocable share--(i) Asset acquisitions. If a corporation
receives less than all of the former common parent's assets and
liabilities in the group structure change, the former common parent's
net asset basis taken into account under paragraph (b)(1) of this
section is adjusted accordingly.
(ii) Stock acquisitions. If a corporation owns less than all of the
former common parent's stock immediately after a group structure change
described in paragraph (b)(2) of this section, the percentage of the
former common parent's net asset basis taken into account equals the
percentage (by fair market value) of the former common parent's stock
owned immediately after the group structure change. For example, if P
owns less than all of the former common parent's stock immediately after
the group structure change, only an allocable part of the basis
determined under this section is reflected in the shares owned by P (and
the amount allocable to shares owned by nonmembers has no effect on the
basis of their shares).
(3) Allocation among shares of stock. The basis determined under
this section is allocated among shares under the principles of section
358. For example, if P owns multiple classes of the former common
parent's stock immediately after the group structure change, only an
allocable part of the basis determined under this section is reflected
in the basis of each share. See Sec. 1.1502-19(d), for special
allocations with respect to excess loss accounts.
(4) Higher-tier members. To the extent that the former common parent
is owned by members other than the new common parent, the basis of
members in the stock of all subsidiaries owning, directly or indirectly,
in whole or in part, an interest in the former common parent's assets or
liabilities is adjusted in accordance with the principles of
[[Page 367]]
this section. The adjustments are applied in the order of the tiers,
from the lowest to the highest.
(e) Waiver of loss carryovers of former common parent --(1) General
rule. An irrevocable election may be made to treat all or any portion of
a loss carryover attributable to the common parent as expiring for all
Federal income tax purposes immediately before the group structure
change. Thus, if the loss carryover is treated as expiring under the
election, it will not result in a negative adjustment to the basis of
P's stock under Sec. 1.1502-32(b).
(2) Election. The election described in this paragraph (e) must be
made in a separate statement entitled ``ELECTION TO TREAT LOSS CARRYOVER
AS EXPIRING UNDER Sec. 1.1502-31(e).'' The statement must be filed with
the consolidated group's return for the year that includes the group
structure change, and it must be signed by the former and the new common
parent. The statement must identify the amount of each loss carryover
deemed to expire (or the amount of each loss carryover deemed not to
expire, with any balance of any loss carryovers being deemed to expire).
(f) Predecessors and successors. For purposes of this section, any
reference to a corporation includes a reference to a successor or
predecessor as the context may require. See Sec. 1.1502-32(f) for
definitions of predecessor and successor.
(g) Examples. For purposes of the examples in this section, unless
otherwise stated, all corporations have only one class of stock
outstanding, the tax year of all persons is the calendar year, all
persons use the accrual method of accounting, the facts set forth the
only corporate activity, all transactions are between unrelated persons,
and tax liabilities are disregarded. The principles of this section are
illustrated by the following examples.
Example 1. Forward triangular merger. (a) Facts. P is the common
parent of one group and T is the common parent of another. T has assets
with an aggregate basis of $60 and fair market value of $100 and no
liabilities. T's shareholders have an aggregate basis of $50 in T's
stock. In Year 1, pursuant to a plan, P forms S and T merges into S with
the T shareholders receiving $100 of P stock in exchange for their T
stock. The transaction is a reorganization described in section
368(a)(2)(D). The transaction is also a reverse acquisition under
Sec. 1.1502- 75(d)(3) because the T shareholders, as a result of owning
T's stock, own more than 50% of the value of P's stock immediately after
the transaction. Thus, the transaction is a group structure change under
Sec. 1.1502-33(f)(1), and P's earnings and profits are adjusted to
reflect T's earnings and profits immediately before T ceases to be the
common parent of the T group.
(b) Analysis. Under paragraph (b)(1) of this section, P's basis in
S's stock is adjusted to reflect T's net asset basis. Under paragraph
(c) of this section, T's net asset basis is $60, the basis T would have
in the stock of a subsidiary under section 358 if T had transferred all
of its assets and liabilities to the subsidiary in a transaction to
which section 351 applies. Thus, P has a $60 basis in S's stock.
(c) Pre-existing S. The facts are the same as in paragraph (a) of
this Example 1, except that P has owned the stock of S for several years
and P has a $50 basis in the S stock before the merger with T. Under
paragraph (b)(1) of this section, P's $50 basis in S's stock is adjusted
to reflect T's net asset basis. Thus, P's basis in S's stock is $110
($50 plus $60).
(d) Excess loss account included in former common parent's net asset
basis. The facts are the same as in paragraph (a) of this Example 1,
except that T has two assets, an operating asset with an $80 basis and
$90 fair market value, and stock of a subsidiary with a $20 excess loss
account and $10 fair market value. Under paragraph (c) of this section,
T's net asset basis is $60 ($80 minus $20). See sections 351 and 358,
and Sec. 1.1502-19. Consequently, P has a $60 basis in S's stock. Under
section 362 and Sec. 1.1502-19, S has an $80 basis in the operating
asset and a $20 excess loss account in the stock of the subsidiary.
(e) Liabilities in excess of basis. The facts are the same as in
paragraph (a) of this Example 1, except that T's assets have a fair
market value of $170 (and $60 basis) and are subject to $70 of
liabilities. Under paragraph (c) of this section, T's net asset basis is
($10) ($60 minus $70). See sections 351 and 358, and Secs. 1.1502-19 and
1.1502-80(d). Thus, P has a $10 excess loss account in S's stock. Under
section 362, S has a $60 basis in its assets (which are subject to $70
of liabilities). (Under paragraph (a)(2) of this section, because the
liabilities are taken into account in determining net asset basis under
paragraph (c) of this section, the liabilities are not also taken into
account as consideration not provided by P under paragraph (d)(1) of
this section.)
(f) Consideration provided by S. The facts are the same as in
paragraph (a) of this Example 1, except that P forms S with a $100
contribution at the beginning of Year 1, and during Year 6, pursuant to
a plan, S purchases $100
[[Page 368]]
of P stock and T merges into S with the T shareholders receiving P stock
in exchange for their T stock. Under paragraph (b)(1) of this section,
P's $100 basis in S's stock is increased by $60 to reflect T's net asset
basis. Under paragraph (d)(1) of this section, P's basis in S's stock is
decreased by $100 (the fair market value of the P stock) because the P
stock purchased by S and used in the transaction is consideration not
provided by P.
(g) Appreciated asset provided by S. The facts are the same as in
paragraph (a) of this Example 1, except that P has owned the stock of S
for several years, and the shareholders of T receive $60 of P stock and
an asset of S with a $30 adjusted basis and $40 fair market value. S
recognizes a $10 gain from the asset under section 1001. Under paragraph
(b)(1) of this section, P's basis in S's stock is increased by $60 to
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's
basis in S's stock is decreased by $40 (the fair market value of the
asset provided by S). In addition, P's basis in S's stock is increased
under Sec. 1.1502-32(b) by S's $10 gain.
(h) Depreciated asset provided by S. The facts are the same as in
paragraph (a) of this Example 1, except that P has owned the stock of S
for several years, and the shareholders of T receive $60 of P stock and
an asset of S with a $50 adjusted basis and $40 fair market value. S
recognizes a $10 loss from the asset under section 1001. Under paragraph
(b)(1) of this section, P's basis in S's stock is increased by $60 to
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's
basis in S's stock is decreased by $40 (the fair market value of the
asset provided by S). In addition, S's $10 loss is taken into account
under Sec. 1.1502-32(b) in determining P's basis adjustments under that
section.
Example 2. Stock acquisition. (a) Facts. P is the common parent of
one group and T is the common parent of another. T has assets with an
aggregate basis of $60 and fair market value of $100 and no liabilities.
T's shareholders have an aggregate basis of $50 in T's stock. Pursuant
to a plan, P forms S and S acquires all of T's stock in exchange for P
stock in a transaction described in section 368(a)(1)(B). The
transaction is also a reverse acquisition under Sec. 1.1502-75(d)(3).
Thus, the transaction is a group structure change under Sec. 1.1502-
33(f)(1), and the earnings and profits of P and S are adjusted to
reflect T's earnings and profits immediately before T ceases to be the
common parent of the T group.
(b) Analysis. Under paragraph (d)(4) of this section, although S is
not the new common parent of the T group, adjustments must be made to
S's basis in T's stock in accordance with the principles of this
section. Although S's basis in T's stock would ordinarily be determined
under section 362 by reference to the basis of T's shareholders in T's
stock immediately before the group structure change, under the
principles of paragraph (b)(2) of this section, S's basis in T's stock
is determined by reference to T's net asset basis. Thus, S's basis in
T's stock is $60.
(c) Higher-tier adjustments. Under paragraph (d)(4) of this section,
P's basis in S's stock is adjusted to $60 (to be consistent with the
adjustment to S's basis in T's stock).
(d) Cross ownership. The facts are the same as in paragraph (a) of
this Example 2, except that S has owned 10% of T's stock for several
years and, pursuant to the plan, S acquires the remaining 90% of T's
stock in exchange for P stock. The results are the same as in paragraphs
(b) and (c) of this Example 2, because S's basis in the initial 10% of
T's stock is redetermined under this section.
(e) Allocable share. The facts are the same as in paragraph (a) of
this Example 2, except that P owns only 90% of S's stock immediately
after the group structure change. S's basis in T's stock is the same as
in paragraph (b) of this Example 2. Under paragraph (d)(2) of this
section, P's basis in its S stock is adjusted to $54 (90% of S's $60
adjustment).
Example 3. Taxable stock acquisition. (a) Facts. P is the common
parent of one group and T is the common parent of another. T has assets
with an aggregate basis of $60 and fair market value of $100 and no
liabilities. T's shareholders have an aggregate basis of $50 in T's
stock. Pursuant to a plan, P acquires all of T's stock in exchange for
$70 of P's stock and $30 in a transaction that is a group structure
change under Sec. 1.1502-33(f)(1). P's acquisition of T's stock is a
taxable transaction. (Because of P's use of cash, the acquisition is not
a transaction described in section 368(a)(1)(B).)
(b) Analysis. Under paragraph (b)(2) of this section, P's basis in
T's stock is adjusted to reflect T's net asset basis. Thus, although P's
basis in T's stock would ordinarily be a cost basis of $100, P's basis
in T's stock under this section is $60.
(h) Effective date--(1) General rule. This section applies to group
structure changes occurring in consolidated return years beginning on or
after January 1, 1995.
(2) Prior law. For prior years, see prior regulations under section
1502 as in effect with respect to the transaction. See, e.g.,
Sec. 1.1502-31T as contained in the 26 CFR part 1 edition revised as of
April 1, 1994.
[T.D. 8560, 59 FR 41683, Aug. 15, 1994]
Sec. 1.1502-32 Investment adjustments.
(a) In general--(1) Purpose. This section provides rules for
adjusting the basis of the stock of a subsidiary (S)
[[Page 369]]
owned by another member (P). These rules modify the determination of P's
basis in S's stock under applicable rules of law by adjusting P's basis
to reflect S's distributions and S's items of income, gain, deduction,
and loss taken into account for the period that S is a member of the
consolidated group. The purpose of the adjustments is to treat P and S
as a single entity so that consolidated taxable income reflects the
group's income. For example, if P forms S with a $100 contribution, and
S takes into account $10 of income, P's $100 basis in S's stock under
section 358 is increased by $10 under this section to prevent S's income
from being taken into account a second time on P's disposition of S's
stock. Comparable adjustments are made for tax-exempt income and
noncapital, nondeductible expenses that S takes into account, to
preserve their treatment under the Internal Revenue Code.
(2) Application of other rules of law. The rules of this section are
in addition to other rules of law. See, e.g., section 358 (basis
determinations for distributees), section 1016 (adjustments to basis),
Sec. 1.1502-11(b) (limitations on the use of losses), Sec. 1.1502-19
(treatment of excess loss accounts), Sec. 1.1502-20 (additional rules
relating to stock loss), and Sec. 1.1502-31 (basis after a group
structure change). P's basis in S's stock must not be adjusted under
this section and other rules of law in a manner that has the effect of
duplicating an adjustment. See also paragraph (h)(5) of this section for
basis reductions applicable to certain former subsidiaries.
(3) Overview--(i) In general. The amount of the stock basis
adjustments and their timing are determined under paragraph (b) of this
section. Under paragraph (c) of this section, the amount of the
adjustment is allocated among the shares of S's stock. Paragraphs (d)
through (g) of this section provide definitions, an anti-avoidance rule,
successor rules, and recordkeeping requirements.
(ii) Excess loss account. Negative adjustments under this section
may exceed P's basis in S's stock. The resulting negative amount is P's
excess loss account in S's stock. See Sec. 1.1502-19 for rules treating
excess loss accounts as negative basis, and treating references to stock
basis as including references to excess loss accounts.
(iii) Tiering up of adjustments. The adjustments to S's stock under
this section are taken into account in determining adjustments to
higher-tier stock. The adjustments are applied in the order of the
tiers, from the lowest to the highest. For example, if P is also a
subsidiary, P's adjustment to S's stock is taken into account in
determining the adjustments to stock of P owned by other members.
(b) Stock basis adjustments--(1) Timing of adjustments--(i) In
general. Adjustments under this section are made as of the close of each
consolidated return year, and as of any other time (an interim
adjustment) if a determination at that time is necessary to determine a
tax liability of any person. For example, adjustments are made as of P's
sale of S's stock in order to measure P's gain or loss from the sale,
and if P's interest in S's stock is not uniform throughout the year
(e.g., because P disposes of a portion of its S stock, or S issues
additional shares to another person), the adjustments under this section
are made by taking into account the varying interests. An interim
adjustment may be necessary even if tax liability is not affected until
a later time. For example, if P sells only 50% of S's stock and S
becomes a nonmember, adjustments must be made for the retained stock as
of the disposition (whether or not P has an excess loss account in that
stock). Similarly, if S liquidates during a consolidated return year,
adjustments must be made as of the liquidation (even if the liquidation
is tax free under section 332).
(ii) Allocation of items. If Sec. 1.1502-76(b) applies to S for
purposes of an adjustment before the close of the group's consolidated
return year, the amount of the adjustment is determined under that
section. If Sec. 1.1502-76(b) does not apply to the interim adjustment,
the adjustment is determined under the principles of Sec. 1.1502-76(b),
consistently applied, and ratable allocation under the principles of
Sec. 1.1502-76(b)(2)(ii) or (iii) may be used without filing an election
under Sec. 1.1502-76(b)(2). The principles would apply, for example, if
P
[[Page 370]]
becomes a nonmember but S remains a member.
(2) Amount of adjustments. P's basis in S's stock is increased by
positive adjustments and decreased by negative adjustments under this
paragraph (b)(2). The amount of the adjustment, determined as of the
time of the adjustment, is the net amount of S's--
(i) Taxable income or loss;
(ii) Tax-exempt income;
(iii) Noncapital, nondeductible expenses; and
(iv) Distributions with respect to S's stock.
(3) Operating rules. For purposes of determining P's adjustments to
the basis of S's stock under paragraph (b)(2) of this section--
(i) Taxable income or loss. S's taxable income or loss is
consolidated taxable income (or loss) determined by including only S's
items of income, gain, deduction, and loss taken into account in
determining consolidated taxable income (or loss), treating S's
deductions and losses as taken into account to the extent they are
absorbed by S or any other member. For this purpose:
(A) To the extent that S's deduction or loss is absorbed in the year
it arises or is carried forward and absorbed in a subsequent year (e.g.,
under section 172, 465, or 1212), the deduction or loss is taken into
account under paragraph (b)(2) of this section in the year in which it
is absorbed.
(B) To the extent that S's deduction or loss is carried back and
absorbed in a prior year (whether consolidated or separate), the
deduction or loss is taken into account under paragraph (b)(2) of this
section in the year in which it arises and not in the year in which it
is absorbed.
(ii) Tax-exempt income--(A) In general. S's tax-exempt income is its
income and gain which is taken into account but permanently excluded
from its gross income under applicable law, and which increases,
directly or indirectly, the basis of its assets (or an equivalent
amount). For example, S's dividend income to which Sec. 1.1502-
13(f)(2)(ii) applies, and its interest excluded from gross income under
section 103, are treated as tax-exempt income. However, S's income not
recognized under section 1031 is not treated as tax- exempt income
because the corresponding basis adjustments under section 1031(d)
prevent S's nonrecognition from being permanent. Similarly, S's tax-
exempt income does not include gain not recognized under section 332
from the liquidation of a lower-tier subsidiary, or not recognized under
section 118 or section 351 from a transfer of assets to S.
(B) Equivalent deductions. To the extent that S's taxable income or
gain is permanently offset by a deduction or loss that does not reduce,
directly or indirectly, the basis of S's assets (or an equivalent
amount), the income or gain is treated as tax-exempt income and is taken
into account under paragraph (b)(3)(ii)(A) of this section. In addition,
the income and the offsetting item are taken into account under
paragraph (b)(3)(i) of this section. For example, if S receives a $100
dividend with respect to which a $70 dividends received deduction is
allowed under section 243, $70 of the dividend is treated as tax-exempt
income. Accordingly, P's basis in S's stock increases by $100 because
the $100 dividend and $70 deduction are taken into account under
paragraph (b)(3)(i) of this section (resulting in $30 of the increase),
and $70 of the dividend is also taken into account under paragraph
(b)(3)(ii)(A) of this section as tax-exempt income (resulting in $70 of
the increase). (See paragraph (b)(3)(iii) of this section if there is a
corresponding negative adjustment under section 1059.) Similarly, income
from mineral properties is treated as tax-exempt income to the extent it
is offset by deductions for depletion in excess of the basis of the
property.
(C) Discharge of indebtedness income--(1) In general. Discharge of
indebtedness income of S that is excluded from gross income under
section 108 is treated as tax-exempt income only to the extent the
discharge is applied to reduce tax attributes (e.g., under section 108
or 1017). Discharge of S's indebtedness is treated as applied to reduce
tax attributes only to the extent the attribute reduction is taken into
account as a reduction under paragraph (b)(3)(iii) of this section.
(2) Expired loss carryovers. If the amount of the discharge exceeds
the amount of the attribute reduction, the
[[Page 371]]
excess is nevertheless treated as applied to reduce tax attributes to
the extent a loss carryover expired without tax benefit, the expiration
was taken into account as a noncapital, nondeductible expense under
paragraph (b)(3)(iii) of this section, and the loss carryover would have
been reduced had it not expired.
(D) Basis shifts. An increase in the basis of S's assets (or an
equivalent as described in paragraph (b)(3)(iv)(B) of this section) is
treated as tax-exempt income to the extent that the increase is not
otherwise taken into account in determining stock basis, it corresponds
to a negative adjustment that is taken into account by the group under
this paragraph (b) (or incurred by the common parent), and it has the
effect (viewing the group in the aggregate) of a permanent recovery of
the reduction. For example, S's basis increase under section 50(c)(2) is
treated as tax-exempt income to the extent the preceding basis reduction
under section 50(c)(1) is reflected in the basis of a member's stock. On
the other hand, if S increases the basis of an asset as the result of an
accounting method change, and the related positive section 481(a)
adjustment is taken into account over time, the basis increase is not
treated as tax-exempt income.
(iii) Noncapital, nondeductible expenses--(A) In general. S's
noncapital, nondeductible expenses are its deductions and losses that
are taken into account but permanently disallowed or eliminated under
applicable law in determining its taxable income or loss, and that
decrease, directly or indirectly, the basis of its assets (or an
equivalent amount). For example, S's Federal taxes described in section
275 and loss not recognized under section 311(a) are noncapital,
nondeductible expenses. Similarly, if a loss carryover (e.g., under
section 172 or 1212) attributable to S expires or is reduced under
section 108(b), it becomes a noncapital, nondeductible expense at the
close of the last tax year to which it may be carried. However, if S
sells and repurchases a security subject to section 1091, the disallowed
loss is not a noncapital, nondeductible expense because the
corresponding basis adjustments under section 1091(d) prevent the
disallowance from being permanent.
(B) Nondeductible basis recovery. Any other decrease in the basis of
S's assets (or an equivalent as described in paragraph (b)(3)(iv)(B) of
this section) may be a noncapital, nondeductible expense to the extent
that the decrease is not otherwise taken into account in determining
stock basis and is permanently eliminated for purposes of determining
S's taxable income or loss. Whether a decrease is so treated is
determined by taking into account both the purposes of the Code or
regulatory provision resulting in the decrease and the purposes of this
section. For example, S's noncapital, nondeductible expenses include any
basis reduction under section 50(c)(1), section 1017, section 1059,
Sec. 1.1502-20(b), or Sec. 1.1502-20(g). Also included as a noncapital,
nondeductible expense is the amount of any gross-up for taxes paid by
another taxpayer that S is treated as having paid (e.g., income included
under section 78, or the portion of an undistributed capital gain
dividend that is treated as tax deemed to have been paid by a
shareholder under section 852(b)(3)(D)(ii), whether or not any
corresponding amount is claimed as a tax credit). In contrast, a
decrease generally is not a noncapital, nondeductible expense if it
results because S redeems stock in a transaction to which section 302(a)
applies, S receives assets in a liquidation to which section 332 applies
and its basis in the assets is less than its basis in the stock
canceled, or S distributes the stock of a subsidiary in a distribution
to which section 355 applies.
(iv) Special rules for tax-exempt income and noncapital,
nondeductible expenses. For purposes of paragraphs (b)(3)(ii) and (iii)
of this section:
(A) Treatment as permanent. An amount is permanently excluded from
gross income, or permanently disallowed or eliminated, if it is so
treated by S even though another person may take a corresponding amount
into account. For example, if S sells property to a nonmember at a loss
that is disallowed under section 267(a), S's loss is a noncapital,
nondeductible expense even though under section 267(d) the nonmember may
treat a corresponding amount of gain as not recognized. (If
[[Page 372]]
the nonmember is a subsidiary in another consolidated group, its gain
not recognized under section 267(d) is tax-exempt income under paragraph
(b)(3)(ii)(A) of this section.)
(B) Amounts equivalent to basis and adjustments to basis. Amounts
equivalent to basis include the amount of money, the amount of a loss
carryover, and the amount of an adjustment to gain or loss under section
475(a) for securities described in section 475(a)(2). An equivalent to a
basis increase includes a decrease in an excess loss account, and an
equivalent to a basis decrease includes the denial of basis for taxable
income.
(C) Timing. An amount is taken into account in the year in which it
would be taken into account under paragraph (b)(3)(i) of this section if
it were subject to Federal income taxation.
(D) Tax sharing agreements. Taxes are taken into account by applying
the principles of section 1552 and the percentage method under
Sec. 1.1502-33(d)(3) (and by assuming a 100% allocation of any decreased
tax liability). The treatment of amounts allocated under this paragraph
(b)(3)(iv)(D) is analogous to the treatment of allocations under
Sec. 1.1552-1(b)(2). For example, if one member owes a payment to a
second member, the first member is treated as indebted to the second
member. The right to receive payment is treated as a positive adjustment
under paragraph (b)(3)(ii) of this section, and the obligation to make
payment is treated as a negative adjustment under paragraph (b)(3)(iii)
of this section. If the obligation is not paid, the amount not paid
generally is treated as a distribution, contribution, or both, depending
on the relationship between the members.
(v) Distributions. Distributions taken into account under paragraph
(b)(2) of this section are distributions with respect to S's stock to
which section 301 applies and all other distributions treated as
dividends (e.g., under section 356(a)(2)). See Sec. 1.1502-13(f)(2)(iv)
for taking into account distributions to which section 301 applies (but
not other distributions treated as dividends) under the entitlement
rule.
(4) Waiver of loss carryovers from separate return limitation
years--(i) General rule. If S has a loss carryover from a separate
return limitation year when it becomes a member of a consolidated group,
the group may make an irrevocable election to treat all or any portion
of the loss carryover as expiring for all Federal income tax purposes
immediately before S becomes a member of the consolidated group (deemed
expiration). If S was a member of another group immediately before it
became a member of the consolidated group, the expiration is also
treated as occurring immediately after it ceases to be a member of the
prior group.
(ii) Stock basis adjustments from a waiver--(A) Qualifying
transactions. If S becomes a member of the consolidated group in a
qualifying cost basis transaction and an election under this paragraph
(b)(4) is made, the noncapital, nondeductible expense resulting from the
deemed expiration does not result in a corresponding stock basis
adjustment for any member under this section. A qualifying cost basis
transaction is the purchase (i.e., a transaction in which basis is
determined under section 1012) by members of the acquiring consolidated
group (while they are members) in a 12-month period of an amount of S's
stock satisfying the requirements of section 1504(a)(2).
(B) Nonqualifying transactions. If S becomes a member of the
consolidated group other than in a qualifying cost basis transaction and
an election under this paragraph (b)(4) is made, the basis of its stock
that is owned by members immediately after it becomes a member is
subject to reduction under the principles of this section to reflect the
deemed expiration. The reduction occurs immediately before S becomes a
member, but after it ceases to be a member of any prior group, and it
therefore does not result in a corresponding stock basis adjustment for
any higher-tier member of the transferring or acquiring consolidated
group. Any basis reduction under this paragraph (b)(4)(ii)(B) is taken
into account in making determinations of basis under the Code with
respect to S's stock (e.g., a determination under section 362 because
the stock is acquired in a transaction described in section
368(a)(1)(B)), but it does not result in corresponding stock basis
adjustments under this section for any higher-tier
[[Page 373]]
member. If the basis reduction exceeds the basis of S's stock, the
excess is treated as an excess loss account to which the members owning
S's stock succeed.
(C) Higher-tier corporations. If S becomes a member of the
consolidated group as a result, in whole or in part, of a higher-tier
corporation becoming a member (whether or not in a qualifying cost basis
transaction), additional adjustments are required. The highest-tier
corporation (T) whose becoming a member resulted in S becoming a member,
and T's chain of lower-tier corporations that includes S, are subject to
the adjustment. The deemed expiration of S's loss carryover that results
in a negative adjustment for the first higher-tier corporation is
treated as an expiring loss carryover of that higher-tier corporation
for purposes of applying paragraph (b)(4)(ii)(B) of this section to that
corporation. For example, if P purchases all of the stock of T, T owns
all of the stock of T1, T1 owns all of the stock of S, S becomes a
member as a result of T becoming a member, and the election under this
paragraph (b)(4) is made, the basis of the S stock is reduced and the
reduction tiers up to T1, T1 treats the negative adjustment to its basis
in S's stock as an expiring loss carryover of T1, and T then adjusts its
basis in T1's stock. In addition, if T becomes a member of the acquiring
group in a transaction other than a qualifying cost basis transaction,
the amount that tiers up to T also reduces the basis of its stock under
paragraph (b)(4)(ii)(B) of this section (but the amount does not tier up
to higher-tier members).
(iii) Net asset basis limitation. Basis reduced under this paragraph
(b)(4) is restored before S becomes a member (and before the basis of
S's stock is taken into account in determining basis under the Code) to
the extent necessary to conform a share's basis to its allocable portion
of net asset basis. In the case of higher-tier corporations under
paragraph (b)(4)(ii)(C) of this section, the restoration does not tier
up but is instead applied separately to each higher-tier corporation.
For purposes of determining each corporation's net asset basis
(including the basis of stock in lower-tier corporations), the
restoration is applied in the order of tiers, from the lowest to the
highest. For purposes of the restoration:
(A) A member's net asset basis is the positive or negative
difference between the adjusted basis of its assets (and the amount of
any of its loss carryovers that are not deemed to expire) and its
liabilities. Appropriate adjustments must be made, for example, to
disregard liabilities that subsequently will give rise to deductions
(e.g., liabilities to which section 461(h) applies).
(B) Within a class of stock, each share has the same allocable
portion of net asset basis. If there is more than one class of common
stock, the net asset basis is allocated to each class by taking into
account the terms of each class and all other facts and circumstances
relating to the overall economic arrangement.
(iv) Election. The election described in this paragraph (b)(4) must
be made in a separate statement entitled ``ELECTION TO TREAT LOSS
CARRYOVER AS EXPIRING UNDER Sec. 1.1502-32(b)(4).'' The statement must
be filed with the consolidated group's return for the year S becomes a
member, and it must be signed by the common parent and S. A separate
statement must be made for each member whose loss carryover is deemed to
expire. The statement must identify the amount of each loss carryover
deemed to expire (or the amount of each loss carryover deemed not to
expire, with any balance of any loss carryovers being deemed to expire),
the basis of any stock reduced as a result of the deemed expiration, and
the computation of the basis reduction.
(5) Examples--(i) In general. For purposes of the examples in this
section, unless otherwise stated, P owns all of the only class of S's
stock, the stock is owned for the entire year, S owns no stock of lower-
tier members, the tax year of all persons is the calendar year, all
persons use the accrual method of accounting, the facts set forth the
only corporate activity, preferred stock is described in section
1504(a)(4), all transactions are between unrelated persons, and tax
liabilities are disregarded.
[[Page 374]]
(ii) Stock basis adjustments. The principles of this paragraph (b)
are illustrated by the following examples.
Example 1. Taxable income. (a) Current taxable income. For Year 1,
the P group has $100 of taxable income when determined by including only
S's items of income, gain, deduction, and loss taken into account. Under
paragraph (b)(1) of this section, P's basis in S's stock is adjusted
under this section as of the close of Year 1. Under paragraph (b)(2) of
this section, P's basis in S's stock is increased by the amount of the P
group's taxable income determined by including only S's items taken into
account. Thus, P's basis in S's stock is increased by $100 as of the
close of Year 1.
(b) Intercompany gain that is not taken into account. The facts are
the same as in paragraph (a) of this Example 1, except that S also sells
property to another member at a $25 gain in Year 1, the gain is deferred
under Sec. 1.1502-13 and taken into account in Year 3, and P sells 10%
of S's stock to nonmembers in Year 2. Under paragraph (b)(3)(i) of this
section, S's deferred gain is not additional taxable income for Year 1
or 2 because it is not taken into account in determining the P group's
consolidated taxable income for either of those years. The deferred gain
is not tax-exempt income under paragraph (b)(3)(ii) of this section
because it is not permanently excluded from S's gross income. The
deferred gain does not result in a basis adjustment until Year 3, when
it is taken into account in determining the P group's consolidated
taxable income. Consequently, P's basis in the S shares sold is not
increased to reflect S's gain from the intercompany sale of the
property. In Year 3, the deferred gain is taken into account, but the
amount allocable to the shares sold by P does not increase their basis
because these shares are held by nonmembers.
(c) Intercompany gain taken into account. The facts are the same as
in paragraph (b) of this Example 1, except that P sells all of S's stock
in Year 2 (rather than only 10%). Under Sec. 1.1502-13, S takes the $25
gain into account immediately before S becomes a nonmember. Thus, P's
basis in S's stock is increased to reflect S's gain from the
intercompany sale of the property.
Example 2. Tax loss. (a) Current absorption. For Year 2, the P group
has a $50 consolidated net operating loss when determined by taking into
account only S's items of income, gain, deduction, and loss. S's loss is
absorbed by the P group in Year 2, offsetting P's income for that year.
Under paragraph (b)(3)(i)(A) of this section, because S's loss is
absorbed in the year it arises, P has a $50 negative adjustment with
respect to S's stock. Under paragraph (b)(2) of this section, P reduces
its basis in S's stock by $50. Under paragraph (a)(3)(ii) of this
section, if the decrease exceeds P's basis in S's stock, the excess is
P's excess loss account in S's stock.
(b) Interim determination from stock sale. The facts are the same as
in paragraph (a) of this Example 2, except that S's Year 2 loss arises
in the first half of the calendar year, P sells 50% of S's stock on July
1 of Year 2, and P's income for Year 2 does not arise until after the
sale of S's stock. P's income for Year 2 (exclusive of the sale of S's
stock) is offset by S's loss, even though the income arises after the
stock sale, and no loss remains to be apportioned to S. See
Secs. 1.1502-11 and 1.1502-21(b). Under paragraph (b)(3)(i)(A) of this
section, because S's $50 loss is absorbed in the year it arises, it
reduces P's basis in the S shares sold by $25 immediately before the
stock sale. Because S becomes a nonmember, the loss also reduces P's
basis in the retained S shares by $25 immediately before S becomes a
nonmember. See also Sec. 1.1502-20(b) (possible stock basis reduction on
the deconsolidation of S).
(c) Loss carryback. The facts are the same as in paragraph (a) of
this Example 2, except that P has no income or loss for Year 2, S's $50
loss is carried back and absorbed by the P group in Year 1 (offsetting
the income of P or S), and the P group receives a $17 tax refund in Year
2 that is paid to S. Under paragraph (b)(3)(i)(B) of this section,
because the $50 loss is carried back and absorbed in Year 1, it is
treated as a tax loss for Year 2 (the year in which it arises). Under
paragraph (b)(3)(ii) of this section, the refund is treated as tax-
exempt income of S. Under paragraph (b)(3)(iv)(C) of this section, the
tax- exempt income is taken into account in Year 2 because that is the
year it would be taken into account under S's method of accounting if it
were subject to Federal income taxation. Thus, under paragraph (b)(2) of
this section, P reduces its basis in S's stock by $33 as of the close of
Year 2 (the $50 tax loss, less the $17 tax refund).
(d) Loss carryforward. The facts are the same as in paragraph (a) of
this Example 2, except that P has no income or loss for Year 2, and S's
loss is carried forward and absorbed by the P group in Year 3
(offsetting the income of P or S). Under paragraph (b)(3)(i)(A) of this
section, the loss is not treated as a tax loss under paragraph (b)(2) of
this section until Year 3.
Example 3. Tax-exempt income and noncapital, nondeductible expenses.
(a) Facts. For Year 1, the P group has $500 of consolidated taxable
income. However, the P group has a $100 consolidated net operating loss
when determined by including only S's items of income, gain, deduction,
and loss taken into account. Also for Year 1, S has $80 of interest
income that is permanently excluded from gross income under section 103,
and S incurs $60 of related expense for which a deduction is permanently
disallowed under section 265.
[[Page 375]]
(b) Analysis. Under paragraph (b)(3)(i)(A) of this section, S has a
$100 tax loss for Year 1. Under paragraph (b)(3)(ii)(A) of this section,
S has $80 of tax-exempt income. Under paragraph (b)(3)(iii)(A) of this
section, S has $60 of noncapital, nondeductible expense. Under paragraph
(b)(3)(iv)(C) of this section, the tax-exempt income and noncapital,
nondeductible expense are taken into account in Year 1 because that is
the year they would be taken into account under S's method of accounting
if they were subject to Federal income taxation. Thus, under paragraph
(b) of this section, P reduces its basis in S's stock as of the close of
Year 1 by an $80 net amount (the $100 tax loss, less $80 of tax-exempt
income, plus $60 of noncapital, nondeductible expenses).
Example 4. Discharge of indebtedness. (a) Facts. P forms S on
January 1 of Year 1 and S borrows $200. During Year 1, S's assets
decline in value and the P group has a $100 consolidated net operating
loss when determined by including only S's items of income, gain,
deduction, and loss taken into account. None of the loss is absorbed by
the group in Year 1, and S is discharged from $100 of indebtedness at
the close of Year 1. Under section 108(a), S's $100 of discharge of
indebtedness income is excluded from gross income because of insolvency.
Under section 108(b), S's $100 net operating loss is reduced to zero at
the close of Year 1.
(b) Analysis. Under paragraph (b)(3)(iii)(B) of this section, the
reduction of the net operating loss is treated as a noncapital,
nondeductible expense in Year 1 because the net operating loss is
permanently disallowed by section 108(b). Under paragraph (b)(3)(ii)(C)
of this section, all $100 of S's discharge of indebtedness income is
treated as tax-exempt income in Year 1 because the discharge results in
a $100 reduction to S's net operating loss. Consequently, the loss and
the cancellation of the indebtedness result in no net adjustment to P's
basis in S's stock under paragraph (b) of this section. (If the basis of
assets were reduced under section 1017, rather than S's loss, the
reduction would not occur until the beginning of Year 2 and the
discharge would not be treated as tax-exempt income until that time.)
(c) Insufficient attributes. The facts are the same as in paragraph
(a) of this Example 4, except that $70 of S's net operating loss is
absorbed in Year 1, offsetting P's income for that year, and the
indebtedness is discharged at the beginning of Year 2. Under paragraph
(b) of this section, the $70 of S's loss absorbed in Year 1 reduces P's
basis in S's stock by $70 as of the close of Year 1. Under section
108(a), S's discharge of indebtedness income in Year 2 is excluded from
the P group's gross income because of insolvency. Under section 108(b),
the remaining $30 of S's net operating loss carryover from Year 1 is
reduced to zero at the close of Year 2. No other attributes are reduced.
Under paragraph (b)(3)(iii)(B) of this section, the elimination of the
remaining $30 net operating loss by section 108(b) is treated as a
noncapital, nondeductible expense. Under paragraph (b)(3)(ii)(C) of this
section, only $30 of the discharge is treated as tax-exempt income
because only that amount is applied to reduce tax attributes. See also
Sec. 1.1502-19(c)(1)(iii) (taking into account any excess loss account
of P in S's stock). The remaining $70 of discharge income excluded under
section 108(a) has no effect on P's basis in S's stock.
(d) Purchase price adjustment. Assume instead that S buys land in
Year 1 in exchange for S's $100 purchase money note (bearing interest at
a market rate of interest in excess of the applicable Federal rate, and
providing for a principal payment at the end of Year 10), and the seller
agrees with S in Year 4 to discharge $60 of the note as a purchase price
adjustment to which section 108(e)(5) applies. S has no discharge of
indebtedness income that is treated as tax-exempt income under paragraph
(b)(3)(ii) of this section. In addition, the $60 purchase price
adjustment is not a noncapital, nondeductible expense under paragraph
(b)(3)(iii) of this section. A purchase price adjustment is not
equivalent to a discharge of indebtedness that is offset by a deduction
or loss. Consequently, the purchase price adjustment results in no net
adjustment to P's basis in S's stock under paragraph (b) of this
section.
Example 5. Distributions. (a) Amounts declared and distributed. For
Year 1, the P group has $120 of consolidated taxable income when
determined by including only S's items of income, gain, deduction, and
loss taken into account. S declares and makes a $10 dividend
distribution to P at the close of Year 1. Under paragraph (b) of this
section, P increases its basis in S's stock as of the close of Year 1 by
a $110 net amount ($120 of taxable income, less a $10 distribution).
(b) Distributions in later years. The facts are the same as in
paragraph (a) of this Example 5, except that S does not declare and
distribute the $10 until Year 2. Under paragraph (b) of this section, P
increases its basis in S's stock by $120 as of the close of Year 1, and
decreases its basis by $10 as of the close of Year 2. (If P were also a
subsidiary, the basis of its stock would also be increased in Year 1 to
reflect P's $120 adjustment to basis of S's stock; the basis of P's
stock would not be changed as a result of S's distribution in Year 2,
because P's $10 of tax-exempt dividend income under paragraph (b)(3)(ii)
of this section would be offset by the $10 negative adjustment to P's
basis in S's stock for the distribution.)
(c) Amounts declared but not distributed. The facts are the same as
in paragraph (a) of this Example 5, except that, during December of Year
1, S declares (and P becomes entitled
[[Page 376]]
to) another $70 dividend distribution with respect to its stock, but P
does not receive the distribution until after it sells all of S's stock
at the close of Year 1. Under Sec. 1.1502-13(f)(2)(iv), S is treated as
making a $70 distribution to P at the time P becomes entitled to the
distribution. (If S is distributing an appreciated asset, its gain under
section 311 is also taken into account under paragraph (b)(3)(i) of this
section at the time P becomes entitled to the distribution.)
Consequently, under paragraph (b) of this section, P increases its basis
in S's stock as of the close of Year 1 by only a $40 net amount ($120 of
taxable income, less two distributions totalling $80). Any further
adjustments after S ceases to be a member and the $70 distribution is
made would be duplicative, because the stock basis has already been
adjusted for the distribution. Accordingly, the distribution will not
result in further adjustments or gain, even if the distribution is a
payment to which section 301(c)(2) or (3) applies.
Example 6. Reorganization with boot. (a) Facts. P owns all of the
stock of S and T. On January 1 of Year 1, P has a $100 basis in the S
stock and a $60 basis in the T stock. S and T have no items of income,
gain, deduction, or loss for Year 1. S and T each have substantial
earnings and profits. At the close of Year 1, T merges into S in a
reorganization described in section 368(a)(1)(A) (and in section
368(a)(1)(D)). P receives no additional S stock, but does receive $10
which is treated as a dividend under section 356(a)(2).
(b) Analysis. Under section 358, P's basis in the S stock is
increased by its basis in the T stock. Under Sec. 1.1502-13(f)(3) the
money received is treated as being taken into account immediately after
the transaction. Thus, the $10 is treated as a dividend distribution
under section 301 and under paragraph (b)(3)(v) of this section, the $10
is a distribution to which paragraph (b)(2)(iv) of this section applies.
Accordingly, P's basis in the S stock is $160 immediately after the
merger, which is then decreased by the $10 distribution taken into
account immediately after the transaction, resulting in a basis of $150.
Example 7. Tiering up of basis adjustments. P owns all of S's stock,
and S owns all of T's stock. For Year 1, the P group has $100 of
consolidated taxable income when determined by including only T's items
of income, gain, deduction, and loss taken into account, and $50 of
consolidated taxable income when determined by including only S's items
taken into account. S increases its basis in T's stock by $100 under
paragraph (b) of this section. Under paragraph (a)(3) of this section,
this $100 basis adjustment is taken into account in determining P's
adjustments to its basis in S's stock. Thus, P increases its basis in
S's stock by $150 under paragraph (b) of this section.
Example 8. Allocation of items. (a) Acquisition in mid-year. P is
the common parent of a consolidated group, and S is an unaffiliated
corporation filing separate returns on a calendar-year basis. P acquires
all of S's stock and S becomes a member of the P group on July 1 of Year
1. For the entire calendar Year 1, S has $100 of ordinary income and
under Sec. 1.1502-76(b) $60 is allocated to the period from January 1 to
June 30 and $40 to the period from July 1 to December 31. Under
paragraph (b) of this section, P increases its basis in S's stock by
$40.
(b) Sale in mid-year. The facts are the same as in paragraph (a) of
this Example 8, except that S is a member of the P group at the
beginning of Year 1 but ceases to be a member on June 30 as a result of
P's sale of S's stock. Under paragraph (b) of this section, P increases
its basis in S's stock by $60 immediately before the stock sale. (P's
basis increase would be the same if S became a nonmember because S
issued additional shares to nonmembers.)
(c) Absorption of loss carryovers. Assume instead that S is a member
of the P group at the beginning of Year 1 but ceases to be a member on
June 30 as a result of P's sale of S's stock, and a $100 consolidated
net operating loss attributable to S is carried over by the P group to
Year 1. The consolidated net operating loss may be apportioned to S for
its first separate return year only to the extent not absorbed by the P
group during Year 1. Under paragraph (b)(3)(i) of this section, if the
loss is absorbed by the P group in Year 1, whether the offsetting income
arises before or after P's sale of S's stock, the absorption of the loss
carryover is included in the determination of S's taxable income or loss
for Year 1. Thus, P's basis in S's stock is adjusted under paragraph (b)
of this section to reflect any absorption of the loss by the P group.
Example 9. Gross-ups. (a) Facts. P owns all of the stock of S, and S
owns all of the stock of T, a newly formed controlled foreign
corporation that is not a passive foreign investment company. In Year 1,
T has $100 of subpart F income and pays $34 of foreign income tax,
leaving T with $66 of earnings and profits. The P group has $100 of
consolidated taxable income when determined by taking into account only
S's items (the inclusion under section 951(a), taking into account the
section 78 gross-up). As a result of the section 951(a) inclusion, S
increases its basis in T's stock by $66 under section 961(a).
(b) Analysis. Under paragraph (b)(3)(i) of this section, S has $100
of taxable income. Under paragraph (b)(3)(iii)(B) of this section, the
$34 gross-up for taxes paid by T that S is treated as having paid is a
noncapital, nondeductible expense (whether or not any corresponding
amount is claimed by the P group as a tax credit). Thus, P increases its
basis in
[[Page 377]]
S's stock under paragraph (b) of this section by the net adjustment of
$66.
(c) Subsequent distribution. The facts are the same as in paragraph
(a) of this Example 9, except that T distributes its $66 of earnings and
profits in Year 2. The $66 distribution received by S is excluded from
S's income under section 959(a) because the distribution represents
earnings and profits attributable to amounts that were included in S's
income under section 951(a) for Year 1. In addition, S's basis in T's
stock is decreased by $66 under section 961(b). The excluded
distribution is not tax-exempt income under paragraph (b)(3)(ii) of this
section because of the corresponding reduction to S's basis in T's
stock. Consequently, P's basis in S's stock is not adjusted under
paragraph (b) of this section for Year 2.
Example 10. Recapture of tax-exempt items. (a) Facts. S is a life
insurance company. For Year 1, the P group has $200 of consolidated
taxable income, determined by including only S's items of income, gain,
deduction, and loss taken into account (including a $300 small company
deduction under section 806). In addition, S has $100 of tax-exempt
interest income, $60 of which is S's company share. The remaining $40 of
tax-exempt income is the policyholders' share that reduces S's deduction
for increase in reserves.
(b) Tax-exempt items generally. Under paragraph (b)(3)(i) of this
section, S has $200 of taxable income for Year 1. Also for Year 1, S has
$100 of tax-exempt income under paragraph (b)(3)(ii)(A) of this section,
and another $300 is treated as tax-exempt income under paragraph
(b)(3)(ii)(B) of this section because of the deduction under section
806. Under paragraph (b)(3)(iii) of this section, S has $40 of
noncapital, nondeductible expenses for Year 1 because S's deduction
under section 807 for its increase in reserves has been permanently
reduced by the $40 policyholders' share of the tax-exempt interest
income. Thus, P increases its basis in S's stock by $560 under paragraph
(b) of this section.
(c) Recapture. Assume instead that S is a property and casualty
company and, for Year 1, S accrues $100 of estimated salvage recoverable
under section 832. Of this amount, $87 (87% of $100) is excluded from
gross income because of the ``fresh start'' provisions of Sec. 11305(c)
of P.L. 101-508 (the Omnibus Budget Reconciliation Act of 1990). Thus, S
has $87 of tax-exempt income under paragraph (b)(3)(ii)(A) of this
section that increases P's basis in S's stock for Year 1. (S also has
$13 of taxable income over the period of inclusion under section 481.)
In Year 5, S determines that the $100 salvage recoverable was
overestimated by $30 and deducts $30 for the reduction of the salvage
recoverable. However, S has $26.10 (87% of $30) of taxable income in
Year 5 due to the partial recapture of its fresh start. Because S has no
basis corresponding to this income, S is treated under paragraph
(b)(3)(iii)(B) of this section as having a $26.10 noncapital,
nondeductible expense in Year 5. This treatment is necessary to reflect
the elimination of the erroneous fresh start in S's stock basis and
causes a decrease in P's basis in S's stock by $30 for Year 5 (a $3.90
taxable loss and a $26.10 special adjustment).
(c) Allocation of adjustments among shares of stock--(1) In general.
The portion of the adjustment under paragraph (b) of this section that
is described in paragraph (b)(2)(iv) of this section (negative
adjustments for distributions) is allocated to the shares of S's stock
to which the distribution relates. The remainder of the adjustment,
described in paragraphs (b)(2)(i) through (iii) of this section
(adjustments for taxable income or loss, tax-exempt income, and
noncapital, nondeductible expenses), is allocated among the shares of
S's stock as provided in paragraphs (c)(2) through (4) of this section.
If the remainder of the adjustment is positive, it is allocated first to
any preferred stock to the extent provided in paragraph (c)(3) of this
section, and then to the common stock as provided in paragraph (c)(2) of
this section. If the remainder of the adjustment is negative, it is
allocated only to common stock as provided in paragraph (c)(2) of this
section. An adjustment under this section allocated to a share for the
period the share is owned by a nonmember has no effect on the basis of
the share. See paragraph (c)(4) of this section for the reallocation of
adjustments, and paragraph (d) of this section for definitions. See
Sec. 1.1502-19(d) for special allocations of basis determined or
adjusted under the Code with respect to excess loss accounts.
(2) Common stock--(i) Allocation within a class. The portion of the
adjustment described in paragraphs (b)(2)(i) through (iii) of this
section (the adjustment determined without taking distributions into
account) that is allocable to a class of common stock is generally
allocated equally to each share within the class. However, if a member
has an excess loss account in shares of a class of common stock at the
time of a positive adjustment, the portion of the adjustment allocable
to the member with respect to the class is
[[Page 378]]
allocated first to equalize and eliminate that member's excess loss
accounts and then to increase equally its basis in the shares of that
class. Similarly, any negative adjustment is allocated first to reduce
the member's positive basis in shares of the class before creating or
increasing its excess loss account. Distributions and any adjustments or
determinations under the Internal Revenue Code (e.g., under section 358,
including any modifications under Sec. 1.1502-19(d)) are taken into
account before the allocation is made under this paragraph (c)(2)(i).
(ii) Allocation among classes--(A) General rule. If S has more than
one class of common stock, the extent to which the adjustment described
in paragraphs (b)(2)(i) through (iii) of this section (the adjustment
determined without taking distributions into account) is allocated to
each class is determined, based on consistently applied assumptions, by
taking into account the terms of each class and all other facts and
circumstances relating to the overall economic arrangement. The
allocation generally must reflect the manner in which the classes
participate in the economic benefit or burden (if any) corresponding to
the items of income, gain, deduction, or loss allocated. In determining
participation, any differences in voting rights are not taken into
account, and the following factors are among those to be considered--
(1) The interest of each share in economic profits and losses (if
different from the interest in taxable income);
(2) The interest of each share in cash flow and other non-
liquidating distributions; and
(3) The interest of each share in distributions in liquidation.
(B) Distributions and Code adjustments. Distributions and any
adjustments or determinations under the Internal Revenue Code are taken
into account before the allocation is made under this paragraph
(c)(2)(ii).
(3) Preferred stock. If the adjustment under paragraphs (b)(2)(i)
through (iii) of this section (the adjustment determined without taking
distributions into account) is positive, it is allocated to preferred
stock to the extent required (when aggregated with prior allocations to
the preferred stock during the period that S is a member of the
consolidated group) to reflect distributions described in section 301
(and all other distributions treated as dividends) to which the
preferred stock becomes entitled, and arrearages arising, during the
period that S is a member of the consolidated group. For this purpose,
the preferred stock is treated as entitled to a distribution no later
than the time the distribution is taken into account under the Internal
Revenue Code (e.g., under section 305). If the amount of distributions
and arrearages exceeds the positive amount (when aggregated with prior
allocations), the positive amount is first allocated among classes of
preferred stock to reflect their relative priorities, and the amount
allocated to each class is then allocated pro rata within the class. An
allocation to a share with respect to arrearages and distributions for
the period the share is owned by a nonmember is not reflected in the
basis of the share under paragraph (b) of this section. However, if P
and S cease to be members of one consolidated group and remain
affiliated as members of another consolidated group, P's ownership of
S's stock during consolidated return years of the prior group is treated
for this purpose as ownership by a member to the extent that the
adjustments during the prior consolidated return years are still
reflected in the basis of the preferred stock.
(4) Cumulative redetermination--(i) General rule. A member's basis
in each share of S's preferred and common stock must be redetermined
whenever necessary to determine the tax liability of any person. See
paragraph (b)(1) of this section. The redetermination is made by
reallocating S's net adjustment described in paragraphs (b)(2)(i)
through (iii) of this section (the adjustment determined without taking
distributions into account) for each consolidated return year (or other
applicable period) of the group by taking into account all of the facts
and circumstances affecting allocations under this paragraph (c) as of
the redetermination date with respect to all of S's shares. For this
purpose:
(A) Amounts may be reallocated from one class of S's stock to
another class,
[[Page 379]]
but not from one share of a class to another share of the same class.
(B) If there is a change in the equity structure of S (e.g., as the
result of S's issuance, redemption, or recapitalization of shares), a
cumulative redetermination is made for the period before the change. If
a reallocation is required by another redetermination after a change,
amounts arising after the change are reallocated before amounts arising
before the change.
(C) If S becomes a nonmember as a result of a change in its equity
structure, any reallocation is made only among the shares of S's stock
immediately before the change. For example, if S issues stock to a
nonmember creditor in exchange for its debt, and the exchange results in
S becoming a nonmember, any reallocation is only among the shares of S's
stock immediately before the exchange.
(D) Any reallocation is treated for all purposes after it is made
(including subsequent redeterminations) as the original allocation of an
amount under this paragraph (c), but the reallocation does not affect
any prior period.
(ii) Prior use of allocations. An amount may not be reallocated
under paragraph (c)(4)(i) of this section to the extent that the amount
has been used before the reallocation. For this purpose, an amount has
been used to the extent it has been taken into account, directly or
indirectly, by any member in determining income, gain, deduction, or
loss, or in determining the basis of any property that is not subject to
this section (e.g., stock of a corporation that has become a nonmember).
For example, if P sells a share of S stock, an amount previously
allocated to the share cannot be reallocated to another share of S
stock, but an amount allocated to another share of S stock can still be
reallocated to the sold share because the reallocated amount has not
been taken into account; however, any adjustment reallocated to the sold
share may effectively be eliminated, because the reallocation was not in
effect when the share was previously sold and P's gain or loss from the
sale is not redetermined. If, however, P sells the share of S stock to
another member, the amount is not used until P's gain or loss is taken
into account under Sec. 1.1502-13.
(5) Examples. The principles of this paragraph (c) are illustrated
by the following examples.
Example 1. Ownership of less than all the stock. (a) Facts. P owns
80% of S's only class of stock with an $800 basis. For Year 1, S has
$100 of taxable income.
(b) Analysis. Under paragraph (c)(1) of this section, the $100
positive adjustment under paragraph (b) of this section for S's taxable
income is allocated among the shares of S's stock, including shares
owned by nonmembers. Under paragraph (c)(2)(i) of this section, the
adjustment is allocated equally to each share of S's stock. Thus, P
increases its basis in S's stock under paragraph (b) of this section as
of the close of Year 1 by $80. (The basis of the 20% of S's stock owned
by nonmembers is not adjusted under this section.)
(c) Varying interest. The facts are the same as in paragraph (a) of
this Example 1, except that P buys the remaining 20% of S's stock at the
close of business on June 30 of Year 1 for $208. Under paragraph (b)(1)
of this section and the principles of Sec. 1.1502-76(b), S's $100 of
taxable income is allocable $40 to the period from January 1 to June 30
and $60 to the period from July 1 to December 31. Thus, for the period
ending June 30, P is treated as having a $32 adjustment with respect to
the S stock that P has owned since January 1 (80% of $40) and, under
paragraph (c)(2)(i) of this section, the adjustment is allocated equally
among those shares. For the period ending December 31, P is treated as
having a $60 adjustment (100% of $60) that is also allocated equally
among P's shares of S's stock owned after June 30. P's basis in the
shares owned as of the beginning of the year therefore increases by $80
(the sum of 80% of $40 and 80% of $60), from $800 to $880, and P's basis
in the shares purchased on June 30 increases by $12 (20% of $60), from
$208 to $220. Thus, P's aggregate basis in S's stock as of the end of
Year 1 is $1,100.
(d) Tax liability. The facts are the same as in paragraph (a) of
this Example 1, except that P pays S's $34 share of the group's
consolidated tax liability resulting from S's taxable income, and S does
not reimburse P. S's $100 of taxable income results in a positive
adjustment under paragraph (b)(3)(i) of this section, and S's $34 of tax
liability results in a negative adjustment under paragraph (b)(3)(iv)(D)
of this section and the principles of section 1552. Because S does not
make any payment in recognition of the additional tax liability, by
analogy to the treatment under Sec. 1.1552-1(b)(2), S is treated as
having made a $34 payment that is described in paragraph (b)(3)(iii) of
this section (noncapital, nondeductible expenses) and as having received
an equal amount from P as a capital contribution. Thus, P increases its
basis in its S
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stock by $52.80 (80% of the $100 of taxable income, less 80% of the $34
tax payment). In addition, P increases its basis in S's stock by $34
under the Internal Revenue Code and paragraph (a)(2) of this section to
reflect the capital contribution. In the aggregate, P increases its
basis in S's stock by $86.80. (If, as in paragraph (c) of this Example
1, P buys the remaining 20% of S's stock at the close of business on
June 30, P increases its basis in S's stock by another $7.90 for the
additional 20% interest in S's income after June 30 ($60 multiplied by
20%, less 20% of the $20.40 tax payment on $60); the $34 capital
contribution by P is reflected in all of its S shares (not just the
original 80%), and P's aggregate basis adjustment under this section is
$94.70 ($86.80 plus $7.90).)
Example 2. Preferred stock. (a) Facts. P owns all of S's common
stock with an $800 basis, and nonmembers own all of S's preferred stock.
The preferred stock was issued for $200, has a $20 annual, cumulative
preference as to dividends, and has an initial liquidation preference of
$200. For Year 1, S has $50 of taxable income and no distributions are
declared or made.
(b) Analysis of arrearages. Under paragraphs (c) (1) and (3) of this
section, $20 of the $50 positive adjustment under paragraph (b) of this
section is allocated first to the preferred stock to reflect the
dividend arrearage arising in Year 1. The remaining $30 of the positive
adjustment is allocated to the common stock, increasing P's basis from
$800 to $830 as of the close of Year 1. (The basis of the preferred
stock owned by nonmembers is not adjusted under this section.)
(c) Current distribution. The facts are the same as in paragraph (a)
of this Example 2, except that S declares and makes a $20 distribution
with respect to the preferred stock during Year 1 in satisfaction of its
preference. The results are the same as in paragraph (b) of this Example
2.
(d) Varying interest. The facts are the same as in paragraph (a) of
this Example 2, except that S has no income or loss for Years 1 and 2, P
purchases all of S's preferred stock at the beginning of Year 3 for
$240, and S has $70 of taxable income for Year 3. Under paragraph (c)(3)
of this section, $60 of the $70 positive adjustment under paragraph (b)
of this section is allocated to the preferred stock to reflect the
dividends arrearages for Years 1 through 3, but only the $20 for Year 3
is reflected in the basis of the preferred stock under paragraph (b) of
this section. (The remaining $40 is not reflected because the preferred
stock was owned by nonmembers during Years 1 and 2.) Thus, P increases
its basis in S's preferred stock from $240 to $260, and its basis in S's
common stock from $800 to $810, as of the close of Year 3. (If P had
acquired all of S's preferred stock in a transaction to which section
351 applies, and P's initial basis in S's preferred stock was $200 under
section 362, P's basis in S's preferred stock would increase from $200
to $220.)
(e) Varying interest with current distributions. The facts are the
same as in paragraph (d) of this Example 2, except that S declares and
makes a $20 distribution with respect to the preferred stock in each of
Years 1 and 2 in satisfaction of its preference, and P purchases all of
S's preferred stock at the beginning of Year 3 for $200. Under paragraph
(c)(3) of this section, $40 of the $70 positive adjustment under
paragraph (b) of this section is allocated to the preferred stock to
reflect the distributions in Years 1 and 2, and $20 of the $70 is
allocated to the preferred stock to reflect the arrearage for Year 3.
However, as in paragraph (d) of this Example 2, only the $20
attributable to Year 3 is reflected in the basis of the preferred stock
under paragraph (b) of this section. Thus, P increases its basis in S's
preferred stock from $200 to $220, and P increases its basis in S's
common stock from $800 to $810.
Example 3. Cumulative redetermination. (a) Facts. P owns all of S's
common and preferred stock. The preferred stock has a $100 annual,
cumulative preference as to dividends. For Year 1, S has $200 of taxable
income, the first $100 of which is allocated to the preferred stock and
the remaining $100 of which is allocated to the common stock. For Year
2, S has no adjustment under paragraph (b) of this section, and P sells
all of S's common stock at the close of Year 2.
(b) Analysis. Under paragraph (c)(4) of this section, P's basis in
S's common stock must be redetermined as of the sale of the stock. The
redetermination is made by reallocating the $200 positive adjustment
under paragraph (b) of this section for Year 1 by taking into account
all of the facts and circumstances affecting allocations as of the sale.
Thus, the $200 positive adjustment for Year 1 is reallocated entirely to
the preferred stock to reflect the dividend arrearages for Years 1 and
2. The reallocation away from the common stock reflects the fact that,
because of the additional amount of arrearage in Year 2, the common
stock is not entitled to any part of the $200 of taxable income from
Year 1. Thus, the common stock has no positive or negative adjustment,
and the preferred stock has a $200 positive adjustment. These
reallocations are treated as the original allocations for Years 1 and 2.
(The results for the common stock would be the same if the common and
preferred stock were not owned by the same member, or the preferred
stock were owned by nonmembers.)
(c) Preferred stock issued after adjustment arises. The facts are
the same as in paragraph (a) of this Example 3, except that S does not
issue its preferred stock until the beginning of Year 2, S has no
further adjustment under paragraph (b) of this section for Years 2 and
3, and P sells S's common stock at the close
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of Year 3. Under paragraphs (c) (1) and (2) of this section, the $200
positive adjustment for Year 1 is initially allocated entirely to the
common stock. Under paragraph (c)(4) of this section, the $200
adjustment is reallocated to the preferred stock to reflect the
arrearages for Years 2 and 3. Thus, the common stock has no positive or
negative adjustment.
(d) Common stock issued after adjustment arises. The facts are the
same as in paragraph (a) of this Example 3, except that S has no
preferred stock, S issues additional common stock of the same class at
the beginning of Year 2, S has no further adjustment under paragraph (b)
of this section in Years 2 and 3, and P sells its S common stock at the
close of Year 3. Under paragraphs (c) (1) and (2) of this section, the
$200 positive adjustment for Year 1 is initially allocated entirely to
the original common stock. Under paragraph (c)(4)(i)(A) of this section,
the $200 adjustment is not reallocated among the original common stock
and the additional stock. Unlike the preferred stock in paragraph (c) of
this Example 3, the additional common stock is of the same class as the
original stock, and there is no reallocation between shares of the same
class.
(e) Positive and negative adjustments. The facts are the same as in
paragraph (a) of this Example 3, except that S has a $200 loss for Year
2 that results in a negative adjustment to the common stock before any
redetermination. For purposes of the basis redetermination under
paragraph (c)(4) of this section, the Year 1 and 2 adjustments under
paragraph (b) of this section are not netted. Thus, as in paragraph (b)
of this Example 3, the redetermination is made by reallocating the $200
positive adjustment for Year 1 entirely to the preferred stock. The $200
negative adjustment for Year 2 is allocated entirely to the common
stock. Consequently, the preferred stock has a $200 positive cumulative
adjustment, and the common stock has a $200 negative cumulative
adjustment. (The results would be the same if there were no other
adjustments described in paragraph (b) of this section, P sells S's
common stock at the close of Year 3 rather than Year 2, and an
additional $100 arrearage arises in Year 3; only adjustments under
paragraph (b) of this section may be reallocated, and there is no
additional adjustment for Year 3.)
(f) Current distributions. The facts are the same as in paragraph
(a) of this Example 3, except that, during Year 1, S declares and makes
a distribution to P of $100 as a dividend on the preferred stock and
$100 as a dividend on the common stock. The taxable income and
distributions result in no Year 1 adjustment under paragraph (b) of this
section for either the common or preferred stock. For example, if T
merges into S, S is treated, as the context may require, as a successor
to T and as becoming a member of the group. However, as in paragraph (b)
of this Example 3, the redetermination under paragraph (c)(4) of this
section is made by reallocating a $200 positive adjustment for Year 1
(S's net adjustment described in paragraph (b) of this section,
determined without taking distributions into account) to the preferred
stock. Consequently, the preferred stock has a $100 positive cumulative
adjustment ($200 of taxable income, less a $100 distribution with
respect to the preferred stock) and the common stock has a $100 negative
cumulative adjustment (for the distribution).
(g) Convertible preferred stock. The facts are the same as in
paragraph (a) of this Example 3, except that the preferred stock is
convertible into common stock that is identical to the common stock
already outstanding, the holders of the preferred stock convert the
stock at the close of Year 2, and no stock is sold until the close of
Year 5. Under paragraph (c)(4) of this section, the $200 positive
adjustment for Year 1 is reallocated entirely to the preferred stock
immediately before the conversion. The newly issued common stock is
treated as a second class of S common stock, and adjustments under
paragraph (b) of this section are allocated between the original and the
new common stock under paragraph (c)(2)(ii) of this section. Although
the preferred stock is converted to common stock, the $200 adjustment to
the preferred stock is not subsequently reallocated between the original
and the new common stock. Because the original and the new stock are
equivalent, adjustments under paragraph (b) of this section for
subsequent periods are allocated equally to each share.
(h) Prior use of allocations. The facts are the same as in paragraph
(a) of this Example 3, except that P sells 10% of S's common stock at
the close of Year 1, and the remaining 90% at the close of Year 2. P's
basis in the common stock sold in Year 1 reflects $10 of the adjustment
allocated to the common stock for Year 1. Under paragraph (c)(4)(ii) of
this section, because $10 of the Year 1 adjustment was used in
determining P's gain or loss, only $90 is reallocated to the preferred
stock, and $10 remains allocated to the common stock sold.
(i) Lower-tier members. The facts are the same as in paragraph (a)
of this Example 3, except that P owns only S's common stock, and P is
also a subsidiary. If there is a redetermination under paragraph (c)(4)
of this section by a member owning P's stock, a redetermination with
respect to S's stock must be made first, and the effect of that
redetermination on P's adjustments is taken into account under paragraph
(b) of this section. However, as in paragraph (h) of this Example 3, to
the extent an amount of the initial adjustments with respect to S's
common stock have already been tiered up and used by a member owning P's
stock, that amount remains with S's common stock (and the
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higher-tier member using the adjustment with respect to P's stock), and
may not be reallocated to S's preferred stock.
Example 4. Allocation to preferred stock between groups. (a) Facts.
P owns all of S's only class of stock, and S owns all of T's common and
preferred stock. The preferred stock has a $100 annual, cumulative
preference as to dividends. For Year 1, T has $200 of taxable income,
the first $100 of which is allocated to the preferred stock and the
remaining $100 of which is allocated to the common stock, and S has no
adjustments other than the amounts tiered up from T. S and T have no
adjustments under paragraph (b) of this section for Years 2 and 3. X,
the common parent of another consolidated group, purchases all of S's
stock at the close of Year 3, and S and T become members of the X group.
For Year 4, T has $200 of taxable income, and S has no adjustments other
than the amounts tiered up from T.
(b) Analysis for Years 1 through 3. Under paragraph (c)(4) of this
section, the allocation of S's adjustments under paragraph (b) of this
section (determined without taking distributions into account) must be
redetermined as of the time P sells S's stock. As a result of this
redetermination, T's common stock has no positive or negative adjustment
and the preferred stock has a $200 positive adjustment.
(c) Analysis for Year 4. Under paragraph (c)(3) of this section, the
allocation of T's $200 positive adjustment in Year 4 to T's preferred
stock with respect to arrearages is made by taking into account the
consolidated return years of both the P group and the X group. Thus, the
allocation of the $200 positive adjustment for Year 4 to T's preferred
stock is not treated as an allocation for a period for which the
preferred stock is owned by a nonmember. Thus, the $200 adjustment is
reflected in S's basis in T's preferred stock under paragraph (b) of
this section.
(d) Definitions. For purposes of this section--
(1) Class. The shares of a member having the same material terms
(without taking into account voting rights) are treated as a single
class of stock.
(2) Preferred stock. Preferred stock is stock that is limited and
preferred as to dividends and has a liquidation preference. A class of
stock that is not described in section 1504(a)(4), however, is not
treated as preferred stock for purposes of paragraph (c) of this section
if members own less than 80% of each class of common stock (determined
without taking this paragraph (d)(2) into account).
(3) Common stock. Common stock is stock that is not preferred stock.
(4) Becoming a nonmember. A member is treated as becoming a
nonmember if it has a separate return year (including another group's
consolidated return year). For example, S may become a nonmember if it
issues additional stock to nonmembers, but S does not become a nonmember
as a result of its complete liquidation.
(e) Anti-avoidance rule--(1) General rule. If any person acts with a
principal purpose contrary to the purposes of this section, to avoid the
effect of the rules of this section or apply the rules of this section
to avoid the effect of any other provision of the consolidated return
regulations, adjustments must be made as necessary to carry out the
purposes of this section.
(2) Examples. The principles of this paragraph (e) are illustrated
by the following examples.
Example 1. Preferred stock treated as common stock. (a) Facts. S has
100 shares of common stock and 100 shares of preferred stock described
in section 1504(a)(4). P owns 80 shares of S's common stock and all of
S's preferred stock. The shareholders expect that S will have negative
adjustments under paragraph (b) of this section for Years 1 and 2 (all
of which will be allocable to S's common stock), the negative
adjustments will have no significant effect on the value of S's stock,
and S will have offsetting positive adjustments thereafter. When the
preferred stock was issued, P intended to cause S to recapitalize the
preferred stock into additional common stock at the end of Year 2 in a
transaction described in section 368(a)(1)(E). P's temporary ownership
of the preferred stock is with a principal purpose to limit P's basis
reductions under paragraph (b) of this section to 80% of the anticipated
negative adjustments. The recapitalization is intended to cause
significantly more than 80% of the anticipated positive adjustments to
increase P's basis in S's stock because of P's increased ownership of
S's common stock immediately after the recapitalization.
(b) Analysis. S has established a transitory capital structure with
a principal purpose to enhance P's basis in S's stock under this
section. Under paragraph (e)(1) of this section, all of S's common and
preferred stock is treated as a single class of common stock in Years 1
and 2 for purposes of this section. Thus, S's items are allocated under
the principles of paragraph (c)(2)(ii) of this section, and P decreases
its basis in both the common and preferred stock accordingly.
[[Page 383]]
Example 2. Contribution of appreciated property. (a) Facts. P owns
all of the stock of S and T, and S and T each own 50% of the stock of U.
P's S stock has a $150 basis and $200 value, and P's T stock has a $200
basis and $200 value. With a principal purpose to eliminate P's gain
from an anticipated sale of S's stock, T contributes to U an asset with
a $100 value and $0 basis, and S contributes $100 cash. U sells T's
asset and recognizes a $100 gain that results in a $100 positive
adjustment under paragraph (b) of this section.
(b) Analysis. Under paragraph (c)(2) of this section, U's adjustment
ordinarily would be allocated equally to each share of U's stock. If so
allocated, P's basis in S's stock would increase from $150 to $200 and P
would recognize no gain from the sale of S's stock for $200. Under
paragraph (e)(1) of this section, however, because T transferred an
appreciated asset to U with a principal purpose to shift a portion of
the stock basis increase from P's stock in T to P's stock in S, the
allocation of the $100 positive adjustment under paragraph (c) of this
section between the shares of U's stock must take into account the
contribution. Consequently, all $100 of the positive adjustment is
allocated to the U stock owned by T, rather than $50 to the U stock
owned by S and $50 to the U stock owned by T. P's basis in S's stock
remains $150, and its basis in T's stock increases to $300. Thus, P
recognizes a $50 gain from its sale of S's stock for $200.
Example 3. Reorganizations. (a) Facts. P forms S with an $800
contribution, $200 of which is in exchange for S's preferred stock
described in section 1504(a)(4) and the balance of which is for S's
common stock. For Years 1 through 3, S has a total of $160 of ordinary
income, $60 of which is distributed with respect to the preferred stock
in satisfaction of its $20 annual preference as to dividends. Under this
section, P's basis in S's preferred stock is unchanged, and its basis in
S's common stock is increased from $600 to $700. To reduce its gain from
an anticipated sale of S's preferred stock, P forms T at the close of
Year 3 with a contribution of all of S's stock in exchange for
corresponding common and preferred stock of T in a transaction to which
section 351 applies. At the time of the contribution, the fair market
value of the common stock is $700 and the fair market value of the
preferred stock is $300 (due to a decrease in prevailing market interest
rates). P subsequently sells T's preferred stock for $300.
(b) Analysis. Under section 358(b), P ordinarily has a $630 basis in
T's common stock (70% of the $900 aggregate stock basis) and a $270
basis in T's preferred stock (30% of the $900 aggregate stock basis).
However, because P transferred S's stock to T with a principal purpose
to shift the allocation of basis adjustments under this section,
adjustments are made under paragraph (e)(1) of this section to preserve
the allocation under this section. Thus, P has a $700 basis in T's
common stock and a $200 basis in T's preferred stock. Consequently, P
recognizes a $100 gain from the sale of T's preferred stock.
Example 4. Post-deconsolidation basis adjustments. (a) Facts. For
Year 1, the P group has $40 of taxable income when determined by
including only S's items of income, gain, deduction, and loss taken into
account, and P increases its basis in S's stock by $40 under paragraph
(b) of this section. P anticipates that S will have a $40 ordinary loss
for Year 2 that will be carried back and offset S's income in Year 1 and
result in a $40 reduction to P's basis in S's stock for Year 2 under
paragraph (b) of this section. With a principal purpose to avoid the
reduction, P causes S to issue voting preferred stock that results in S
becoming a nonmember at the beginning of Year 2. (Section 1.1502-20(b)
does not reduce P's basis in the S stock as a result of S's
deconsolidation.) As anticipated, S has a $40 loss for Year 2, which is
carried back to Year 1 and offsets S's income from Year 1.
(b) Analysis. Under paragraph (e)(1) of this section, because P
caused S to become a nonmember with a principal purpose to absorb S's
loss but avoid the corresponding negative adjustment under this section,
and P bears a substantial portion of the loss because of its continued
ownership of S common stock, the basis of P's common stock in S is
decreased by $40 for Year 2. (If P has less than a $40 basis in the
retained S stock, P must recognize income for Year 2 to the extent of
the excess.) Section 1504(a)(3) limits the ability of S to subsequently
rejoin the P group's consolidated return.
(c) Carryback to pre-consolidation year. The facts are the same as
in paragraph (a) of this Example 4, except that P anticipates that S's
loss will be carried back and absorbed in a separate return year of S
before Year 1 (rather than to the P group's consolidated return for Year
1). Although P causes S to become a nonmember with a principal purpose
to avoid the negative adjustment under this section, and P bears a
substantial portion of the loss because of its continued ownership of S
common stock, both S's income and loss are taken into account under the
separate return rules. Consequently, no one has acted with a principal
purpose contrary to the purposes of this section, and no adjustments are
necessary to carry out the purposes of this section.
Example 5. Pre-consolidation basis adjustments. (a) Facts. P forms S
with a $100 contribution, and S becomes a member of the P affiliated
group which does not file consolidated returns. For Years 1 through 3, S
earns $300. P anticipates that it will elect under section 1501 for the
P group to begin filing consolidated returns in Year 5. In anticipation
of filing consolidated returns, and to
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avoid the negative stock basis adjustment that would result under
paragraph (b) of this section from distributing S's earnings after Year
5, P causes S to distribute $300 during Year 4 as a qualifying dividend
within the meaning of section 243(b). There is no plan or intention to
recontribute the funds to S after the distribution.
(b) Analysis. Although S's distribution of $300 is with a principal
purpose to avoid a corresponding negative adjustment under this section,
the $300 was both earned and distributed entirely under the separate
return rules. Consequently, P and S have not acted with a principal
purpose contrary to the purposes of this section, and no adjustments are
necessary to carry out the purposes of this section.
(f) Predecessors and successors. For purposes of this section, any
reference to a corporation or to a share of stock includes a reference
to a successor or predecessor as the context may require. A corporation
is a successor if the basis of its assets is determined, directly or
indirectly, in whole or in part, by reference to the basis of another
corporation (the predecessor). For example, if T merges into S, S is
treated, as the context may require, as a successor to T and as becoming
a member of the group. A share is a successor if its basis is
determined, directly or indirectly, in whole or in part, by reference to
the basis of another share (the predecessor).
(g) Recordkeeping. Adjustments under this section must be reflected
annually on permanent records (including work papers). See also section
6001, requiring records to be maintained. The group must be able to
identify from these permanent records the amount and allocation of
adjustments, including the nature of any tax-exempt income and
noncapital, nondeductible expenses, so as to permit the application of
the rules of this section for each year.
(h) Effective date--(1) General rule. This section applies with
respect to determinations of the basis of the stock of a subsidiary
(e.g., for determining gain or loss from a disposition of stock) in
consolidated return years beginning on or after January 1, 1995. If this
section applies, basis must be determined or redetermined as if this
section were in effect for all years (including, for example, the
consolidated return years of another consolidated group to the extent
adjustments from those years are still reflected). For example, if the
portion of a consolidated net operating loss carryover attributable to S
expired in 1990 and is treated as a noncapital, nondeductible expense
under paragraph (b) of this section, it is taken into account in tax
years beginning on or after January 1, 1995 as a negative adjustment for
1990. Any such determination or redetermination does not, however,
affect any prior period. Thus, the negative adjustment for S's
noncapital, nondeductible expense is not taken into account for tax
years beginning before January 1, 1995.
(2) Dispositions of stock before effective date--(i) In general. If
P disposes of stock of S in a consolidated return year beginning before
January 1, 1995, the amount of P's income, gain, deduction, or loss, and
the basis reflected in that amount, are not redetermined under this
section. See Sec. 1.1502-19 as contained in the 26 CFR part 1 edition
revised as of April 1, 1994 for the definition of disposition, and
paragraph (h)(5) of this section for the rules applicable to such
dispositions.
(ii) Lower-tier members. Although P disposes of S's stock in a tax
year beginning before January 1, 1995, S's determinations or adjustments
with respect to the stock of a lower-tier member with which it continues
to file a consolidated return are redetermined in accordance with the
rules of this section (even if they were previously taken into account
by P and reflected in income, gain, deduction, or loss from the
disposition of S's stock). For example, assume that P owns all of S's
stock, S owns all of T's stock, and T owns all of U's stock. If S sells
80% of T's stock in a tax year beginning before January 1, 1995 (the
effective date), the amount of S's income, gain, deduction, or loss from
the sale, and the stock basis adjustments reflected in that amount, are
not redetermined if P sells S's stock after the effective date. If S
sells the remaining 20% of T's stock after the effective date, S's stock
basis adjustments with respect to that T stock are also not redetermined
because T became a nonmember before the effective date. However, if T
and U continue to file a consolidated return with each other and T sells
U's stock after the effective date, T's stock basis
[[Page 385]]
adjustments with respect to U's stock are redetermined (even though some
of those adjustments may have been taken into account by S in its prior
sale of T's stock before the effective date).
(iii) Deferred amounts. For purposes of this paragraph (h)(2), a
disposition does not include a transaction to which Sec. 1.1502-13,
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead,
the transaction is deemed to occur as the income, gain, deduction, or
loss (if any) is taken into account.
(3) Distributions--(i) Deemed dividend elections. If there is a
deemed distribution and recontribution pursuant to Sec. 1.1502-32(f)(2)
as contained in the 26 CFR part 1 edition revised as of April 1, 1994 in
a consolidated return year beginning before January 1, 1995, the deemed
distribution and recontribution under the election are treated as an
actual distribution by S and recontribution by P as provided under the
election.
(ii) Affiliated earnings and profits. This section does not apply to
reduce the basis in S's stock as a result of a distribution of earnings
and profits accumulated in separate return years, if the distribution is
made in a consolidated return year beginning before January 1, 1995, and
the distribution does not cause a negative adjustment under the
investment adjustment rules in effect at the time of the distribution.
See paragraph (h)(5) of this section for the rules in effect with
respect to the distribution.
(4) Expiring loss carryovers. If S became a member of a consolidated
group in a consolidated return year beginning before January 1, 1995,
and S had a loss carryover from a separate return limitation year at
that time, the group does not treat any expiration of the loss carryover
(even if in a tax year beginning on or after January 1, 1995) as a
noncapital, nondeductible expense resulting in a negative adjustment
under this section. If S becomes a member of a consolidated group in a
consolidated return year beginning on or after January 1, 1995, and S
has a loss carryover from a separate return limitation year at that
time, adjustments with respect to the expiration are determined under
this section.
(5) Prior law--(i) In general. For prior determinations, see prior
regulations under section 1502 as in effect with respect to the
determination. See, e.g., Secs. 1.1502-32 and 1.1502-32T as contained in
the 26 CFR part 1 edition revised as of April 1, 1994.
(ii) Continuing basis reductions for certain deconsolidated
subsidiaries. If a subsidiary ceases to be a member of a group in a
consolidated return year beginning before January 1, 1995, and its basis
was subject to reduction under Sec. 1.1502-32T or Sec. 1.1502-32(g) as
contained in the 26 CFR part 1 edition revised as of April 1, 1994, its
basis remains subject to reduction under those principles. For example,
if S ceased to be a member in 1990, and P's basis in any retained S
stock was subject to a basis reduction account, the basis remains
subject to reduction. Similarly, if an election could be made to apply
Sec. 1.1502-32T instead of Sec. 1.1502-32(g), the election remains
available. However, Secs. 1.1502-32T and 1.1502-32(g) do not apply as a
result of a subsidiary ceasing to be a member in tax years beginning on
or after January 1, 1995.
[T.D. 8560, 59 FR 41685, Aug. 15, 1994, as amended by T.D. 8677, 61 FR
33323, June 27, 1996; T.D. 8560, 62 FR 12098, Mar. 14, 1997; T.D. 8823,
64 FR 36099, July 2, 1999]
Sec. 1.1502-33 Earnings and profits.
(a) In general--(1) Purpose. This section provides rules for
adjusting the earnings and profits of a subsidiary (S) and any member
(P) owning S's stock. These rules modify the determination of P's
earnings and profits under applicable rules of law, including section
312, by adjusting P's earnings and profits to reflect S's earnings and
profits for the period that S is a member of the consolidated group. The
purpose for modifying the determination of earnings and profits is to
treat P and S as a single entity by reflecting the earnings and profits
of lower-tier members in the earnings and profits of higher-tier members
and consolidating the group's earnings and profits in the common parent.
References in this section to earnings and profits include deficits in
earnings and profits.
(2) Application of other rules of law. The rules of this section are
in addition to other rules of law. For example, the
[[Page 386]]
allowance for depreciation is determined in accordance with section
312(k). P's earnings and profits must not be adjusted under this section
and other rules of law in a manner that has the effect of duplicating an
adjustment. For example, if S's earnings and profits are reflected in
P's earnings and profits under paragraph (b) of this section, and S
transfers its assets to P in a liquidation to which section 332 applies,
S's earnings and profits that P succeeds to under section 381 must be
adjusted to prevent duplication.
(b) Tiering up earnings and profits--(1) General rule. P's earnings
and profits are adjusted under this section to reflect changes in S's
earnings and profits in accordance with the applicable principles of
Sec. 1.1502-32, consistently applied, and an adjustment to P's earnings
and profits for a tax year under this paragraph (b)(1) is treated as
earnings and profits of P for the tax year in which the adjustment
arises. Under these principles, for example, the adjustments are made as
of the close of each consolidated return year, and as of any other time
if a determination at that time is necessary to determine the earnings
and profits of any person. Similarly, S's earnings and profits are
allocated under the principles of Sec. 1.1502-32(c), and the adjustments
are applied in the order of the tiers, from the lowest to the highest.
However, modifications to the principles include:
(i) The amount of P's adjustment is determined by reference to S's
earnings and profits, rather than S's taxable and tax-exempt items (and
therefore, for example, the deferral of a negative adjustment for S's
unabsorbed losses does not apply).
(ii) The tax sharing rules under paragraph (d) of this section apply
rather than those of Sec. 1.1502-32(b)(3)(iv)(D).
(2) Affiliated earnings and profits. The reduction in S's earnings
and profits under section 312 from a distribution of earnings and
profits accumulated in separate return years of S that are not separate
return limitation years does not tier up to P's earnings and profits.
Thus, the increase in P's earnings and profits under section 312 from
receipt of the distribution is not offset by a corresponding reduction.
(3) Examples--(i) In general. For purposes of the examples in this
section, unless otherwise stated, P owns all of the only class of S's
stock, the stock is owned for the entire year, S owns no stock of lower-
tier members, the tax year of all persons is the calendar year, all
persons use the accrual method of accounting, the facts set forth the
only corporate activity, preferred stock is described in section
1504(a)(4), all transactions are between unrelated persons, and tax
liabilities are disregarded.
(ii) Tiering up earnings and profits. The principles of this
paragraph (b) are illustrated by the following examples.
Example 1. Tier-up and distribution of earnings and profits. (a)
Facts. P forms S in Year 1 with a $100 contribution. S has $100 of
earnings and profits for Year 1 and no earnings and profits for Year 2.
During Year 2, S declares and distributes a $50 dividend to P.
(b) Analysis. Under paragraph (b)(1) of this section, S's $100 of
earnings and profits for Year 1 increases P's earnings and profits for
Year 1. P has no additional earnings and profits for Year 2 as a result
of the $50 distribution in Year 2, because there is a $50 increase in
P's earnings and profits as a result of the receipt of the dividend and
a corresponding $50 decrease in S's earnings and profits under section
312(a) that is reflected in P's earnings and profits under paragraph
(b)(1) of this section.
(c) Distribution of current earnings and profits. The facts are the
same as in paragraph (a) of this Example 1, except that S distributes
the $50 dividend at the end of Year 1 rather than during Year 2. Under
paragraph (b)(1) of this section, P's earnings and profits are increased
by $100 (S's $50 of undistributed earnings and profits, plus P's receipt
of the $50 distribution). Thus, S's earnings and profits increase by $50
and P's earnings and profits increase by $100.
(d) Affiliated earnings and profits. The facts are the same as in
paragraph (a) of this Example 1, except that P and S do not begin filing
consolidated returns until Year 2. Because P and S file separate returns
for Year 1, P's basis in S's stock remains $100 under Sec. 1.1502-32 and
this section, S has $100 of earnings and profits, and none of S's
earnings and profits is reflected in P's earnings and profits under
paragraph (b) of this section. S's distribution in Year 2 ordinarily
would reduce S's earnings and profits but not increase P's earnings and
profits. (P's $50 of earnings and profits from the dividend would be
offset by S's $50 reduction in earnings and profits that tiers up under
paragraph (b) of this section.)
[[Page 387]]
However, under paragraph (b)(2) of this section, the negative adjustment
for S's distribution to P does not apply. Thus, S's distribution reduces
its earnings and profits by $50 but increases P's earnings and profits
by $50. (If S's earnings and profits had been accumulated in a separate
return limitation year, paragraph (b)(2) of this section would not apply
and the distribution would reduce S's earnings and profits but not
increase P's earnings and profits.)
(e) Earnings and profits deficit. Assume instead that after P forms
S in Year 1 with a $100 contribution, S borrows additional funds and has
a $150 deficit in earnings and profits for Year 1. The corresponding
loss for tax purposes is not absorbed in Year 1, and is included in the
group's consolidated net operating loss carried forward to Year 2. Under
paragraph (b)(1) of this section, however, S's $150 deficit in earnings
and profits decreases P's earnings and profits for Year 1 by $150.
(Absorption of the loss in a later tax year has no effect on the
earnings and profits of P and S.)
Example 2. Section 355 distribution. (a) Facts. P owns all of S's
stock and S owns all of T's stock. For Year 1, T has $100 of earnings
and profits. Under paragraph (b)(1) of this section, the earnings and
profits of T tier up to S and to P. S and P have no other earnings and
profits for Year 1. S distributes T's stock to P at the end of Year 1 in
a distribution to which section 355 applies.
(b) Analysis. Because S's distribution of T's stock is a
distribution to which section 355 applies, the applicable principles of
Sec. 1.1502-32(b)(2)(iv) do not require P's earnings and profits to be
adjusted by reason of the distribution. In addition, although S's
earnings and profits may be reduced under section 312(h) as a result of
the distribution, the applicable principles of Sec. 1.1502-32(b)(3)(iii)
do not require P's earnings and profits to be adjusted to reflect this
reduction in S's earnings and profits.
Example 3. Allocating earnings and profits among shares. P owns 80%
of S's stock throughout Year 1. For Year 1, S has $100 of earnings and
profits. Under paragraph (b)(1) of this section, $80 of S's earnings and
profits is allocated to P based on P's ownership of S's stock.
Accordingly, $80 of S's earnings and profits for Year 1 is reflected in
P's earnings and profits for Year 1.
(c) Special rules. For purposes of this section--
(1) Stock of members. For purposes of determining P's earnings and
profits from the disposition of S's stock, P's basis in S's stock is
adjusted to reflect S's earnings and profits determined under paragraph
(b) of this section, rather than under Sec. 1.1502-32. For example, P's
basis in S's stock is increased by positive earnings and profits and
decreased by deficits in earnings and profits. Similarly, P's basis in
S's stock is not reduced for distributions to which paragraph (b)(2) of
this section applies (affiliated earnings and profits). P may have an
excess loss account in S's stock for earnings and profits purposes
(whether or not there is an excess loss account under Sec. 1.1502-32),
and the excess loss account is determined, adjusted, and taken into
account in accordance with the principles of Secs. 1.1502-19 and 1.1502-
32.
(2) Intercompany transactions. Intercompany items and corresponding
items are not reflected in earnings and profits before they are taken
into account under Sec. 1.1502-13. See Sec. 1.1502-13 for the applicable
rules and definitions.
(3) Example. The principles of this paragraph (c) are illustrated by
the following example.
Example. Adjustments to stock basis. (a) Facts. P forms S in Year 1
with a $100 contribution. For Year 1, S has $75 of taxable income and
$100 of earnings and profits. For Year 2, S has no taxable income or
earnings and profits, and S declares and distributes a $50 dividend to
P. P sells all of S's stock for $150 at the end of Year 2.
(b) Analysis. Under paragraph (c)(1) of this section, P's basis in
S's stock for earnings and profits purposes immediately before the sale
is $150 (the $100 initial basis, plus S's $100 of earnings and profits
for Year 1, minus the $50 distribution of earnings and profits in Year
2). Thus, P recognizes no gain or loss from the sale of S's stock for
earnings and profits purposes.
(c) Earnings and profits deficit. Assume instead that S has a $100
tax loss and earnings and profits deficit for Year 1. The tax loss is
not absorbed in Year 1 and is included in the group's consolidated net
operating loss carried forward to Year 2. Under paragraph (b) of this
section, S's $100 deficit in earnings and profits decreases P's earnings
and profits for Year 1. Under paragraph (c) of this section, P decreases
its basis in S's stock for purposes of determining earnings and profits
from $100 to $0. (If S had borrowed an additional $50 that it also lost
in Year 1, P would have decreased its earnings and profits for Year 1 by
the additional $50, and P would have had a $50 excess loss account in
S's stock for earnings and profits purposes, which would be taken into
account in determining P's earnings and profits from its sale of S's
stock.)
[[Page 388]]
(d) Affiliated earnings and profits. Assume instead that P and S do
not begin filing consolidated returns until Year 2. Under paragraph (b)
of this section, the negative adjustment under Sec. 1.1502-32(b) for
distributions does not apply to S's distribution of earnings and profits
accumulated in a separate return year that is a not separate return
limitation year. Thus, P's basis in S's stock for earnings and profits
purposes remains $100, and P has $50 of earnings and profits from the
sale of S's stock.
(d) Federal income tax liability--(1) In general--(i) Extension of
tax allocations. Section 1552 allocates the tax liability of a
consolidated group among its members for purposes of determining the
amounts by which their earnings and profits are reduced for taxes.
Section 1552 does not reflect the absorption by one member of another
member's tax attributes (e.g., losses, deductions and credits). For
example, if P's $100 of income is offset by S's $100 of deductions,
consolidated tax liability is $0 and no amount is allocated under
section 1552. However, the group may elect under this paragraph (d) to
allocate additional amounts to reflect the absorption by one member of
the tax attributes of another member. Permissible methods are set forth
in paragraphs (d)(2) through (4) of this section, and election
procedures are provided in paragraph (d)(5) of this section. Allocations
under this paragraph (d) must be reflected annually on permanent records
(including work papers). Any computations of separate return tax
liability are subject to the principles of section 1561.
(ii) Effect of extended tax allocations. The amounts allocated under
this paragraph (d) are treated as allocations of tax liability for
purposes of Sec. 1.1552-1(b)(2). For example, if P's taxable income is
offset by S's loss, and tax liability is allocated under the percentage
method of paragraph (d)(3) of this section, P's earnings and profits are
reduced as if its income were subject to tax, P is treated as liable to
S for the amount of the tax, and corresponding adjustments are made to
S's earnings and profits. If the liability of one member to another is
not paid, the amount not paid generally is treated as a distribution,
contribution, or both, depending on the relationship between the
members.
(2) Wait-and-see method. The wait-and-see method under this
paragraph (d)(2) is derived from Securities and Exchange Commission
procedures. In the year that a member's tax attribute is absorbed, the
group's consolidated tax liability is allocated in accordance with the
group's method under section 1552. When, in effect, the member with the
tax attribute could have absorbed the attribute on a separate return
basis in a later year, a portion of the group's consolidated tax
liability for the later year that is otherwise allocated to members
under section 1552 is reallocated. The reallocation takes into account
all consolidated return years to which this paragraph (d) applies (the
computation period), and is determined by comparing the tax allocated to
a member during the computation period with the member's tax liability
determined as if it had filed separate returns during the computation
period.
(i) Cap on allocation under section 1552. A member's allocation
under section 1552 for a tax year may not exceed the excess, if any,
of--
(A) The total of the tax liabilities of the member for the
computation period (including the current year), determined as if the
member had filed separate returns; over
(B) The total amount allocated to the member under section 1552 and
this paragraph (d) for the computation period (except the current year).
(ii) Reallocation of capped amounts. To the extent that the amount
allocated to a member under section 1552 exceeds the limitation under
paragraph (d)(2)(i) of this section, the excess is allocated among the
remaining members in proportion to (but not to exceed the amount of)
each member's excess, if any, of--
(A) The total of the tax liabilities of the member for the
computation period (including the current year), determined as if the
member had filed separate returns; over
(B) The total amount allocated to the member under section 1552 and
this paragraph (d) for the computation period (including for the current
year only the amount allocated under section 1552).
[[Page 389]]
(iii) Reallocation of excess capped amounts. If the reductions under
paragraph (d)(2)(i) of this section exceed the amounts allocable under
paragraph (d)(2)(ii) of this section, the excess is allocated among the
members in accordance with the group's method under section 1552 without
taking this paragraph (d)(2) into account.
(3) Percentage method. The percentage method under this paragraph
(d)(3) allocates tax liability based on the absorption of tax
attributes, without taking into account the ability of any member to
subsequently absorb its own tax attributes. The allocation under this
method is in addition to the allocation under section 1552.
(i) Decreased earnings and profits. A member's allocation under
section 1552 for any year is increased, thereby decreasing its earnings
and profits, by a fixed percentage (not to exceed 100%) of the excess,
if any, of--
(A) The member's separate return tax liability for the consolidated
return year as determined under Sec. 1.1552-1(a)(2)(ii); over
(B) The amount allocated to the member under section 1552.
(ii) Increased earnings and profits. An amount equal to the total
decrease in earnings and profits under paragraph (d)(3)(i) of this
section (including amounts allocated as a result of a carryback)
increases the earnings and profits of the members whose attributes are
absorbed, and is allocated among them in a manner that reasonably
reflects the absorption of the tax attributes.
(4) Additional methods. The absorption by one member of the tax
attributes of another member may be reflected under any other method
approved in writing by the Commissioner.
(5) Election of allocation method--(i) In general. Tax liability may
be allocated under this paragraph (d) only if an election is filed with
the group's first return. The election must--
(A) Be made in a separate statement entitled ``ELECTION TO ALLOCATE
TAX LIABILITY UNDER Sec. 1.1502-33(d)'';
(B) State the allocation method elected under Sec. 1.1502-33(d) and
under section 1552;
(C) If the percentage method is elected, state the percentage (not
to exceed 100%) to be used; and
(D) If a method is permitted under paragraph (d)(4) of this section,
attach evidence of approval of the method by the Commissioner.
(ii) Consent--(A) Electing or changing methods. An election for a
later year, or an election to change methods, may be made only with the
written consent of the Commissioner.
(B) Prior law elections. An election in effect for the last tax year
beginning before January 1, 1995, remains in effect under this section.
However, a group may elect to conform its earnings and profits
computations to the method described in Sec. 1.1502-32(b)(3)(iv)(D) (the
percentage method, using a 100% allocation), whether or not it has
previously made an election for earnings and profits purposes. If a
conforming election is made, the group must make all adjustments
necessary to prevent amounts from being duplicated or omitted. The
conforming election is made by attaching a statement entitled ``ELECTION
TO CONFORM TAX ALLOCATIONS UNDER Secs. 1.1502-32 and 1.1502-33(d)'' to
the consolidated group's return for its first tax year beginning on or
after January 1, 1995. The statement must be signed by the common
parent, and must specify whether the method is conformed only for years
beginning on or after January 1, 1995 or as if the method were in effect
for all prior years. The statement must also describe the adjustments
made by reason of the change (e.g., to reflect prior use of earnings and
profits).
(6) Examples. The principles of this paragraph (d) are illustrated
by the following examples.
Example 1. Wait-and-see method. (a) Facts. P owns all of the stock
of S1 and S2. The P group uses the wait-and-see method of allocation
under paragraph (d)(2) of this section in conjunction with Sec. 1.1552-
1(a)(1). For Year 1, each member's taxable income, both for purposes of
Sec. 1.1552-1(a)(1) and redetermined as if the member had filed separate
returns, is as follows: P $0, S1 $2,000, and S2 ($1,000). Thus, the P
group's consolidated tax liability for Year 1 is $340 (assuming a 34%
tax rate).
(b) Analysis. Under Sec. 1.1552-1(a)(1)(i), the tax liability of the
P group is allocated among the members in accordance with the portion
[[Page 390]]
of the consolidated taxable income attributable to each member having
taxable income. Thus, all of the P group's $340 consolidated tax
liability is allocated to S1. As a result, S1 decreases its earnings and
profits under section 1552 by $340 (even if S1 does not pay the tax
liability). No further allocations are made under paragraph (d)(2) of
this section because S2 cannot yet absorb its loss on a separate return
basis.
(c) Payment of tax liability. If S1 pays the $340 tax liability,
there is no further effect on the income, earnings and profits, or stock
basis of any member. If P pays the $340 tax liability (and the payment
is not a loan from P to S1), P is treated as making a $340 contribution
to the capital of S1; if S2 pays the $340 tax liability (and the payment
is not a loan from S2 to S1), S2 is treated as making a $340
distribution to P with respect to its stock, and P is treated as making
a $340 contribution to the capital of S1. See Sec. 1.1552-1(b)(2).
(d) Year 2. For Year 2, each member's taxable income, under
Sec. 1.1552-1(a)(1)(ii) and redetermined as if the member had filed
separate returns, without taking into account any carryover from Year 1,
is as follows: P $0, S1 $1,000, and S2 $3,000. Thus, the P group's
consolidated tax liability for Year 2 is $1,360 (assuming a 34% tax
rate). Of this amount, section 1552 would allocate $340 to S1 and $1,020
to S2. However, under paragraph (d)(2)(i) of this section, no more than
$680 may be allocated to S2. This is because S2 would have had an
aggregate tax liability of $680 if it had filed separate returns for
Years 1 and 2 (a $0 tax liability for Year 1, and a $680 tax liability
for Year 2, taking into account a $1,000 net operating loss carryover
from Year 1). Under paragraph (d)(2)(ii) of this section, the entire
excess of $340 which would otherwise be allocated to S2 under
Sec. 1.1552-1(a)(1) is allocated to S1. This is because S1 would have
had an additional $340 of aggregate tax liability if it had filed
separate returns for Years 1 and 2 (a $680 tax liability for Year 1, and
a $340 tax liability for Year 2, not taking into account S2's $1,000 net
operating loss for Year 1). The effect of the allocation of $680 to S1
and $680 to S2 is determined under Sec. 1.1552-1(b)(2).
Example 2. Percentage method. (a) Facts. The facts are the same as
in Example 1, but the P group uses the percentage method of allocation
under paragraph (d)(3) of this section, with a percentage of 100%. In
addition, the taxable incomes and losses of the members are the same if
computed as provided in Sec. 1.1552-1(a)(2)(ii).
(b) Analysis. Under Sec. 1.1552-1(a)(2)(ii), $340 of tax liability
is allocated to S1 for Year 1. Under paragraph (d)(3)(i) of this
section, S1 is allocated another $340 of tax liability because S1 would
have had a $680 tax liability if it had filed separate returns but only
$340 is allocated to S1 under section 1552. Thus, S1's earnings and
profits are decreased by the $680 total. Under paragraph (d)(3)(ii) of
this section, S2's earnings and profits are increased by $340 because
the additional $340 allocated to S1 under paragraph (d)(3)(i) of this
section is attributable to the absorption of S2's losses.
(c) Payment of tax liability. If S1 pays the $340 tax liability of
the P group and pays $340 to S2, the Year 1 tax liability results in no
further adjustments to the income, earnings and profits, or basis of any
member's stock. If S1 pays the $340 tax liability of the P group and
pays the other $340 to P instead of S2 because, for example, of an
agreement among the members, S2 is treated as distributing $340 to P
with respect to its stock in the year that S1 makes the payment to P.
See Sec. 1.1552-1(b)(2).
(d) Year 2. For Year 2, $340 is allocated to S1 and $1,020 is
allocated to S2 under section 1552. No additional amounts are allocated
under paragraph (d)(3) of this section.
(e) Deconsolidations--(1) In general. Immediately before it becomes
a nonmember, S's earnings and profits are eliminated to the extent they
were taken into account by any member under this section. If S's
earnings and profits are eliminated under this paragraph (e)(1), no
corresponding adjustment is made to the earnings and profits of P (or
any other member) under paragraph (b) of this section or to any basis in
a member's stock under paragraph (c) of this section. For this purpose,
S is treated as becoming a nonmember on the first day of its first
separate return year (including another group's consolidated return
year).
(2) Acquisition of group--(i) Application. This paragraph (e)(2)
applies only if a consolidated group (the terminating group) ceases to
exist as a result of--
(A) The acquisition by a member of another consolidated group of
either the assets of the common parent of the terminating group in a
reorganization described in section 381(a)(2), or the stock of the
common parent of the terminating group; or
(B) The application of the principles of Sec. 1.1502-75(d)(2) or
(d)(3).
(ii) General rule. Paragraph (e)(1) of this section does not apply
solely by reason of the termination of a group because it is acquired,
if there is a surviving group that is, immediately thereafter, a
consolidated group. Instead, the surviving group is treated as
[[Page 391]]
the terminating group for purposes of applying this paragraph (e) to the
terminating group. This treatment does not apply, however, to members of
the terminating group that are not members of the surviving consolidated
group immediately after the terminating group ceases to exist (e.g.,
under section 1504(a)(3) relating to reconsolidation, or section 1504(c)
relating to includible insurance companies).
(3) Certain corporate separations and reorganizations. The
adjustments under paragraph (e)(1) of this section must be modified to
the extent necessary to effectuate the principles of section 312(h).
Thus, P's earnings and profits rather than S's earnings and profits may
be eliminated immediately before S becomes a nonmember. P's earnings and
profits are eliminated to the extent that its earnings and profits
reflect S's earnings and profits after applying section 312(h)
immediately after S becomes a nonmember (determined without taking this
paragraph (e) into account).
(4) Special uses of earnings and profits. Paragraph (e)(1) of this
section does not apply for purposes of determining--
(i) The extent to which a distribution is charged to reserve
accounts under section 593(e);
(ii) The extent to which a distribution is taxable to the recipient
under sections 805(a)(4) and 832; and
(iii) Any other special use identified in guidance published in the
Internal Revenue Bulletin.
(5) Example. The principles of this paragraph (e) are illustrated by
the following example.
Example. (a) Facts. Individuals A and B own all of P's stock, and P
owns all of the stock of S and T, each with a $500 basis. For Year 1, S
has $100 of earnings and profits and T has $50 of earnings and profits.
Under paragraph (b)(1) of this section, the earnings and profits of S
and T tier up to P, and P has $150 of earnings and profits for Year 1. P
sells all of S's stock for $600 at the close of Year 1.
(b) Analysis. Under paragraph (e)(1) of this section, S's $100 of
earnings and profits is eliminated immediately before S becomes a
nonmember because the earnings and profits are taken into account under
paragraph (b) of this section in P's earnings and profits. However, no
corresponding adjustment is made to P's earnings and profits or to P's
basis in S's stock for purposes of earnings and profits. P's earnings
and profits for Year 1 remain $150 following the sale of S's stock.
(c) Forward merger. The facts are the same as in paragraph (a) of
this Example, except that, rather than P selling S's stock, S merges
into a nonmember in a transaction described in section 368(a)(2)(D).
Under paragraph (h) of this section, the nonmember is treated as a
successor to S. Thus, as in paragraph (b) of this Example, S's $100 of
earnings and profits is eliminated immediately before S ceases to be a
member.
(d) Acquisition of entire group. The facts are the same as in
paragraph (a) of this Example, except that X, the common parent of
another consolidated group, purchases all of P's stock at the close of
Year 1, and P sells S's stock during Year 3. Under paragraph (e)(2) of
this section, the earnings and profits of S and T are not eliminated as
a result of X purchasing P's stock. However, S's earnings and profits
from consolidated return years of both the P group and the X group are
eliminated immediately before S becomes a nonmember of the X group.
(e) Earnings and profits deficit. The facts are the same as in
paragraph (d) of this Example, except that S has a $550 deficit in
earnings and profits for Year 1. The effect of paragraph (e)(1) of this
section is the same. Under paragraph (c)(1) of this section, P would
have an excess loss account in S's stock for earnings and profits
purposes under the principles of Secs. 1.1502-19 and 1.1502-32, and,
under the principles of Sec. 1.1502-19(c)(2), the excess loss account is
not taken into account as a result of X's purchase of P's stock. Under
paragraph (e)(2) of this section, S's deficit is not eliminated under
paragraph (e)(1) of this section immediately before X's purchase of P's
stock. However, S's earnings and profits (or deficit) is eliminated
immediately before S becomes a nonmember of the X group.
(f) Section 355 distribution. The facts are the same as in paragraph
(a) of this Example, except that, rather than selling S's stock, P
distributes S's stock to A at the close of Year 1 in a distribution to
which section 355 applies. Under paragraph (e)(3) of this section, P's
earnings and profits may be reduced under section 312(h) as a result of
the distribution. To the extent that P's earnings and profits are
reduced, S's earnings and profits are not eliminated under paragraph
(e)(1) of this section.
(f) Changes in the structure of the group--(1) Changes in the common
parent--(i) General rule. If P succeeds another corporation under the
principles of Sec. 1.1502-75(d) (2) or (3) as the common parent of a
consolidated group (a group structure change), the earnings and profits
of P are adjusted immediately after P becomes the new common parent to
reflect the earnings and profits
[[Page 392]]
of the former common parent immediately before the former common parent
ceases to be the common parent. The adjustment is made as if P succeeds
to the earnings and profits of the former common parent in a transaction
described in section 381(a). See Sec. 1.1502-31 for the basis of the
stock of members following a group structure change.
(ii) Minority shareholders. If the former common parent's stock is
not wholly owned by members of the consolidated group immediately after
the former common parent ceases to be the common parent, appropriate
adjustments must be made to reflect in the new common parent only an
allocable part of the former common parent's earnings and profits.
(iii) Higher-tier members. To the extent that earnings and profits
are adjusted under this paragraph (f)(1), and the former common parent
is owned by members other than P, the earnings and profits of the
intermediate subsidiaries must be adjusted in accordance with the
principles of this section.
(iv) Example. The principles of this paragraph (f)(1) are
illustrated by the following example.
Example. (a) Facts. X is the common parent of a consolidated group
with $100 of earnings and profits, and P is the common parent of another
consolidated group with $20 of earnings and profits. P acquires all of
X's stock at the close of Year 1 in exchange for 70% of P's stock. The
exchange is a reverse acquisition under Sec. 1.1502-75(d)(3), and the X
group is treated as remaining in existence with P as its new common
parent.
(b) Adjustments for X group earnings and profits. Under paragraph
(f)(1) of this section, P's earnings and profits are adjusted
immediately after P becomes the new common parent, to reflect X's $100
of earnings and profits immediately before X ceases to be the common
parent. The adjustment is made as if P succeeds to X's earnings and
profits in a transaction described in section 381(a). Thus, immediately
after the acquisition, P has $120 of accumulated earnings and profits
and X continues to have $100 of accumulated earnings and profits.
(c) Adjustments for P group earnings and profits. Although the P
group terminates on P's acquisition of X's stock, under paragraph (e)(2)
of this section, no adjustments are made to the earnings and profits of
any subsidiaries in the terminating P group.
(d) Acquisition of separate return corporation. The facts are the
same as in paragraph (a) of this Example, except that, immediately
before the acquisition of its stock by P, X is not affiliated with any
other corporation. The exchange is a reverse acquisition under
Sec. 1.1502-75(d)(3), and P is treated as the common parent of the X
group. Consequently, the results are the same as in paragraphs (b) and
(c) of this Example.
(2) Change in the location of subsidiaries. If the location of a
member within a group changes, appropriate adjustments must be made to
the earnings and profits of the members to prevent the earnings and
profits from being eliminated. For example, if P transfers all of S's
stock to another member in a transaction to which section 351 and
Sec. 1.1502-13 apply, the transferee's earnings and profits are adjusted
immediately after the transfer to reflect S's earnings and profits
immediately before the transfer from consolidated return years. On the
other hand, if the transferee purchases S's stock from P, the
transferee's earnings and profits are not adjusted.
(g) Anti-avoidance rule. If any person acts with a principal purpose
contrary to the purposes of this section, to avoid the effect of the
rules of this section or apply the rules of this section to avoid the
effect of any other provision of the consolidated return regulations,
adjustments must be made as necessary to carry out the purposes of this
section.
(h) Predecessors and successors. For purposes of this section, any
reference to a corporation or to a share includes a reference to a
successor or predecessor as the context may require. A corporation is a
successor if its earnings and profits are determined, directly or
indirectly, in whole or in part, by reference to the earnings and
profits of another corporation (the predecessor). A share is a successor
if its basis is determined, directly or indirectly, in whole or in part,
by reference to the basis of another share (the predecessor).
(i) [Reserved]
(j) Effective date--(1) General rule. This section applies with
respect to determinations of the earnings and profits of a member (e.g.,
for purposes of a characterizing a distribution to which section 301
applies) in consolidated return years beginning on or after January 1,
1995. If this section applies, earnings and profits must be determined
or
[[Page 393]]
redetermined as if this section were in effect for all years (including,
for example, the consolidated return years of another consolidated group
to the extent the earnings and profits from those years are still
reflected). For example, if a distribution by P to a nonmember
shareholder in 1990 was a dividend because of an unabsorbed loss
carryover attributable to S, P's earnings and profits in tax years
beginning after January 1, 1995 are redetermined by taking into account
a negative adjustment in the tax year S's loss arose and in 1990 for P's
distribution, and any subsequent absorption of the loss has no effect on
earnings and profits. Any such determination or redetermination does
not, however, affect any prior period. Thus, the shareholder's treatment
in 1990 of the distribution as a dividend (and the effect of the
distribution on stock basis) is not redetermined under this section.
(2) Dispositions of stock before effective date--(i) In general. If
P disposes of stock of S in a consolidated return year beginning before
January 1, 1995, the amount of P's earnings and profits with respect to
S are not redetermined under paragraph (j)(1) of this section. See
Sec. 1.1502-19 as contained in the 26 CFR part 1 edition revised as of
April 1, 1994 for the definition of disposition, and paragraph (j)(5) of
this section for the rules applicable to such dispositions.
(ii) Lower-tier members. Although P disposes of S's stock in a tax
year beginning before January 1, 1995, S's determinations or adjustments
with respect to lower-tier members with which it continues to file a
consolidated return are redetermined in accordance with the rules of
this section (even if S's earnings and profits were previously taken
into account by P). For example, assume that P owns all of S's stock, S
owns all of T's stock, and T owns all of U's stock. If S sells 80% of
T's stock in a tax year beginning before January 1, 1995 (the effective
date), the amount of S's earnings and profits from the sale, and the
adjustments to stock basis for earnings and profits purposes that are
reflected in that amount, are not redetermined if P sells S's stock
after the effective date. If S sells the remaining 20% of T's stock
after the effective date, S's stock basis adjustments with respect to
that T stock are also not redetermined because T became a nonmember
before the effective date. However, if T and U continue to file a
consolidated return with each other, paragraph (e)(1) of this section
did not apply, and T sells U's stock after the effective date, T's
earnings and profits with respect to U are redetermined (even though
some of the earnings and profits may have been taken into account by S
in its prior sale of T's stock before the effective date).
(iii) Deferred amounts. For purposes of this paragraph (j)(2), a
disposition does not include a transaction to which Sec. 1.1502-13,
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead,
the transaction is deemed to occur as the earnings and profits (if any)
are taken into account.
(3) Deconsolidations and group structure changes--(i) In general.
Paragraphs (e) and (f) of this section apply with respect to
deconsolidations and group structure changes occurring in consolidated
return years beginning on or after January 1, 1995.
(ii) Prior period group structure changes. If there was a group
structure change in a consolidated return year beginning before January
1, 1995, and earnings and profits were not determined under Sec. 1.1502-
33T(a) as contained in the 26 CFR part 1 edition revised as of April 1,
1994, a distribution in a tax year ending after September 7, 1988, of
earnings and profits that are not reflected in the earnings and profits
of the distributee member, but would have been so reflected if
Sec. 1.1502-33T(a) as contained in the 26 CFR part 1 edition revised as
of April 1, 1994 had applied, the negative adjustment under paragraph
(b) of this section for distributions does not apply (and there is
therefore no offset to the increase in the earnings and profits of the
distributee).
(4) Deemed dividend elections. If there is a deemed distribution and
recontribution pursuant to Sec. 1.1502-32(f)(2) as contained in the 26
CFR part 1 edition revised as of April 1, 1994 in a consolidated return
year beginning before
[[Page 394]]
January 1, 1995, the deemed distribution and recontribution under the
election are treated as an actual distribution by S and recontribution
by P as provided under the election.
(5) Prior law. For prior determinations, see prior regulations under
section 1502 as in effect with respect to the determination. See, e.g.,
Secs. 1.1502-33 and 1.1502-33T as contained in the 26 CFR part 1 edition
revised as of April 1, 1994.
[T.D. 8560, 59 FR 41695, Aug. 15, 1994, as amended by T.D. 8597, 60 FR
36710, July 18, 1995]
Sec. 1.1502-34 Special aggregate stock ownership rules.
For purposes of Secs. 1.1502-1 through 1.1502-80, in determining the
stock ownership of a member of a group in another corporation (the
``issuing corporation'') for purposes of determining the application of
section 165(g)(3)(A), 332(b)(1), 333(b), 351(a), or 904(f), in a
consolidated return year, there shall be included stock owned by all
other members of the group in the issuing corporation. Thus, assume that
members A, B, and C each own 33\1/3\ percent of the stock issued by D.
In such case, A, B, and C shall each be treated as meeting the 80-
percent stock ownership requirement for purposes of section 332, and no
member can elect to have section 333 apply. Furthermore, the special
rule for minority shareholders in section 337(d) cannot apply with
respect to amounts received by A, B, or C in liquidation of D.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966
Special Taxes and Taxpayers
Sec. 1.1502-42 Mutual savings banks, etc.
(a) In general. This section applies to mutual savings banks and
other institutions described in section 593(a).
(b) Total deposits. In computing for purposes of section
593(b)(1)(B)(ii) total deposits or withdrawable accounts at the close of
the taxable year, the total deposits or withdrawable accounts of other
members shall be excluded.
(c) Taxable income; taxable years for which the due date (without
extensions) for filing returns is before March 15, 1983. For taxable
years for which the due date (without extensions) for filing returns is
before March 15, 1983, a member's taxable income for purposes of section
593(b)(2) is determined under Sec. 1.1502-27(b) (computed without regard
to any deduction under section 593(b)(2)). In addition, for taxable
years beginning after July 11, 1969, taxable income as computed under
the preceding sentence is subject to the adjustments provided in section
593(b)(2)(E). See Sec. 1.593-6A(b)(5).
(d) Taxable income; taxable years for which the due date (without
extensions) for filing returns is after March 14, 1983--(1) In general.
For a taxable year for which the due date (without extensions) for
filing returns is after March 14, 1983, a thrift's taxable income for
purposes of section 593(b)(2) is its tentative taxable income (as
defined in paragraph (e)(1) of this section).
(2) Definitions. For purposes of this section:
(i) A thrift is a member described in section 593(a).
(ii) A nonthrift is a member that is not a thrift.
(e) Tentative taxable income (or loss)--(1) Thrift. For purposes of
this section, a thrift's tentative taxable income (or loss) is its
separate taxable income (determined under Sec. 1.1502-12 without
paragraph (q) thereof and without any deduction under section 593(b)),
subject to the following adjustments in the following order:
(i) The adjustments described in paragraph (e)(3) of this section;
(ii) The adjustments described in section 593(b)(2)(E) for those
thrifts with separate taxable income greater than zero (determined after
the adjustments under paragraph (e)(3) of this section); and
(iii) The adjustments described in paragraph (f) of this section.
(2) Nonthrift. For purposes of this section, a nonthrift's tentative
taxable income (or loss) is its separate taxable income (determined
under Sec. 1.1502-12), adjusted for the portion of the consolidated net
operating loss deduction attributable to the member, the portion of the
consolidated net capital loss carryover or carryback attributable to the
member, and further adjusted as described in paragraph (e)(3) of this
section.
[[Page 395]]
(3) Adjustments for all members. For each member, the following
adjustments taken into account in the computation of consolidated
taxable income are included in determining its tentative taxable income
(or loss) in order to adjust separate taxable income of the member to
take into account certain consolidated items:
(i) The portions of the consolidated charitable contributions
deduction and the consolidated dividends received deduction attributable
to the member.
(ii) The member's capital gain net income, determined without any
net capital loss carryover or carryback attributable to the member.
(iii) The member's net capital loss and section 1231 net loss,
reduced by the portion of the consolidated net capital loss attributable
to the member.
(f) Adjustments for thrifts--(1) Reductions. A thrift's separate
taxable income (as adjusted under paragraph (e)(3) of this section) is
reduced (but not below zero) by losses of thrifts and to the extent
attributable to functionally related activities, losses of a nonthrift.
Certain operating rules for determining the amount of the reductions are
provided in paragraph (f)(4) of this section. The reductions are made in
the following amounts in the following order:
(i) The thrift's allocable share (as determined under paragraph
(h)(2) of this section) of another thrift's tentative taxable loss. That
tentative taxable loss is determined by including a deduction under
section 593(b) (other than paragraph (2) thereof) for the year in which
the loss arises.
(ii) The thrift's allocable share (as determined under paragraph
(h)(3) of this section) of the portion of the consolidated net operating
loss deduction attributable to it or another thrift. That consolidated
net operating loss deduction is determined by including a deduction
under section 593(b) (other than paragraph (2) thereof) for the year in
which the loss arose. The portion of a consolidated net operating loss
deduction attributable to another thrift is computed by excluding losses
arising in taxable years for which the due date (without extensions) for
filing returns is before March 15, 1983.
(iii) The thrift's allocable share (as determined under paragraph
(h)(4) of this section) of the loss attributable to functionally related
activities of a nonthrift (as determined under paragraph (g) of this
section). For a rule netting that share against certain income
attributable to functionally related activities of that nonthrift, see
paragraph (f)(4)(iv) of this section.
(iv) The thrift's allocable share (as determined under paragraph
(h)(3) of this section) of the portion of the consolidated net operating
loss deduction attributable to functionally related activities of a
nonthrift (as determined under paragraph (h)(5) of this section). That
consolidated net operating loss deduction is determined by excluding
losses arising in taxable years for which the due date (without
extensions) for filing returns is before March 15, 1983. For a rule
netting that share against certain income attributable to functionally
related activities of that nonthrift, see paragraph (f)(4)(iv) of this
section.
(2) Increases. (i) A thrift's separate taxable income (as adjusted
under paragraphs (e)(3) and (f)(1) of this section) is increased in a
subsequent consolidated return year to restore reductions made in a
prior consolidated return year to a thrift's separate taxable income by
reason of losses of a nonthrift. This increase is the amount of the
thrift's allocable share (as determined under paragraph (h)(6) of this
section) of the income attributable to functionally related activities
of a nonthrift in a consolidated return year and is made only in that
year. This increase is made only if both the thrift and the nonthrift
were members of the group in the consolidated return years in which both
the reduction and increase are made.
(ii) This subdivision (ii) limits the increases to a thrift's
separate taxable income to assure that income of a particular nonthrift
is used to restore reductions of a thrift only to the extent that such
nonthrift's losses reduced the thrift's income. Therefore, as of the end
of a consolidated return year, the cumulative increases to a thrift's
tentative taxable income (by reason of income attributable to
functionally related activities of a nonthrift) may not
[[Page 396]]
exceed the cumulative reductions to the thrift's separate taxable income
made (by reason of the nonthrift's functionally related activities)
under paragraph (f)(1) (iii) and (iv) of this section in the current and
all prior consolidated return years during which both the thrift
institution and the nonthrift institution were members of the group.
(iii) For a netting rule, see paragraph (f)(4)(iv) of this section.
(3) Special Rule. (i) If a carryback to a thrift's separate taxable
income diminishes the reduction to a thrift's separate taxable income
for a prior consolidated return year otherwise required by paragraph
(f)(1) (iii) or (iv) of this section, then any increases to a thrift's
separate taxable income under paragraph (f)(2) of this section for an
intervening consolidated return year must be recomputed to take into
account the effect of such carryback. Thus, if a net operating loss
attributable to a thrift is carried back and completely offsets the
thrift's separate taxable income (before the reductions under paragraph
(f)(1) (iii) or (iv) or this section), any increase to the thrift's
separate taxable income under paragraph (f)(2) of this section
(attributable to a reduction in the year to which the loss is carried)
for an intervening consolidated return year will be eliminated. The
recomputation required by this subparagraph (3) must be reflected on an
amended return for the intervening consolidated return year for which
the increase was previously reported. See example (2) in paragraph (j)
of this section.
(ii) If a deficiency for an intervening consolidated return year
results from the application of paragraph (f)(3)(i) of this section with
respect to an item to which section 6501(h) applies, the deficiency may
be assessed at any time within the period described in section 6501(h).
(iii) For purposes of chapter 67 of the Code (relating to interest),
the last date prescribed for payment of any tax owed as a result of the
application of paragraph (f)(3)(i) of this section is deemed to be the
last day of the taxable year for which the item carried back arose.
(4) Operating rules. For purposes of paragraphs (d) through (j) of
this section:
(i) The portion of a consolidated net operating loss deduction
attributable to a member is determined as follows:
(A) First, determine under Sec. Sec. 1.1502-21(b) (or Sec. 1.1502-
79A(a)(3), as appropriate) the portion of each consolidated net
operating loss attributable to the member for the particular year in
which the loss arose.
(B) Second, apply the anti-double-counting rule in paragraph
(h)(3)(iii) of this section so as not to take the same loss into account
twice.
(C) Finally, apply the loss absorption limit in paragraph
(f)(4)(iii) of this section to the total amount of the consolidated net
operating loss deduction from a particular loss year.
(ii) Capital loss carryovers and carrybacks shall be taken into
account in a manner consistent with the principles of paragraphs (d)
through (j) of this section.
(iii) This subdivision (iii) prescribes a loss absorption limit. The
total amount of the consolidated net operating loss deduction from a
given year (loss year) taken into account as reductions under paragraph
(f)(1) of this section for another year (absorption year) shall not
exceed the amount of the consolidated net operating loss deduction
attributable to the loss year absorbed in computing consolidated taxable
income for the absorption year. For this purpose, consolidated taxable
income for the absorption year shall include a deduction under section
593(b) (other than paragraph (2) thereof) for each thrift member.
(iv) This subdivision (iv) prescribes a rule for netting in certain
cases income attributable to functionally related activities of a
nonthrift in a consolidated return year (``income year'') against losses
attributable to functionally related activities of that nonthrift which
arise in a consolidated return year (``loss year''). That nonthrift's
income is netted against the portion of that nonthrift's loss which
would otherwise be applied in a consolidated return year (``reduction
year'') under paragraph (f)(1) (iii) or (iv) of this section to reduce a
thrift's tentative taxable income, but:
[[Page 397]]
(A) Only if the income year is not later than the loss year and the
reduction year, and
(B) Only to the extent the income had not previously been taken into
account under paragraph (f)(2) of this section or this subdivision (iv)
as of the close of the later of the loss year and the reduction year.
(g) Income (or loss) attributable to functionally related activities
of a nonthrift--(1) In general. For purposes of this section, the income
(or loss) attributable to functionally related activities of a nonthrift
is the income (or loss) of the nonthrift:
(i) Attributable to the provision of assets or the rendition of
services to a thrift (such as the leasing of office space or providing
computer or financial services), or
(ii) Derived from the assets described in section 7701(a)(19)(C)
(iii) through (x), but only if such assets comprise 5 percent or more of
the gross assets of the nonthrift.
(2) Amount of income (or loss).The amount of income (or loss) from
such activities is the excess of (i) gross income from such activities
over (ii) the deductions of the nonthrift allocable and apportionable to
that gross income under the principles of Sec. 1.861-8. The loss
attributable to functionally related activities of a nonthrift is the
excess (if any) of such deductions over such gross income. That loss,
however, may not exceed the amount of the tentative taxable loss of that
nonthrift (determined by excluding losses arising in taxable years for
which the due date (without extensions) for filing returns is before
March 15, 1983).
(h) Allocation of income and losses--(1) In general. Paragraphs
(h)(2) through (5) of this section provides rules for allocating
different losses among thrifts that have tentative taxable income
greater than zero. Generally, these allocations are made in the order
listed in paragraph (f)(1) of this section and are based upon the
relative tentative taxable income of the thrifts to which the particular
loss is allocated. For purposes of each allocation under a subdivision
of such paragraph (f)(1), the tentative taxable income of the thrifts
used in making this allocation is reduced by the thrift's allocable
share of losses allocated to the thrift under a prior subdivision of
such paragraph (f)(1). Accordingly, for purposes of this paragraph (h),
tentative taxable income is determined without regard to paragraph (f)
of this section, except as otherwise provided. Paragraph (h)(6) of this
section provides rules for allocating income attributable to
functionally related activities of a nonthrift based upon the relative
reductions to thrift income made on account of that nonthrift.
(2) Allocation of tentative taxable loss of other thrifts. For
purposes of paragraph (f)(1)(i) of this section, a thrift's allocable
share of another thrift's tentative taxable loss is the loss multiplied
by a fraction. The numerator of the fraction is the tentative taxable
income (if greater than zero) of the thrift, and the denominator is the
aggregate of such tentative taxable income of each thrift.
(3) Allocation of portions of a consolidated net operating loss
deduction. (i) For purposes of paragraph (f)(1)(ii) of this section, a
first thrift's allocable share of the portion of the consolidated net
operating loss deduction attributable to another thrift is determined
under paragraph (h)(2) of this section as if that portion were a
tentative taxable loss of that other thrift and by computing tentative
taxable income under such paragraph (h)(2) by taking into account
paragraph (f)(1)(i) of this section. A thrift's allocable share of the
portion of the consolidated net operating loss deduction attributable to
that thrift is equal to that entire portion.
(ii) For purposes of paragraph (f)(1)(iv) of this section, a
thrift's allocable share of the portion of a consolidated net operating
loss deduction attributable to functionally related activities of a
nonthrift (determined under paragraph (h)(5) of this section) is
determined under paragraph (h)(4) of this section as if that portion
were a loss attributable to functionally related activities of the
nonthrift and by computing tentative taxable income under such paragraph
(h)(4) by taking into account paragraph (f)(1) (i), (ii), and (iii) of
this section.
(iii) This subdivision (iii) prevents the ``double-counting'' of
losses. The
[[Page 398]]
reduction to the tentative taxable income of a thrift is diminished to
the extent the loss that gave rise to the reduction has previously been
taken into account in reducing a thrift's tentative taxable income.
Thus, any loss taken into account as a reduction to a thrift's separate
taxable income under any subdivision of paragraph (f)(1) of this section
shall be reduced (but not below zero) to the extent taken into account:
(A) In a prior consolidated return year under any subdivision of
such paragraph (f)(1) or
(B) In the current consolidated return year under a previous
subdivision of such paragraph (f)(1).
(4) Allocation of loss attributable to functionally related
activities of a nonthrift. For purposes of paragraph (f)(1)(iii) of this
section, a thrift's allocable share of a loss attributable to
functionally related activities of a nonthrift is determined by
multiplying the loss by a fraction. The numerator of the fraction is the
tentative taxable income (if greater than zero) of the thrift (taking
into account paragraph (f)(1) (i) and (ii) of this section) and the
denominator is the aggregate of such tentative taxable income (so
determined) of each thrift.
(5) Portion of the consolidated net operating loss deduction
attributable to functionally related activities of a particular
nonthrift. The portion of the consolidated net operating loss deduction
attributable to functionally related activities of a particular
nonthrift is the lesser of the following two amounts:
(i) The portion of the consolidated net operating loss deduction
attributable to that nonthrift.
(ii) The aggregate of the losses attributable to functionally
related activities of that nonthrift for the taxable years in which the
consolidated net operating loss deduction arose.
(6) Allocation of income attributable to functionally related
activities of a nonthrift. For purposes of paragraph (f)(2) of this
section, a thrift institution's allocable share of the income
attributable to functionally related activities of a nonthrift is
determined by multiplying that income by a fraction. The numerator of
the fraction is the amount of the cumulative reductions referred to in
paragraph (f)(2)(ii) of this section (minus the cumulative increases
under paragraph (f)(2) of this section) made on account of that
nonthrift for the thrift and the denominator is the sum of such
cumulative reductions (minus such cumulative increases) made on account
of that nonthrift for all thrifts.
(7) Proper accounting The provisions of section 482 apply in
determining a thrift institution's tentative taxable income, and in
determining the gross income and deductions attributable to functionally
related activities. For example, an expense such as the salary of an
individual who performs services for both a thrift and a nonthrift must
be allocated in a manner that fairly reflects the value of the services
rendered to each.
(i) [Reserved]
(j) Examples. The provisions of this section may be illustrated by
the following examples. In each example the letter ``T'' for a member
denotes a thrift and the letters ``NT'' denote a nonthrift. Also, in
each example, a thrift loss includes a bad debt deduction under section
593(b) (other than paragraph (2) thereof) for such year and a thrift
with income would have such a bad debt deduction of zero.
Example (1). (a) In 1983, corporations T1, T2, NT1, and NT2 are
formed. These corporations constitute an affiliated group that files a
consolidated return on the basis of a calendar year. For 1983, 1984, and
1985, the tentative taxable income (or loss) of each member (before the
application of paragraph (f) of this section) is as follows:
------------------------------------------------------------------------
1983 1984 1985
------------------------------------------------------------------------
NT1........................................... $(60) $(140) $15
T1............................................ 1,000 500 750
NT2........................................... (90) (220) 150
T2............................................ (300) 400 250
------------------------------------------------------------------------
In 1983, NT1, in addition to its other business activities, acted as
a collection agency for T1. Deductions attributable to those activities
exceeded gross income attributable to those activities by $70. NT1's
other activities generated a $10 gain. In 1984 and 1985, NT1 acted as a
collection agency for T1 as its sole activity.
(b) The tentative taxable incomes of T1 and T2 for 1983 (determined
under paragraph (e) of this section) as of the close of that year are
adjusted by paragraph (f) of this section as follows:
[[Page 399]]
(i) T1's tentative taxable income:
T1's tentative taxable income (before the ....... $1,000
application of paragraph (f) of this section.......
Less:
T2's tentative taxable loss......................... $300 .......
NT1's functionally related loss (limited by NT1's 60 360
overall loss)......................................
-----------------
T1's tentative taxable income for 1983.............. ....... 640
(ii) T2's tentative taxable income for 1983 is zero.
(c) The tentative taxable incomes of T1 and T2 for 1984 (determined
under paragraph (e) of this section as of the close of that year) are
adjusted by paragraph (f) of this section as follows:
(i) T1's tentative taxable income:
T1's tentative taxable income (before the application of $500
paragraph (f) of this section)................................
Less:
T1's allocable portion of NT1's functionally related loss 78
(140x500/(500+400)).........................................
--------
T1's tentative taxable income for 1984....................... 422
========
(ii) T2's tentative taxable income:
T2's tentative taxable income (before the application of 400
paragraph (f) of this section...............................
Less:
T2's allocable portion of NT1's functionally related loss 62
(140x400/(500+400)).........................................
T2's tentative taxable income for 1984....................... 338
(d) For 1985, the amount under paragraph (f) (2) of this section for
both T1 and T2 is $15 (NT1's tentative taxable income from functionally
related activities for 1985). For 1983 and 1984, T1's tentative taxable
income was reduced by a total of $138 (i.e., $60 + $78) due to NT1`s
losses from functionally related activities. For 1984, T2's tentative
taxable income was reduced by $62 due to those losses. Accordingly,
under paragraph (f)(2) of this section, T1's tentative taxable income
for 1983 is increased by $10 (i.e., $15x$138/($138+$62)) and T2's
tentative taxable income is increased by $5 (i.e., $15x$62/($138+$62)).
Example (2). (a) In 1983, corporations T, NT1, and NT2 are formed.
these corporations constitute an affiliated group. NT2 provides computer
services to T as its sole activity. For the calendar years 1983, 1984,
and 1985, the group files a consolidated return. The tentative taxable
income of each member (before the application of paragraph (f) of this
section) is as follows:
------------------------------------------------------------------------
1983 1984 1985
------------------------------------------------------------------------
T............................................ $100 $0 $(200)
NT1.......................................... 200 0 100
NT2.......................................... (20) 20 0
------------------------------------------------------------------------
(b) Under paragraph (f)(1) of this section, T's tentative taxable
income for 1983 (determined at the close of that year) is reduced to $80
(i.e., $100 less NT2's $20 loss). For 1984, under paragraph (f)(2) of
this section, T's tentative taxable income is increased by $20. For
1985, the consolidated net operating loss of $100 (all of which is
attributable to T) is carried back to 1983. That $100 carryback is not
limited by paragraph (f)(4)(iii) of this section, since consolidated
taxable income for 1983 available for absorption after a bad debt
deduction of $0 under section 593(b) (other than paragraph (2) thereof)
for that year is $280. Accordingly, under paragraph (f)(1)(ii) of this
section, T's tentative taxable income is reduced by the full $100, which
is taken into account before the previous reduction of T's tentative
taxable income under paragraph (f)(1)(iii) of this section. In addition,
under paragraph (f)(3)(i) of this section, the group must file an
amended return for 1984 to eliminate the increase to T's bad debt
deduction for 1984 by reason of the consolidated net operating loss
carryback to 1983.
Example (3) . (a) T and NT are formed in 1983 and are the only
members of an affiliated group filing a consolidated return on a
calendar year basis. NT provided computer services to T as its sole
activity. For 1983, 1984, and 1985, the tentative taxable income of T
and NT (before the application of paragraph (f) of this section) is as
follows:
------------------------------------------------------------------------
1983 1984 1985
------------------------------------------------------------------------
T............................................ $100 $0 $0
NT........................................... 0 40 (40)
------------------------------------------------------------------------
(b) At the close of 1983, T's tentative taxable income is $100. For
1985, however, the group has a consolidated net operating loss of $40,
all of which is attributable to NT's functionally related activities and
which is carried back to 1983. However, T's tentative taxable income for
1983 is not reduced under paragraph (f)(1)(iv) of this section, since,
under paragraph (f)(4)(iv) of this section, NT's 1984 income
attributable to functionally related activities of $40 is netted against
that $40 carryback.
Example (4). (a) In 1983, corporations T1, T2, NT1, and NT2 are
formed. For calendar years 1983, 1984, and 1985, the affiliated group
consisting of T1, T2, NT1, and NT2 filed a consolidated return. NT1
provided computer services to T1 as its sole activity. The tentative
taxable income of each member (before the application of paragraph (f)
of this section) is as follows:
------------------------------------------------------------------------
1983 1984 1985
------------------------------------------------------------------------
T1........................................... (50) 100 30
T2........................................... (50) (80) (25)
NT1.......................................... (50) (40) (99)
NT2.......................................... 120 30 100
------------------------------------------------------------------------
(b) For 1983, the group has a consolidated net operating loss of
$30, apportioned $10 each to T1, T2, and NT1 under Sec. 1.1502-
[[Page 400]]
79A(a)(3). For 1984, the only thrift with tentative taxable income
greater than zero (before applying paragraph (f) of this section) is T1.
That tentative taxable income of $100 is first reduced to $20 by T2's
$80 1984 loss under paragraph (f)(1)(i) of this section. Next, T1's
remaining tentative taxable income of $20 is reduced to $10 by the
portions attributable to T1 and T2 of the 1983 consolidated net
operating loss carryover to 1984 under paragraph (f)(1)(ii) of this
section. The sum of those portions is limited to $10 (i.e., $5 each) by
paragraph (f)(4)(iii) of this section because 1984 consolidated taxable
income available for absorption after a bad debt deduction under section
593(b) (other than paragraph (2) thereof) for each thrift member for
that year is $10. For that reason, paragraph (f)(4)(iii) of this section
also prevents any further portion of that carryover from being taken
into account in 1984 as a reduction under paragraph (f)(1) of this
section. T1's remaining tentative taxable income of $10 is reduced to
zero, under paragraph (f)(1)(iii) of this section, by NT1's 1984
tentative taxable loss.
(c) For 1985, the only thrift with tentative taxable income greater
than zero (before applying paragraph (f) of this section) is T1. T1's
tentative taxable income for 1985 of $30 is reduced to $5 by T2's 1985
loss of $25 under paragraph (f)(1)(i) of this section. Next, the
portions attributable to T1 and T2 of the consolidated net operating
loss carryover from 1983 to 1985 for purposes of paragraph (f)(1)(ii) of
this section must be determined. That determination is made without
applying the rules for loss absorption in computing consolidated taxable
income under Sec. 1.1502-21A(b)(3). Those portions are instead
determined in 3 steps under paragraph (f)(4)(i) of this section. The
first of those steps is to determine each of T1's and T2's attributable
portions of the 1983 consolidated net operating loss which under
Sec. 1.1502-79A (a)(3) is $10 or $20 for both thrifts. The second of
those steps is to apply the anti-double counting rule under paragraph
(h)(3)(iii) of this section to reduce that $20 amount by the $10 total
of the two $5 portions attributable to T1 and T2 of the consolidated net
operating loss carryover from 1983 to 1984 taken into account as
reductions to T1's tentative taxable income for 1984 under paragraph
(f)(1)(ii) of this section. That leaves a $10 total amount available to
be taken into account as reductions to T1's remaining tentative taxable
income of $5 for 1985 under paragraph (f)(1)(ii) of this section. Under
the third of those steps that $10 amount, however, is limited, under the
loss absorption limit of paragraph (f)(4)(iii) of this section, to the
$6 of the 1983 consolidated net operating loss carryover to 1985 which
is absorbed in computing consolidated taxable income for 1985 since 1985
consolidated taxable income available for absorption after a bad debt
deduction under section 593(b) (other than paragraph (2) thereof) for
that year is $6 (i.e., $30+$100-$99-$25). Because separate taxable
income cannot be reduced below zero under paragraph (f)(1) of this
section, T1's remaining tentative taxable income of $5 is thus reduced
to zero by the portions attributable to T1 and T2, respectively, of the
consolidated net operating loss carryover from 1983 to 1985 under
paragraph (f)(1)(ii) of this section.
(Sec. 1502, 7805, Internal Revenue Code of 1954 (68A Stat. 367 and 917;
(26 U.S.C. 1502 and 7805))
[T.D. 7637, 44 FR 46841, Aug. 9, 1979, as amended by T.D. 7815, 47 FR
11516, Mar. 17, 1982; T.D. 7876, 48 FR 11258, Mar. 17, 1983; 48 FR
13165, Mar. 30, 1983; T.D. 8677, 61 FR 33324, June 27, 1996; T.D. 8823,
64 FR 36100, July 2, 1999]
Sec. 1.1502-43 Consolidated accumulated earnings tax.
(a) Group subject to tax--(1) General rule. For a group filing a
consolidated return for the taxable year, the accumulated earnings tax
under section 531 is imposed on consolidated accumulated taxable income
(as defined in paragraph (b) of this section). This tax applies to any
group that is formed or availed of to avoid or prevent the imposition of
the individual income tax on the shareholders of either any of its
members or any other corporation by permitting earnings and profits to
accumulate instead of dividing or distributing them. Section 531 and
this section do not apply to a group that is treated as a ``personal
holding company'' under section 542(a)(1) as a result of the application
of section 542(b)(1). Special rules are provided in this section for
other groups which include one or more personal holding companies.
(2) Evidence of purpose to avoid income tax. (i) Under section
533(a), the fact that the group's earnings and profits are permitted to
accumulate beyond the reasonable needs of its business is determinative
of the purpose to avoid the income tax with respect to shareholders,
unless the group by the preponderance of the evidence proves to the
contrary.
(ii) The fact that a group is a mere holding or investment group is
prima facie evidence of the group's purpose to avoid the income tax with
respect to
[[Page 401]]
the shareholders. The activities of a member which is a personal holding
company are not taken into account in determining if the group is a mere
holding or investment group.
(3) Earnings and profits. For purposes of this paragraph (a) and
paragraph (d) of this section, the following rules apply:
(i) If no member of the group is a personal holding company, the
group's earnings and profits are the aggregate of the earnings and
profits (or deficit) of each corporation that is a member at the close
of the taxable year, determined in accordance with Sec. 1.1502-33.
(ii) Earnings and profits resulting from the application of
Sec. 1.1502-33(b) are not taken into account.
(iii) Earnings and profits resulting from the disposition of a
member's stock are determined without regard to the stock basis
adjustments under Secs. 1.1502-32 and 1.1502-33(c)(1).
(4) Reasonable needs of the business. The reasonable needs of the
group's business include the reasonable needs of the business of any
corporation (other than a personal holding company) that is a member at
the close of the taxable year. Thus, the earnings and profits of one
member may be accumulated with respect to the reasonable business needs
of another member. If under Sec. 1.537-3(b) the business of a nonmember
corporation is considered the business of a member, then the earnings
and profits of any member may be accumulated with respect to such
nonmember's reasonable business needs.
(5) Burden of proof. The notification described in section 534(b)
and the statement described in section 534(c) are made to or by the
common parent corporation in accordance with Sec. 1.1502-77.
(b) Consolidated accumulated taxable income--(1) In general.
``Consolidated accumulated taxable income'' is the group's consolidated
taxable income determined under Sec. 1.1502-11 adjusted in the manner
provided in paragraph (b)(2) of this section, minus the sum of--
(i) The consolidated dividends paid deduction determined under
paragraph (c) of this section and
(ii) The consolidated accumulated earnings credit determined under
paragraph (d) of this section.
(2) Adjustments to consolidated taxable income. For purposes of
paragraph (b)(1) of this section, consolidated taxable income is
adjusted as follows:
(i) Under section 535(b)(1), the deduction for taxes is the excess
of--
(A) The consolidated liability for tax determined without
Sec. 1.1502-2 (b) through (d) and without the foreign tax credit
provided by section 33, over
(B) The consolidated foreign tax credit determined pursuant to
Sec. 1.1502-4. Foreign taxes deductible under Sec. 1.535-2(a)(2) are
also allowed as a deduction under section 535(b)(1).
(ii) The consolidated charitable contributions deduction under
Sec. 1.1502-24 does not apply. Under section 535(b)(2), there shall be
allowed the aggregate charitable contributions of the members allowable
under section 170, determined without section 170 (b)(2) and (d)(2).
(iii) Under section 535(b)(3), the deductions provided in
Secs. 1.1502-26 and 1.1502-27 are not allowed.
(iv) Under section 535(b)(4), the consolidated net operating loss
deduction described in Sec. Sec. 1.1502-21(a) or 1.1502-21A(a), as
appropriate is not allowed.
(v) Under section 535(b)(5), there is allowed as a deduction the
consolidated net capital loss, determined under Sec. Sec. 1.1502-22(a)
or 1.1502-22A(a), as appropriate .
(vi) Under section 535(b)(6), there is allowed as a deduction an
amount equal to (A) the excess of the consolidated net long-term capital
gain (determined under Sec. Sec. 1.1502-22(a) or 1.1502-41A, as
appropriate over the consolidated net short-term capital loss
(determined under Sec. Sec. 1.1502-22T(a) or 1.1502-41A, as
appropriate), minus (B) the taxes attributable to this excess. This
consolidated net short-term capital loss is determined without the
consolidated net capital loss carryovers or carrybacks to the taxable
year.
(vii) Under section 535(b)(7), the consolidated net capital loss
carryovers and carrybacks are not allowed. See Sec. Sec. 1.1502-22(b) or
1.1502-22A(b), as appropriate.
[[Page 402]]
(viii) Sections 1.1502-15A (Limitations on built-in deductions not
subject to Sec. 1.1502-15) and 1.1502-15 do not apply.
(3) Personal holding company a member. If a member is a personal
holding company for the taxable year--
(i) [Reserved]
(ii) In applying paragraph (b)(2)(i) of this section, consolidated
liability for tax (as determined under that paragraph (b)(2)(i)) is
reduced by the portion thereof allocable to that member under section
1552(a) (1), (2), (3), or (4) (or Sec. 1.1502-33(d)), whichever is
applicable. The consolidated foreign tax credit is computed by excluding
the taxable income and any foreign taxes paid or accrued by that member,
and foreign taxes deductible under Sec. 1.535-2(a)(2) do not include
foreign taxes attributable to that member.
(c) Consolidated dividends paid deduction--(1) General rule. For
purposes of this section, the consolidated dividends paid deduction is
the aggregate of the members' deductions under section 561(a) (1) and
(2). This deduction is determined by excluding deductions for dividends
paid to other members.
(2) Exception for certain personal holding companies. [Reserved]
(3) Dividends paid defined. For purposes of this paragraph (c),
``dividends paid'' and ``dividend (or portion thereof) paid'' include
amounts treated as dividends paid during the taxable year under sections
562(b)(1), 563, and 565 (relating respectively to liquidating
distributions, dividends paid after year end, and consent dividends).
(4) Examples. This paragraph (c) can be illustrated by the following
examples:
Example (1). Corporations P and S constitute an affiliated group
which files a consolidated return on a calendar year basis for 1984 and
1985. P owns all of S's stock and two individuals own all of P's stock.
Neither member of the group is a personal holding company for 1984.
Assume that on December 15, 1984, S pays a dividend (as defined in
section 316 (a)) of $2,000 to P, and P pays a dividend (as so defined)
of $3,000 on January 15, 1985, to its individual shareholders. All
dividends are paid in cash and are pro rata with no preference as to any
shares or class of stock. For purposes of this paragraph (c), the
consolidated dividends paid deduction for 1984 is $3,000, i.e., the
dividend paid on January 15, 1985, by P to its nonmember shareholders.
See section 563 (a). The $2,000 dividend paid by S to P is not taken
into account in computing the consolidated dividends paid deduction.
Example (2) [Reserved]
(d) Consolidated accumulated earnings credit. [Reserved]
[T.D. 7937, 49 FR 3462, Jan. 27, 1984, as amended by T.D. 8560, 59 FR
41674, Aug. 15, 1994; T.D. 8677, 61 FR 33324, June 27, 1996; T.D. 8560,
62 FR 12098, Mar. 14, 1997; T.D. 8823, 64 FR 36100, July 2, 1999]
Sec. 1.1502-44 Percentage depletion for independent producers and royalty owners.
(a) In general. The sum of the percentage depletion deductions for
the taxable year for all oil or gas property owned by all members, plus
any carryovers under section 613A(d)(1) or paragraph (d) of this section
from a prior taxable year, may not exceed 65 percent of the group's
adjusted consolidated taxable income (under paragraph (b) of this
section) for the consolidated return year.
(b) Adjusted consolidated taxable income. For purposes of this
section, adjusted consolidated taxable income is an amount (not less
than zero) equal to the group's consolidated taxable income determined
without:
(1) Any depletion with respect to an oil or gas property (other than
a gas property with respect to which the depletion allowance for all
production is determined pursuant to section 613A(b)) for which
percentage depletion would exceed cost depletion in the absence of the
depletable quantity limitations contained in section 613A(c) (1) and (6)
and the consolidated taxable income limitation contained in paragraph
(a) of this section.
(2) Any consolidated net operating loss carryback to the
consolidated return year under Secs. 1.1502-21 or 1.1502-21A (as
appropriate) and
(3) Any consolidated net capital loss carryback to the consolidated
return year under Sec. Sec. 1.1502-22 or 1.1502-22A (as appropriate).
(c) Allocation to oil and gas properties. The maximum amount
allowable as a deduction under section 613A(c), after the application of
paragraph (a) of this section, is allocated to properties held by
members in accordance with the regulations under section 613A(d).
[[Page 403]]
Those regulations provide for an initial allocation and possible
reallocation of the maximum allowable percentage depletion deduction
among oil and gas properties. Thus, if, after the initial allocation,
cost depletion exceeds the percentage depletion that would be allowable
for a particular oil or gas property, cost depletion must be used for
that property and the maximum amount of percentage depletion allowable
as a deduction for the group is reallocated among only the remaining
properties held by all members.
(d) Carryover for disallowed amounts. (1) If any amount is
disallowed as a deduction for the taxable year by reason of section
613A(d)(1) or paragraph (a) of this section, the disallowed amount for
each oil or gas property is treated as an amount allowed as a deduction
under section 613A(c), for the following taxable year for the member
that owned the property, in accordance with the regulations under
section 613A and paragraphs (a) and (d)(2) of this section.
(2) Any amount that was disallowed as a deduction in a separate
return limitation year of a member may be carried to a consolidated
return year only to the extent that 65 percent of the excess determined
under paragraph (d)(3) of this section exceeds the sum of the otherwise
allowable percentage depletion deductions for the member's oil and gas
properties for the year.
(3) The excess determined in this subparagraph (3) for a member is
the excess, if any, of adjusted consolidated taxable income for the year
under paragraph (b) of this section over that income recomputed by
excluding the items of income and deductions of the member.
(e) Effective date. This section applies to taxable years for which
the due date (without extensions) for filing returns is after September
30, 1980.
[T.D. 7725, 45 FR 65561, Oct. 3, 1980, as amended by T.D. 8677, 61 FR
33324, June 27, 1996; T.D. 8823, 64 FR 36100, July 2, 1999]
Sec. 1.1502-47 Consolidated returns by life- nonlife groups.
(a) Scope--(1) In general. Under section 1504(b)(2), insurance
companies that are taxed under section 802 or 821 (relating respectively
to life insurance companies and to certain mutual insurance companies)
are not treated as includible corporations for purposes of determining
under section 1504(a) the existence of an affiliated group and the
composition of its membership. Section 1504(c)(2) provides an election
whereby certain life insurance companies and mutual insurance companies
may be treated as includible corporations, and thus members, of a group
composed of other includible corporations. This section provides
regulations for the making of this election and for the determination of
an electing group's composition and its consolidated tax liability.
(2) General method of consolidation--(i) Subgroup method. The
regulations adopt a subgroup method to determine consolidated taxable
income. One subgroup is the group's nonlife companies (including those
taxable under section 821). The other subgroup is the group's life
insurance companies. Initially, the nonlife subgroup computes nonlife
consolidated taxable income and the life subgroup computes consolidated
partial life insurance company taxable income. A subgroup's income may
in effect be reduced by a loss of the other subgroup. The life subgroup
losses consist of consolidated loss from operations and life
consolidated net capital loss. The nonlife subgroup losses consist of
nonlife consolidated net operating loss and nonlife consolidated net
capital loss. Consolidated taxable income is therefore defined in
pertinent part as the sum of nonlife consolidated taxable income and
consolidated partial life insurance company taxable income reduced by
life subgroup losses or nonlife subgroup losses.
(ii) Subgroup loss. A subgroup loss does not actually affect the
computation of nonlife consolidated taxable income or consolidated
partial life insurance company taxable income. It merely constitutes a
bottom-line adjustment in reaching consolidated taxable income.
Furthermore, one subgroup's loss must first be carried back against
income of the same subgroup before it may be used as a setoff against
the second subgroup income in the taxable year the loss arose. (See
section 1503(c)(1)). The carryback of the losses from one subgroup may
not be used to
[[Page 404]]
offset income of the other subgroup in the year to which the loss is to
be carried. This carryback of the first subgroup's loss may ``bump'' the
second subgroup's loss that in effect previously reduced the income of
the first subgroup. The second subgroup's loss that is bumped in
appropriate cases may in effect reduce a succeeding year's income of the
second or first subgroup. This approach gives the group the tax savings
of the use of losses but the bumping rule assures that insofar as
possible life deductions will be matched against life income and nonlife
deductions against nonlife income.
(iii) Carryover of subgroup loss. A subgroup's loss may be used in a
succeeding year, but in any particular succeeding year the loss must be
used to reduce the income of the same subgroup before it may be used as
a setoff against the other subgroup's income.
(3) Authority. This section is prescribed under the authority of
sections 1502, 1503(c), 1504(c)(2), and 7805(b).
(4) Other provisions. The provisions of Secs. 1.1502-1 through
1.1502-80 apply unless this section provides otherwise. Further, unless
otherwise indicated in this section, a term used in this section has the
same meaning as in sections 801-844.
(b) Effective date. This section is effective for taxable years for
which the due date (without extensions) for filing returns is after
March 14, 1983.
(c) Cross references. The following table provides cross references
for some of the definitions and operating rules that are relevant in
making the election and determining the group's composition and its tax
liability:
Item and Paragraph
General definitions (d).
Eligible corporation (Five-year rules) (d)(12).
Election (e).
Consolidated taxable income (g).
Nonlife consolidated taxable income (h).
Consolidated partial life insurance company taxable income (j).
Nonlife subgroup losses (m).
Life subgroup losses (n).
Alternative tax (o).
(d) Definitions. For purposes of this section:
(1) Life insurance company. The term ``life company'' means a life
insurance company as defined in section 801. Section 801 applies to each
company separately.
(2) Mutual insurance company. The term ``mutual company'' means a
mutual insurance company taxable under section 821(a)(1).
(3) Life insurance company taxable income. The term ``life insurance
company taxable income'' is referred to as LICTI. The terms ``TII'',
``GO'', and ``LO'' refer, respectively, to taxable investment income
(section 804), gain from operations (section 809), and loss from
operations (section 812). The term ``consolidated partial LICTI'' refers
to consolidated LICTI without section 802(b)(3).
(4) Group. The term ``group'' means an affiliated group of
corporations (as defined in section 1504(a)). Unless otherwise indicated
in this section, a group's composition is determined without section
1504(b)(2).
(5) Member. The term ``member'' means a corporation (including the
common parent) that is an includible corporation in the group. A life
company or mutual company is tentatively treated as a member for any
taxable year for purposes of determining if it is an eligible
corporation under paragraph (d)(12) of this section and therefore if it
is an includible corporation under section 1504(c)(2). If such a company
is eligible and includible (under section 1504(c)(2)), it will actually
be treated as a member of the group.
(6) Life member. A life member is a member of the group that is a
life company.
(7) Nonlife member. A nonlife member is a member of the group that
is not a life company.
(8) Life subgroup. A life subgroup is composed of those members that
are life members. If the group has only one life member, it constitutes
a life subgroup.
(9) Nonlife subgroup. A nonlife subgroup is composed of those
members that are nonlife members. If the group has only one nonlife
member, it constitutes a nonlife subgroup.
(10) Separate return year. The term ``separate return year'' means a
taxable year of a corporation for which it
[[Page 405]]
files a separate return or for which it joins in the filing of a
consolidated return by another group. For purposes of this subparagraph
(10), the term ``group'' is defined with regard to section 1504(b)(2)
for years in which an election under section 1504(c)(2) is not in
effect. Thus, a separate return year includes a taxable year for which
that election is not in effect.
(11) Separate return limitation year. Section 1.1502-1(f)(2)
provides exceptions to the definition of the term ``separate return
limitation year''. For purposes of applying those exceptions to this
section, for taxable years ending after December 31, 1980, the term
``group'' is defined without regard to section 1504(b)(2) and the
definition in this subparagraph (11) applies separately to the nonlife
subgroup in determining nonlife consolidated taxable income under
paragraph (h) of this section and to the life subgroup in determining
consolidated partial LICTI under paragraph (j) of this section.
Paragraph (m)(3)(ix) of this section defines the term ``separate return
limitation year'' for purposes of determining whether the losses of one
subgroup may be used against the income of the other subgroup.
(12) Eligible corporations--(i) In general. A corporation is an
eligible corporation for a taxable year of a group only if, throughout
every day of the base period the corporation:
(A) Was in existence and a member of the group determined without
the exclusions in section 1504(b)(2) (see paragraphs (d)(12) (iii)
through (vi) of this section),
(B) Was engaged in the active conduct of a trade or business
(``active business''),
(C) Did not experience a change in tax character (see paragraph
(d)(12)(vii) of this section), and
(D) Did not undergo disproportionate asset acquisitions (see
paragraph (d)(12)(viii) of this section).
(ii) Base period. The base period consists of the common parent's
five taxable years immediately preceding the group's taxable year for
which the consolidated return and the determination of eligibility are
made. Eligibility is determined for each consolidated return year
beginning with the first year for which the election under section
1504(c)(2) is effective.
(iii) In existence. Except as provided in paragraphs (d)(12) (v) and
(vi) of this section, a corporation organized after the base period
begins is not eligible even though it is a member of the group
immediately after its organization. For purposes of this subdivision
(iii), a corporation that was a party to a reorganization described in
section 368(a)(1)(F) shall be treated as the same entity both before and
after the reorganization.
(iv) Membership period. Except as provided in paragraphs (d)(12) (v)
and (vi) of this section, a corporation must have been a member of the
group throughout the base period to be eligible. Thus, an ineligible
corporation includes one whose stock was acquired from outside the group
at any time during the base period or one which was a member of a
different group (whether by application of reverse acquistion rules in
Sec. 1.1502-75(d)(3) or otherwise) at any time during the base period.
For purposes of this subdivision (iv), the common parent of a group is
treated as constituting a group (and hence is a member) during any
period when it was not a member of an affiliated group within the
meaning of section 1504(a) (applied without section 1504(b)(2)).
(v) Tacking rule. The period during which an ``old'' corporation is
in existence and a member of the group engaged in active business is
included in (or ``tacks'' onto) the period for the ``new'' corporation
if the following five conditions listed in this subdivision (v) are met.
For purposes of this subparagraph (12), a ``new'' corporation is a
corporation (whether or not newly organized) during the period its
eligibility depends upon the tacking rule. The five conditions are as
follows:
(A) The first condition is that, at any time, 80 percent or more of
the new corporation's assets it acquired (other than in the ordinary
course of its trade or business) where acquired from the old corporation
in one or more transactions described in section 351(a) or 381(a). This
asset test is applied by using the fair market values of assets on the
date they were acquired and
[[Page 406]]
without regard to liabilities. Assets acquired in the ordinary course of
business will be excluded from total assets only if they were acquired
after the new corporation became a member of the group (determined
without section 1504(b)(2)). In addition, assets that the old
corporation acquired from outside the group in transactions not
conducted in the ordinary course of its trade or business are not
included in the 80 percent (but are included in total assets) if the old
corporation acquired those assets within five calendar years before the
date of their transfer to the new corporation.
(B) The second condition is that at the end of the taxable year
during which the first condition is first met, the old corporation and
the new corporation must both have the same tax character. For purposes
of this paragraph (d)(12), a corporation's tax character is the section
under which it would be taxed (i.e., sections 11, 802, 821, or 831) if
it filed a separate return. If the old corporation is not in existence
(or adopts a plan of complete liquidation) at the end of that taxable
year, this subdivision (v)(B) will apply to the old corporation's
taxable year immediately preceding the beginning of the taxable year
during which the first condition is first met.
(C) The third condition is that, if the old and new corporation are
life insurance companies, the transfer (or transfers) is not reasonably
expected (at the time of the transfer) to result in the separation of
profitable activities from loss activities.
(D) The fourth condition is that, at the end of the taxable year
during which the first condition is first met, the new corporation does
not undergo a disproportionate asset acquisition under paragraph
(d)(12)(viii) of this section.
(E) The fifth condition is that, if there is more than one old
corporation, the first three conditions apply to all of the
corporations. Thus, the second condition (tax character) must be met by
all of the old corporations transferring assets taken into account in
meeting the test in paragraph (d)(12)(v)(A) of this section.
(vi) Old group remaining in existence. If the common parent of a
group (or a new common parent) became the common parent in a transaction
described in Sec. 1.1502-75 (d)(2) or (d)(3) where a group remained in
existence, then paragraph (d)(12) (ii) through (iv) of this section
apply by treating that common parent as if it were also the previous
common parent of the group that remains in existence. If this paragraph
(d)(12)(vi) applies to a transaction, the tacking rule in paragraph
(d)(12)(v) of this section does not apply to the transaction.
(vii) Change in tax character. A corporation must not experience
during the base period a change in tax character (as defined in
paragraph (d)(12)(v)(B) of this section) if the change is attributable
to an acquisition of assets from outside the group in transactions not
conducted in the ordinary course of its trade or business. However, if a
new corporation relies on the tacking rules in paragraph (d)(12)(v) of
this section, this paragraph (d)(12)(vii) shall apply during the base
period and the current consolidated return year and even if the change
in tax character is attributable to an asset acquisition from within the
group.
(viii) Disproportionate asset acquisition. To be eligible, a
corporation must not undergo during the base period disproportionate
asset acquisitions which are attributable to an acquisition (or a series
of acquisitions) of assets from outside the group in transactions not
conducted in the ordinary course of its trade or business (special
acquisition). Whether special acquisitions are disproportionate is
determined at the end of each base period. Whether an acquisition
results in a disproportionate asset acquisition depends on all of the
facts and circumstances including the following factors and rules:
(A) One factor is the portion of the insurance reserves (i.e., total
reserves in section 801 (c)) of the acquiring company at the end of the
base period which is attributable to special acquisitions.
(B) A second factor is the portion of the fair market value of the
assets (without reduction for liabilities) of the acquiring company at
the end of the base period that is attributable to special acquisitions.
[[Page 407]]
(C) A third factor is the portion of the premiums generated during
the last taxable year of the base period which are attributable to
special acquisitions.
(D) A corporation will not experience a disproportionate asset
acquisition unless 75 percent of one factor (whether or not listed in
this subdivision (viii)) is attributable to special acquisitions.
(E) Money or other property contributed to a corporation by a
shareholder that is not a member of the group (without section
1504(b)(2)) is not a special acquisition.
(F) If a new corporation relies on the tacking rules in paragraph
(d)(12)(v) of this section, this subdivision (viii) applies to that
corporation during a consolidated return year. Thus, if at any time
during a consolidated return year, a new corporation undergoes a
disproportionate asset acquisition, the corporation becomes ineligible
at that time.
(13) Ineligible corporation. A corporation that is not an eligible
corporation is ineligible. If a life company or mutual company is
ineligible, it is not treated under section 1504(c)(2) as an includible
corporation. Losses of a nonlife member arising in years when it is
ineligible may not be used under section 1503(c)(2) and paragraph (m) of
this section to set off the income of a life member. If a life or mutual
company is ineligible and is the common parent of the group (without
section 1504(b)(2)), the election under section 1504(c)(2) may not be
made.
(14) Illustrations. The following examples illustrate this paragraph
(d). In each example, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). P has owned all of the stock of S since 1913. On
January 1, 1980, P purchased all of the stock of L1 which
owns all of the stock of L2 and S2. L1
and L2 are treated as members for purposes of determining if
they are eligible for 1982. However, for 1982, L1,
L2, and S2 are ineligible because none of them has
been a member of the group for P's five taxable years preceding 1982.
For 1982, L1 and L2 may elect to file a
consolidated return because they constitute an affiliated group under
section 1504(c)(1), and P and S may file a consolidated return.
Example (2). Since 1974, P has been a mutual insurance company
owning all the stock of L1. In 1980, P transfers assets to
S1., a new stock casualty company subject to taxation under
section 831(a). For 1982, only P and L1 are eligible
corporations. The tacking rule in paragraph (d)(12)(v) of this section
does not apply in 1982 because the old corporation (P) and the new
corporation (S1) do not have the same tax character. The
result would be the same if P were a life company.
Example (3). Since 1974, L has owned all the stock of L1
which has owned all the stock of S1, a stock casualty
company. L1 writes some accident and health insurance
business. In 1980, L1 transfers this business, and
S1 transfers some of its business, to a new stock casualty
company, S2., in a transaction described in section 351 (a).
The property transferred to S2. by L1 had a fair
market value of $50 million. The property transferred by S1
had a fair market value of $40 million. S2. is ineligible for
1982 because the tacking rule in paragraph (d)(12)(v) of this section
does not apply. The old corporations (L1 and S1)
and the new corporation (S2.) do not all have the same tax
character. See subparagraph (d)(12)(v)(B) and (E) of this section. The
result would be the same if L1 transferred other property
(e.g., stock and securities) with the same value, rather than accident
and health insurance contracts, to S2.
Example (4). Since 1974, P has owned all the stock of S and
L1. L1 is a large life company engaged in active
business since 1974. On January 1, 1982, L1 transfers in a
section 351 (a) transaction assets (not acquired from outside the group)
to a new life company, L2. For 1982, L2 is
eligible because under paragraph (d)(12)(v) of this section,
L2 is considered to have been in existence and a member of
the group engaged in the active business since 1974 which is the period
L1, the old corporation, was in existence and a member of the
group so engaged.
Example (5). The facts are the same as in example (4). Assume that
the fair market value of the assets L1 transferred to
L2 was $10 million on January 1, 1982 and that L2
acquired no other assets prior to June 30, 1983. Assume further that on
January 1, 1983, L1 acquires (other than in the ordinary
course of its trade or business) assets having a fair market value of
$40 million from L3, an unrelated life company. On June 30,
1983, L1 transfers those assets to L2.
L2 becomes ineligible on June 30, 1983. Since by fair market
values, 80 percent (i.e., 40/50) of L2's assets are
attributable to special acquisitions, L2 has undergone a
disproportionate asset acquisition at that time. See paragraph
(d)(12)(viii)(B), (D), and (F) of this section.
Example (6). The facts are the same as in example (5) except that
L1 transfers assets (other than life insurance contracts)
having a fair market value of $40 million to L2 and
L2 purchases the assets of L3 on June 30, 1983.
[[Page 408]]
the result of the 1983 acquisition is the same as in example (5).
Example (7). The facts are the same as in example (5) except the
acquired assets acquired by L2 in 1983 from L1
have a fair market value of $20 million. In 1983, L2 had $1
million of premiums on its pre-existing contracts but premiums generated
by the acquired business for the entire year would have been $2 million.
L2 is eligible in 1983 because it did not experience a
disproportionate asset acquisition on June 30, 1983.
Example (8). Since 1974, L, a State A corporation, has owned all of
the stock of L1 and S1. On January 1, 1982, L
merges into L3, a smaller State B corporation, which owns the
stock of S2. The transaction is a reverse acquisition
described in Sec. 1.1502-75(d)(3) and the group of which L was the
common parent remains in existence. Under paragraph (d)(12)(vi) of this
section, L3 is eligible for 1982. However, S2 is
ineligible in 1982 under paragraph (d)(12)(iv) of this section.
Example (9). The facts are the same as in example (8) except that L
acquires the stock of L3. L3 and S2 are
both ineligible for 1982. On January 1, 1983, the fair market value of
L3's assets are $5 million (without liabilities) and on that
date L transfers assets (not acquired from outside the group) having a
fair market value of $95 million (without liabilities) to L3.
L and L3 are life companies at the end of 1983. L3
is eligible in 1983 under the tacking rule in paragraph (d)(12)(v) of
this section. S2 is ineligible in that year. The result would
be the same if L3 was not a life company prior to January 1,
1983. See paragraph (d)(12)(v)(B) of this section.
Example (10). Since 1974, P has owned all of the stock of
S1 and L1. On January 1, 1982, L1
incorporates L2 and transfers cash and securities to
L2. L2 begins writing a new line of specialty life
insurance products and it qualifies as a life company for calendar year
1982. L2 generates a loss from operations (section 812)
attributable to its writing of new business. For 1982, L2 is
ineligible under paragraph (d)(12)(v)(C) of this section.
Example (11). The facts are the same as in example (10) except that
L1 transfers to L2 a block of insurance contracts
that generated losses for L1 and continued to generate losses
for L2, producing a loss from operations. L2 is
ineligible in 1982 under paragraph (d)(12)(v)(C) of this section.
Example (12). Since 1974, X, a foreign corporation, has owned all
the stock of S2 and S1, and S1 has
owned all of the stock of L1. On January 1, 1982, X
incorporates a new U.S. company P, and transfers the stock of S1
and S2 to P. Assume that under Sec. 1.1502-75(d)(3) (relating
to reverse acquisitions), the S1-L1 affiliated
group remains in existence. Under paragraph (d)(12)(vi) of this section,
P, S1, and L1 are eligible but S2 is
ineligible. The result would be the same if X were an individual.
Example (13). The facts are the same as in example (12) except that
X owns all of the stock of S1, L1, and
S2. In addition, on January 1, 1982, X transfers the stock of
S1 and S2 to L1. L1 is
eligible in 1982 under paragraph (d)(12)(iv) of this section. L1
would still be eligible even if it owned a subsidiary during the base
period but sold the subsidiary prior to January 1, 1982. S1
and S2 are ineligible in 1982.
Example (14). Since 1974, S1 has owned all of the stock
of L1. S2, an unrelated company, has owned all of
the stock of L2 and S3 for 10 years. S1
and S2 are active stock casualty companies and not holding
companies. On January 1, 1982, S1 and S2 merge
into a new casualty company, S, in a transaction described in
Sec. 1.1502-75(d)(3) so that the group of which S1 was the
common parent remains in existence. S and L1 are eligible in
1982 under paragraph (d)(12)(vi) of this section. L2 and
S3 are ineligible.
Example (15). The facts are the same as in example (14) except that
S2 (the first corporation in Sec. 1.1502-75(d)(3)) acquires
the stock of S1 in exchange for the stock of S2.
The result is that only S2, S1, and L1
are eligible in 1982.
Example (16). Since 1974, S had owned all of the stock of
L1. L1 is a large life company. On January 1,
1982, L1 incorporates L2 and transfers $40 million
in cash and securities to L2 in a transaction described in
section 351(a). On March 1, 1982, L2 purchases the assets of
L3, an unrelated life company. The purchased assets have a
fair market value (without liabilities) of $30 million on March 1, 1982.
L2 is ineligible for 1982 because the tacking rule in
paragraph (d)(12)(v) of this section does not apply. L2
experienced a disproportionate asset acquisition in 1982. See paragraph
(d)(12)((v)(D) of this section.
(e) Election--(1) In general. The election under section 1504(c)(2)
may not be made if the group's common parent is an ineligible life
company or an ineligible mutual company. The election under section
1504(c)(2) may only be made by the common parent of the group (as
defined in section 1504(c)(2) without the exclusions in section
1504(b)(2)). For example, assume that P owns all of the stock of
L1, an eligible life company, which owns the stock of
S1. Assume further that P also owns the stock of
L2, an ineligible life member, which (for more than five
years) has owned the stock of a nonlife company, S2. Only P
may make the election and, if it does so, P, L1, and S1
may file a consolidated return under
[[Page 409]]
this section. L2 may not make the election under section
1504(c)(2) and may not file a consolidated return with S2.
(2) How election is made--(i) General rule. The election under
section 1504(c)(2) is generally made by the group's common parent in the
same manner (and it has the same effect) as the election to file a
consolidated return is made under Sec. 1.1502-75 (a) and (b) for a group
which did not file a consolidated return for the immediately preceding
taxable year. The procedure for making the election under section
1504(c)(2) is the same whether or not a consolidated return was filed by
the life members or the nonlife members for the immediately preceding
taxable year.
(ii) Special rule. Notwithstanding the general rule, however, if the
nonlife members in the group filed a consolidated return for the
immediately preceding taxable year and had executed and filed a Form
1122 that is effective for the preceding year, then such members will be
treated as if they filed a Form 1122 when they join in the filing of a
consolidated return under section 1504(c)(2) and they will be deemed to
consent to the regulations under this section. However, an affiliation
schedule (Form 851) must be filed by the group and the life members must
execute a Form 1122 in the manner prescribed in Sec. 1.1502-75(h)(2).
(3) Irrevocability. Except as provided in Sec. 1.1502-75(c) and
paragraph (e)(4) of this section, the election under section 1504(c)(2)
is irrevocable.
(4) Permission to discontinue--(i) General rule. A ``section
1504(c)(2) group'' with a common parent that has made the election to
file a consolidated return under section 1504(c)(2) in a previous
taxable year is granted permission to elect (under Sec. 1.1502-
75(c)(2)(ii)) to discontinue filing such a consolidated return for that
group's first taxable year for which the regulations under this section
are effective. This election to discontinue shall be exercised in the
time and manner prescribed in Sec. 1.1502-75(c)(3), except that the
group's common parent shall exercise this election to discontinue (and
the other members of the section 1504(c)(2) group must comply with this
election) by filing appropriate returns. For purposes of this paragraph
(e)(4), an appropriate return is either a separate return or a
consolidated return that is filed by newly exercising the privilege
under Sec. 1.1502-75(a)(1).
(ii) Types of groups. (A) A ``section 1504(c)(2) group'' is an
affiliated group which files or filed a consolidated return pursuant to
an election under section 1504(c)(2).
(B) A ``limited group'' is an affiliated group (determined without
section 1504(c)(2)) having at least one member which was a member of a
section 1504(c)(2) group on the date that the section 1504(c)(2) group
elected to discontinue under paragraph (e)(4)(i) of this section.
(iii) Effect on restoration rules. If a group ceases to file a
consolidated return or terminates or if a member leaves the group,
certain items of income, gain, or loss on transactions between members
are taken into account under Secs. 1.1502-13, 1.1502-18, and 1.1502-19
(``restoration rules''). For purposes of applying these restoration
rules solely by reason of an election under paragraph (e)(4)(i) or
(e)(4)(v)(A) of this section to discontinue filing consolidated returns
as a section 1504(c)(2) group, the following rules apply:
(A) The section 1504(c)(2) group shall not be considered to
terminate and no member of that group shall be treated as ceasing to be
a member.
(B) Members of that section 1504(c)(2) group that are included in
the consolidated return of a limited group for the first taxable year
for which the discontinuance is effective shall be considered to be
filing a consolidated return as a continuation of the section 1504(c)(2)
group. However, a corporation that is not a member of a particular
limited group for that taxable year is considered to have a separate
return year (and, for purposes of Sec. 1.1502-19(c), not to be a member
of a group filing a consolidated return) with respect to that limited
group's members.
(C) Section 1.1502-13 shall be applied without regard to paragraph
(f)(1)(vii).
(iv) Illustrations. The following examples illustrate paragraph
(e)(4)(i)-(iii) of this section. In these examples, L indicates a life
company and another letter indicates a nonlife company. All corporations
use the calendar year as
[[Page 410]]
the taxable year. For all taxable years involved, P owns all the stock
of L1 and of S, L1 owns all the stock of
L2, L2 owns all the stock of L3, and S
owns all the stock of L4. For 1981, P makes the life-nonlife
election of section 1504(c)(2) and L4 is an eligible
corporation. For 1982, P makes the election to discontinue filing
consolidated returns under section 1504(c)(2) in accordance with the
permission granted in this paragraph (e)(4).
Example (1). L1, L2, and L3 were
eligible members. For 1982, P and S may either file separate returns or
may file, as a limited group, a consolidated return. Similarly,
L1, L2, and L3 may either file separate
returns or may file a consolidated return as a limited group under
section 1504(c)(1). L4 must file a separate return.
Example (2). For 1981, L1 was an ineligible member and
L1, L2, and L3 filed a consolidated
return under section 1504(c)(1). For 1982, L1, L2,
and L3 must continue filing a consolidated return under
section 1504(c)(1).
Example (3). For 1981, L1 was an eligible member and
L2 and L3 were ineligible members. For 1982,
L1, L2, and L3 either must each file a
separate return or must file a consolidated return as a limited group
under section 1504(c)(1) having L1 as a common parent.
Example (4). The facts are the same as in example (3). Assume
further that for 1981, L2 and L3 file a
consolidated return. During 1981, intercompany transactions (see
Sec. 1.1502-13) occur in the life-nonlife group between P and
L1, between P and S, and between S and L4 and
occur in the ineligible life subgroup between L2 and
L3. For 1982, the restoration rules of Sec. 1.1502-13, as
modified by paragraph (e)(4)(iii)(B) of this section, will be applicable
as indicated in the following table:
------------------------------------------------------------------------
Intercompany transactions between Sec. 1.1502-13
------------------------------------------------------------------------
P and L1............................... Yes.
P and S, if they file:
Separate returns..................... Yes.
A consolidated return................ No.
S and L4............................... Yes.
L2 and L3, if L1, L2, and L3 file:
Separate returns..................... Yes.
A consolidated return................ No.
------------------------------------------------------------------------
(v) Additional rules. (A) If a group with a taxable year ending in
the month of December, 1982, had made the election under section
1504(c)(2) for a taxable year ending prior to December 1, 1982, and if
that group meets the conditions of subdivision (vi) of this paragraph
(e)(4), then the common parent may elect to discontinue filing a
consolidated return for its taxable year ending in the month of
December, 1982 (and other members of the section 1504(c)(2) group must
comply with this election) by filing appropriate returns (see paragraph
(e)(4)(i) of this section) before September 16, 1983.
(B) If a group made the election under section 1504(c)(2) for its
taxable year ending in the month of December, 1982, and if that group
meets the conditions of subdivision (vi) of this paragraph (e)(4), then
the common parent may elect to withdraw the section 1504(c)(2) election
(and all other members of the group determined without section
1504(b)(2) comply with the election) by filing before September 16,
1983, any returns for the appropriate taxable years that would have been
filed had the section 1504(c)(2) election never been made.
(vi) A group referred to at subdivision (v)(A) or (B) of this (e)(4)
meets the conditions of this subdivision (vi) if it--
(A) filed before March 16, 1983, a return for its taxable year
ending in the month of December, 1982, and
(B) had not been granted an extension of time beyond March 15, 1983,
for the filing of that return.
(vii) Interest. For purposes of section 6601(a), interest runs from
the original due date (without extensions) for the filing of such
returns as are filed pursuant to an election (to discontinue or withdraw
as the case may be) under this paragraph (e)(4).
(5) Consent to regulations. If a group does not discontinue filing a
consolidated return under paragraph (e)(4) of this section but continues
to file a consolidated return for the group's first taxable year for
which the regulations under this section are first effective, the
members of the group will be deemed to have consented to the regulations
under this section.
(6) Cross reference. If an election is made under section
1504(c)(2), see Sec. 1.1502-75 (e) and (f) for rules that apply for not
including (or including) a member or a nonmember in the consolidated
return.
(f) Effect of election. If the common parent makes the election
under section 1504(c)(2), the following rules apply:
[[Page 411]]
(1) Termination of group. A mere election under section 1504(c)(2)
will not cause the creation of a new group or the termination of an
affiliated group that files a consolidated return in the immediately
preceding taxable year.
(2) Effect of eligibility. If a life member is eligible after an
election under section 1504(c)(2), it may not be included as a member of
an affiliated group as defined in section 1504(c)(1).
(3) Eligible and ineligible life companies. If any life company was
a member of an affiliated group of life companies (as defined in section
1504(c)(1)) but is ineligible for a taxable year for which the election
under section 1504(c)(2) is effective, that year is not a separate
return year merely by reason of the election under section 1504(c)(2) in
applying Secs. 1.1502-13, 1.1502-18, and 1.1502-19 to transactions
occurring in prior consolidated return years of that affiliated group.
In addition, if more than one ineligible life member of the group (as
defined in section 1504(c)(1)) joined in the filing of a consolidated
return in the taxable year immediately preceding the year for which the
election under section 1504(c)(2) is effective and, solely as a result
of the election, one of the ineligible life members becomes the common
parent of such a group (section 1504(c)(1)), the group must continue to
file a consolidated return. For example, assume that L1 owns
all of the stock of S1 and all of the stock of L2.
L2 owns the stock of L3. L1,
L2, and L3 are life companies and S1 is
a nonlife company. Assume further that in 1981, L1,
L2, and L3 file a consolidated return but L1
makes the election under section 1504(c)(2) for 1982 and L2
and L3 are ineligible. L2 and L3 must
continue to file a consolidated return in 1982. Moreover, L2
could elect in 1982 to file a consolidated return (section 1504(c)(1))
with L3 even if they did not file a consolidated return in
1981 with L1.
(4) Inclusion of life company. If a life company is ineligible in
the consolidated return year for which the election is effective, it
will be treated as an includible corporation for the common parent's
first taxable year in which the company becomes eligible.
(5) Dividends received deduction. Section 243(b)(5) defines the term
affiliated group for purposes of the election to deduct 100 percent of
the qualifying dividends received by a member from another member of the
group. Section 246(b)(6) limits certain multiple tax benefits and the
deduction itself. Section 243(b) (5) and (6) do not apply to the mutual
companies and life companies that are eligible corporations. See section
1504(c)(2)(B)(i). Thus, the common parent of the group may elect to
deduct 100 percent of the qualifying dividends received from an
ineligible life company.
(6) Controlled group. Sections 1563 (a)(4), (b)(2)(D), and (b)(3)(C)
(insofar as it applies to corporations described in section
1563(b)(2)(D)) do not apply to any eligible or ineligible life company
that is a member of the group for a taxable year during which the
election is effective. See paragraph (d)(4) of this section for the
definition of group.
(7) Consolidated tax. The tax liability of a group for a
consolidated return year (before application of credits against that
tax) is computed on a consolidated basis by adding together the
following taxes:
(i) The tax imposed under section 11 on consolidated taxable income
(as determined under paragraph (g) of this section). The taxes imposed
under sections 802(a), 821(a), and 831(a) will each be treated as a tax
imposed under section 11.
(ii) The tax imposed by section 1201 on consolidated net capital
gain (as determined under paragraph (o) of this section) in lieu of the
tax imposed under paragraph (f)(7)(i) of this section on that gain.
(iii) Any taxes described in Sec. 1.1502-2 (other than by paragraphs
(a), (f), and (h) thereof).
(g) Consolidated taxable income. The consolidated taxable income is
the sum of the following three amounts:
(1) Nonlife consolidated taxable income. The nonlife consolidated
taxable income (as defined in paragraph (h) of this section) of the
nonlife subgroup, as set off by the life subgroup losses as provided in
paragraph (n) of this section. The amount in this paragraph (g)(1) may
not be less than zero.
(2) Consolidated partial LICTI. The consolidated partial LICTI (as
defined in paragraph (j) of this section) of the
[[Page 412]]
life subgroup, as set off by the nonlife subgroup losses as provided in
paragraph (m) of this section. The amount in this paragraph (g)(2) may
not be less than zero.
(3) Surplus accounts. The sum of the amounts subtracted under
section 815 from the policyholders' surplus accounts of the life
members.
(h) Nonlife consolidated taxable income--(1) In general. Nonlife
consolidated taxable income is the consolidated taxable income of the
nonlife subgroup, computed under Sec. 1.1502-11 as modified by this
paragraph (h). For this purpose, separate taxable income of a member
includes separate mutual insurance company taxable income (as defined in
section 821(b)) and insurance company taxable income (as defined in
section 832).
(2) Nonlife consolidated net operating loss deduction--(i) In
general. In applying Sec. Sec. 1.1502-21 or 1.1502-21A (as appropriate),
the rules in this subparagraph (2) apply in determining for the nonlife
subgroup the nonlife net operating loss and the portion of the nonlife
net operating loss carryovers and carrybacks to the taxable year.
(ii) Nonlife CNOL. The nonlife consolidated net operating loss is
determined under Sec. Sec. 1.1502-21(A)(f) or 1.1502-21(e) (as
appropriate) by treating the nonlife subgroup as the group.
(iii) Carryback. The nonlife consolidated net operating loss for the
nonlife subgroup is carried back under Sec. Sec. 1.1502-21A or 1.1502-21
(as appropriate) to the appropriate years (whether consolidated or
separate) before the loss may be used as a nonlife subgroup loss under
paragraphs (g)(2) and (m) of this section to set off consolidated
partial LICTI in the year the loss arose. The election under section
172(b)(3)(C) to relinquish the entire carryback period for the net
operating loss of the nonlife subgroup may be made by the common parent
of the group. Furthermore, the election may be made even though the
election under section 812(b)(3) and paragraph (l)(3)(iii) of this
section is not made.
(iv) Subgroup rule. In determining the portion of the nonlife
consolidated net operating loss that is absorbed when the loss is
carried back to a consolidated return year beginning after December 31,
1981, Sec. Sec. 1.1502-21A or 1.1502-21 (as appropriate) is applied by
treating the nonlife subgroup as the group. Therefore, the absorption is
determined without taking into account any life subgroup losses that
were previously reported on a consolidated return as setting off nonlife
consolidated taxable income for the year to which the nonlife loss is
carried back.
(v) Carryover. The portion of the nonlife consolidated net operating
loss that is not absorbed in a prior year as a carryback, or as a
nonlife subgroup loss that set off consolidated partial LICTI for the
year the loss arose, constitutes a nonlife carryover under this
subparagraph (2) to reduce nonlife consolidated taxable income before
that portion may constitute a nonlife subgroup loss that sets off
consolidated partial LICTI for a particular year.
(vi) Transitional rules. The nonlife consolidated net operating loss
deduction is subject to a transitional rule limitation in paragraph
(h)(3) of this section.
(vii) Example. The following example illustrates this paragraph
(h)(2). In the example, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example. P owns all of the stock of S and L1. L1
owns all of the stock of L2. For 1982, the group first files
a consolidated return for which the election under section 1504(c)(2) is
effective. P and S filed consolidated returns for 1979 through 1981. In
1982, the P-S group sustains a nonlife consolidated net operating loss.
The loss is carried back to the consolidated return years 1979, 1980,
and 1981 of P and S by using the principles of Secs. 1.1502-21A and
1.1502-79A and, because the election in 1982 under section 1504(c)(2)
does not result under paragraph (f)(1) of this section in the creation
of a new group or the termination of the P-S nonlife group, the loss is
absorbed on the consolidated return in those years without regard to
whether the loss in 1982 is attributable to P or S and without regard to
their contribution to consolidated taxable income in 1979, 1980, or
1981. The portion of the loss not absorbed in 1979, 1980, and 1981 may
serve as a nonlife subgroup loss in 1982 that may set off the
consolidated partial LICTI of L1 and L2 under
paragraphs (g)(2) and (m) of this section.
(3) Transitional rule--(i) In general. The portion of the nonlife
consolidated
[[Page 413]]
net operating loss deduction in a consolidated return year beginning
after December 31, 1980 (referred to as ``post-1980 year'') attributable
to net operating losses sustained in separate return years ending before
January 1, 1981 (referred to as ``pre-1981 year''), is subject to the
rules and limitations in this subparagraph (3).
(ii) Separate nonlife groups. To determine the limitation, first,
identify for the post-1980 year one or more separate affiliated groups
of nonlife companies (as defined in section 1504 without section
1504(c)(2)). For this purpose, a single nonlife company may constitute a
separate affiliated group if (A) it is not otherwise a member of a
separate group or (B) it has a net operating loss sustained in the pre-
1981 year that may be carried over and that year is a separate return
limitation year (determined under Sec. 1.1502-1(f) without paragraph
(d)(11) of this section).
(iii) Carryover. Second, identify the pre-1981 year net operating
losses that may be carried over and that are attributable to each
separate affiliated group of nonlife companies. The separate return
limitation year rules in Sec. Sec. 1.1502-21A(c) or 1.1502-21(c) (as
appropriate) do not apply to any of these carryovers.
(iv) Limitation. Third, treat the last taxable year ending before
January 1, 1981, as if in that year there was a consolidated return
change of ownership of each such separate affiliated group of nonlife
companies and apply the consolidated return change of ownership
limitation in Sec. 1.1502-21A(d) to the losses of each group by treating
the members of each separate group as old members.
(v) Examples. The following examples illustrate this paragraph
(h)(3). In the examples L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). Throughout all of 1982, P owns all of the stock of S
and L1 and L1 owns all of the stock of L2
which in turn owns all of the stock of S1. Thus, for 1982,
there are two nonlife subgroups under this subparagraph (3), P-S and
S1. For 1981, P and S did not file a consolidated return and
for 1980 P has a net operating loss of $200,000. Assume that P had no
income in 1981. For 1982, the group makes an election under section
1504(c)(2) to file a consolidated return and all corporations are
eligible corporations. The consolidated taxable income for the nonlife
subgroup for 1982 (determined without the consolidated net operating
loss deduction) recomputed by including only items of income and
deduction of P and S is $120,000. If $120,000 is the Sec. 1.1502-
21(d)(2) amount for P and S, then the amount of P's net operating loss
for 1980 that may be carried over to P and S for 1982 cannot exceed
$120,000.
Example (2). (a) P owns all of the stock of S1. On
January 1, 1979, P purchased all of the stock of L1 which
owns all of the stock of L2 and S2. Prior to 1984,
all of the corporations filed separate returns. For 1984, the group
makes an election under section 1504(c)(2) to file a consolidated
return.
(b) 1981, 1982, and 1983 are not treated under paragraph (d)(11) of
this section as separate return limitation years of the P,
S1, and S2 nonlife subgroup. However, P and
S1 will be treated as old members under paragraph (h)(3)(iv)
of this section and under Sec. 1.1502-21A(d) with respect to their
losses in 1979 and 1980 (whether a consolidated return was filed or
separate returns were filed) so that the portion of nonlife consolidated
taxable income attributable to S2 may not absorb the losses
of P or S1. The rules that apply to the P-S1
nonlife subgroup for 1979 and 1980 apply in an identical way to S2
by treating S2 as a subgroup separate from the P-S1
nonlife subgroup. See section 1507(c)(2)(A) of the Tax Reform Act of
1976.
(c) Similarly, L1 and L2 are treated as old
members under paragraphs (l)(3) and (h)(3)(iv) of this section for
losses arising in 1979 and 1980. However, since the L1--
L2 subgroup is also the life subgroup under paragraph (d)(8)
of this section, the limitation in paragraph (h)(3)(iv) of this section
does not affect the computation of consolidated partial LICTI for the
life subgroup.
(4) Nonlife consolidated capital gain net income or loss--(i) In
general. In applying Sec. Sec. 1.1502-22 or 1.1502-22A (as
appropriate),the rules in this subparagraph (4) apply in determining for
the nonlife subgroup the nonlife consolidated capital gain net income or
loss and the portion of the nonlife net capital loss carryovers and
carrybacks to the taxable year. In particular, the nonlife consolidated
capital gain net income and nonlife consolidated net capital loss are
determined under the principles of Sec. Sec. 1.1502-22 or 1.1502-22A(a)
(as appropriate) by treating the nonlife subgroup as the group.
(ii) Additional principles. In applying Sec. Sec. 1.1502-22A or
1.1502-22 to nonlife consolidated net capital loss carryovers and
carrybacks, the principles set forth
[[Page 414]]
in paragraphs (h)(2) (iii) through (v) for applying Sec. Sec. 1.1502-21
or 1.1502-21A (as appropriate) to nonlife consolidated net operating
loss carryovers and carrybacks shall also apply. Further, the portion of
nonlife consolidated net capital loss carryovers attributable to losses
sustained in taxable years ending before January 1, 1981, is subject to
the limitations in paragraph (h)(3) of this section applied by
substituting ``net capital loss'' for the term ``net operating loss''
and ``Sec. 1.1502-22A(d)'' for ``Sec. 1.1502-21A(d)''.
(iii) Special rules. The nonlife consolidated net capital loss is
reduced, for purposes of determining the carryovers and carrybacks under
Sec. Sec. 1.1502-22A(b)(1) or 1.1502-22(b) by the lesser of:
(A) The aggregate of the additional capital loss deductions allowed
under section 822(c)(6) or section 832(c)(5), or
(B) The nonlife consolidated taxable income computed without capital
gains and losses.
(i) [Reserved]
(j) Consolidated partial LICTI. [Reserved]
(k) Consolidated TII--(1) General rule. [Reserved]
(2) Separate TII. [Reserved]
(3) Company's share of investment yield. [Reserved]
(4) Life consolidated capital gain net income. [Reserved]
(5) Life consolidated net capital loss carryovers and carrybacks.
The life consolidated net capital loss carryovers and carrybacks for the
life subgroup are determined by applying the principles of
Sec. Sec. 1.1502-22 or 1.1502-22A (as appropriate) as modified by the
following rules in this subparagraph (5):
(i) Life consolidated net capital loss is first carried back (or
apportioned to the life members for separate return years) to be
absorbed by life consolidated capital gain net income without regard to
any nonlife subgroup capital losses and before the life consolidated net
capital loss may serve as a life subgroup capital loss that sets off
nonlife consolidated capital gain net income in the year the life
consolidated net capital loss arose.
(ii) If a life consolidated net capital loss is not carried back or
is not a life subgroup loss that sets off nonlife consolidated capital
gain net income in the year the life consolidated net capital loss
arose, then it is carried over to the particular year under this
paragraph (k)(5) first against life consolidated capital gain net income
before it may serve as a life subgroup capital loss that sets off
nonlife consolidated capital gain net income in that particular year.
(iii) Section 818(f). Capital losses may not be deducted more than
once and capital gain will not be included more than once. See section
818(e) and also section 818(f).
(iv) Capital loss carryovers are subject to the transitional rule in
paragraph (k)(6) of this section.
(6) Transitional rule. The portion of the life consolidated capital
loss carryovers attributable to the net capital losses of the life
members sustained in separate return years ending before January 1,
1981, is subject to the same limitations as the capital losses of
nonlife members in paragraph (h)(4)(iii) of this section by applying the
principles of paragraph (h)(3) of this section to each separate
affiliated group of life companies.
(l) Consolidated GO or LO--(1) General rule. [Reserved]
(2) Separate GO. [Reserved]
(3) Consolidated operations loss deduction--(i) General rule. The
consolidated operations loss deduction is an amount equal to the
consolidated operations loss carryovers and carrybacks to the taxable
year. The provisions of Sec. Sec. 1.1502-21 or 1.1502-21A (as
appropriate) and section 812 apply to the extent not inconsistent with
this paragraph (l)(3).
(ii) Consolidated offset. For purposes of applying section 812 (b)
and (d), the term ``consolidated offset'' means the increase in the
consolidated operations loss deduction which reduces consolidated
partial LICTI to zero. For setoff of consolidated LO against nonlife
consolidated taxable income, see paragraph (n)(2) of this section.
(iii) Carrybacks. A consolidated LO is first carried back to be
absorbed by GO of a life member under section 809(d)(4) or consolidated
partial LICTI (as the case may be under section 818(f)(2)) for prior
consolidated return years (or apportioned to the life members for prior
separate return years) without regard
[[Page 415]]
to any nonlife subgroup losses that were set off against consolidated
partial LICTI and before the consolidated LO may serve as a life
subgroup loss to be set off against nonlife consolidated taxable income
in the year the consolidated LO arose. The election to relinquish the
entire carryback period for the consolidated LO of the life subgroup may
be made by the common parent of the group. See section 812(b)(3).
Furthermore, the election may be made even though the election under
section 172(b)(3)(C) and paragraph (h)(2)(iii) of this section is not
made.
(iv) Carryovers. If a consolidated LO is not carried back or is not
applied as a life subgroup loss that set off nonlife consolidated
taxable income in the year the consolidated LO arose, then it is carried
over to a particular year under this paragraph (l)(3) first against the
GO of a life member under section 809(d)(4) or consolidated partial
LICTI (as the case may be under section 818(f)(2)) before it may serve
as a life subgroup loss that may be set off against nonlife consolidated
taxable income for that particular year.
(v) Transitional rule. The portion of a consolidated operations loss
deduction that is attributable to LOs sustained in separate return years
ending before January 1, 1981, is subject to the same rules and
limitations that the nonlife consolidated net operating loss deduction
is subject to in paragraph (h)(3) of this section as applied by
identifying separate affiliated groups of life companies.
(4) Life consolidated capital gain net income or loss. Life
consolidated capital gain net income or loss is determined in the same
manner as under paragraph (k)(4) of this section. However, a life
member's company share is determined under section 809 (a) and (b)(3).
(m) Consolidated partial LICTI setoff by nonlife subgroup losses--
(1) In general. The nonlife subgroup losses consist of the nonlife
consolidated net operating loss and the nonlife consolidated net capital
loss. Under paragraph (g)(2) of this section, consolidated partial LICTI
is set off by the amounts of these two consolidated losses specified in
paragraph (m)(2) of this section. The setoff is subject to the rules and
limitations in paragraph (m)(3) of this section.
(2) Amount of setoff--(i) Current year. Consolidated partial LICTI
for the current taxable year is set off by the portion of the nonlife
consolidated net operating loss and nonlife consolidated net capital
loss arising in that year that cannot be carried back under paragraph
(h) of this section to prior taxable years (whether consolidated or
separate return years) of the nonlife subgroup.
(ii) Carryovers. The portion of the offsettable nonlife consolidated
net operating loss or nonlife consolidated net capital loss that has not
been used as a nonlife subgroup loss setoff against consolidated partial
LICTI in the year it arose may be carried over to succeeding taxable
years under the principles of Sec. Sec. 1.1502-21 or 1.1502-21A (as
appropriate) (relating to net operating loss deduction) or
Sec. Sec. 1.1502-22 or 1.1502-22A (as appropriate) (relating to net
capital loss carryovers). However, in any particular succeeding year,
the losses will be used under paragraph (h) of this section in computing
nonlife consolidated taxable income before being used in that year as a
nonlife subgroup loss that sets off consolidated partial LICTI.
(3) Nonlife subgroup loss rules and limitations. The nonlife
subgroup losses are subject to the following operating rules and
limitations:
(i) Separate return years. The carryovers in paragraph (m)(2)(ii) of
this section may include net operating losses and net capital losses of
the nonlife members arising in separate return years ending after
December 31, 1980, that may be carried over to a succeeding year under
the principles (including limitations) of Sec. Sec. 1.1502-21 and
1.1502-22 (or Sec. Sec. 1.1502-21A and 1.1502-22A, as appropriate). But
see subdivision (ix) of this paragraph (m)(3).
(ii) Capital loss. Nonlife consolidated net capital loss sets off
consolidated partial LICTI only to the extent of life consolidated
capital gain net income (as determined under paragraph (l)(4) of this
section) and this setoff applies before any nonlife consolidated net
operating loss sets off consolidated partial LICTI.
[[Page 416]]
(iii) Capital gain. Life consolidated capital gain net income is
zero in any taxable year in which the life subgroup has a consolidated
LO and, in any taxable year, it may not exceed consolidated partial
LICTI.
(iv) Ordering rule. Consolidated partial LICTI for a consolidated
return year is set off by nonlife subgroup losses for that year before
being set off (under paragraph (m)(2)(ii) of this section) by a
carryover of a nonlife subgroup loss to that year.
(v) Setoff at bottom line. The setoff of nonlife subgroup losses
against consolidated partial LICTI does not affect life member
deductions that depend in whole or in part on GO or TII. Thus, the
setoff does not affect the amount of consolidated partial LICTI (as
determined under paragraph (j) of this section) for any taxable year but
it merely constitutes an adjustment in arriving at the group's
consolidated taxable income under paragraph (g) of this section.
(vi) Ineligible nonlife member. (A) The offsetable nonlife
consolidated net operating loss that arises in any consolidated return
year (that may be set off against consolidated partial LICTI in the
current taxable year or in a succeeding taxable year) is the amount
computed under paragraph (h)(2)(ii) of this section reduced by the
ineligible NOL. For purposes of this subparagraph (3), the ``ineligible
NOL'' is in the year the loss arose the amount of the separate net
operating loss (determined under Sec. Sec. 1.1502-21(b) of any nonlife
member that is ineligible in that year (and not the portion of the
nonlife consolidated net operating loss attributable under
Sec. Sec. 1.1502-21(b) to such a member). (B) The carryovers of
offsetable nonlife net operating losses under paragraph (m)(2)(ii) of
this section do not include an ineligible NOL arising in a consolidated
return year or a loss attributable to an ineligible member arising in a
separate return year. See section 1503(c)(2). (C) For absorption within
the nonlife subgroup of an ineligible NOL arising in a consolidated
return year or a loss of an ineligible member arising in a separate
return year which is not a separate return limitation year under
paragraph (m)(3)(ix) of this section, see paragraph (m)(3)(vii) of this
section.
(vii) Absorption of ineligible NOL. (A) If all or a portion of a
nonlife member's ineligible NOL (determined under paragraph
(m)(3)(vi)(A) of this section) may be carried back or carried over under
paragraph (h)(2) of this section to a particular consolidated return
year of the nonlife subgroup (absorption year), then notwithstanding
Sec. 1.1502-21A(b)(3)(ii) or 1.1502-21(b), the amount carried to the
absorption year will be absorbed by that member's contribution (to the
extent thereof) to nonlife consolidated taxable income for that year.
(B) For purposes of (A) of this subdivision (vii), a member's
contribution to nonlife consolidated taxable income for an absorption
year is the amount of such income (computed without the portion of the
nonlife consolidated net operating loss deduction attributable to
taxable years subsequent to the year the loss arose), minus such
consolidated taxable income recomputed by excluding both that member's
items of income and deductions for the absorption year. The deductions
of the member include the prior application of this paragraph
(m)(3)(vii) to the absorption of the nonlife consolidated net operating
loss deduction for losses arising in taxable years prior to the
particular loss year.
(viii) Election to relinquish carryback. The offsetable nonlife
consolidated net operating loss does not include the amount that could
be carried back under paragraph (h) (2) of this section but for the
common parent's election under section 172(b)(3)(C) to relinquish the
carryback. See section 1503(c)(1).
(ix) Separate return limitation year. The offsetable nonlife
consolidated net operating and capital loss carryovers do not include
any losses attributable to a nonlife member that were sustained (A) in a
separate return limitation year (determined without section 1504(b)(2))
of that member (or a predecessor), or (B) in a separate return year
ending after December 31, 1980, in which an election was in effect under
neither section 1504(c)(2) nor section 243(b)(2). For purposes of this
paragraph (m), a separate return limitation
[[Page 417]]
year includes a taxable year ending before January 1, 1981. See section
1507(c)(2)(A) of the Tax Reform Act of 1976 and Sec. Sec. 1.1502-15 and
1.1502-15A (including applicable exceptions thereto).
(x) Percentage limitation. The offsetable nonlife consolidated net
operating losses that may be set off against consolidated partial LICTI
in a particular year may not exceed a percentage limitation. This
limitation is the applicable percentage in section 1503(c)(1) of the
lesser of two amounts.
The first amount is the sum of the offsetable nonlife consolidated net
operating losses under paragraph (m)(2) of this section that may serve
in the particular year (determined without this limitation) as a setoff
against consolidated partial LICTI. The second amount is consolidated
partial LICTI (as defined in paragraph (j) of this section) in the
particular year reduced by any nonlife consolidated net capital loss
that sets off consolidated partial LICTI in that year.
(xi) Further limitation. Any offsetable nonlife consolidated net
operating loss remaining after applying the percentage limitation that
is carried over to a succeeding taxable year may not be set off against
the consolidated partial LICTI attributable to a life member that was
not an eligible life member in the year the loss arose. See section
1503(c)(2).
(xii) Restoration rule. The carryback of a consolidated LO or life
consolidated net capital loss under paragraph (l) of this section that
reduces consolidated partial LICTI (or life consolidated capital gain
net income) for a prior year may reduce the amount of nonlife subgroup
losses that would offset consolidated partial LICTI in that prior year.
Thus, that amount may be carried over under paragraph (h) (2) or (4) of
this section from that prior year in determining nonlife consolidated
taxable income in a succeeding year or serve as offsetable nonlife
subgroup losses in a succeeding year.
(4) Acquired groups. [Reserved]
(5) Illustrations. The following examples illustrates this paragraph
(m). In the examples, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). P owns all of the stock of L and S. S owns all of the
stock of I, a nonlife member that is an ineligible corporation for 1982
under paragraph (d)(13) of this section. For 1982, the group elects
under section 1504(c)(2) to file a consolidated return. For 1982, assume
that any nonlife consolidated net operating loss may not be carried back
to a prior taxable year. Other facts are summarized in the following
table.
------------------------------------------------------------------------
Separate
taxable
income
(loss)
------------------------------------------------------------------------
P............................................................ $100
S............................................................ (100)
I............................................................ (100)
----------
Nonlife consolidated net operating loss.................. (100)
------------------------------------------------------------------------
Under paragraph (m)(3)(vi) of this section, P's separate income is
considered to absorb the loss of S, an eligible member, first and the
offsetable nonlife consolidated net operating loss is zero, i.e., the
consolidated net operating loss ($100) reduced by I's loss ($100). The
consolidated net operating loss ($100) may be carried over, but since it
is entirely attributable to I (an ineligible member) its use is subject
to the restrictions in paragraph (m)(3)(vi) of this section. The result
would be the same if the group contained two additional members,
S1, an eligible member, and I1, an ineligible
member, where S1 had a loss of ($100) and I1 had
income of $100.
Example (2). The facts are the same as in example (1) except that
for 1982 S's separate net operating loss is $200. Assume further that
L's consolidated partial LICTI is $200. Under paragraph (m)(3)(vi) of
this section, the offsetable nonlife consolidated net operating loss is
$100, i.e., the nonlife consolidated net operating loss computed under
paragraph (h)(2)(ii) of this section ($200), reduced by the separate net
operating loss of I ($100). The offsetable nonlife consolidated net
operating loss that may be set off against consolidated partial LICTI in
1982 is $30, i.e., 30 percent of the lesser of the offsetable $100 or
consolidated partial LICTI of $200. See paragraph (m)(3)(x) of this
section. The nonlife subgroup may carry $170 to 1983 under paragraph
(h)(2) of this section against nonlife consolidated taxable income,
i.e., consolidated net operating loss ($200) less amount used in 1982
($30). Under paragraph (m)(2)(ii) of this section, the offsetable
nonlife consolidated net operating loss that may be carried to 1983 is
$70, i.e., $100 minus $30. The facts and results are summarized in the
table below.
[[Page 418]]
----------------------------------------------------------------------------------------------------------------
(Dollars omitted)
-----------------------------------------------------------
Facts Offsetable Limit Unused loss
----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
1. P................................................ 100 ............. ........... ...............
2. S................................................ (200) (100) ........... (70)
3. I................................................ (100) ............. ........... (100)
4. Nonlife subgroup................................. (200) (100) (100) (170)
5. L................................................ 200 ............. 200 ...............
6. 30% of lower of line 4(c) or 5(c)................ ............. ............. 30 ...............
7. Unused offsetable loss........................... ............. ............. ........... (70)
----------------------------------------------------------------------------------------------------------------
Accordingly, under paragrah (g) of this section (assuming no amount is
withdrawn from L's surplus accounts), consolidated taxable income is
$170, i.e., line 5 (a) minus line 6(c)).
Example (3). The facts are the same as in example (2) with the
following additions for 1983. The nonlife subgroup has nonlife
consolidated taxable income of $50 (all of which is attributable to I)
before the nonlife consolidated net operating loss deduction under
paragraph (h)(2) of this section. Consolidated partial LICTI is $100.
Under paragraph (h)(2) of this section, $50 of the nonlife consolidated
net operating loss carryover ($170) is used in 1983 and, under paragraph
(m)(3) (vi) and (vii) of this section, the portion used in 1982 is
attributable to I, the ineligible nonlife member. Accordingly, the
offsetable nonlife consolidated net operating loss from 1982 under
paragraph (m)(3)(ii) of this section is $70, i.e., the unused loss from
1982. The offsetable nonlife consolidated net operating loss in 1983 is
$24.50, i.e., 35 percent of the lesser of the offsetable loss of $70 or
consolidated partial LICTI of $100. Accordingly, under paragraph (g) of
this section (assuming no amount is withdrawn from L's surplus
accounts), consolidated taxable income is $75.50, i.e., consolidated
partial LICTI of $100 minus the offsetable loss of $24.50.
Example (4). P owns all of the stock of S and L. For 1982, all
corporations are eligible corporations, and the group elects under
section 1504(c)(2) to file a consolidated return, the nonlife
consolidated net operating loss is $100, and the nonlife consolidated
net capital loss is $50. Assume that the losses may not be carried back
and the capital losses are not attributable to built-in deductions under
paragraph (m)(3)(ix) of this section or under Sec. 1.1502-15A. Other
facts and the results are set forth in the following table:
------------------------------------------------------------------------
P-S L
------------------------------------------------------------------------
1. Nonlife consolidated net operating loss.............. ($100) .....
2. Nonlife consolidated capital loss.................... (50) .....
3. Consolidated partial LICTI........................... ....... $100
4. Life consolidated capital gain net income included in ....... 50
line 3.................................................
===============
5. Offsetable:
(a) 30% of lower of line (1) or line (3)-(4).......... (15) .....
(b) Line 2............................................ (50) .....
---------------
(c) Total............................................. (65) .....
6. Unused losses available to be carried over:
(a) From line 1 (line 1 minus line 5 (a))............. (85) .....
(b) From line 2 (line 2 minus line 5 (b))............. 0 .....
------------------------------------------------------------------------
Accordingly, under paragraph (g) of this section consolidated taxable
income is $35, i.e., line 3 minus line 5(c).
Example (5). The facts are the same as in example (4). Assume
further that for 1983 L has an LO that is carried back to 1982 and the
LO is large enough to reduce consolidated partial LICTI for 1982 to zero
as determined before any setoff for nonlife losses. Under paragraph
(m)(3)(xii) of this section, the nonlife consolidated net operating loss
of $15 and the nonlife consolidated net capital loss of $50 that were
set off in 1982 respectively against consolidated partial LICTI and life
consolidated capital gain net income are restored. These restored
amounts may consititute part of the nonlife consolidated net operating
loss carryover to 1983 under paragraph (h)(2) of this section or part of
the nonlife net capital loss carryover to 1983 under paragraph (h)(4) of
this section.
Example (6). The facts are the same as in example (5) except that
L's LO for 1983 as carried back reduces consolidated partial LICTI in
1982 from $100 to $25. Since consolidated partial LICTI of $100 in 1982
(before the carryback) included life consolidated capital gain net
income of $50, under paragraph (m)(3)(iii) of this section, the life
consolidated capital gain net income is $25, i.e., $50 but not more than
$25. Therefore, under paragraph (m)(3)(ii) of this section, the
offsetable nonlife capital loss in 1982 is $25 and, under paragraph (m)
(3)(xii) of this section, $25 of the $50 nonlife consolidated net
capital loss in 1982 may be carried under paragraph (h)(4) of this
section to 1983. No nonlife consolidated net operating loss is used as a
setoff against consolidated partial LICTI in 1982 under paragraph
(m)(3)(xii) of this section by reason of the carryback of the
consolidated LO from 1983 to 1982.
[[Page 419]]
(n) Nonlife consolidated taxable income set off by life subgroup
losses--(1) In general. The life subgroup losses consist of the
consolidated LO and the life consolidated net capital loss (as
determined under paragraph (l)(4) of this section). Under paragraph
(g)(1) of this section, nonlife consolidated taxable income is set off
by the amounts of these two consolidated losses specified in paragraph
(n)(2) of this section.
(2) Amount of setoff. The portion of the consolidated LO or life
consolidated net capital loss that may be set off against nonlife
consolidated taxable income (determined under paragraph (h) of this
section) is determined by applying the rules prescribed in paragraphs
(m) (2) and (3) of this section in the following manner:
(i) Substitute the term ``life'' for ``nonlife'', and vice versa.
(ii) Substitute the term ``nonlife consolidated taxable income'' for
``consolidated partial LICTI'', and vice versa.
(iii) Substitute the term ``consolidated LO'' for ``non-life
consolidated net operating loss'', ``paragraph (l)'' or ``paragraph
(j)'' for ``paragraph (h)'', and ``section 812(b)(3)'' for ``section
172(b)(3)(C)''.
(iv) Paragraphs (m)(3)(vi), (vii), (x), and (xi) of this section do
not apply to a consolidated LO.
(v) Capital losses may not be deducted more than once. See section
818(e) and also the requirements in section 818(f).
(vi) The setoff of life subgroup losses against nonlife consolidated
taxable income does not affect nonlife member deductions that depend in
whole or in part on taxable income.
(3) Illustrations. The following examples illustrate this paragraph
(n). In the examples, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). P, S, L1 and L2 constitute a
group that elects under section 1504(c)(2) to file a consolidated return
for 1982. In 1982, the nonlife subgroup consolidated taxable income is
$100 and there is $20 of nonlife consolidated net capital loss that
cannot be carried back under paragraph (h) of this section to taxable
years (whether consolidated or separate) preceding 1982. The nonlife
subgroup has no carryover from years prior to 1982. Consolidated LO is
$150 which under paragraph (l) of this section includes life
consolidated capital gain net income of $25. The $150 LO is carried back
under paragraph (l)(3) of this section to taxable years (whether
consolidated or separate) preceding 1982 before it may offset in 1982
nonlife consolidated taxable income. Since life consolidated capital
gain net income is zero for 1982, the nonlife capital loss offset is
zero.
Example (2). The facts are the same as in example (1). Assume
further that no part of the $150 consolidated LO for 1982 can be used by
L1 and L2 in years prior to 1982. For 1982, $100
of consolidated LO sets off the $100 nonlife consolidated taxable
income. The life subgroup carries under paragraph (l)(3) of this section
to 1983 $50 of the consolidated LO ($150 minus $100). See paragraph
(l)(3)(ii) of this section. The $50 carryover will be used in 1983
against life subgroup income before it may be used in 1983 to setoff
nonlife consolidated taxable income.
Example (3). (a) The facts are the same as in example (1), except
that for 1982 the nonlife consolidated taxable income is $150 and
includes nonlife consolidated capital gain net income of $50,
consolidated partial LICTI is $200, and a life consolidated net capital
loss is $50. Assume that the $50 life consolidated net capital loss sets
off the $50 nonlife consolidated capital gain net income. Consolidated
taxable income under paragraph (g) of this section is $300, i.e.,
nonlife consolidated taxable income ($150) minus the setoff of the life
consolidated net capital loss ($50), plus consolidated partial LICTI
($200).
(b) Assume that for 1983 the nonlife consolidated net operating loss
is $150. Under paragraph (h)(2) of this section, the loss may be carried
back to 1982 against nonlife consolidated taxable income. If P, the
common parent, does not elect to relinquish the carryback under section
172(b)(3)(C), the entire $150 must be carried back reducing 1982 nonlife
consolidated taxable income to zero and nonlife consolidated capital
gain net income to zero. Under paragraph (m)(3)(xii) of this section,
the setoff in 1982 of the nonlife consolidated capital gain net income
($50) by the life consolidated net capital loss ($50) is restored.
Accordingly, the 1982 life consolidated net capital loss may be carried
over by the life subgroup to 1983. Under paragraph (g) of this section,
after the carryback consolidated taxable income for 1982 is $200, i.e.,
nonlife consolidated taxable income ($0) plus consolidated partial LICTI
($200).
Example (4). The facts are the same as in example (3), except that P
elects under section 172 (b)(3)(C) to relinquish the carryback of $150
arising in 1983. The setoff in part (a) of example (3) is not restored.
However, the offsetable nonlife consolidated net operating loss for 1983
(or that may be carried forward from 1983) is zero. See paragraph
(m)(3)(viii) of this section. Nevertheless, the $150 nonlife
[[Page 420]]
consolidated net operating loss may be carried forward to be used by the
nonlife group.
Example (5). P owns all of the stock of S1 and of
L1. On January 1, 1978, L1 purchases all of the
stock of L2. For 1982, the group elects under section
1504(c)(2) to file a consolidated return. For 1982, L1 is an
eligible corporation under paragraph (d)(12) of this section but L2
is ineligible. Thus, L1 but not L2 is a member for
1982. For 1982, L2 sustains an LO that cannot be carried
back. For 1982, L2 is treated under paragraph (f)(6) of this
section as a member of a controlled group of corporations under section
1563 with P, S, and L1. For 1983, L2 is eligible
and is included on the group's consolidated return. L2's LO
for 1982 that may be carried to 1983 is not treated under paragraph
(d)(11) of this section as having been sustained in a separate return
limitation year for purposes of computing consolidated partial LICTI of
the L1-L2 life subgroup for 1983. Furthermore, the
portion of L2's LO not used under paragraph (l)(3) of this
section against life subgroup income in 1983 may be included in
offsetable consolidated operations loss under paragraph (n)(2) and
(m)(3)(i) of this section that reduces in 1983 nonlife consolidated
taxable income because L2's loss in 1982 was not sustained in
a separate return limitation year under paragraph (n)(2) and
(m)(3)(ix)(A) of this section or in a separate return year (1982) when
an election was in effect neither under section 1504(c)(2) nor section
243(b)(2).
(o) Alternative tax--(1) In general. For purposes of the alternative
tax under paragraph (f)(7)(ii) of this section, consolidated net capital
gain is the sum of the following two amounts:
(i) The nonlife consolidated net capital gain reduced by any setoff
of a life consolidated net capital loss.
(ii) The life consolidated net capital gain reduced by any setoff of
a nonlife consolidated net capital loss.
(2) Net capital gain. For purposes of this paragraph (o):
(i) Nonlife consolidated net capital gain is computed under
Sec. Sec. 1.1502-41A or 1.1502-22T (as appropriate) except that it may
not exceed nonlife consolidated taxable income (computed under paragraph
(h) of this section).
(ii) Life consolidated net capital gain is computed under
Sec. Sec. 1.1502-41A or 1.1502-22T (as appropriate), applied in a manner
consistent with paragraph (l)(4) of this section, except that it may not
exceed consolidated partial LICTI (as determined under paragraph (j) of
this section).
(iii) Setoffs. Setoffs are determined under paragraphs (m) or (n) of
this section (as the case may be).
(p) Transitional rule for credit carryovers. For limitations on
credits arising in taxable years ending before January 1, 1981, that may
be carried over to taxable years beginning on or after that date,
section 1507(c)(2)(A) of the Tax Reform Act of 1976 and the principles
in paragraph (h)(3) of this section (relating to limitations on loss
carryovers) apply.
(q) Preemption. The rules in this section preempt any inconsistent
rules in other sections (Sec. 1.1502-1 through 1.1502-80) of the
consolidated return regulations. For example, the rules in paragraph
(m)(3)(vi) apply notwithstanding Secs. 1.1502-21A(b)(3) and 1.1502-
79A(a)(3) (or Sec. 1.1502-21, as appropriate).
(r) Other consolidation principles. The fact that this section
treats the life and nonlife members as separate groups in computing,
respectively, consolidated partial LICTI (or LO) and nonlife
consolidated taxable income (or loss) does not affect the usual rules in
Secs. 1.1502-0--1.1502-80 unless this section provides otherwise. Thus,
the usual rules in Sec. 1.1502-13 (relating to intercompany
transactions) apply to both the life and nonlife members by treating
them as members of one affiliated group.
(s) Filing requirements. Nonlife consolidated taxable income or loss
under paragraph (h) of this section shall be determined on a separate
Form 1120 or 1120 M and consolidated partial LICTI under paragraph (j)
of this section shall be determined on a separate Form 1120 L. The
consolidated return shall be made on a separate Form 1120, 1120 M, or
1120 L by the common parent (if the group includes a life company),
which shows the set-offs under paragraphs (g), (m), and (n) of this
section and clearly indicates by notation on the face of the return that
it is a life-nonlife consolidated return (if the group includes a
[[Page 421]]
life company). See also Sec. 1.1502-75(j), relating to statements and
schedules for subsidiaries.
(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat.
637, 917; 26 U.S.C. 1502, 7805))
[T.D. 7877, 48 FR 11441, Mar. 18, 1983, as amended by T.D. 7912, 48 FR
40215, Sept. 6, 1983; T.D. 8560, 59 FR 41674, Aug. 15, 1994; T.D. 8597,
60 FR 36679-36680, July 18, 1995; T.D. 8677, 61 FR 33324, June 27, 1996;
T.D. 8823, 64 FR 36100, July 2, 1999]
Sec. 1.1502-55T Computation of alternative minimum tax of consolidated groups (temporary).
(a) through (h)(3) [Reserved].
(h)(4) Separate return year minimum tax credit.
(i) and (ii) [Reserved].
(iii)(A) Limitation on portion of separate return year minimum tax
credit arising in separate return limitation years. The aggregate of a
member's minimum tax credits arising in SRLYs that are included in the
consolidated minimum tax credits for all consolidated return years of
the group may not exceed--
(1) The aggregate for all consolidated return years of the member's
contributions to the consolidated section 53(c) limitation for each
consolidated return year; reduced by
(2) The aggregate of the member's minimum tax credits arising and
absorbed in all consolidated return years (whether or not absorbed by
the member).
(B) Computational rules--(1) Member's contribution to the
consolidated section 53(c) limitation. Except as provided in the special
rule of paragraph (h)(4)(iii)(B)(2) of this section, a member's
contribution to the consolidated section 53(c) limitation for a
consolidated return year equals the member's share of the consolidated
net regular tax liability minus its share of consolidated tentative
minimum tax. The group computes the member's shares by applying to the
respective consolidated amounts the principles of section 1552 and the
percentage method under Sec. 1.1502-33(d)(3), assuming a 100% allocation
of any decreased tax liability. The group makes proper adjustments so
that taxes and credits not taken into account in computing the
limitation under section 53(c) are not taken into account in computing
the member's share of the consolidated net regular tax, etc. (See, for
example, the taxes described in section 26(b) that are disregarded in
computing regular tax liability.)
(2) Adjustment for year in which alternative minimum tax is paid.
For a consolidated return year for which consolidated tentative minimum
tax is greater than consolidated regular tax liability, the group
reduces the member's share of the consolidated tentative minimum tax by
the member's share of the consolidated alternative minimum tax for the
year. The group determines the member's share of consolidated
alternative minimum tax for a year using the same method it uses to
determine the member's share of the consolidated minimum tax credits for
the year.
(3) Years included in computation. For purposes of computing the
limitation under this paragraph (h)(4)(iii), the consolidated return
years of the group include only those years, including the year to which
a credit is carried, that the member has been continuously included in
the group's consolidated return, but exclude any years after the year to
which the credit is carried.
(4) Subgroup principles. The SRLY subgroup principles under
Sec. 1.1502-21(c)(2) apply for purposes of this paragraph (h)(4)(iii).
The predecessor and successor principles under Sec. 1.1502-21(f) also
apply for purposes of this paragraph (h)(4)(iii).
(C) Effective date. This paragraph (h)(4)(iii) applies to
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998. However, a group
does not take into account a consolidated taxable year for which the due
date of the income tax return (without extensions) is on or before March
13, 1998, in determining a member's (or subgroup's) contributions to the
consolidated section 53(c) limitation under this paragraph (h)(4)(iii).
See Sec. 1.1502-3T(c)(4) for an optional effective date rule (generally
making this paragraph (h)(4)(iii) applicable to a consolidated return
year beginning after December 31, 1996, if the due date of the income
tax return (without extensions) for
[[Page 422]]
such year is on or before March 13, 1998).
[T.D. 8751, 63 FR 1745, Jan. 12, 1998, as amended by T.D. 8766, 63 FR
12643, Mar. 16, 1998]
Administrative Provisions and Other Rules
Sec. 1.1502-75 Filing of consolidated returns.
(a) Privilege of filing consolidated returns--(1) Exercise of
privilege for first consolidated return year. A group which did not file
a consolidated return for the immediately preceding taxable year may
file a consolidated return in lieu of separate returns for the taxable
year, provided that each corporation which has been a member during any
part of the taxable year for which the consolidated return is to be
filed consents (in the manner provided in paragraph (b) of this section)
to the regulations under section 1502. If a group wishes to exercise its
privilege of filing a consolidated return, such consolidated return must
be filed not later than the last day prescribed by law (including
extensions of time) for the filing of the common parent's return. Such
consolidated return may not be withdrawn after such last day (but the
group may change the basis of its return at any time prior to such last
day).
(2) Continued filing requirement. A group which filed (or was
required to file) a consolidated return for the immediately preceding
taxable year is required to file a consolidated return for the taxable
year unless it has an election to discontinue filing consolidated
returns under paragraph (c) of this section.
(b) How consent for first consolidated year exercised--(1) General
rule. The consent of a corporation referred to in paragraph (a)(1) of
this section shall be made by such corporation joining in the making of
the consolidated return for such year. A corporation shall be deemed to
have joined in the making of such return for such year if it files a
Form 1122 in the manner specified in paragraph (h)(2) of this section.
(2) Consent under facts and circumstances. If a member of the group
fails to file Form 1122, the Commissioner may under the facts and
circumstances determine that such member has joined in the making of a
consolidated return by such group. The following circumstances, among
others, will be taken into account in making this determination:
(i) Whether or not the income and deductions of the member were
included in the consolidated return;
(ii) Whether or not a separate return was filed by the member for
that taxable year; and
(iii) Whether or not the member was included in the affiliations
schedule, Form 851.
If the Commissioner determines that the member has joined in the making
of the consolidated return, such member shall be treated as if it had
filed a Form 1122 for such year for purposes of paragraph (h)(2) of this
section.
(3) Failure to consent due to mistake. If any member has failed to
join in the making of a consolidated return under either subparagraph
(1) or (2) of this paragraph, then the tax liability of each member of
the group shall be determined on the basis of separate returns unless
the common parent corporation establishes to the satisfaction of the
Commissioner that the failure of such member to join in the making of
the consolidated return was due to a mistake of law or fact, or to
inadvertence. In such case, such member shall be treated as if it had
filed a Form 1122 for such year for purposes of paragraph (h)(2) of this
section, and thus joined in the making of the consolidated return for
such year.
(c) Election to discontinue filing consolidated returns--(1) Good
cause--(i) In general. Notwithstanding that a consolidated return is
required for a taxable year, the Commissioner, upon application by the
common parent, may for good cause shown grant permission to a group to
discontinue filing consolidated returns. Any such application shall be
made to the Commissioner of Internal Revenue, Washington, DC 20224, and
shall be made not later than the 90th day before the due date for the
filing of the consolidated return (including extensions of time). In
addition, if an amendment of the Code, or other law affecting the
computation of tax liability, is enacted and the enactment is effective
for a taxable year
[[Page 423]]
ending before or within 90 days after the date of enactment, then
application for such a taxable year may be made not later than the 180th
day after the date of enactment, and if the application is approved the
permission to discontinue filing consolidated returns will apply to such
taxable year notwithstanding that a consolidated return has already been
filed for such year.
(ii) Substantial adverse change in law affecting tax liability.
Ordinarily, the Commissioner will grant a group permission to
discontinue filing consolidated returns if the net result of all
amendments to the Code or regulations with effective dates commencing
within the taxable year has a substantial adverse effect on the
consolidated tax liability of the group for such year relative to what
the aggregate tax liability would be if the members of the group filed
separate returns for such year. Thus, for example, assume P and S filed
a consolidated return for the calendar year 1966 and that the provisions
of the Code have been amended by a bill which was enacted by Congress in
1966, but which is first effective for taxable years beginning on or
after January 1, 1967. Assume further that P makes a timely application
to discontinue filing consolidated returns. In order to determine
whether the amendments have a substantial adverse effect on the
consolidated tax liability for 1967, relative to what the aggregate tax
liability would be if the members of the group filed separate returns
for 1967, the difference between the tax liability of the group computed
on a consolidated basis and taking into account the changes in the law
effective for 1967 and the aggregate tax liability of the members of the
group computed as if each such member filed separate returns for such
year (also taking into account such changes) shall be compared with the
difference between the tax liability of such group for 1967 computed on
a consolidated basis without regard to the changes in the law effective
in such year and the aggregate tax liability of the members of the group
computed as if separate returns had been filed by such members for such
year without regard to the changes in the law effective in such year.
(iii) Other factors. In addition, the Commissioner will take into
account other factors in determining whether good cause exists for
granting permission to discontinue filing consolidated returns beginning
with the taxable year, including:
(a) Changes in law or circumstances, including changes which do not
affect Federal income tax liability,
(b) Changes in law which are first effective in the taxable year and
which result in a substantial reduction in the consolidated net
operating loss (or consolidated unused investment credit) for such year
relative to what the aggregate net operating losses (or investment
credits) would be if the members of the group filed separate returns for
such year, and
(c) Changes in the Code or regulations which are effective prior to
the taxable year but which first have a substantial adverse effect on
the filing of a consolidated return relative to the filing of separate
returns by members of the group in such year.
(2) Discretion of Commissioner to grant blanket permission--(i)
Permission to all groups. The Commissioner, in his discretion, may grant
all groups permission to discontinue filing consolidated returns if any
provision of the Code or regulations has been amended and such amendment
is of the type which could have a substantial adverse effect on the
filing of consolidated returns by substantially all groups, relative to
the filing of separate returns. Ordinarily, the permission to
discontinue shall apply with respect to the taxable year of each group
which includes the effective date of such an amendment.
(ii) Permission to a class of groups. The Commissioner, in his
discretion, may grant a particular class of groups permission to
discontinue filing consolidated returns if any provision of the Code or
regulations has been amended and such amendment is of the type which
could have a substantial adverse effect on the filing of consolidated
returns by substantially all such groups relative to the filing of
separate returns. Ordinarily, the permission to discontinue shall apply
with respect to the taxable year of each group within
[[Page 424]]
the class which includes the effective date of such an amendment.
(3) Time and manner for exercising election. If, under subparagraph
(1) or (2) of this paragraph, a group has an election to discontinue
filing consolidated returns for any taxable year and such group wishes
to exercise such election, then the common parent must file a separate
return for such year on or before the last day prescribed by law
(including extensions of time) for the filing of the consolidated return
for such year. See section 6081 (relating to extensions of time for
filing returns).
(d) When group remains in existence--(1) General rule. A group
remains in existence for a tax year if the common parent remains as the
common parent and at least one subsidiary that was affiliated with it at
the end of the prior year remains affiliated with it at the beginning of
the year, whether or not one or more corporations have ceased to be
subsidiaries at any time after the group was formed. Thus, for example,
assume that individual A forms corporation P. P acquires 100 percent of
the stock of corporation S on January 1, 1965, and P and S file a
consolidated return for the calendar year 1965. On May 1, 1966, P
acquires 100 percent of the stock of S-1, and on July 1, 1966, P sells
the stock of S. The group (consisting originally of P and S) remains in
existence in 1966 since P has remained as the common parent and at least
one subsidiary (now S-1) remains affiliated with it.
(2) Common parent no longer in existence--(i) Mere change in
identity. For purposes of this paragraph, the common parent corporation
shall remain as the common parent irrespective of a mere change in
identity, form, or place of organization of such common parent
corporation (see section 368(a)(1)(F)).
(ii) Transfer of assets to subsidiary. The group shall be considered
as remaining in existence notwithstanding that the common parent is no
longer in existence if the members of the affiliated group succeed to
and become the owners of substantially all of the assets of such former
parent and there remains one or more chains of includible corporations
connected through stock ownership with a common parent corporation which
is an includible corporation and which was a member of the group prior
to the date such former parent ceases to exist. For purposes of applying
paragraph (f)(2)(i) of Sec. 1.1502-1 to separate return years ending on
or before the date on which the former parent ceases to exist, such
former parent, and not the new common parent, shall be considered to be
the corporation described in such paragraph.
(iii) Taxable years. If a transfer of assets described in
subdivision (ii) of this subparagraph is an acquisition to which section
381(a) applies and if the group files a consolidated return for the
taxable year in which the acquisition occurs, then for purposes of
section 381:
(a) The former common parent shall not close its taxable year merely
because of the acquisition, and all taxable years of such former parent
ending on or before the date of acquisition shall be treated as taxable
years of the acquiring corporation, and
(b) The corporation acquiring the assets shall close its taxable
year as of the date of acquisition, and all taxable years of such
corporation ending on or before the date of acquisition shall be treated
as taxable years of the transferor corporation.
(iv) Exception. With respect to acquisitions occurring before
January 1, 1971, subdivision (iii) of this subparagraph shall not apply
if the group, in its income tax return, treats the taxable year of the
former common parent as having closed as of the date of acquisition.
(3) Reverse acquisitions--(i) In general. If a corporation
(hereinafter referred to as the ``first corporation'') or any member of
a group of which the first corporation is the common parent acquires
after October 1, 1965:
(a) Stock of another corporation (hereinafter referred to as the
second corporation), and as a result the second corporation becomes (or
would become but for the application of this subparagraph) a member of a
group of which the first corporation is the common parent, or
(b) Substantially all the assets of the second corporation,
in exchange (in whole or in part) for stock of the first corporation,
and the stockholders (immediately before the
[[Page 425]]
acquisition) of the second corporation, as a result of owning stock of
the second corporation, own (immediately after the acquisition) more
than 50 percent of the fair market value of the outstanding stock of the
first corporation, then any group of which the first corporation was the
common parent immediately before the acquisition shall cease to exist as
of the date of acquisition, and any group of which the second
corporation was the common parent immediately before the acquisition
shall be treated as remaining in existence (with the first corporation
becoming the common parent of the group). Thus, assume that corporations
P and S comprised group PS (P being the common parent), that P was
merged into corporation T (the common parent of a group composed of T
and corporation U), and that the shareholders of P immediately before
the merger, as a result of owning stock in P, own 90 percent of the fair
market value of T's stock immediately after the merger. The group of
which P was the common parent is treated as continuing in existence with
T and U being added as members of the group, and T taking the place of P
as the common parent.
For purposes of determining under (a) of this subdivision whether the
second corporation becomes (or would become) a member of the group of
which the first corporation is the common parent, and for purposes of
determining whether the former stockholders of the second corporation
own more than 50 percent of the outstanding stock of the first
corporation, there shall be taken into account any acquisitions or
redemptions of the stock of either corporation which are pursuant to a
plan of acquisition described in (a) or (b) of this subdivision.
(ii) Prior ownership of stock. For purposes of subdivision (i) of
this subparagraph, if the first corporation, and any members of a group
of which the first corporation is the common parent, have continuously
owned for a period of at least 5 years ending on the date of the
acquisition an aggregate of at least 25 percent of the fair market value
of the outstanding stock of the second corporation, then the first
corporation (and any subsidiary which owns stock of the second
corporation immediately before the acquisition) shall, as a result of
owning such stock, be treated as owning (immediately after the
acquisition) a percentage of the fair market value of the first
corporation's outstanding stock which bears the same ratio to (a) the
percentage of the fair market value of all the stock of the second
corporation owned immediately before the acquisition by the first
corporation and its subsidiaries as (b) the fair market value of the
total outstanding stock of the second corporation immediately before the
acquisition bears to (c) the sum of (1) the fair market value,
immediately before the acquisition, of the total outstanding stock of
the first corporation, and (2) the fair market value, immediately before
the acquisition, of the total outstanding stock of the second
corporation (other than any such stock owned by the first corporation
and any of its subsidiaries). For example, assume that corporation P
owns stock in corporation T having a fair market value of $100,000, that
P acquires the remaining stock of T from individuals in exchange for
stock of P, that immediately before the acquisition the total
outstanding stock of T had a fair market value of $150,000, and that
immediately before the acquisition the total outstanding stock of P had
a fair market value of $200,000. Assuming P owned at least 25 percent of
the fair market value of T's stock for 5 years, then for purposes of
this subparagraph, P is treated as owning (immediately after the
acquisition) 40 percent of the fair market value of its own outstanding
stock, determined as follows:
[$150,000/($200,000+$50,000)] x 662/3%=40%.
Thus, if the former individual stockholders of T own, immediately after
the acquisition more than 10 percent of the fair market value of the
outstanding stock of P as a result of owning stock of T, the group of
which T was the common parent is treated as continuing in existence with
P as the common parent, and the group of which P was the common parent
before the acquisition ceases to exist.
(iii) Election. The provisions of subdivision (ii) of this
subparagraph shall not apply to any acquisition occurring
[[Page 426]]
in a taxable year ending after October 7, 1969, unless the first
corporation elects to have such subdivision apply. The election shall be
made by means of a statement, signed by any officer who is duly
authorized to act on behalf of the first corporation, stating that the
corporation elects to have the provisions of Sec. 1.1502-75(d)(3)(ii)
apply and identifying the acquisition to which such provisions will
apply. The statement shall be filed, on or before the due date
(including extensions of time) of the return for the group's first
consolidated return year ending after the date of the acquisition, with
the internal revenue officer with whom such return is required to be
filed.
(iv) Transfer of assets to subsidiary. This subparagraph shall not
apply to a transaction to which subparagraph (2)(ii) of this paragraph
applies.
(v) Taxable years. If, in a transaction described in subdivision (i)
of this subparagraph, the first corporation files a consolidated return
for the first taxable year ending after the date of acquisition, then:
(a) The first corporation, and each corporation which, immediately
before the acquisition, is a member of the group of which the first
corporation is the common parent, shall close its taxable year as of the
date of acquisition, and each such corporation shall, immediately after
the acquisition, change to the taxable year of the second corporation,
and
(b) If the acquisition is a transaction described in section
381(a)(2), then for purposes of section 381:
(1) All taxable years ending on or before the date of acquisition,
of the first corporation and each corporation which, immediately before
the acquisition, is a member of the group of which the first corporation
is the common parent, shall be treated as taxable years of the
transferor corporation, and
(2) The second corporation shall not close its taxable year merely
because of such acquisition, and all taxable years ending on or before
the date of acquisition, of the second corporation and each corporation
which, immediately before the acquisition, is a member of any group of
which the second corporation is the common parent, shall be treated as
taxable years of the acquiring corporation.
(vi) Exception. With respect to acquisitions occurring before April
17, 1968, subdivision (v) of this subparagraph shall not apply if the
parties to the transaction, in their income tax returns, treat
subdivision (i) as not affecting the closing of taxable years or the
operation of section 381.
(4) [Reserved]
(5) Coordination with section 833--(i) Election to continue old
group. If, solely by reason of the enactment of section 833 (relating to
certain Blue Cross or Blue Shield organizations and certain other health
insurers), an organization to which section 833 applies (a ``section 833
organization'') became the new common parent of an old group on January
1, 1987, the old group may elect to continue in existence with that
section 833 organization as its new common parent, provided all the old
groups having the same section 833 organization as their new common
parent elect to continue in existence. To revoke this election, see
paragraph (d)(5)(x) of this section. To file as a new group, see
paragraph (d)(5)(v) of this section.
(ii) Old group. For purposes of this paragraph (d)(5), an old group
is a group which, for its last taxable year ending in 1986, either filed
a consolidated return or was eligible to (but did not) file a
consolidated return.
(iii) Manner of electing to continue--(A) Deemed election. If all
the members of all the old groups having the same section 833
organization as their new common parent are included for the first
taxable year beginning after December 31, 1986, on the same consolidated
(or amended consolidated) return and a Form 1122 was not filed, the old
groups are deemed to have elected under paragraph (d)(5)(i) of this
section to continue in existence.
(B) Delayed election. If a deemed election to continue in existence
was not made under paragraph (d)(5)(iii)(A) of this section, all the
members of all the old groups having the same section 833 organization
as their new common parent may make a delayed election under paragraph
(d)(5)(i) of this section to continue in existence by:
[[Page 427]]
(1) Filing an appropriate consolidated (or amended consolidated)
return or returns for each taxable year beginning after December 31,
1986, (notwithstanding Sec. 1.1502-75(a)(1)) on or before January 3,
1991, and
(2) On the top of any such return prominently affixing a statement
containing the following declaration: ``THIS RETURN'' (or, if
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO
CONTINUE UNDER Sec. 1.1502-75T(d)(5)(iii)(B)''. A delayed election to
continue in existence automatically revokes a deemed election to file as
a new group which was made under paragraph (d)(5)(vi) of this section.
(iv) Effects of election to continue in existence. If an old group
or groups elect to continue in existence under paragraph (d)(5)(i) of
this section, the following rules apply:
(A) Taxable years. Each member that filed returns other than on a
calendar year basis shall close its taxable year on December 31, 1986,
and change to a calendar year beginning on January 1, 1987. See section
843 and Sec. 1.1502-76(a)(1).
(B) Carryovers from separate return limitation years. For purposes
of applying the separate return limitation year rules to carryovers from
taxable years beginning before 1987 to taxable years beginning after
1986, the following rules apply:
(1) Any taxable year beginning before 1987 of a corporation that was
not a member of an old group (including a section 833 organization) will
be treated as a separate return limitation year;
(2) Any taxable year beginning before 1987 of a corporation that was
a member of an old group that, without regard to this section and the
enactment of section 833, was a separate return limitation year will
continue to be treated as a separate return limitation year;
(3) Any taxable year beginning before 1987 of a member of an old
group (other than a separate return limitation year described in
paragraph (d)(5)(iv)(B)(2) of this section) will not be treated as a
separate return limitation year with respect to any corporation that was
a member of such group for each day of that taxable year; and
(4) Any taxable year beginning before 1987 of a member of an old
group will be treated as a separate return limitation year with respect
to any corporation that was not a member of such group for each day of
that taxable year (e.g., a corporation that was not a member of an old
group, including a section 833 organization, or a corporation that was a
member of another old group).
(C) Five-year rules for life-nonlife groups. Any life-nonlife
election under section 1504(c)(2) in effect for an old group remains in
effect. Any old group which was eligible to make a life-nonlife election
will remain eligible to make the election. For purposes of section
1503(c), a nonlife member is treated as ineligible under Sec. 1.1502-
47(d)(13) with respect to a life member, unless both were members of the
same affiliated group (determined without regard to the exclusions in
section 1504(b) (1) and (2)) for five taxable years immediately
preceding the taxable year in which the loss arose. See paragraph
(d)(5)(ix) of this section for a tacking rule.
(v) Election to file as a new group. If, solely by reason of the
enactment of section 833, a section 833 organization became the new
common parent of an old group on January 1, 1987, the application of the
five-year prohibition on reconsolidation in section 1504(a)(3)(A) to the
old group is waived and the old group together with the new section 833
organization common parent may elect to file as a new group provided
that all includible corporations elect to file a consolidated (or
amended consolidated) return as a new group for the first taxable year
beginning after December 31, 1986. To revoke this election, see
paragraph (d)(5)(x) of this section.
(vi) Manner of electing to file as a new group--(A) Deemed election.
The old group or groups and the section 833 organization are deemed to
have elected under paragraph (d)(5)(v) of this section to file as a new
group by filing, for the first taxable year beginning after December 31,
1986, a Form 1122 and a consolidated (or amended consolidated) tax
return.
(B) Delayed election. If a deemed election to file as a new group
was not made pursuant to paragraph
[[Page 428]]
(d)(5)(vi)(A) of this section, the old group or groups and the section
833 organization may make a delayed election under paragraph (d)(5)(v)
of this section to file as a new group by
(1) Filing an appropriate consolidated (or amended consolidated)
return or returns for each taxable year beginning after December 31,
1986 (notwithstanding Sec. 1.1502-75(a)(1)) on or before January 3,
1991, and
(2) On the top of any such return prominently affixing a statement
containing the following declaration: ``THIS RETURN'' (or, if
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO FILE AS
A NEW GROUP UNDER Sec. 1.1502-75T (d)(5)(vi)(B)''. A delayed election to
file as a new group automatically revokes any deemed election to
continue in existence which was made under paragraph (d)(5)(iii) of this
section.
(vii) Effects of election to file as a new group. If an old group or
groups elect to file as a new group under paragraph (d)(5)(v) of this
section, the following rules apply:
(A) Termination. Each old group is treated as if it terminated on
January 1, 1987, and the termination is not treated as resulting from
the acquisition by a nonmember of all of the stock of the common parent.
(B) Taxable years. Each member that filed returns other than on a
calendar year basis shall close its taxable year on December 31, 1986,
and change to a calendar year beginning on January 1, 1987. See section
843 and Sec. 1.1502-76(a)(1).
(C) Separate return limitation year and life-nonlife groups. For
purposes of Sec. 1.1502-1(f), sections 1503(c) and 1504(c), and
Sec. 1.1502-47, the group is treated as coming into existence as a new
group on January 1, 1987. Thus, for example, paragraphs (d)(5)(iv) (B)
and (C) of this section do not apply.
(viii) Earnings and profits. All distributions after January 1, 1987
by a corporation, whether or not such corporation was a member of an old
group, to an existing Blue Cross or Blue Shield organization (as defined
in section 833(c)(2)) out of earnings and profits accumulated before
1987 are deemed made out of earnings and profits accumulated in pre-
affiliation years. See Sec. 1.1502-32(h)(5).
(ix) Five-year tacking rules for certain life-nonlife groups. For
purposes of applying Sec. 1.1502-47(d) (5) and (12) to any taxable year
ending after 1986 to a corporation, whether or not the corporation was a
member of an old group,
(A) The determination of whether the corporation was in existence
and a member or tentatively treated as a member of a group, for taxable
years ending before 1987, is made without regard to the exclusions under
section 1504(b) (1) and (2) of any section 833 organization or life
insurance company (as the case may be) and
(B) A section 833 organization is not treated as having a change in
tax character solely by reason of the loss of its tax-exempt status due
to the enactment of section 833.
This paragraph (d)(5)(ix) does not apply if an election to file as a new
group under paragraph (d)(5)(v) of this section is made.
(x) Time to revoke elections made before September 5, 1990. An
election by an old group to continue in existence or to file as a new
group that was made (or deemed made) before September 5, 1990, may be
revoked by filing an appropriate return (or returns) on or before
January 3, 1991. For purposes of this paragraph (d)(5)(x), appropriate
returns include separate returns filed by each member of the group or
consolidated returns filed in accordance with a delayed election either
under paragraph (d)(5)(iii)(B) or (vi)(B) of this section.
(xi) Examples. The following examples illustrate this paragraph
(d)(5). In these examples, each corporation uses the calendar year as
its taxable year.
Example 1. B is a section 833 organization. For several years, B has
owned all of the outstanding stock of X, Y, and Z. X has owned all the
outstanding stock of X1 throughout X1's existence
and Y has owned all of the outstanding stock of Y1 throughout
Y1's existence. For 1986 X and X1 filed a
consolidated federal income tax return but Y and Y1 filed
separate returns. Under paragraph (d)(5)(ii) of this section, X and
X1 and Y and Y1 each constitute an old group
because they either filed a consolidated return or were eligible to file
a consolidated return for 1986. The X and Y groups may elect under
paragraph (d)(5)(i) of this section to continue in existence. If they
elect to continue, under
[[Page 429]]
paragraph (d)(5)(iv)(B) of this section, the separate return limitation
year rules apply as follows: any taxable year of B or Z beginning before
1987 is treated as a separate return limitation year with respect to
each other and to all other members of the group; any taxable year of X
or X1 beginning before 1987 is treated as a separate return
limitation year with respect to B, Z, Y and Y1, but not with
respect to each other; and any taxable year of Y or Y1
beginning before 1987 is treated as a separate return limitation year
with respect to B, Z, X and X1, but not with respect to each
other.
Example 2. The facts are the same as in Example 1 except that B is
owned by C, another section 833 organization. If the X and Y groups
elect to continue, the results are the same as in Example 1, except
that, under paragraph (d)(5)(iv)(B)(1) of this section, for purposes of
applying the separate return limitation year rules, any taxable year of
C beginning before 1987 is also treated as a separate return limitation
year with respect to all other members of the group.
Example 3. The facts are the same as in Example 1 except that Y
purchased Y1 on January 1, 1985. If the X and Y groups elect
to continue, the results are the same as in Example 1, except that,
under paragraph (d)(5)(iv)(B)(2) of this section, for purposes of
applying the separate return limitation year rules, any taxable year of
Y1 beginning before 1985 is treated as a separate return
limitation year with respect to Y as well as with respect to all other
members of the group.
Example 4. B, a section 833 organization, has owned all the stock of
X since November 1984. X has owned all the stock of L, a life insurance
company, throughout L's existence. In 1986, X and L properly filed a
life-nonlife consolidated return. Under paragraph (d)(5)(i) of this
section, the X group elects to continue in existence. Under paragraph
(d)(5)(iv)(C) of this section, the life-nonlife election will remain in
effect. However, losses of B which arise before 1990 cannot be used to
offset the income of L. See section 1503(c)(2) and Sec. 1.1502-47(d)(13)
and paragraph (d)(5)(iv)(C) of this section. Under paragraph
(d)(5)(iv)(B) of this section, the separate return limitation year rules
apply as follows: any taxable year of B beginning before 1987 is treated
as a separate return limitation year with respect to all other members
of the group; and any taxable year of X or L beginning before 1987 is
treated as a separate return limitation year with respect to B, but not
with respect to each other.
Example 5. The facts are the same as Example 4 except that, on
January 1, 1984, B formed L1, a life insurance company. Under
paragraph (d)(5)(ix) of this section and section 1504(c), the first year
L1 is eligible to join in B's life-nonlife election is 1989.
Example 6. The facts are the same as in Example 4 except that B and
the X group elect under paragraph (d)(5)(v) of this section to file as a
new group. The X group will be considered to have terminated under
Sec. 1.1502-75(d)(1) on December 31, 1986. X and L are each separately
subject to the separate return limitation year rules of Sec. 1.1502-
1(f). The first year L and L1 are eligible to join the new
group in a life-nonlife election is 1992 (five years after the new group
is formed). See section 1504(c)(2) and paragraphs (d)(5)(vii)(C) and
(ix) of this section.
The provisions contained in this Treasury decision are needed to
immediately amend the consolidated return regulations in response to
changes made by section 1012 of the Tax Reform Act of 1986. It is
therefore found impracticable and contrary to the public interest to
issue this Treasury decision with notice and public procedure under
section 553(b) of title 5 of the United States Code or subject to the
effective date limitations of section 553(d) of title 5, United States
Code.
(e) Failure to include subsidiary. If a consolidated return is
required for the taxable year under the provisions of paragraph (a)(2)
of this section, the tax liability of all members of the group for such
year shall be computed on a consolidated basis even though:
(1) Separate returns are filed by one or more members of the group,
or
(2) There has been a failure to include in the consolidated return
the income of any member of the group.
If subparagraph (1) of this paragraph applies, the amounts assessed or
paid upon the basis of separate returns shall be considered as having
been assessed or paid upon the basis of a consolidated return.
(f) Inclusion of one or more corporations not members of the group--
(1) Method of determining tax liability. If a consolidated return
includes the income of a corporation which was not a member of the group
at any time during the consolidated return year, the tax liability of
such corporation will be determined upon the basis of a separate return
(or a consolidated return of another group, if paragraph (a)(2) or
(b)(3) of this section applies), and the consolidated return will be
considered as including only the income of the corporations which were
members of the group during that taxable year. If a consolidated return
includes the income of two or more corporations which were not
[[Page 430]]
members of the group but which constitute another group, the tax
liability of such corporations will be computed in the same manner as if
separate returns had been made by such corporations unless the
Commissioner upon application approves the making of a consolidated
return for the other group or unless under paragraph (a)(2) of this
section a consolidated return is required for the other group.
(2) Allocation of tax liability. In any case in which amounts have
been assessed and paid upon the basis of a consolidated return and the
tax liability of one or more of the corporations included in the
consolidated return is to be computed in the manner described in
subparagraph (1) of this paragraph, the amounts so paid shall be
allocated between the group composed of the corporations properly
included in the consolidated return and each of the corporations the tax
liability of which is to be computed on a separate basis (or on the
basis of a consolidated return of another group) in such manner as the
corporations which were included in the consolidated return may, subject
to the approval of the Commissioner, agree upon or in the absence of an
agreement upon the method used in allocating the tax liability of the
members of the group under the provisions of section 1552(a).
(g) Computing periods of limitation--(1) Income incorrectly included
in consolidated return. If:
(i) A consolidated return is filed by a group for the taxable year,
and
(ii) The tax liability of a corporation whose income is included in
such return must be computed on the basis of a separate return (or on
the basis of a consolidated return with another group), then for the
purpose of computing any period of limitation with respect to such
separate return (or such other consolidated return), the filing of such
consolidated return by the group shall be considered as the making of a
return by such corporation.
(2) Income incorrectly included in separate returns. If a
consolidated return is required for the taxable year under the
provisions of paragraph (a)(2) of this section, the filing of separate
returns by the members of the group for such year shall not be
considered as the making of a return for the purpose of computing any
period of limitation with respect to such consolidated return unless
there is attached to each such separate return a statement setting
forth:
(i) The most recent taxable year of the member for which its income
was included in a consolidated return, and
(ii) The reasons for the group's belief that a consolidated return
is not required for the taxable year.
(h) Method of filing return and forms--(1) Consolidated return made
by common parent corporation. The consolidated return shall be made on
Form 1120 for the group by the common parent corporation. The
consolidated return, with Form 851 (affiliations schedule) attached,
shall be filed with the district director with whom the common parent
would have filed a separate return.
(2) Filing of Form 1122 for first year. If, under the provisions of
paragraph (a)(1) of this section, a group wishes to exercise its
privilege of filing a consolidated return, then a Form 1122 must be
executed by each subsidiary and must be attached to the consolidated
return for such year. Form 1122 shall not be required for a taxable year
if a consolidated return was filed (or was required to be filed) by the
group for the immediately preceding taxable year.
(3) Persons qualified to execute returns and forms. Each return or
form required to be made or prepared by a corporation must be executed
by the person authorized under section 6062 to execute returns of
separate corporations.
(i) [Reserved]
(j) Statements and schedules for subsidiaries. The statement of
gross income and deductions and the schedules required by the
instructions on the return shall be prepared and filed in columnar form
so that the details of the items of gross income, deductions, and
credits for each member may be readily audited. Such statements and
schedules shall include in columnar form a reconciliation of surplus for
each corporation, and a reconciliation of consolidated surplus.
Consolidated balance sheets as of the beginning and close of the taxable
year of the group, taken from the books of the members, shall accompany
the consolidated return and shall be prepared in a form
[[Page 431]]
similar to that required for reconciliation of surplus.
(k) Cross-reference. See Sec. 1.338(h)(10)-T(d)(7) for special rules
regarding filing consolidated returns when a section 338(h)(10) election
is made for a target acquired from a selling consolidated group.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7016, 34 FR
15556, Oct. 7, 1969; T.D. 7024, 35 FR 2774, Feb. 10, 1970; T.D. 7244, 37
FR 28897, Dec. 30, 1972; T.D. 7246, 38 FR 766, Jan. 4, 1973; T.D. 8438,
57 FR 44333, Sept. 25, 1992; T.D. 8515, 59 FR 2984, Jan. 20, 1994; T.D.
8560, 59 FR 41675, 41700, Aug. 15, 1994; T.D. 8858, 65 FR 1237, Jan. 7,
2000]
Sec. 1.1502-76 Taxable year of members of group.
(a) Taxable year of members of group--(1) Change to parent's taxable
year. The consolidated return of a group must be filed on the basis of
the common parent's taxable year, and each subsidiary must adopt the
common parent's annual accounting period for the first consolidated
return year for which the subsidiary's income is includible in the
consolidated return. If any member is on a 52-53-week taxable year, the
rule of the preceding sentence shall, with the advance consent of the
Commissioner, be deemed satisfied if the taxable years of all members of
the group end within the same 7-day period. Any request for such consent
shall be filed with the Commissioner of Internal Revenue, Washington, DC
20224, not later than the 30th day before the due date (not including
extensions of time) for the filing of the consolidated return.
(2) Includible insurance company as member of group. If an
includible insurance company required by section 843 to file its return
on the basis of a calendar year is a member of the group and if the
common parent of such group files its return on the basis of a fiscal
year, then the first consolidated return which includes the income of
such insurance company may be filed on the basis of the common parent's
fiscal year, provided, however, that if such insurance company is a
member of the group on the last day of the common parent's taxable year,
all members other than such insurance company change to a calendar year
or to a 52-53-week taxable year ending within a 7-day period which
includes December 31, effective immediately after the close of the
common parent's taxable year. If any member changes to a 52-53-week
taxable year, the advance consent of the Commissioner shall be obtained
in accordance with subparagraph (1) of this paragraph.
(b) Items included in the consolidated return--(1) General rules--
(i) In general. A consolidated return must include the common parent's
items of income, gain, deduction, loss, and credit for the entire
consolidated return year, and each subsidiary's items for the portion of
the year for which it is a member. If the consolidated return includes
the items of a corporation for only a portion of its tax year determined
without taking this section into account, items for the portion of the
year not included in the consolidated return must be included in a
separate return (including the consolidated return of another group).
The rules of this paragraph (b) must be applied to prevent the
duplication or elimination of the corporation's items.
(ii) The day a corporation becomes or ceases to be a member--(A) End
of the day rule. (1) In general. If a corporation (S), other than one
described in paragraph (b)(1)(ii)(A)(2) of this section, becomes or
ceases to be a member during a consolidated return year, it 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. Appropriate adjustments must be made if
another provision of the Internal Revenue Code or the regulations
thereunder contemplates the event occurring before or after S's change
in status. For example, S's items restored under Sec. 1.1502-13
immediately before it becomes a nonmember are taken into account in
determining the basis of S's stock under Sec. 1.1502-32. On the other
hand, if a section 338(g) election is made in connection with S becoming
a member, the deemed asset sale under that section takes place before S
becomes a member. See Sec. 1.338-10T(a)(5) (deemed sale excluded from
purchasing corporation's consolidated return.)
(2) Special rule for former S corporations. If S becomes a member in
a
[[Page 432]]
transaction other than in a qualified stock purchase for which an
election under section 338(g) is made, and immediately before becoming a
member an election under section 1362(a) was in effect, then S will
become a member at the beginning of the day the termination of its S
corporation election is effective. S's tax year ends for all Federal
income tax purposes at the end of the preceding day. This paragraph
(b)(1)(ii)(A)(2) applies to transactions occurring after November 10,
1999.
(B) Next day rule. If, on the day of S's change in status as a
member, a transaction occurs that is properly allocable to the portion
of S's day after the event resulting in the change, S and all persons
related to S under section 267(b) immediately after the event must treat
the transaction for all Federal income tax purposes as occurring at the
beginning of the following day. A determination as to whether a
transaction is properly allocable to the portion of S's day after the
event will be respected if it is reasonable and consistently applied by
all affected persons. In determining whether an allocation is
reasonable, the following factors are among those to be considered--
(1) Whether income, gain, deduction, loss, and credit are allocated
inconsistently (e.g., to maximize a seller's stock basis adjustments
under Sec. 1.1502-32);
(2) If the item is from a transaction with respect to S stock,
whether it reflects ownership of the stock before or after the event
(e.g., if a member transfers encumbered land to nonmember S in exchange
for additional S stock in a transaction to which section 351 applies and
the exchange results in S becoming a member of the consolidated group,
the applicability of section 357(c) to the exchange must be determined
under Sec. 1.1502-80(d) by treating the exchange as occurring after the
event; on the other hand, if S is a member but has a minority
shareholder and becomes a nonmember as a result of its redemption of
stock with appreciated property, S's gain under section 311 is treated
as from a transaction occurring before the event);
(3) Whether the allocation is inconsistent with other requirements
under the Internal Revenue Code (e.g., if a section 338(g) election is
made in connection with a group's acquisition of S, the deemed asset
sale must take place before S becomes a member and S's gain or loss with
respect to its assets must be taken into account by S as a nonmember);
and
(4) Whether other facts exist, such as a prearranged transaction or
multiple changes in S's status, indicating that the transaction is not
properly allocable to the portion of S's day after the event resulting
in S's change.
(C) Successor corporations. For purposes of this paragraph
(b)(1)(ii), any reference to a corporation includes a reference to a
successor or predecessor as the context may require. A corporation is a
successor if the basis of its assets is determined, directly or
indirectly, in whole or in part, by reference to the basis of the assets
of another corporation (the predecessor). For example, if a member forms
S, S is treated as a member from the beginning of its existence.
(iii) Group structure changes. If the common parent ceases to be the
common parent but the group remains in existence, adjustments must be
made in accordance with the principles of Sec. 1.1502-75(d)(2) and (3).
(2) Determination of items included in separate and consolidated
returns--(i) In general. The returns for the years that end and begin
with S becoming (or ceasing to be) a member are separate tax years for
all Federal income tax purposes. The returns are subject to the rules of
the Internal Revenue Code applicable to short periods, as if S ceased to
exist on becoming a member (or first existed on becoming a nonmember).
For example, cost recovery deductions under section 168 must be
allocated for short periods. On the other hand, annualization under
section 443 is not required of S solely because it has a short year as a
result of becoming a member. (Similarly, section 443 applies with
respect to a consolidated return only to the extent that the group's
return is for a short period and section 443 applies without taking this
paragraph (b) into account.)
(ii) Ratable allocation of a year's items--(A) Application. Although
the periods ending and beginning with S's
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change in status are different tax years, items (other than
extraordinary items) may be ratably allocated between the periods if--
(1) S is not required to change its annual accounting period or its
method of accounting as a result of its change in status (e.g., because
its stock is sold between consolidated groups that have the same annual
accounting periods); and
(2) An irrevocable ratable allocation election is made under
paragraph (b)(2)(ii)(D) of this section.
(B) General rule--(1) Allocation within original year. Under a
ratable allocation election, paragraph (b)(2) of this section applies by
allocating to each day of S's original year (S's tax year determined
without taking this section into account) an equal portion of S's items
taken into account in the original year, except that extraordinary items
must be allocated to the day that they are taken into account. All
persons affected by the election must take into account S's
extraordinary items and the ratable allocation of S's remaining items in
a manner consistent with the election.
(2) Items to be allocated. Under ratable allocation, the items to be
allocated and their timing, location, character, and source are
generally determined by treating the original year as a single tax year,
and the items are not subject to the rules of the Internal Revenue Code
applicable to short periods (unless the original year is a short
period). However, the years ending and beginning with S's change in
status are treated as different tax years (and as short periods) with
respect to any item carried to or from these years (e.g., a net
operating loss carried under section 172) and with respect to the
application of section 481.
(3) Multiple applications. If this paragraph (b) applies more than
once with respect to an original year, adjustments must be made in
accordance with the principles of this paragraph (b). For example, if S
becomes a member of two different consolidated groups during the same
original year and ratable allocation is elected with respect to both
groups, ratable allocation is generally determined for both groups by
treating the original year as a single tax year; however, if ratable
allocation is elected only with respect to the first group, the ratable
allocation is determined by treating the original year as a short period
that does not include the period that S is a member of the second group.
Ratable allocation is not a method of accounting, and ratable allocation
with respect to one application of this paragraph (b) to S does not
require ratable allocation to be subsequently applied with respect to S.
(C) Extraordinary items. An extraordinary item is--
(1) Any item from the disposition or abandonment of a capital asset
as defined in section 1221 (determined without the application of any
other rules of law);
(2) Any item from the disposition or abandonment of property used in
a trade or business as defined in section 1231(b) (determined without
the application of any holding period requirement);
(3) Any item from the disposition or abandonment of an asset
described in section 1221(1), (3), (4), or (5), if substantially all the
assets in the same category from the same trade or business are disposed
of or abandoned in one transaction (or series of related transactions);
(4) Any item from assets disposed of in an applicable asset
acquisition under section 1060(c);
(5) Any 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) adjustment;
(6) The effects of any change in accounting method initiated by the
filing of the appropriate form after S's change in status;
(7) Any item from the discharge or retirement of indebtedness (e.g.,
cancellation of indebtedness income or a deduction for retirement at a
premium);
(8) Any item from the settlement of a tort or similar third-party
liability;
(9) Any compensation-related deduction in connection with S's change
in status (including, for example, deductions from bonus, severance, and
option cancellation payments made in connection with S's change in
status);
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(10) Any dividend income from a nonmember that S controls within the
meaning of section 304 at the time the dividend is taken into account;
(11) Any deemed income inclusion from a foreign corporation, or any
deferred tax amount on an excess distribution from a passive foreign
investment company under section 1291;
(12) Any interest expense allocable under section 172(h) to a
corporate equity reduction transaction causing this paragraph (b) to
apply;
(13) Any credit, to the extent it arises from activities or items
that are not ratably allocated (e.g., the rehabilitation credit under
section 47, which is based on placement in service); and
(14) Any item which, in the opinion of the Commissioner, would, if
ratably allocated, result in a substantial distortion of income in any
consolidated return or separate return in which the item is included.
(D) Election. The election to ratably allocate items under this
paragraph (b)(2)(ii) must be made in a separate statement entitled
``THIS IS AN ELECTION UNDER Sec. 1.1502-76(b)(2)(ii) TO RATABLY ALLOCATE
THE YEAR'S ITEMS OF [insert name and employer identification number of
the member].'' The statement must be signed by the member and by the
common parent of each affected group, and must be filed with the returns
including the items for the year's ending and beginning with S's change
in status. If two or more members of the same consolidated group, as a
consequence of the same plan or arrangement, cease to be members of that
group and remain affiliated as members of another consolidated group, an
election under this paragraph (b)(2)(ii)(D) may be made only if it is
made by each such member. The statement must provide all of the
following:
(1) Identify the extraordinary items, their amounts, and the
separate or consolidated returns in which they are included.
(2) Identify the aggregate amount to be ratably allocated, and the
portion of the amount included in the separate and consolidated returns.
(3) Include the name and employer identification number of the
common parent (if any) of each group that must take the items into
account.
(iii) Ratable allocation of a month's items. If ratable allocation
under paragraph (b)(2)(ii) of this section is not elected (e.g., because
S is required to change its annual accounting period), this paragraph
(b)(2)(iii) may be applied to ratably allocate only S's items taken into
account in the month of its change in status, but only if the allocation
is consistently applied by all affected persons. The ratable allocation
is made by applying the principles of paragraph (b)(2)(ii) of this
section under any reasonable method. For example, S may close its books
both at the end of the preceding month and at the end of the month of
the change, and allocate only its items (other than extraordinary items)
from the month of the change. See paragraph (b)(1)(ii)(B) of this
section for factors to be considered in determining whether the method
is reasonable.
(iv) Taxes. To the extent properly taken into account during the
member's tax year (determined without the application of this paragraph
(b)), Federal, state, local, and foreign taxes are allocated under
paragraph (b)(2) of this section on the basis of the items or activities
to which the taxes relate. Thus, income tax is allocated based on the
inclusion of the income (determined under the principles of this
paragraph (b)) to which the tax relates. For example, if a calendar-year
domestic corporation has $100 of foreign source dividend income
(determined in accordance with United States tax accounting principles
but without taking this paragraph (b) into account) that is passive
income for purposes of section 904, and $60 of the income is allocated
under this paragraph (b) to the period of the calendar year after it
becomes a member of a consolidated group, then 60% of the corporation's
deemed paid foreign tax credit associated with its dividend income for
the calendar year is taken into account in computing the group's passive
basket consolidated foreign tax credit. Similarly, property taxes relate
to the ownership of property and are allocated over the period that the
property is owned. This paragraph (b)(2)(iv) applies without regard
[[Page 435]]
to any determination or allocation by another taxing jurisdiction.
(v) Acquisition of S corporation. If a corporation is acquired in a
transaction to which paragraph (b)(1)(ii)(A)(2) of this section applies,
then paragraphs (b)(2)(ii) and (iii) of this section do not apply and
items of income, gain, loss, deduction, and credit are assigned to each
short taxable year on the basis of the corporation's normal method of
accounting as determined under section 446. This paragraph (b)(2)(v)
applies to transactions occurring after November 10, 1999.
(vi) Passthrough entities--(A) In general. If S is a partner in a
partnership or an owner of a similar interest with respect to which
items of the entity are taken into account by S, S is treated, solely
for purposes of determining the year to which the entity's items are
allocated under paragraph (b)(2) of this section, as selling or
exchanging its entire interest in the entity immediately before S's
change in status.
(B) Treatment as a conduit. For purposes of this paragraph (b)(2),
if a member (together with other members) would be treated under section
318(a)(2) as owning an aggregate of at least 50% of any stock owned by
the passthrough entity, the method that is used to determine the
inclusion of the entity's items in the consolidated or separate return
must be the same method that is used to determine the inclusion of the
member's items in the consolidated or separate return.
(C) Exception for certain foreign entities. This paragraph (b)(2)(v)
does not apply to any foreign corporation generating the deemed
inclusion of income, or to any passive foreign investment company
generating a deferred tax amount on an excess distribution under section
1291.
(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, adjustments must be made
as necessary to carry out the purposes of this section.
(4) Determination of due date for separate return. Paragraph (c) of
this section contains rules for the filing of the separate return
referred to in this paragraph (b). In applying paragraph (c) of this
section, the due date for the filing of S's separate return shall also
be determined without regard to the ending of the tax year under
paragraph (b)(1)(ii) of this section or the deemed cessation of its
existence under paragraph (b)(2)(i) of this section.
(5) Examples. For purposes of the examples in this paragraph (b),
unless otherwise stated, P and X are common parents of calendar-year
consolidated groups, P owns all of the only class of T's stock, T owns
no stock of lower-tier members, all persons use the accrual method of
accounting, the facts set forth the only corporate activity, all
transactions are between unrelated persons, tax liabilities are
disregarded, and any election required under paragraph (b)(2) of this
section is properly made. The principles of this paragraph (b) are
illustrated by the following examples.
Example 1. Items allocated between consolidated and separate
returns. (a) Facts. P and S are the only members of the P group. P sells
all of S's stock to individual A on June 30, and therefore S becomes a
nonmember on July 1 of Year 2.
(b) Analysis. Under paragraph (b)(1) of this section, the P group's
consolidated return for Year 2 includes P's income for the entire tax
year and S's income for the period from January 1 to June 30, and S must
file a separate return for the period from July 1 to December 31.
(c) Acquisition of another subsidiary before end of tax year. The
facts are the same as in paragraph (a) of this Example 1, except that on
July 31 P acquires all the stock of T (which filed a separate return for
its year ending on November 30 of Year 1) and T therefore becomes a
member on August 1 of Year 2. Under Sec. 1.1502-75(d) and paragraph
(b)(1) of this section, the P group's consolidated return for Year 2
includes P's income for the entire year, S's income from January 1 to
June 30, and T's income from August 1 to December 31. S must file a
separate return that includes its income from July 1 to December 31, and
T must file a separate return that includes its income from December 1
of Year 1 to July 31 of Year 2. (If P had acquired T after December 31,
the P group that included S is a different group from the P group that
includes T, and, for example, the P group that includes T must make a
separate election under section 1501 and Sec. 1.1502-75 if consolidated
returns are to be filed.)
Example 2. Group structure change. (a) Facts. P owns all of the
stock of S and T. Shortly after the beginning of Year 1, P merges into
[[Page 436]]
T in a reorganization described in section 368(a)(1)(A) (and in section
368(a)(1)(D)), and P's shareholders receive T's stock in exchange for
all of P's stock. The P group is treated under Sec. 1.1502-75(d)(2)(ii)
as remaining in existence with T as its common parent.
(b) Analysis. Under paragraph (b)(1) of this section, the P group's
return must include the common parent's items for the entire
consolidated return year and, if the common parent ceases to be the
common parent but the group remains in existence, appropriate
adjustments must be made. Consequently, although P did not exist for all
of Year 1, P's items for the portion of Year 1 ending with the merger
are treated as the items of the common parent that must be included in
the P group's return for Year 1.
(c) Reverse acquisition. Assume instead that X acquires all of P's
assets in exchange for more than 50% of X's stock in a reorganization
described in section 368(a)(1)(D). The reorganization constitutes a
reverse acquisition under Sec. 1.1502-75(d)(3), with the X group
terminating and the P group surviving with X as its common parent.
Consequently, P's items for the portion of Year 1 ending with the
acquisition are treated as the items of the common parent that must be
included in the P group's return for Year 1, and X's items are treated
for purposes of paragraph (b)(1) of this section as the items of a
subsidiary included in the P group's return for the portion of Year 1
for which X is a member.
Example 3. Ratable allocation. (a) Facts. P sells all of T's stock
to X, and T becomes a nonmember on July 1 of Year 1. T engages in the
production and sale of merchandise throughout Year 1 and is required to
use inventories. The sale is treated as causing T's tax year to end on
June 30, and the periods beginning and ending with the sale are treated
as two tax years for Federal income tax purposes.
(b) Analysis. If ratable allocation under paragraph (b)(2)(ii) of
this section is not elected, T must perform an inventory valuation as of
the acquisition and also as of the end of Year 1. If ratable allocation
is elected, T must perform an inventory valuation only as of the close
of Year 1, and T's income from inventory is ratably allocated, along
with T's other items that are not extraordinary items, between the P and
X consolidated returns.
(c) Merger into nonmember. Assume instead that T merges into a
wholly owned subsidiary of X in a reorganization described in section
368(a)(2)(D), and P receives 10% of X's stock in exchange for all of T's
stock. Under paragraph (b)(2)(ii)(B) of this section, because T's tax
year ends on June 30 under section 381(b)(1), T's original year
determined without taking paragraph (b) of this section into account
also ends on June 30. Consequently, a ratable allocation under paragraph
(b)(2)(ii) of this section is the same as an allocation based on closing
the books.
Example 4. Net operating loss. P sells all of T's stock to X, T
becomes a nonmember on June 30 of Year 1, and ratable allocation under
paragraph (b)(2)(ii) of this section is elected. Under ratable
allocation, the X group has a $100 consolidated net operating loss for
Year 1, all of which is attributable to T. However, because of
extraordinary items, T has $100 of income for the portion of Year 1 that
T is a member of the P group. Under paragraph (b)(2)(ii)(B)(2) of this
section, T's loss may be carried back from the X group to the portion of
Year 1 that T was a member of the P group. See also section 172 and
Sec. 1.1502-21(b). Under paragraph (b)(2)(ii)(C)(5) of this section, any
item carried to or from any portion of the original year is an
extraordinary item, and the loss therefore is not taken into account
again in determining the ratable allocation under paragraph (b)(2)(ii)
of this section.
Example 5. Employee benefit plans. (a) Facts. P sells all of T's
stock to X, and T becomes a nonmember on June 30 of Year 1. On March 15
of Year 2, T contributes $100 to its retirement plan, which is a
qualified plan under section 401(a). T is not required to make quarterly
contributions to the plan for Year 1 under section 412(m). The
contribution is made on account of T's taxable period beginning on July
1 of Year 1, and is deemed in accordance with section 404(a)(6) to have
been made on the last day of T's taxable period beginning on July 1 of
Year 1. Ratable allocation under paragraph (b)(2)(ii) of this section is
not elected.
(b) Analysis. Under paragraph (b) of this section, the sale is
treated as causing T's tax year to end on June 30, and the period
beginning on July 1 is treated as a separate annual accounting period
for all Federal income tax purposes. T's income from January 1 to June
30 is included in the P group's Year 1 return, and T's income from July
1 to December 31 is included in the X group's Year 1 return. Thus, the
$100 contribution is deductible by T for the period of Year 1 that it is
a member of the X group, subject to the applicable limitations of
section 404, if a contribution on the last day of that period would
otherwise be deductible.
(c) The facts are the same as in paragraph (a) of this Example 5,
except that, in accordance with section 404(a)(6), $40 of the $100
contribution is made on account of T's taxable period beginning on
January 1 of Year 1 and is deemed to be made on the last day of T's
taxable period beginning on January 1 of Year 1. The remaining $60 is
made on account of T's taxable period beginning on July 1 of Year 1 and
is deemed to be made on the last day of T's taxable period beginning on
July 1 of Year 1. As in paragraph (b) of this Example 5, under paragraph
(b) of this section, the sale is treated as causing T's tax
[[Page 437]]
year to end on June 30, and the period beginning on July 1 is treated as
a separate annual accounting period for all Federal income tax purposes.
The $40 portion of the contribution is deductible by T for the period of
Year 1 that it is a member of the P group, subject to the applicable
limitations of section 404 and provided that a $40 contribution on the
last day of that period would otherwise be deductible for that period,
and the $60 portion is deductible by T for the period of Year 1 that it
is a member of the X group, subject to the same conditions.
(d) Ratable allocation. The facts are the same as in paragraph (a)
of this Example 5, except that P, T, and X elect ratable allocation
under paragraph (b)(2)(ii) of this section and T's deduction for the
retirement plan contribution is not an extraordinary item. T's deduction
may be ratably allocated, subject to the applicable limitations of
section 404, and is allowable only if a contribution on the last day of
Year 1 otherwise would be deductible for any period in the year. (The
results would be the same if S were an unaffiliated corporation when
acquired by X, and the due date of its last separate return (including
extensions) were before the pension contribution was made on March 15 of
Year 2.)
Example 6. Allocation of partnership items. (a) Facts. P sells all
of T's stock to X, and T becomes a nonmember on June 30 of Year 1. T has
a 10% interest in the capital and profits of a calendar-year
partnership.
(b) Analysis. Under paragraph (b)(2)(vi)(A) of this section, T is
treated, solely for purposes of determining T's tax year in which the
partnership's items are included, as selling or exchanging its entire
interest in the partnership as of P's sale of T's stock. Thus, the
deemed disposition is not taken into account under section 708, it does
not result in gain or loss being recognized by T, and T's holding period
is unaffected. However, under section 706(a), in determining T's income,
T is required to include its distributive share of partnership items for
the partnership's year ending within or with T's tax year. Under section
706(c)(2), the partnership's tax year is treated as closing with respect
to T for this purpose as of P's sale of T's stock. The allocation of T's
distributive share of partnership items must be made under Sec. 1.706-
1(c)(2)(ii).
(c) Controlled partnership. The facts are the same as in paragraph
(a) of this Example 6, except that T has a 75% interest in the capital
and profits of the partnership. Under paragraph (b)(2)(vi)(B) of this
section, T's distributive share of the partnership items is treated as
T's items for purposes of paragraph (b)(2) of this section. Thus, if
ratable allocation under paragraph (b)(2)(ii) of this section is not
elected, T's distributive share of the partnership's items must be
determined under Sec. 1.706-1(c)(2)(ii) by an interim closing of the
partnership's books. Similarly, if ratable allocation is elected for T's
items that are not extraordinary items, T's distributive share of the
partnership's nonextraordinary items must also be ratably allocated
under Sec. 1.706-1(c)(2)(ii).
Example 7. Acquisition of S corporation. (a) Facts. Z is a small
business corporation for which an election under section 1362(a) was in
effect at all times since Year 1. At all times, Z had only 100 shares of
stock outstanding, all of which were owned by individual A. On July 1 of
Year 3, P acquired all of the Z stock. P does not make an election under
section 338(g) with respect to its purchase of the Z stock.
(b) Analysis. As a result of P's acquisition of the Z stock, Z's
election under section 1362(a) terminates. See sections 1361(b)(1)(B)
and 1362(d)(2). Z is required to join in the filing of the P
consolidated return. See Sec. 1.1502-75. Z's tax year ends for all
Federal income tax purposes on June 30 of Year 3. If no extension of
time is sought, Z must file a separate return for the period from
January 1 through June 30 of Year 3 on or before March 15 of Year 4. See
paragraph (b)(4) of this section. Z will become a member of the P
consolidated group as of July 1 of Year 3. See paragraph
(b)(1)(ii)(A)(2) of this section. P group's Year 3 consolidated return
will include Z's items from July 1 to December 31 of Year 3.
(6) Effective date--(i) General rule. Except as provided in
paragraphs (b)(1)(ii) (A)(2) and (b)(2)(v) of this section, this
paragraph (b) applies to corporations becoming or ceasing to be members
of consolidated groups on or after January 1, 1995.
(ii) Prior law. For prior transactions, see prior regulations under
section 1502 as in effect with respect to the transaction. See, e.g.,
Sec. 1.1502-76(b) and (d) as contained in the 26 CFR part 1 edition
revised as of April 1, 1994. However, Sec. 1.1502-76(b)(5) and (6) as
contained in the 26 CFR part 1 edition revised as of April 1, 1994 do
not apply with respect to corporations becoming or ceasing to be members
of consolidated groups on or after January 1, 1995. If both this
paragraph (b) and prior law may apply to determine the inclusion of any
amount in a return, appropriate adjustments must be made to prevent the
omission or duplication of the amount.
(c) Time for making separate returns for periods not included in
consolidated return--(1) Consolidated return filed by due date for
separate return. If the group has filed a consolidated return on or
before
[[Page 438]]
the due date for the filing of a subsidiary's separate return (including
extensions of time and determined without regard to any change of its
taxable year required under paragraph (a) of this section), then the
separate return for any portion of the subsidiary's taxable year for
which its income is not included in the consolidated return of the group
must be filed no later than the due date of such consolidated return
(including extensions of time).
(2) Consolidated return not filed by due date for separate return.
If the group has not filed a consolidated return on or before the due
date for the filing of a subsidiary corporation's separate return
(including extensions of time and determined without regard to any
change of its taxable year required under paragraph (a) of this
section), then on or before such due date such subsidiary shall file a
separate return either for the portion of its taxable year for which its
income would not be included in a consolidated return if such a return
were filed, or for its complete taxable year. However, if a separate
return is filed for such portion of its taxable year and the group
subsequently does not file a consolidated return, such subsidiary
corporation shall file a substituted return for its complete taxable
year not later than the due date (including extensions of time)
prescribed for the filing of the common parent's return. On the other
hand, if the return is filed for the subsidiary's complete taxable year
and the group later files a consolidated return, such subsidiary must
file an amended return not later than the due date (including extensions
of time) for the filing of the consolidated return of the group. Such
amended return shall be for that portion of such subsidiary's taxable
year which is not included in the consolidated return. If, under this
subparagraph, a substituted return must be filed, then the return
previously filed shall not be considered a return within the meaning of
section 6011. If, under this subparagraph, a substituted or amended
return must be filed, then, for purposes of sections 6513(a) and
6601(a), the last date prescribed for payment of tax shall be the due
date (not including extensions of time) for the filing of the
subsidiary's separate return (determined without regard to this
subparagraph and without regard to any change of its taxable year
required under paragraph (a) of this section).
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). Corporation P, which filed a separate return for the
calendar year 1966, acquires all of the stock of corporation S as of the
close of December 31, 1966. Corporation S reports its income on the
basis of a fiscal year ending March 31. On June 15, 1967, the due date
for the filing of a separate return by S (assuming no extensions of
time), a consolidated return has not been filed for the group (P and S).
On such date S may either file a return for the period April 1, 1966,
through December 31, 1966, or it may file a return for the complete
fiscal year ending March 31, 1967. If S files a return for the short
period ending December 31, 1966, and if the group elects not to file a
consolidated return for the calendar year 1967, S, on or before March
15, 1968 (the due date of P's return, assuming no extensions of time),
must file a substituted return for the complete fiscal year ending March
31, 1967, in lieu of the return previously filed for the short period.
Interest is computed from June 15, 1967. If, however, S files a return
for the complete fiscal year ending March 31, 1967, and the group elects
to file a consolidated return for the calendar year 1967, then S must
file an amended return covering the period from April 1, 1966, through
December 31, 1966, in lieu of the return previously filed for the
complete fiscal year. Interest is computed from June 15, 1967.
Example (2). Assume the same facts as in example (1) except that
corporation P acquires all of the stock of corporation S at the close of
September 30, 1967, and that P files a consolidated return for the group
for 1967 on March 15, 1968 (not having obtained any extensions of time).
Since a consolidated return has been filed on or before the due date
(June 15, 1968) for the filing of the separate return for the taxable
year ending March 31, 1968, the return of S for the short taxable year
beginning April 1, 1967, and ending September 30, 1967, should be filed
no later than March 15, 1968.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7244, 37 FR
28897, Dec. 30, 1972; T.D. 7246, 38 FR 766, Jan. 4, 1973; T.D. 8560, 59
FR 41700, Aug. 15, 1994; T.D. 8560, 62 FR 12098, Mar. 14, 1997; T.D.
8842, 64 FR 61205, Nov. 10, 1999; T.D. 8858, 65 FR 1237, Jan. 7, 2000]
[[Page 439]]
Sec. 1.1502-77 Common parent agent for subsidiaries.
(a) Scope of agency of common parent corporation. The common parent,
for all purposes (other than the making of the consent required by
paragraph (a)(1) of Sec. 1.1502-75, the making of an election under
section 936(e), the making of an election to be treated as a DISC under
Sec. 1.992-2, and a change of the annual accounting period pursuant to
paragraph (b)(3)(ii) of Sec. 1.991-1) shall be the sole agent for each
subsidiary in the group, duly authorized to act in its own name in all
matters relating to the tax liability for the consolidated return year.
Except as provided in the preceding sentence, no subsidiary shall have
authority to act for or to represent itself in any such matter. For
example, any election available to a subsidiary corporation in the
computation of its seperate taxable income must be made by the common
parent, as must any change in an election previously made by the
subsidiary corporation; all correspondence will be carried on directly
with the common parent; the common parent shall file for all extensions
of time including extensions of time for payment of tax under section
6164; notices of deficiencies will be mailed only to the common parent,
and the mailing to the common parent shall be considered as a mailing to
each subsidiary in the group; notice and demand for payment of taxes
will be given only to the common parent and such notice and demand will
be considered as a notice and demand to each subsidiary; the common
parent will file petitions and conduct proceedings before the Tax Court
of the United States, and any such petition shall be considered as also
having been filed by each such subsidiary. The common parent will file
claims for refund or credit, and any refund will be made directly to and
in the name of the common parent and will discharge any liability of the
Government in respect thereof to any such subsidiary; and the common
parent in its name will give waivers, give bonds, and execute closing
agreements, offers in compromise, and all other documents, and any
waiver or bond so given, or agreement, offer in compromise, or any other
document so executed, shall be considered as having also been given or
executed by each such subsidiary. Notwithstanding the provisions of this
paragraph, any notice of deficiency, in respect of the tax for a
consolidated return year, will name each corporation which was a member
of the group during any part of such period (but a failure to include
the name of any such member will not affect the validity of the notice
of deficiency as to the other members); any notice and demand for
payment will name each corporation which was a member of the group
during any part of such period (but a failure to include the name of any
such member will not affect the validity of the notice and demand as to
the other members); and any levy, any notice of a lien, or any other
proceeding to collect the amount of any assessment, after the assessment
has been made, will name the corporation from which such collection is
to be made. The provisions of this paragraph shall apply whether or not
a consolidated return is made for any subsequent year, and whether or
not one or more subsidiaries have become or have ceased to be members of
the group at any time. Notwithstanding the provisions of this paragraph,
the district director may, upon notifying the common parent, deal
directly with any member of the group in respect of its liability, in
which event such member shall have full authority to act for itself.
(b) Notification of deficiency to corporation which has ceased to be
a member of the group. If a subsidiary has ceased to be a member of the
group and if such subsidiary files written notice of such cessation with
the district director with whom the consolidated return is filed, then
such district director upon request of such subsidiary will furnish it
with a copy of any notice of deficiency in respect of the tax for a
consolidated return year for which it was a member and a copy of any
notice and demand for payment of such deficiency. The filing of such
written notification and request by a corporation shall not have the
effect of limiting the scope of the agency of the common parent provided
for in paragraph (a) of this section and a failure by such district
director to comply with such written
[[Page 440]]
request shall not have the effect of limiting the tax liability of such
corporation provided for in Sec. 1.1502-6.
(c) Effect of waiver given by common parent. Unless the district
director agrees to the contrary, an agreement entered into by the common
parent extending the time within which an assessment may be made or levy
or proceeding in court begun in respect of the tax for a consolidated
return year shall be applicable:
(1) To each corporation which was a member of the group during any
part of such taxable year, and
(2) To each corporation the income of which was included in the
consolidated return for such taxable year, notwithstanding that the tax
liability of any such corporation is subsequently computed on the basis
of a separate return under the provisions of Sec. 1.1502-75.
(d) Effect of dissolution of common parent corporation. If the
common parent corporation contemplates dissolution, or is about to be
dissolved, or if for any other reason its existence is about to
terminate, it shall forthwith notify the district director with whom the
consolidated return is filed of such fact and designate, subject to the
approval of such district director, another member to act as agent in
its place to the same extent and subject to the same conditions and
limitations as are applicable to the common parent. If the notice thus
required is not given by the common parent, or the designation is not
approved by the district director, the remaining members may, subject to
the approval of such district director, designate another member to act
as such agent, and notice of such designation shall be given to such
district director. Until a notice in writing designating a new agent has
been approved by such district director, any notice of deficiency or
other communication mailed to the common parent shall be considered as
having been properly mailed to the agent of the group; or, if such
district director has reason to believe that the existence of the common
parent has terminated, he may, if he deems it advisable, deal directly
with any member in respect of its liability.
(e) Cross-references--(1) Alternative agents. For rules relating to
alternative agents of the group, see Sec. 1.1502-77.
(2) Groups that include insolvent financial institutions. For
further rules applicable to groups that include insolvent financial
institutions, see Sec. 301.6402-7 of this chapter.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7323, 39 FR
34409, Sept. 25, 1974; T.D. 7673, 45 FR 8588, Feb. 8, 1980; T.D. 8226,
53 FR 34733, Sept. 8, 1988; T.D. 8446, 57 FR 53034, Nov. 6, 1992]
Sec. 1.1502-77T Alternative agents of the group (temporary).
(a) General rules--(1) Scope. This section applies if the
corporation that is the common parent of the group ceases to be the
common parent, whether or not the group remains in existence under
Sec. 1.1502-75(d).
(2) Notice of deficiency. A notice of deficiency mailed to any one
or more corporations referred to in paragraph (a)(4) of this section is
deemed for purposes of Sec. 1.1502-77 to be mailed to the agent of the
group. If the group has designated an agent that has been approved by
the district director under Sec. 1.1502-77(d), a notice of deficiency
shall be mailed to that designated agent in addition to any other
corporation referred to in paragraph (a)(4) of this section. However,
failure by the district director to mail a notice of deficiency to that
designated agent shall not invalidate the notice of deficiency mailed to
any other corporation referred to in paragraph (a)(4) of this section.
(3) Waiver of statute of limitations. A waiver of the statute of
limitations with respect to the group given by any one or more
corporations referred to in paragraph (a)(4) of this section is deemed
to be given by the agent of the group.
(4) Alternative agents. The corporations referred to in paragraph
(a) (2) and (3) of this section are--
(i) The common parent of the group for all or any part of the year
to which the notice or waiver applies,
(ii) A successor to the former common parent in a transaction to
which section 381(a) applies,
(iii) The agent designated by the group under Sec. 1.1502-77(d), or
[[Page 441]]
(iv) If the group remains in existence under Sec. 1.1502-75(d) (2)
or (3), the common parent of the group at the time the notice is mailed
or the waiver given.
(b) Effective date. Paragraph (a) of this section applies to
statutory notices and waivers of the statute of limitations for taxable
years for which the due date (without extensions) of the consolidated
return is after September 7, 1988.
[T.D. 8226, 53 FR 34733, Sept. 8, 1988]
Sec. 1.1502-78 Tentative carryback adjustments.
(a) General rule. If a group has a consolidated net operating loss,
a consolidated net capital loss, or a consolidated unused investment
credit for any taxable year, then any application under section 6411 for
a tentative carryback adjustment of the taxes for a consolidated return
year or years preceding such year shall be made by the common parent
corporation to the extent such loss or unused investment credit is not
apportioned to a corporation for a separate return year pursuant to
Sec. Sec. 1.1502-21(b), 1.1502-22(b), or 1.1502-79(c) (or
Sec. Sec. 1.1502-79A(a), 1.1502-79A(b), or 1.1502-79(c), as appropriate.
In the case of the portion of a consolidated net operating loss or
consolidated net capital loss or consolidated unused investment credit
to which the preceding sentence does not apply, and in the case of a net
capital or net operating loss or unused investment credit arising in a
separate return year which may be carried back to a consolidated return
year, the corporation or corporations to which any such loss or credit
is attributable shall make any application under section 6411.
(b) Special rules--(1) Payment of refund. Any refund allowable under
an application referred to in paragraph (a) of this section shall be
made directly to and in the name of the corporation filing the
application, except that in all cases where a loss is deducted from the
consolidated taxable income or a credit is allowed in computing the
consolidated tax liability for a consolidated return year, any refund
shall be made directly to and in the name of the common parent
corporation. The payment of any such refund shall discharge any
liability of the Government with respect to such refund.
(2) Several liability. If a group filed a consolidated return for a
taxable year for which there was an adjustment by reason of an
application under section 6411, and if a deficiency is assessed against
such group under section 6213(b)(2), then each member of such group
shall be severally liable for such deficiency including any interest or
penalty assessed in connection with such deficiency.
(3) Groups that include insolvent financial institutions. For
further rules applicable to groups that include insolvent financial
institutions, see Sec. 301.6402-7 of this chapter.
(c) Examples. The provisions of paragraphs (a) and (b) of this
section may be illustrated by the following examples:
Example (1). Corporations P, S, and S-1 filed a consolidated return
for the calendar year 1966. P, S, and S-1 also filed a consolidated
return for the calendar year 1969. The group incurred a consolidated net
operating loss in 1969 attributable to S-1 which may be carried back to
1966 as a consolidated net operating loss carryback. If a tentative
carryback adjustment is desired, P, the common parent, must file an
application under section 6411 and any refund will be made to P.
Example (2). Assume the same facts as in example (1) except that P,
S, and S-1 filed separate returns for the calendar year 1969, even
though they were members of the same group for such year. S-1 incurred a
net operating loss in 1969 which may be carried back to 1966. If a
tentative carryback adjustment is desired, S-1 must file an application
under section 6411 and any refund from such application will be made to
P.
Example (3). Corporations X, Y, and Z filed a consolidated return
for the calendar year 1966. Z ceased to be a member of the group in
1967. Z filed a separate return for 1968 while X and Y filed a
consolidated return for such year. The group incurred a consolidated net
operating loss in 1968 attributable to Y, which may be carried back to
1966. Z also incurred a net operating loss for 1968 which may be carried
back to 1966. If a tentative carryback adjustment is claimed with
respect to the consolidated net operating loss, X, the common parent,
must file an application under section 6411. If a tentative carryback
adjustment is desired with respect to Z's loss, Z must file an
application. Any refunds attributable to either application will be made
to X. If an assessment is made
[[Page 442]]
under section 6213(b)(2) to recover an excessive tentative allowance
made with respect to calendar year 1966, X, Y, and Z are severally
liable for such assessment.
Example (4). Corporations L and M filed a consolidated return for
the calendar year 1966. Corporation N filed a separate return for such
year. Later, N became a member of the group and filed a consolidated
return with the group for the calendar year 1968. The group incurred a
consolidated net operating loss in 1968 attributable to N which may be
carried back to N's separate return for 1966. If a tentative carryback
adjustment is desired, N must file an application under section 6411 and
any refund will be made directly to N.
(d) Adjustments of overpayments of estimated income tax. If a group
paid its estimated income tax on a consolidated basis, then any
application under section 6425 for an adjustment of overpayment of
estimated income tax shall be made by the common parent corporation. If
the members of a group paid estimated income taxes on a separate basis,
then any application under section 6425 shall be made by the member of
the group which claims an overpayment on a separate basis. Any refund
allowable under an application under section 6425 shall be made directly
to and in the name of the corporation filing the application.
[T.D. 6894, 31 FR 11794, Sept. 3, 1966, as amended by T.D. 7059, 35 FR
14546, Sept. 17, 1970; T.D. 7246, 38 FR 767, Jan. 4, 1973; T.D. 8387, 56
FR 67489, Dec. 31, 1991; T.D. 8446, 57 FR 53034, Nov. 6, 1992; T.D.
8677, 61 FR 33324, June 27, 1996; T.D. 8823, 64 FR 36100, July 2, 1999]
Sec. 1.1502-79 Separate return years.
(a) Carryover and carryback of consolidated net operating losses to
separate return years. For losses arising in consolidated return years
beginning before January 1, 1997, see Sec. 1.1502-79A(a). For later
years, see Sec. 1.1502-21(b).
(b) Carryover and carryback of consolidated net capital loss to
separate return years. For losses arising in consolidated return years
beginning before January 1, 1997, see Sec. 1.1502-79A(b). For later
years, see Sec. 1.1502-22(b).
(c) Carryover and carryback of consolidated unused investment credit
to separate return years--(1) In general. If a consolidated unused
investment credit can be carried under the principles of section 46(b)
and paragraph (b) of Sec. 1.1502-3 to a separate return year of a
corporation (or could have been so carried if such corporation were in
existence) which was a member of the group in the year in which such
unused credit arose, then the portion of such consolidated unused credit
attributable to such corporation (as determined under subparagraph (2)
of this paragraph) shall be apportioned to such corporation (and any
successor to such corporation in a transaction to which section 381(a)
applies) under the principles of Sec. 1.1502-21(b) (or Sec. Sec. 1.1502-
79A(a)(1) and (2), as appropriate) and shall be an investment credit
carryover or carryback to such separate return year.
(2) Portion of consolidated unused investment credit attributable to
a member--(i) Investment credit carryback. In the case of a consolidated
unused credit which is an investment credit carryback, the portion of
such consolidated unused credit attributable to a member of the group is
an amount equal to such consolidated unused credit multiplied by a
fraction, the numerator of which is the credit earned of such member for
the consolidated unused credit year, and the denominator of which is the
consolidated credit earned for such unused credit year.
(ii) Investment credit carryover. In the case of a consolidated
unused credit which is an investment credit carryover, the portion of
such consolidated unused credit attributable to a member of the group is
an amount equal to such consolidated unused credit multiplied by a
fraction, the numerator of which is the credit earned with respect to
any section 38 property placed in service in the consolidated unused
credit year and owned by such member (whether or not placed in service
by such member) at the close of the last day as of which the taxable
income of such member is included in a consolidated return filed by the
group, and the denominator of which is the consolidated credit earned
for such unused credit year.
(d) Carryover and carryback of consolidated unused foreign tax--(1)
In general. If a consolidated unused foreign tax can be carried under
the principles of section 904(d) and paragraph (e) of Sec. 1.1502-4 to a
separate return year of a
[[Page 443]]
corporation (or could have been so carried if such corporation were in
existence) which was a member of the group in the year in which such
unused foreign tax arose, then the portion of such consolidated unused
foreign tax attributable to such corporation (as determined under
subparagraph (2) of this paragraph) shall be apportioned to such
corporation (and any successor to such corporation in a transaction to
which section 381(a) applies) under the principles of Sec. 1.1502-21(b)
(or Sec. Sec. 1.1502-79A(a)(1) and (2), as appropriate) and shall be
deemed paid or accrued in such separate return year to the extent
provided in section 904(d).
(2) Portion of consolidated unused foreign tax attributable to a
member. The portion of a consolidated unused foreign tax for any year
attributable to a member of a group is an amount equal to such
consolidated unused foreign tax multipled by a fraction, the numerator
of which is the foreign taxes paid or accrued for such year (including
those taxes deemed paid or accrued, other than by reason of section
904(d)) to each foreign country or possession (or to all foreign
countries or possessions if the overall limitation is effective) by such
member, and the denominator of which is the aggregate of all such taxes
paid or accrued for such year (including those taxes deemed paid or
accrued, other than by reason of section 904(d)) to each such foreign
country or possession (or to all foreign countries or possessions if the
overall limitation is effective) by all the members of the group.
(e) Carryover of consolidated excess charitable contributions to
separate return years--(1) In general. If the consolidated excess
charitable contributions for any taxable year can be carried under the
principles of section 170(b)(2) and paragraph (b) of Sec. 1.1502-24 to a
separate return year of a corporation (or could have been so carried if
such corporation were in existence) which was a member of the group in
the year in which such excess contributions arose, then the portion of
such consolidated excess charitable contributions attributable to such
corporation (as determined under subparagraph (2) of this paragraph)
shall be apportioned to such corporation (and any successor to such
corporation in a transaction to which section 381(a) applies) under the
principles of Sec. 1.1502-21(b) (or Sec. Sec. 1.1502-79A(a)(1) and (2),
as appropriate) and shall be a charitable contribution carryover to such
separate return year.
(2) Portion of consolidated excess charitable contributions
attributable to a member. The portion of the consolidated excess
charitable contributions attributable to a member of a group is an
amount equal to such consolidated excess contributions multiplied by a
fraction, the numerator of which is the charitable contributions paid by
such member for the taxable year, and the denominator of which is the
aggregate of all such charitable contributions paid for such year by all
the members of the group.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980; T.D. 8294, 55 FR 9438, Mar. 14, 1990; T.D. 8319, 55
FR 49038, Nov. 26, 1990; T.D. 8364, 56 FR 47402, Sept. 19, 1991; T.D.
8597, 60 FR 36710, July 18, 1995; T.D. 8677, 61 FR 33324, 33325, 33334,
June 27, 1996; T.D. 8823, 64 FR 36100, July 2, 1999]
Sec. 1.1502-80 Applicability of other provisions of law.
(a) In general. The Internal Revenue Code, or other law, shall be
applicable to the group to the extent the regulations do not exclude its
application. Thus, for example, in a transaction to which section 381(a)
applies, the acquiring corporation will succeed to the tax attributes
described in section 381(c). Furthermore, sections 269 and 482 apply for
any consolidated year. Section 304 applies except as provided in
paragraph (b) of this section.
(b) Non-applicability of section 304. Section 304 does not apply to
any acquisition of stock of a corporation in an intercompany transaction
or to any intercompany item from such transaction occurring on or after
July 24, 1991.
(c) Deferral of section 165. For consolidated return years beginning
on or after January 1, 1995, stock of a member is not treated as
worthless under section 165 before the stock is treated as disposed of
under the principles of Sec. 1.1502-19(c)(1)(iii). See Secs. 1.1502-
11(c) and 1.1502-20 for additional rules relating to stock loss.
[[Page 444]]
(d) Non-applicability of section 357(c)--(1) In general. Section
357(c) does not apply to any transaction to which Sec. 1.1502-13,
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies, if it
occurs in a consolidated return year beginning on or after January 1,
1995. For example, P, S, and T are members of a consolidated group, P
owns all of the stock of S and T with bases of $30 and $20,
respectively, S has a $30 basis in its assets and $40 of liabilities,
and S merges into T in a transaction described in section 368(a)(1)(A)
(and in section 368(a)(1)(D)); section 357(c) does not apply to the
merger, P's basis in T's stock increases to $50 ($30 plus $20), and T
succeeds to S's $30 basis in the assets transferred subject to the $40
liability. Similarly, if S instead transferred its assets and
liabilities to a newly formed subsidiary in a transaction to which
section 351 applies, section 357(c) does not apply and S's basis in the
subsidiary's stock is a $10 excess loss account. This paragraph (d) does
not apply to a transaction if the transferor or transferee becomes a
nonmember as part of the same plan or arrangement. The transferor (or
transferee) is treated as becoming a nonmember once it is no longer a
member of a consolidated group that includes the transferee (or
transferor). For purposes of this paragraph (d), any reference to a
transferor or transferee includes, as the context may require, a
reference to a successor or predecessor.
(2) Prior period transactions. If, in a tax year beginning before
January 1, 1995, a member's stock with an excess loss account is
transferred in a transaction to which Sec. 1.1502-13, Sec. 1.1502-13T,
Sec. 1.1502-14, or Sec. 1.1502-14T applies, paragraph (d)(1) of this
section applies to the stock transfer to the extent that the income,
gain, deduction, or loss (if any) is not taken into account in a tax
year beginning before January 1, 1995. For example, if P, S, and T, are
members of a consolidated group, T's stock has an excess loss account,
and P transfers the T stock to S in 1993 in a transaction to which
section 351 and Sec. 1.1502-13 apply, section 357(c) applies to the
transfer only to the extent P's gain is taken into account in tax years
beginning before January 1, 1995.
(e) Non-applicability of section 163(e)(5). Section 163(e)(5) does
not apply to any intercompany obligation (within the meaning of
Sec. 1.1502-13(g)) issued in a consolidated return year beginning on or
after July 12, 1995.
(f) Non-applicability of section 1031. Section 1031 does not apply
to any intercompany transaction occurring in consolidated return years
beginning on or after July 12, 1995.
[T.D. 8402, 57 FR 9385, Mar. 18, 1992, as amended by T.D. 8560, 59 FR
41703, Aug. 15, 1994; T.D. 8597, 60 FR 36710, July 18, 1995; T.D. 8677,
61 FR 33325, June 27, 1996; T.D. 8597, 62 FR 12098, Mar. 14, 1997]
Sec. 1.1502-81T Alaska Native Corporations.
(a) General Rule. The application of section 60(b)(5) of the Tax
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986
(relating to Native Corporations established under the Alaska Native
Claims Settlement Act (43 U.S.C. 1601 et seq.)) is limited to the use on
a consolidated return of losses and credits of a Native Corporation, and
of a corporation all of whose stock is owned directly by a Native
Corporation, during any taxable year (beginning after the effective date
of such sections and before 1992), or any part thereof, against the
income and tax liability of a corporation affiliated with the Native
Corporation. Thus, no other tax saving, tax benefit, or tax loss is
intended to result from the application of section 60(b)(5) of the Tax
Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986
to any person (whether or not such person is a member of an affiliated
group of which a Native Corporation is the common parent). In
particular, except as approved by the Secretary, no positive adjustment
under Sec. 1.1502-32(b) will be made with respect to the basis of stock
of a corporation that is affiliated with a Native Corporation through
application of section 60(b)(5) of the Tax Reform Act of 1984 and
section 1804(e)(4) of the Tax Reform Act of 1986.
(b) Effective Dates. This section applies to taxable years beginning
after December 31, 1984.
[T.D. 8130, 52 FR 8448, Mar. 18, 1987, as amended by T.D. 8560, 59 FR
41675, Aug. 15, 1994]
[[Page 445]]
Sec. 1.1502-90 Table of contents.
The following list contains the major headings in Secs. 1.1502-91
through 1.1502-99:
Sec. 1.1502-91 Application of section 382 with respect to a
consolidated group.
(a) Determination and effect of an ownership change.
(1) In general.
(2) Special rule for post-change year that includes the change date.
(3) Cross-reference.
(b) Definitions and nomenclature.
(c) Loss group.
(1) Defined.
(2) Coordination with rule that ends separate tracking.
(3) Example.
(d) Loss subgroup.
(1) Net operating loss carryovers.
(2) Net unrealized built-in loss.
(3) Loss subgroup parent.
(4) Election to treat loss subgroup parent requirement as satisfied.
(5) Principal purpose of avoiding a limitation.
(6) Special rules.
(7) Examples.
(e) Pre-change consolidated attribute.
(1) Defined.
(2) Example.
(f) Pre-change subgroup attribute.
(1) Defined.
(2) Example.
(g) Net unrealized built-in gain and loss.
(1) In general.
(2) Members included.
(i) Consolidated group with a net operating loss.
(ii) Determination whether a consolidated group has a net unrealized
built-in loss.
(iii) Loss subgroup with net operating loss carryovers.
(iv) Determination whether subgroup has a net unrealized built-in
loss.
(v) Separate determination of section 382 limitation for recognized
built-in losses and net operating losses.
(3) Coordination with rule that ends separate tracking.
(4) Acquisitions of built-in gain or loss assets.
(5) Indirect ownership.
(6) Common parent not common parent for five years.
(h) Recognized built-in gain or loss.
(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a member.
(3) Intercompany transactions.
(4) Exchanged basis property.
(i) [Reserved]
(j) Predecessor and successor corporations.
Sec. 1.1502-92 Ownership change of a loss group or a loss subgroup.
(a) Scope.
(b) Determination of an ownership change.
(1) Parent change method.
(i) Loss group.
(ii) Loss subgroup.
(iii) Special rule if election regarding section 1504(a)(1)
relationship is made.
(2) Examples.
(3) Special adjustments.
(i) Common parent succeeded by a new common parent.
(ii) Newly created loss subgroup parent.
(iii) Examples.
(4) End of separate tracking of certain losses.
(c) Supplemental rules for determining ownership change.
(1) Scope.
(2) Cause for applying supplemental rule.
(3) Operating rules.
(4) Supplemental ownership change rules.
(i) Additional testing dates for the common parent (or loss subgroup
parent).
(ii) Treatment of subsidiary stock as stock of the common parent (or
loss subgroup parent).
(iii) Different testing periods.
(iv) Disaffiliation of a subsidiary.
(v) Subsidiary stock acquired first.
(vi) Anti-duplication rule.
(5) Examples.
(d) Testing period following ownership change under this section.
(e) Information statements.
(1) Common parent of a loss group.
(2) Abbreviated statement with respect to loss subgroups.
Sec. 1.1502-93 Consolidated section 382 limitation (or subgroup section
382 limitation).
(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation).
(1) In general.
(2) Coordination with apportionment rule.
(b) Value of the loss group (or loss subgroup).
(1) Stock value immediately before ownership change.
(2) Adjustment to value.
(i) In general.
(ii) Anti-duplication.
(3) Examples.
(c) Recognized built-in gain of a loss group or loss subgroup.
(1) In general.
(2) Adjustments.
(d) Continuity of business.
(1) In general.
(2) Example.
(e) Limitations of losses under other rules.
[[Page 446]]
Sec. 1.1502-94 Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated group.
(a) Scope.
(1) In general.
(2) Successor corporation as new loss member.
(3) Coordination in the case of a loss subgroup.
(4) End of separate tracking of certain losses.
(5) Cross-reference.
(b) Application of section 382 to a new loss member.
(1) In general.
(2) Adjustment to value.
(3) Pre-change separate attribute defined.
(4) Examples.
(c) Built-in gains and losses.
(d) Information statements.
Sec. 1.1502-95 Rules on ceasing to be a member of a consolidated group
(or loss subgroup).
(a) In general.
(1) Consolidated group.
(2) Election by common parent.
(3) Coordination with Secs. 1.1502-91 through 1.1502-93.
(b) Separate application of section 382 when a member leaves a
consolidated group.
(1) In general.
(2) Effect of a prior ownership change of the group.
(3) Application in the case of a loss subgroup.
(4) Examples.
(c) Apportionment of a consolidated section 382 limitation.
(1) In general.
(2) Amount which may be apportioned.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(3) Effect of apportionment on the consolidated group.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(4) Effect on corporations to which an apportionment is made.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(5) Deemed apportionment when loss group terminates.
(6) Appropriate adjustments when former member leaves during the
year.
(7) Examples.
(d) Rules pertaining to ceasing to be a member of a loss subgroup.
(1) In general.
(2) Exceptions.
(3) Examples.
(e) Allocation of net unrealized built-in loss.
(1) In general.
(2) Amount of allocation.
(i) In general.
(ii) Transferred basis property and deferred gain or loss.
(iii) Assets for which gain or loss has been recognized.
(iv) Exchanged basis property.
(v) Two or more members depart during the same year.
(vi) Anti-abuse rule.
(3) Effect of the allocation on the consolidated group.
(4) Effect on corporations to which the allocation is made.
(5) Subgroup principles.
(6) Apportionment of consolidated section 382 limitation (or
subgroup section 382 limitation).
(i) In general.
(ii) Special rule for former members that become members of the same
consolidated group.
(7) Examples.
(8) Reporting requirement.
(f) Filing the election to apportion the section 382 limitation and
net unrealized built-in gain.
(1) Form of the election to apportion.
Signing of the election.
(3) Filing of the election.
(4) Revocation of election.
Sec. 1.1502-96 Miscellaneous rules.
(a) End of separate tracking of losses.
(1) Application.
(2) Effect of end of separate tracking.
(i) Net operating loss carryovers.
(ii) Net unrealized built-in losses.
(iii) Common parent not common parent for five years.
(3) Continuing effect of end of separate tracking.
(i) In general.
(ii) Example.
(4) Special rule for testing period.
(5) Limits on effects of end of separate tracking.
(b) Ownership change of subsidiary.
(1) Ownership change of a subsidiary because of options or plan or
arrangement.
(2) Effect of the ownership change.
(i) In general.
(ii) Pre-change losses.
(3) Coordination with Secs. 1.1502-91, 1.1502-92, and 1.1502-94.
(4) Example.
(c) Continuing effect of an ownership change.
(d) Losses reattributed under Sec. 1.1502-20(g).
(1) In general.
(2) Deemed section 381(a) transaction.
(3) Rules relating to owner shifts.
(i) In general.
(ii) Examples.
(4) Rules relating to the section 382 limitation.
(i) Reattributed loss is a pre-change separate attribute of a new
loss member.
[[Page 447]]
(ii) Reattributed loss is a pre-change subgroup attribute.
(iii) Potential application of section 382(l)(1).
(iv) Duplication or omission of value.
(v) Special rule for continuity of business requirement.
(5) Election to reattribute section 382 limitation.
(i) Effect of election.
(ii) Examples.
(e) Time and manner of making election under Sec. 1.1502-91(d)(4).
(1) In general.
(2) Election statement.
Sec. 1.1502-97 Special rules under section 382 for members under the
jurisdiction of a court in a title 11 or similar case. [Reserved].
Sec. 1.1502-98 Coordination with section 383.
Sec. 1.1502-99 Effective dates.
(a) Effective date.
(b) Special rules.
(1) Election to treat subgroup parent requirement as satisfied.
(2) Principal purpose of avoiding a limitation.
(3) Ceasing to be a member of a loss subgroup.
(i) Ownership change of a loss subgroup.
(ii) Expiration of 5-year period.
(4) Reattribution of net operating loss carryovers under
Sec. 1.1502-20(g).
(5) Election to apportion net unrealized built-in gain.
(c) Testing period may include a period beginning before June 25,
1999.
(1) In general.
(2) Transition rule for net unrealized built-in losses.
[T.D. 8824, 64 FR 36128, July 2, 1999]
Sec. 1.1502-91 Application of section 382 with respect to a consolidated group.
(a) Determination and effect of an ownership change--(1) In general.
This section and Secs. 1.1502-92 and 1.1502-93 set forth the rules for
determining an ownership change under section 382 for members of
consolidated groups and the section 382 limitations with respect to
attributes described in paragraphs (e) and (f) of this section. These
rules generally provide that an ownership change and the section 382
limitation are determined with respect to these attributes for the group
(or loss subgroup) on a single entity basis and not for its members
separately. Following an ownership change of a loss group (or a loss
subgroup) under Sec. 1.1502-92, the amount of consolidated taxable
income for any post-change year which may be offset by pre-change
consolidated attributes (or pre-change subgroup attributes) shall not
exceed the consolidated section 382 limitation (or subgroup section 382
limitation) for such year as determined under Sec. 1.1502-93.
(2) Special rule for post-change year that includes the change date.
If the post-change year includes the change date, section 382(b)(3)(A)
is applied so that the consolidated section 382 limitation (or subgroup
section 382 limitation) does not apply to the portion of consolidated
taxable income that is allocable to the period in the year on or before
the change date. See generally Sec. 1.382-6 (relating to the allocation
of income and loss). The allocation of consolidated taxable income for
the post-change year that includes the change date must be made before
taking into account any consolidated net operating loss deduction (as
defined in Sec. 1.1502-21(a)).
(3) Cross-reference. See Secs. 1.1502-94 and 1.1502-95 for rules
that apply section 382 to a corporation that becomes or ceases to be a
member of a group or loss subgroup.
(b) Definitions and nomenclature. For purposes of this section and
Secs. 1.1502-92 through 1.1502-99, unless otherwise stated:
(1) The definitions and nomenclature contained in section 382 and
the regulations thereunder (including the nomenclature and assumptions
relating to the examples in Sec. 1.382-2T(b)) and this section and
Secs. 1.1502-92 through 1.1502-99 apply.
(2) In all examples, all groups file consolidated returns, all
corporations file their income tax returns on a calendar year basis, the
only 5-percent shareholder of a corporation is a public group, the facts
set forth the only owner shifts during the testing period, no election
is made under paragraph (d)(4) of this section, and each asset of a
corporation has a value equal to its adjusted basis.
(3) As the context requires, references to Secs. 1.1502-91 through
1.1502-96 include references to corresponding provisions of
Secs. 1.1502-A through 1.1502-96A. For example, a reference to an
ownership change under Sec. 1.1502-92 in
[[Page 448]]
Sec. 1.1502-95(b) can include a reference to an ownership change under
Sec. 1.1502-92A.
(c) Loss group--(1) Defined. A loss group is a consolidated group
that--
(i) Is entitled to use a net operating loss carryover to the taxable
year that did not arise (and is not treated under Sec. 1.1502-21(c) as
arising) in a SRLY;
(ii) Has a consolidated net operating loss for the taxable year in
which a testing date of the common parent occurs (determined by treating
the common parent as a loss corporation); or
(iii) Has a net unrealized built-in loss (determined under paragraph
(g) of this section by treating the date on which the determination is
made as though it were a change date).
(2) Coordination with rule that ends separate tracking. A
consolidated group may be a loss group because a member's losses that
arose in (or are treated as arising in) a SRLY are treated as described
in paragraph (c)(1)(i) of this section. See Sec. 1.1502-96(a).
(3) Example. The following example illustrates the principles of
this paragraph (c):
Example. Loss group. (i) L and L1 file separate returns and each has
a net operating loss carryover arising in Year 1 that is carried over to
Year 2. A owns 40 shares and L owns 60 shares of the 100 outstanding
shares of L1 stock. At the close of Year 1, L buys the 40 shares of L1
stock from A. For Year 2, L and L1 file a consolidated return. The
following is a graphic illustration of these facts:
[[Page 449]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.000
(ii) L and L1 become a loss group at the beginning of Year 2 because
the group is entitled to use the Year 1 net operating loss carryover of
L, the common parent, which did not arise (and is not treated under
Sec. 1.1502-21(c) as arising) in a SRLY. See Sec. 1.1502-94 for rules
relating to the application of section 382 with respect to L1's net
operating loss
[[Page 450]]
carryover from Year 1 which did arise in a SRLY.
(d) Loss subgroup--(1) Net operating loss carryovers. Two or more
corporations that become members of a consolidated group (the current
group) compose a loss subgroup if--
(i) They were affiliated with each other in another group (the
former group), whether or not the group was a consolidated group;
(ii) They bear the relationship described in section 1504(a)(1) to
each other through a loss subgroup parent immediately after they become
members of the current group (or are deemed to bear that relationship as
a result of an election described in paragraph (d)(4) of this section);
and
(iii) At least one of the members carries over a net operating loss
that did not arise (and is not treated under Sec. 1.1502-21(c) as
arising) in a SRLY with respect to the former group.
(2) Net unrealized built-in loss. Two or more corporations that
become members of a consolidated group compose a loss subgroup if they--
(i) Have been continuously affiliated with each other for the 5
consecutive year period ending immediately before they become members of
the group;
(ii) Bear the relationship described in section 1504(a)(1) to each
other through a loss subgroup parent immediately after they become
members of the current group (or are deemed to bear that relationship as
a result of an election described in paragraph (d)(4) of this section);
and
(iii) Have a net unrealized built-in loss (determined under
paragraph (g) of this section on the day they become members of the
group by treating that day as though it were a change date).
(3) Loss subgroup parent. A loss subgroup parent is the corporation
that bears the same relationship to the other members of the loss
subgroup as a common parent bears to the members of a group.
(4) Election to treat loss subgroup parent requirement as
satisfied--(i) In general. Solely for purposes of paragraphs (d)(1)(i)
and (2)(ii) of this section, two or more corporations that become
members of a consolidated group at the same time and that were
affiliated with each other immediately before becoming members of the
group are deemed to bear a section 1504(a)(1) relationship to each other
immediately after they become members of the group if the common parent
of that group makes an election under this paragraph (d)(4) with respect
to those members. See Sec. 1.1502-96(e) for the time and manner of
making the election.
(ii) Members included. An election under this paragraph (d)(4)
includes all corporations that become members of the current group at
the same time and that were affiliated with each other immediately
before they become members of the current group.
(iii) Each member included treated as loss subgroup parent. If the
members to which this election applies are a loss subgroup described in
paragraph (d)(1) or (2) of this section, then each member is treated as
a loss subgroup parent. See Sec. 1.1502-92(b)(1)(iii) for special rules
relating to an ownership change of a loss subgroup if the election under
this paragraph (d)(4) is made.
(5) Principal purpose of avoiding a limitation. The corporations
described in paragraphs (d)(1) or (2) of this section do not compose a
loss subgroup if any one of them is formed, acquired, or availed of with
a principal purpose of avoiding the application of, or increasing any
limitation under, section 382. Instead, Sec. 1.1502-94 applies with
respect to the attributes of each such corporation. Any member excluded
from a loss subgroup, if excluded with a principal purpose of so
avoiding or increasing any section 382 limitation, is treated as
included in the loss subgroup. This paragraph (d)(5) does not apply
solely because, in connection with becoming members of the group, the
members of a group (or loss subgroup) are rearranged (or, in the case of
the preceding sentence, are not rearranged) to bear a relationship to
the other members described in section 1504(a)(1).
(6) Special rules. See Sec. 1.1502-95(d) for rules concerning when a
corporation ceases to be a member of a loss subgroup, and for certain
exceptions that may apply if a member does not continue to satisfy the
loss subgroup parent requirement within the current group. See also
Sec. 1.1502-96(a) for a special rule regarding the end of separate
tracking of SRLY losses of a member
[[Page 451]]
that has an ownership change or that has been a member of a group for at
least 5 consecutive years.
(7) Examples. The following examples illustrate the principles of
this paragraph (d):
Example 1. Loss subgroup. (i) P owns all the L stock and L owns all
the L1 stock. The P group has a consolidated net operating loss arising
in Year 1 that is carried to Year 2. On May 2, Year 2, P sells all the
stock of L to A, and L and L1 thereafter file consolidated returns. A
portion of the Year 1 consolidated net operating loss is apportioned
under Sec. 1.1502-21(b) to each of L and L1, which they carry over to
Year 2. The following is a graphic illustration of these facts:
[[Page 452]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.001
(ii) (a) L and L1 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section because--
(A) They were affiliated with each other in the P group (the former
group);
(B) They bear a relationship described in section 1504(a)(1) to each
other through a
[[Page 453]]
loss subgroup parent (L) immediately after they became members of the L
group; and
(C) At least one of the members (here, both L and L1) carries over a
net operating loss to the L group (the current group) that did not arise
in a SRLY with respect to the P group.
(b) Under paragraph (d)(3) of this section, L is the loss subgroup
parent of the L loss subgroup.
Example 2. Loss subgroup--section 1504(a)(1) relationship. (i) P
owns all the stock of L and L1. L owns all the stock of L2. L1 and L2
own 40 percent and 60 percent of the stock of L3, respectively. The P
group has a consolidated net operating loss arising in Year 1 that is
carried over to Year 2. On May 22, Year 2, P sells all the stock of L
and L1 to P1, the common parent of another consolidated group. The Year
1 consolidated net operating loss is apportioned under Sec. 1.1502-
21(b), and each of L, L1, L2, and L3 carries over a portion of such loss
to the first consolidated return year of the P1 group ending after the
acquisition. The following is a graphic illustration of these facts:
[[Page 454]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.002
(ii) L and L2 compose a loss subgroup within the meaning of
paragraph(d)(1) of this section. Neither L1 nor L3 is included in a loss
subgroup because neither bears a relationship described in section
1504(a)(1) through a loss subgroup parent to any other member of the
former group immediately after becoming members of the P1 group.
[[Page 455]]
Example 3. Loss subgroup--section 1504(a)(1) relationship. The facts
are the same as in Example 2, except that the stock of L1 is transferred
to L in connection with the sale of the L stock to P1. L, L1, L2, and L3
compose a loss subgroup within the meaning of paragraph (d)(1) of this
section because--
(i) They were affiliated with each other in the P group (the former
group);
(ii) They bear a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
become members of the P1 group; and
(iii) At least one of the members (here, each of L, L1, L2, and L3)
carries over a net operating loss to the P1 group (the current group).
Example 4. Loss subgroup--elective section 1504(a)(1) relationship.
The facts are the same as in Example 2, except that P1 makes the
election under paragraph (d)(4) of this section. The election includes
L, L1, L2, and L3 (even though L and L2 would compose a loss subgroup
without regard to the election) because they become members of the
current group (the P1 group) at the same time and were affiliated with
each other in the P group immediately before they became members of the
P1 group. As a result of the election, L, L1, L2, and L3 are treated as
satisfying the requirement that they bear the relationship described in
section 1504(a)(1) to each other through a loss subgroup parent
immediately after they become members of the P1 group. L, L1, L2, and L3
compose a loss subgroup within the meaning of paragraph (d)(1) of this
section.
(e) Pre-change consolidated attribute--(1) Defined. A pre-change
consolidated attribute of a loss group is--
(i) Any loss described in paragraph (c)(1)(i) or (ii) of this
section (relating to the definition of loss group) that is allocable to
the period ending on or before the change date; and
(ii) Any recognized built-in loss of the loss group.
(2) Example. The following example illustrates the principle of this
paragraph (e):
Example. Pre-change consolidated attribute. (i) The L group has a
consolidated net operating loss arising in Year 1 that is carried over
to Year 2. The L loss group has an ownership change at the beginning of
Year 2.
(ii) The net operating loss carryover of the L loss group from Year
1 is a pre-change consolidated attribute because the L group was
entitled to use the loss in Year 2 and therefore the loss was described
in paragraph (c)(1)(i) of this section. Under paragraph (a)(2)(i) of
this section, the amount of consolidated taxable income of the L group
for Year 2 that may be offset by this loss carryover may not exceed the
consolidated section 382 limitation of the L group for that year. See
Sec. 1.1502-93 for rules relating to the computation of the consolidated
section 382 limitation.
(f) Pre-change subgroup attribute--(1) Defined. A pre-change
subgroup attribute of a loss subgroup is--
(i) Any net operating loss carryover described in paragraph
(d)(1)(iii) of this section (relating to the definition of loss
subgroup); and
(ii) Any recognized built-in loss of the loss subgroup.
(2) Example. The following example illustrates the principle of this
paragraph (f):
Pre-change subgroup attribute. (i) P is the common parent of a
consolidated group. P owns all the stock of L, and L owns all the stock
of L1. L2 is not a member of an affiliated group, and has a net
operating loss arising in Year 1 that is carried over to Year 2. On
December 11, Year 2, L1 acquires all the stock of L2, causing an
ownership change of L2. During Year 2, the P group has a consolidated
net operating loss that is carried over to Year 3. On November 2, Year
3, M acquires all the L stock from P. M, L, L1, and L2 thereafter file
consolidated returns. All of the P group Year 2 consolidated net
operating loss is apportioned under Sec. 1.1502-21(b) to L and L2, which
they carry over to the M group.
(ii)(a) L, L1, and L2 compose a loss subgroup because--
(1) They were affiliated with each other in the P group (the former
group);
(2) They bear a relationship described in section 1504(a)(1) to each
other through a loss subgroup parent (L) immediately after they became
members of the L group; and
(3) At least one of the members (here, both L and L2) carries over a
net operating loss to the M group (the current group) that is described
in paragraph (d)(1)(iii) of this section.
(b) For this purpose, L2's loss from Year 1 that was a SRLY loss
with respect to the P group (the former group) is described in paragraph
(d)(1)(iii) of this section because L2 had an ownership change on
becoming a member of the P group (see Sec. 1.1502-96(a)) on December 11,
Year 2. Starting on December 12, Year 2, the P group no longer
separately tracked owner shifts of the stock of L1 with respect to the
Year 1 loss. M's acquisition results in an ownership change of L, and
therefore the L loss subgroup under Sec. 1.1502-92(a)(2). See
Sec. 1.1502-93 for rules governing the computation of the subgroup
section 382 limitation.
(iii) In the M group, L2's Year 1 loss continues to be subject to a
section 382 limitation resulting from the ownership change
[[Page 456]]
that occurred on December 11, Year 2. See Sec. 1.1502-96(c).
(g) Net unrealized built-in gain and loss--(1) In general. The
determination whether a consolidated group (or loss subgroup) has a net
unrealized built-in gain or loss under section 382(h)(3) is based on the
aggregate amount of the separately computed net unrealized built-in
gains or losses of each member that is included in the group (or loss
subgroup) under paragraph (g)(2) of this section, including items of
built-in income and deduction described in section 382(h)(6). Thus, for
example, amounts deferred under section 267, or under Sec. 1.1502-13
(other than amounts deferred with respect to the stock of a member (or
an intercompany obligation) included in the group (or loss subgroup)
under paragraph (g)(2) of this section) are built-in items. The
threshold requirement under section 382(h)(3)(B) applies on an aggregate
basis and not on a member-by-member basis. The separately computed
amount of a member included in a group or loss subgroup does not include
any unrealized built-in gain or loss on stock (including stock described
in section 1504(a)(4) and Sec. 1.382-2T(f)(18)(ii) and (iii)) of another
member included in the group or loss subgroup (or an intercompany
obligation). However, a member of a group or loss subgroup includes in
its separately computed amount the unrealized built-in gain or loss on
stock (but not on an intercompany obligation) of another member not
included in the group or loss subgroup. If a member is not included in
the determination whether a group (or subgroup) has a net unrealized
built-in loss under paragraph (g)(2)(ii) or (iv) of this section, that
member is not included in the loss group or loss subgroup. See
Sec. 1.1502-94(c) (relating to built-in gain or loss of a new loss
member) and Sec. 1.1502-96(a) (relating to the end of separate tracking
of certain losses).
(2) Members included--(i) Consolidated group with a net operating
loss. The members included in the determination whether a consolidated
group described in paragraph (c)(1)(i) or (ii) of this section (relating
to loss groups with net operating losses) has a net unrealized built-in
gain are all members of the consolidated group on the day that the
determination is made.
(ii) Determination whether a consolidated group has a net unrealized
built-in loss. The members included in the determination whether a
consolidated group is a loss group described in paragraph (c)(1)(iii) of
this section are--
(A) The common parent and all other members that have been
affiliated with the common parent for the 5 consecutive year period
ending on the day that the determination is made;
(B) Any other member that has a net unrealized built-in loss
determined under paragraph (g)(1) of this section on the date that the
determination is made, and that is neither a new loss member described
in Sec. 1.1502-94(a)(1)(ii) nor a member of a loss subgroup described in
paragraph (d)(2) of this section;
(C) Any new loss member described in Sec. 1.1502-94(a)(1)(ii) that
has a net unrealized built-in gain determined under paragraph (g)(1) of
this section on the day that the determination is made; and
(D) The members of a loss subgroup described in paragraph (d)(2) of
this section if the members of the subgroup have, in the aggregate, a
net unrealized built-in gain on the day that the determination is made.
(iii) Loss subgroup with net operating loss carryovers. The members
included in the determination whether a loss subgroup described in
paragraph (d)(1) of this section (relating to loss subgroups with net
operating loss carryovers) has a net unrealized built-in gain are all
members of the loss subgroup on the day that the determination is made.
(iv) Determination whether subgroup has a net unrealized built-in
loss. The members included in the determination whether a subgroup has a
net unrealized built-in loss are those members described in paragraphs
(d)(2)(i) and (ii) of this section.
(v) Separate determination of section 382 limitation for recognized
built-in losses and net operating losses. In determining
[[Page 457]]
whether a loss group described in paragraph (c)(1)(i) or (ii) of this
section (relating to loss groups that have net operating loss
carryovers) has a net unrealized built-in gain which, if recognized,
increases the consolidated section 382 limitation, the group includes,
under paragraph (g)(2)(i) of this section, all of its members on the day
the determination is made. Under paragraph (g)(2)(ii) of this section,
however, for purposes of determining whether a group has a net
unrealized built-in loss described in paragraph (c)(1)(iii) of this
section, not all members of the consolidated group may be included.
Thus, a consolidated group may have recognized built-in gains that
increase the amount of consolidated taxable income that may be offset by
its pre-change net operating loss carryovers that did not arise (and are
not treated as arising) in a SRLY, and also may have recognized built-in
losses the absorption of which is limited. Similar results may obtain
for loss subgroups under paragraphs (g)(2)(iii) and (iv) of this
section. See Sec. 1.1502-93(c)(2) for rules prohibiting the use of
recognized built-in gains to increase the amount of consolidated taxable
income that can be offset by recognized built-in losses.
(3) Coordination with rule that ends separate tracking. See
Sec. 1.1502-96(a) for special rules relating to members (or loss
subgroups) that have an ownership change within six months before, on,
or after becoming a member of the group.
(4) Acquisitions of built-in gain or loss assets. A member of a
consolidated group (or loss subgroup) may not, in determining its
separately computed net unrealized built-in gain or loss, include any
gain or loss with respect to assets acquired with a principal purpose to
affect the amount of its net unrealized built-in gain or loss. A group
(or loss subgroup) may not, in determining its net unrealized built-in
gain or loss, include any gain or loss of a member acquired with a
principal purpose to affect the amount of its net unrealized built-in
gain or loss.
(5) Indirect ownership. A member's separately computed net
unrealized built-in gain or loss is adjusted to the extent necessary to
prevent any duplication of unrealized gain or loss attributable to the
member's indirect ownership interest in another member through a
nonmember if the member has a 5-percent or greater ownership interest in
the nonmember.
(6) Common parent not common parent for five years. If the common
parent has become the common parent of an existing group within the
previous 5 year period in a transaction described in Sec. 1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying
paragraph (g)(2)(ii)(A) of this section so that corporations that have
not been members of the group for five years are not included. In such a
case, references to the common parent in paragraph (g)(2)(ii)(A) of this
section are to the former common parent. Thus, members of the group
remaining in existence (including the new common parent) that have not
been affiliated with the former common parent (or that have not been
members of that group) for the five consecutive year period ending on
the day that the determination is made are not included under paragraph
(g)(2)(ii)(A) of this section. See, however, Sec. 1.1502-96(a)(2) for
special rules relating to members (or loss subgroups) that have an
ownership change within six months before, on, or after the time that
the member becomes a member of the group.
(h) Recognized built-in gain or loss--(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a member.
Gain or loss recognized by a member on the disposition of stock
(including stock described in section 1504(a)(4) and Sec. 1.382-
2T(f)(18)(ii) and (iii)) of another member is treated as a recognized
gain or loss for purposes of section 382(h)(2) (unless disallowed under
Sec. 1.1502-20 or otherwise), even though gain or loss on such stock was
not included in the determination of a net unrealized built-in gain or
loss under paragraph (g)(1) of this section. Gain or loss recognized by
a member with respect to an intercompany obligation is treated as
recognized gain or loss only to the extent (if any) the transaction
gives rise to aggregate income or loss within the consolidated group.
(3) Intercompany transactions. Gain or loss that is deferred under
provisions such as section 267 and Sec. 1.1502-13 is treated as
recognized built-in gain or
[[Page 458]]
loss only to the extent taken into account by the group during the
recognition period. See also Sec. 1.1502-13(c)(7) Example 10.
(4) Exchanged basis property. If the adjusted basis of any asset is
determined, directly or indirectly, in whole or in part, by reference to
the adjusted basis of another asset held by the member at the beginning
of the recognition period, the asset is treated, with appropriate
adjustments, as held by the member at the beginning of the recognition
period.
(i) [Reserved]
(j) Predecessor and successor corporations. A reference in this
section and Secs. 1.1502-92 through 1.1502-99 to a corporation, member,
common parent, loss subgroup parent, or subsidiary includes, as the
context may require, a reference to a predecessor or successor
corporation as defined in Sec. 1.1502-1(f)(4). For example, the
determination whether a successor satisfies the continuous affiliation
requirement of paragraph (d)(2)(i) or (g)(2)(ii) of this section is made
by reference to its predecessor.
[T.D. 8824, 64 FR 36129, July 2, 1999]
Sec. 1.1502-92 Ownership change of a loss group or a loss subgroup.
(a) Scope. This section provides rules for determining if there is
an ownership change for purposes of section 382 with respect to a loss
group or a loss subgroup. See Sec. 1.1502-94 for special rules for
determining if there is an ownership change with respect to a new loss
member and Sec. 1.1502-96(b) for special rules for determining if there
is an ownership change of a subsidiary.
(b) Determination of an ownership change--(1) Parent change method--
(i) Loss group. A loss group has an ownership change if the loss group's
common parent has an ownership change under section 382 and the
regulations thereunder. Solely for purposes of determining whether the
common parent has an ownership change--
(A) The losses described in Sec. 1.1502-91(c) are treated as net
operating losses (or a net unrealized built-in loss) of the common
parent; and
(B) The common parent determines the earliest day that its testing
period can begin by reference to only the attributes that make the group
a loss group under Sec. 1.1502-91(c).
(ii) Loss subgroup. A loss subgroup has an ownership change if the
loss subgroup parent has an ownership change under section 382 and the
regulations thereunder. The principles of Sec. 1.1502-95(b) (relating to
ceasing to be a member of a consolidated group) apply in determining
whether the loss subgroup parent has an ownership change. Solely for
purposes of determining whether the loss subgroup parent has an
ownership change--
(A) The losses described in Sec. 1.1502-91(d) are treated as net
operating losses (or a net unrealized built-in loss) of the loss
subgroup parent;
(B) The day that the members of the loss subgroup become members of
the group (or a loss subgroup) is treated as a testing date within the
meaning of Sec. 1.382-2(a)(4); and
(C) The loss subgroup parent determines the earliest day that its
testing period can begin under Sec. 1.382-2T(d)(3) by reference to only
the attributes that make the members a loss subgroup under Sec. 1.1502-
91(d).
(iii) Special rule if election regarding section 1504(a)(1)
relationship is made--(A) Ownership change of deemed loss subgroup
parent is an ownership change of loss subgroup. If the common parent
makes an election under Sec. 1.1502-91(d)(4), each of the members in the
loss subgroup is treated as the loss subgroup parent for purposes of
determining whether the loss subgroup has an ownership change under
section 382 and the regulations thereunder on or after the day the
members become members of the group.
(B) Exception. Paragraph (b)(1)(iii)(A) of this section does not
apply to cause an ownership change of a loss subgroup if a deemed loss
subgroup parent has an ownership change upon (or after) ceasing to be a
member of the current group.
(2) Examples. The following examples illustrate the principles of
this paragraph (b):
Example 1. Loss group--ownership change of the common parent. (i) A
owns all the L stock. L owns 80 percent and B owns 20 percent of the L1
stock. For Year 1, the L group has a consolidated net operating loss
that resulted from the operations of L1 and that is carried over to Year
2. The value of the L
[[Page 459]]
stock is $1000. The total value of the L1 stock is $600 and the value of
the L1 stock held by B is $120. The L group is a loss group under
Sec. 1.1502-91(c)(1) because it is entitled to use its net operating
loss carryover from Year 1. On August 15, Year 2, A sells 51 percent of
the L stock to C. The following is a graphic illustration of these
facts:
[GRAPHIC] [TIFF OMITTED] TR02JY99.003
(ii) Under paragraph (b)(1)(i) of this section, section 382 and the
regulations thereunder are applied to L to determine whether it (and
therefore the L loss group) has an ownership change with respect to its
net operating loss carryover from Year 1 attributable to L1 on August
15, Year 2. The sale of the L stock to C causes an ownership change of L
under Sec. 1.382-2T and of the L loss group under paragraph (b)(1)(i) of
this section. The amount of consolidated taxable income of the L loss
group for any post-change taxable year that may be offset by its pre-
change consolidated attributes (that is, the net operating loss
carryover from Year 1 attributable to L1) may not exceed the
consolidated section 382 limitation for the L loss group for the taxable
year.
Example 2. Loss group--owner shifts of subsidiaries disregarded. (i)
The facts are the
[[Page 460]]
same as in Example 1, except that on August 15, Year 2, A sells only 49
percent of the L stock to C and, on December 12, Year 3, in an unrelated
transaction, B sells the 20 percent of the L1 stock to D. A's sale of
the L stock to C does not cause an ownership change of L under
Sec. 1.382-2T nor of the L loss group under paragraph (b)(1)(i) of this
section. The following is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR02JY99.004
(ii) B's subsequent sale of L1 stock is not taken into account for
purposes of determining whether the L loss group has an ownership change
under paragraph (b)(1)(i) of this section, and, accordingly, there is no
ownership change of the L loss group. See paragraph (c) of this section,
however, for a supplemental ownership change method that would apply to
cause an ownership change if the purchases by C and D were pursuant to a
plan or arrangement and certain other conditions are satisfied.
Example 3. Loss subgroup--ownership change of loss subgroup parent
controls. (i) P owns all the L stock. L owns 80 percent and A owns 20
percent of the L1 stock. The P group has a consolidated net operating
loss arising in Year 1 that is carried over to Year 2. On September 9,
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a
portion of the Year 1 consolidated net operating loss under Sec. 1.1502-
21(b), which it carries over to its next taxable year. L and L1 file a
consolidated return for their first taxable year ending after the sale
to B. The following is a graphic illustration of these facts:
[[Page 461]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.005
(ii) Under Sec. 1.1502-91(d)(1), L and L1 compose a loss subgroup on
September 9, Year 2, the day that they become members of the L group.
Under paragraph (b)(1)(ii) of this section, section 382 and the
regulations thereunder are applied to L to determine whether it (and
therefore the L loss subgroup) has an ownership change with respect to
the portion
[[Page 462]]
of the Year 1 consolidated net operating loss that is apportioned to L1
on September 9, Year 2. L has an ownership change resulting from P's
sale of 51 percent of the L stock to A. Therefore, the L loss subgroup
has an ownership change with respect to that loss.
Example 4. Loss group and loss subgroup--contemporaneous ownership
changes. (i) A owns all the stock of corporation M, M owns 35 percent
and B owns 65 percent of the L stock, and L owns all the L1 stock. The L
group has a consolidated net operating loss arising in Year 1 that is
carried over to Year 2. On May 19, Year 2, B sells 45 percent of the L
stock to M for cash. M, L, and L1 thereafter file consolidated returns.
L and L1 are each apportioned a portion of the Year 1 consolidated net
operating loss, which they carry over to the M group's Year 2 and Year 3
consolidated return years. The M group has a consolidated net operating
loss arising in Year 2 that is carried over to Year 3. On June 9, Year
3, A sells 70 percent of the M stock to C. The following is a graphic
illustration of these facts:
[[Page 463]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.006
(ii) Under Sec. 1.1502-91(d)(1), L and L1 compose a loss subgroup on
May 19, Year 2, the day they become members of the M group. Under
paragraph (b)(1)(ii) of this section, section 382 and the regulations
thereunder are applied to L to determine whether L (and therefore the L
loss subgroup) has an ownership change with respect to the loss
[[Page 464]]
carryovers from Year 1 on May 19, Year 2, a testing date because of B's
sale of L stock to M. The sale of L stock to M results in only a 45
percentage point increase in A's ownership of L stock. Thus, there is no
ownership change of L (or the L loss subgroup) with respect to those
loss carryovers under paragraph (b)(1)(ii) of this section on that day.
(iii) June 9, Year 3, is also a testing date with respect to the L
loss subgroup because of A's sale of M stock to C. The sale results in a
56 percentage point increase in C's ownership of L stock, and L has an
ownership change. Therefore, the L loss subgroup has an ownership change
on that day with respect to the loss carryovers from Year 1.
(iv) Paragraph (b)(1)(i) of this section requires that section 382
and the regulations thereunder be applied to M to determine whether M
(and therefore the M loss group) has an ownership change with respect to
the net operating loss carryover from Year 2 on June 9, Year 3, a
testing date because of A's sale of M stock to C. The sale results in a
70 percentage point increase in C's ownership of M stock, and M has an
ownership change. Therefore, the M loss group has an ownership change on
that day with respect to that loss carryover.
Example 5--Deemed subgroup parent. (i) P owns all the stock of L and
L1 and 80 percent of the stock of T. A owns the remaining 20 percent of
the stock of T. L1 owns all the stock of L2. P1, which owns 60 percent
of the stock of P, acquires, at the beginning of Year 2, the T, L, and
L1 stock owned by P, and T, L, L1, and L2 become members of the P1
group. The P group has a consolidated net operating loss arising in Year
1 that is carried over to Year 2. L, L1, and L2 are each apportioned a
portion of the Year 1 consolidated net operating loss under Sec. 1.1502-
21(b), which they carry over to the P1 group's Year 2 and Year 3
consolidated return years. P1 makes the election described in
Sec. 1.1502-91(d)(4) to treat T, L, L1 and L2 as meeting the section
1504(a)(1) requirement of Sec. 1.1502-91(d)(1)(ii). As a result of the
election, T, L, L1 and L2 compose a loss subgroup and T, L, L1, and L2
are each treated as the loss subgroup parent for purposes of this
paragraph (b). Because of P1's indirect ownership of T, L, L1, and L2
prior to P1's acquisition of the T, L, and L1 stock, P1's acquisition
does not cause an ownership change of the loss subgroup.
(ii) On February 2, Year 3, L1 sells all of the stock of L2 to B.
Although L2 is treated as a loss subgroup parent, the determination
whether the loss subgroup comprised of T, L, and L1 has an ownership
change under this paragraph (b) is made without regard to the sale of L2
because L2's ownership change occurred upon ceasing to be a member of
the P1 group. See Sec. 1.1502-95(b) to determine the application of
section 382 to L2 when L2 ceases to be a member of the P1 group and the
T, L, L1 and L2 loss subgroup.
(iii) On March 26, Year 3, A sells her 20 percent minority stock
interest in T to C . C's purchase, together with the 32 percentage point
owner shift effected by P1's acquisition of the T stock at the beginning
of Year 2, causes an ownership change of T, and therefore of the loss
subgroup comprised of T, L, and L1.
(3) Special adjustments--(i) Common parent succeeded by a new common
parent. For purposes of determining if a loss group has an ownership
change, if the common parent of a loss group is succeeded or acquired by
a new common parent and the loss group remains in existence, the new
common parent is treated as a continuation of the former common parent
with appropriate adjustments to take into account shifts in ownership of
the former common parent during the testing period (including shifts
that occur incident to the common parent's becoming the former common
parent). A new common parent may be a continuation of the former common
parent even if, under Sec. 1.1502-91(g)(2)(ii), the new common parent is
not included in determining whether the group has a net unrealized
built-in loss.
(ii) Newly created loss subgroup parent. For purposes of determining
if a loss subgroup has an ownership change, if the member that is the
loss subgroup parent has not been the loss subgroup parent for at least
3 years as of a testing date, appropriate adjustments must be made to
take into account owner shifts of members of the loss subgroup so that
the structure of the loss subgroup does not have the effect of avoiding
an ownership change under section 382. (See paragraph (b)(3)(iii),
Example 3 of this section.)
(iii) Examples. The following examples illustrate the principles of
this paragraph (b)(3):
Example 1. New common parent acquires old common parent. (i) A, who
owns all the L stock, sells 30 percent of the L stock to B on August 26,
Year 1. L owns all the L1 stock. The L group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 3. On July
16, Year 2, A and B transfer their L stock to a newly created holding
company, HC, in exchange for 70 percent and 30 percent, respectively, of
the HC stock. HC, L, and L1 thereafter file consolidated returns. Under
the principles of Sec. 1.1502-75(d), the L loss group is treated as
remaining in
[[Page 465]]
existence, with HC taking the place of L as the new common parent of the
loss group. The following is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR02JY99.007
[[Page 466]]
(ii) On November 11, Year 3, A sells 25 percent of the HC stock to
B. For purposes of determining if the L loss group has an ownership
change under paragraph (b)(1)(i) of this section on November 11, Year 3,
HC is treated as a continuation of L under paragraph (b)(4)(i) of this
section because it acquired L and became the common parent without
terminating the L loss group. Accordingly, HC's testing period commences
on January 1, Year 1, the first day of the taxable year of the L loss
group in which the consolidated net operating loss that is carried over
to Year 3 arose (see Sec. 1.382-2T(d)(3)(i)). Immediately after the
close of November 11, Year 3, B's percentage ownership interest in the
common parent of the loss group (HC) has increased by 55 percentage
points over its lowest percentage ownership during the testing period
(zero percent). Accordingly, HC and the L loss group have an ownership
change on that day.
Example 2. New common parent in case in which common parent ceases
to exist. (i) A, B, and C each own one-third of the L stock. L owns all
the L1 stock. The L group has a consolidated net operating loss arising
in Year 2 that is carried over to Year 3. On November 22, Year 3, L is
merged into P, a corporation owned by D, and L1 thereafter files
consolidated returns with P. A, B, and C, as a result of owning stock of
L, own 90 percent of P's stock after the merger. D owns the remaining 10
percent of P's stock. The merger of L into P qualifies as a reverse
acquisition of the L group under Sec. 1.1502-75(d)(3)(i), and the L loss
group is treated as remaining in existence, with P taking the place of L
as the new common parent of the L group. The following is a graphic
illustration of these facts:
[[Page 467]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.008
(ii) For purposes of determining if the L loss group has an
ownership change on November 22, Year 3, the day of the merger, P is
treated as a continuation of L so that the testing period for P begins
on January 1, Year 2, the first day of the taxable year of the L loss
group in which the consolidated net operating loss that is carried over
to
[[Page 468]]
Year 3 arose. Immediately after the close of November 22, Year 3, D is
the only 5-percent shareholder that has increased his ownership interest
in P during the testing period (from zero to 10 percentage points).
(iii) The facts are the same as in paragraph (i) of this Example 2,
except that A has held 23\1/3\ shares (23\1/3\ percent) of L's stock for
five years, and A purchased an additional 10 shares of L stock from E
two years before the merger. Immediately after the close of the day of
the merger (a testing date), A's ownership interest in P, the common
parent of the L loss group, has increased by 6\2/3\ percentage points
over A's lowest percentage ownership during the testing period (23\1/3\
percent to 30 percent).
(iv) The facts are the same as in (i) of this Example 2, except that
P has a net operating loss arising in Year 1 that is carried to the
first consolidated return year ending after the day of the merger.
Solely for purposes of determining whether the L loss group has an
ownership change under paragraph (b)(1)(i) of this section, the testing
period for P commences on January 1, Year 2. P does not determine the
earliest day for its testing period by reference to its net operating
loss carryover from Year 1, which Secs. 1.1502-1(f)(3) and 1.1502-
75(d)(3)(i) treat as arising in a SRLY. See Sec. 1.1502-94 to determine
the application of section 382 with respect to P's net operating loss
carryover.
Example 3. Newly acquired loss subgroup parent. (i) P owns all the L
stock and L owns all the L1 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 3. On
January 19, Year 2, L issues a 20 percent stock interest to B. On
February 5, Year 3, P contributes its L stock to a newly formed
subsidiary, HC, in exchange for all the HC stock, and distributes the HC
stock to its sole shareholder A. HC, L, and L1 thereafter file
consolidated returns. A portion of the P group's Year 1 consolidated net
operating loss is apportioned to L and L1 under Sec. 1.1502-21(b) and is
carried over to the HC group's year ending after February 5, Year 3. HC,
L, and L1 compose a loss subgroup within the meaning of Sec. 1.1502-
91(d) with respect to the net operating loss carryovers from Year 1. The
following is a graphic illustration of these facts:
[[Page 469]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.009
(ii) February 5, Year 3, is a testing date for HC as the loss
subgroup parent with respect to the net operating loss carryovers of L
and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section. For
purposes of determining whether HC has an ownership change on the
testing date, appropriate adjustments must be made with respect to the
changes in the
[[Page 470]]
percentage ownership of the stock of HC because HC was not the loss
subgroup parent for at least 3 years prior to the day on which it became
a member of the HC loss subgroup (a testing date). The appropriate
adjustments include adjustments so that HC succeeds to the owner shifts
of other members of the former group. Thus, HC succeeds to the owner
shift of L that resulted from the sale of the 20 percent interest to B
in determining whether the HC loss subgroup has an ownership change on
February 5, Year 3, and on any subsequent testing date that includes
January 19, Year 2.
(4) End of separate tracking of certain losses. If Sec. 1.1502-96(a)
(relating to the end of separate tracking of attributes) applies to a
loss subgroup, then, while one or more members that were included in the
loss subgroup remain members of the consolidated group, there is an
ownership change with respect to their attributes described in
Sec. 1.1502-96(a)(2) only if the consolidated group is a loss group and
has an ownership change under paragraph (b)(1)(i) of this section (or
such a member has an ownership change under Sec. 1.1502-96(b) (relating
to ownership changes of subsidiaries)). If, however, the loss subgroup
has had an ownership change before Sec. 1.1502-96(a) applies, see
Sec. 1.1502-96(c) for the continuing application of the subgroup's
section 382 limitation with respect to its pre-change subgroup
attributes.
(c) Supplemental rules for determining ownership change--
(1) Scope. This paragraph (c) contains a supplemental rule for
determining whether there is an ownership change of a loss group (or
loss subgroup). It applies in addition to, and not instead of, the rules
of paragraph (b) of this section. Thus, for example, if the common
parent of the loss group has an ownership change under paragraph (b) of
this section, the loss group has an ownership change even if, by
applying this paragraph (c), the common parent would not have an
ownership change. This paragraph (c) does not apply in determining an
ownership change of a loss subgroup for which an election under
Sec. 1.1502-91(d)(4) is made.
(2) Cause for applying supplemental rule. This paragraph (c) applies
to a loss group (or loss subgroup) if--
(i) Any 5-percent shareholder of the common parent (or loss subgroup
parent) increases its percentage ownership interest in the stock of
both--
(A) A subsidiary of the loss group (or loss subgroup) other than by
a direct or indirect acquisition of stock of the common parent (or loss
subgroup parent); and
(B) The common parent (or loss subgroup parent);
(ii) Those increases occur within a 3 year period ending on any day
of a consolidated return year or, if shorter, the period beginning on
the first day following the most recent ownership change of the loss
group (or loss subgroup); and
(iii) Either--
(A) The common parent (or loss subgroup parent) has actual knowledge
of the increase in the 5-percent shareholder's ownership interest in the
stock of the subsidiary (or has actual knowledge of the plan or
arrangement described in paragraph (c)(3)(i) of this section) before the
date that the group's income tax return is filed for the taxable year
that includes the date of that increase; or
(B) At any time during the period described in paragraph (c)(2)(ii)
of this section, the 5-percent shareholder of the common parent is also
a 5-percent shareholder of the subsidiary (determined without regard to
paragraph (c)(3)(i) of this section) whose percentage increase in the
ownership of the stock of the subsidiary would be taken into account in
determining if the subsidiary has an ownership change (determined as if
the subsidiary was a loss corporation and applying the principles of
Sec. 1.382-2T(k), including the principles relating to duty to inquire).
(3) Operating rules. Solely for purposes of this paragraph (c)--
(i) A 5-percent shareholder of the common parent (or loss subgroup
parent) is treated as increasing its ownership interest in the stock of
a subsidiary to the extent, if any, that another person or persons
increases its percentage ownership interest in the stock of a subsidiary
pursuant to a plan or arrangement under which the 5-percent shareholder
increases its percentage ownership interest in the common parent (or
loss subgroup parent);
(ii) The rules in section 382(l)(3) and Secs. 1.382-2T(h) and 1.382-
4(d) (relating to
[[Page 471]]
constructive ownership) apply with respect to the stock of the
subsidiary by treating such stock as stock of a loss corporation; and
(iii) In the case of a loss subgroup, a subsidiary includes any
member of the loss subgroup other than the loss subgroup parent. (A loss
subgroup parent is, however, a subsidiary of the loss group of which it
is a member.)
(4) Supplemental ownership change rules. The determination whether
the common parent (or loss subgroup parent) has an ownership change is
made by applying paragraph (b)(1) of this section as modified by the
following additional rules:
(i) Additional testing dates for the common parent (or loss subgroup
parent). A testing date for the common parent (or loss subgroup parent)
also includes--
(A) Each day on which there is an increase in the percentage
ownership of stock of a subsidiary as described in paragraph (c)(2) of
this section; and
(B) The first day of the first consolidated return year for which
the group is a loss group (or the members compose a loss subgroup).
(ii) Treatment of subsidiary stock as stock of the common parent (or
loss subgroup parent). The common parent (or loss subgroup parent) is
treated as though it had issued to the person acquiring (or deemed to
acquire) the subsidiary stock an amount of its own stock (by value) that
equals the value of the subsidiary stock represented by the percentage
increase in that person's ownership of the subsidiary (determined on a
separate entity basis). Similar principles apply if the increase in
percentage ownership interest is effected by a redemption or similar
transaction.
(iii) Different testing periods. Stock treated as issued under
paragraph (c)(4)(ii) of this section on a testing date is not treated as
so issued for purposes of applying the ownership change rules of this
paragraph (c) and paragraph (b)(1) of this section in a testing period
that does not include that testing date.
(iv) Disaffiliation of a subsidiary. If a deemed issuance of stock
under paragraph (c)(4)(ii) of this section would not cause the loss
group (or loss subgroup) to have an ownership change before the day (if
any) on which the subsidiary ceases to be a member of the loss group (or
subgroup), then paragraph (c)(4) of this section shall not apply.
(v) Subsidiary stock acquired first. If an increase of subsidiary
stock described in paragraph (c)(2)(i)(A) of this section occurs before
the date that the 5-percent shareholder increases its percentage
ownership interest in the stock of the common parent (or loss subgroup
parent), then the deemed issuance of stock is treated as occurring on
that later date, but in an amount equal to the value of the subsidiary
stock on the date it was acquired.
(vi) Anti-duplication rule. If two or more 5-percent shareholders
are treated as increasing their percentage ownership interests pursuant
to the same plan or arrangement described in paragraph (c)(3)(i) of this
section, appropriate adjustments must be made so that the amount of
stock treated as issued is not taken into account more than once.
(5) Examples. The following examples illustrate the principles of
this paragraph (c):
Example 1. Stock of the common parent under supplemental rules. (i)
A owns all the L stock. L is not a member of an affiliated group and has
a net operating loss carryover arising in Year 1 that is carried over to
Year 6. On September 20, Year 6, L transfers all of its assets and
liabilities to a newly created subsidiary, S, in exchange for S stock. L
and S thereafter file consolidated returns. On November 23, Year 6, B
contributes cash to L in exchange for a 45 percent ownership interest in
L and contributes cash to S for a 20 percent ownership interest in S.
(ii) During the 3 year period ending on November 23, Year 6, B is a
5% shareholder of L and of S that increases its ownership interest in L
and S during that period. Under paragraph (c)(4)(ii) of this section,
the determination whether L (the common parent of a loss group) has an
ownership change on November 23, Year 6 (or, subject to paragraph
(c)(4)(iv) of this section, on any testing date in the testing period
which includes November 23, Year 6), is made by applying paragraph
(b)(1)(i) of this section and by treating the value of B's 20 percent
ownership interest in S as if it were L stock issued to B. Because B is
a 5% shareholder of both L and S during the 3 year period ending on
November 23, Year 6, and B's increase in its percentage ownership in the
stock of S would be taken into account in determining if S (if it were a
loss corporation) had an ownership change,
[[Page 472]]
it is not relevant whether L has actual knowledge of B's acquisition of
S stock.
Example 2. Plan or arrangement--public offering of subsidiary stock.
(i) A owns all the stock of L and L owns all the stock of L1. The L
group has a consolidated net operating loss arising in Year 1 that
resulted from the operations of L1 and that is carried over to Year 2.
On October 7, Year 2, A sells 49 percent of the L stock to B. As part of
a plan that includes the sale of L stock, A causes a public offering of
L1 stock on November 6, Year 2. L has actual knowledge of the plan. The
following is a graphic illustration of these facts:
[[Page 473]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.010
(ii) A's sale of the L stock to B does not cause an ownership change
of the L loss group on October 7, Year 2, under the rules of Sec. 1.382-
2T and paragraph (b)(1)(i) of this section.
(iii) Because the issuance of L1 stock to the public occurs as part
of the same plan as
[[Page 474]]
B's acquisition of L stock, and L has knowledge of the plan, paragraph
(c)(4) of this section applies to determine whether the L loss group has
an ownership change on November 6, Year 2 (or, subject to paragraph
(c)(4)(iv) of this section, on any testing date for which the testing
period includes November 6, Year 2).
(d) Testing period following ownership change under this section. If
a loss group (or a loss subgroup) has had an ownership change under this
section, the testing period for determining a subsequent ownership
change with respect to pre-change consolidated attributes (or pre-change
subgroup attributes) begins no earlier than the first day following the
loss group's (or loss subgroup's) most recent change date.
(e) Information statements--(1) Common parent of a loss group. The
common parent of a loss group must file the information statement
required by Sec. 1.382-2T(a)(2)(ii) for a consolidated return year
because of any owner shift, equity structure shift, or other transaction
described in Sec. 1.382-2T(a)(2)(i)--
(i) With respect to the common parent and with respect to any
subsidiary stock subject to paragraph (c) of this section; and
(ii) With respect to an ownership change described in Sec. 1.1502-
96(b) (relating to ownership changes of subsidiaries).
(2) Abbreviated statement with respect to loss subgroups. The common
parent of a consolidated group that has a loss subgroup during a
consolidated return year must file the information statement required by
Sec. 1.382-2T(a)(2)(ii) because of any owner shift, equity structure
shift, or other transaction described in Sec. 1.382-2T(a)(2)(i) with
respect to the loss subgroup parent and with respect to any subsidiary
stock subject to paragraph (c) of this section. Instead of filing a
separate statement for each loss subgroup parent, the common parent
(which is treated as a loss corporation) may file the single statement
described in paragraph (e)(1) of this section. In addition to the
information concerning stock ownership of the common parent, the single
statement must identify each loss subgroup parent and state which loss
subgroups, if any, have had ownership changes during the consolidated
return year. The loss subgroup parent is, however, still required to
maintain the records necessary to determine if the loss subgroup has an
ownership change. This paragraph (e)(2) applies with respect to the
attributes of a loss subgroup until, under Sec. 1.1502-96(a), the
attributes are no longer treated as described in Sec. 1.1502-91(d)
(relating to the definition of loss subgroup). After that time, the
information statement described in paragraph (e)(1) of this section must
be filed with respect to those attributes.
[T.D. 8824, 64 FR 36137, July 2, 1999]
Sec. 1.1502-93 Consolidated section 382 limitation (or subgroup section 382 limitation).
(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation)--(1) In general. Following an ownership
change, the consolidated section 382 limitation (or subgroup section 382
limitation) for any post-change year is an amount equal to the value of
the loss group (or loss subgroup), as defined in paragraph (b) of this
section, multiplied by the long-term tax-exempt rate that applies with
respect to the ownership change, and adjusted as required by section 382
and the regulations thereunder. See, for example, section 382(b)(2)
(relating to the carryforward of unused section 382 limitation), section
382(b)(3)(B) (relating to the section 382 limitation for the post-change
year that includes the change date), section 382(h) (relating to
recognized built-in gains and section 338 gains), and section 382(m)(2)
(relating to short taxable years). For special rules relating to the
recognized built-in gains of a loss group (or loss subgroup), see
paragraph (c)(2) of this section.
(2) Coordination with apportionment rule. For special rules relating
to apportionment of a consolidated section 382 limitation (or a subgroup
section 382 limitation) or net unrealized built-in gain when one or more
corporations cease to be members of a loss group (or a loss subgroup)
and to aggregation of amounts so apportioned, see Sec. 1.1502-95(c).
(b) Value of the loss group (or loss subgroup)--(1) Stock value
immediately before ownership change. Subject to any adjustment under
paragraph (b)(2) of this section, the value of the loss group
[[Page 475]]
(or loss subgroup) is the value, immediately before the ownership
change, of the stock of each member, other than stock that is owned
directly or indirectly by another member. For this purpose--
(i) Ownership is determined under Sec. 1.382-2T;
(ii) A member is considered to indirectly own stock of another
member through a nonmember only if the member has a 5-percent or greater
ownership interest in the nonmember; and
(iii) Stock includes stock described in section 1504(a)(4) and
Sec. 1.382-2T(f)(18)(ii) and (iii).
(2) Adjustment to value--(i) In general. The value of the loss group
(or loss subgroup), as determined under paragraph (b)(1) of this
section, is adjusted under any rule in section 382 or the regulations
thereunder requiring an adjustment to such value for purposes of
computing the amount of the section 382 limitation. See, for example,
section 382(e)(2) (redemptions and corporate contractions), section
382(l)(1) (certain capital contributions) and section 382(l)(4)
(ownership of substantial nonbusiness assets). For purposes of section
382(e)(2), redemptions and corporate contractions that do not effect a
transfer of value outside of the loss group (or loss subgroup) are
disregarded. For purposes of section 382(l)(1), capital contributions
between members of the loss group (or loss subgroup) (or a contribution
of stock to a member made solely to satisfy the loss subgroup parent
requirement of paragraph (d)(1)(ii) or (2)(ii) of this section), are not
taken into account. Also, the substantial nonbusiness asset test of
section 382(l)(4) is applied on a group (or subgroup) basis, and is not
applied separately to its members.
(ii) Anti-duplication. Appropriate adjustments must be made to the
extent necessary to prevent any duplication of the value of the stock of
a member, even though corporations that do not file consolidated returns
may not be required to make such an adjustment. In making these
adjustments, the group (or loss subgroup) may apply the principles of
Sec. 1.382-8 (relating to controlled groups of corporations) in
determining the value of a loss group (or loss subgroup) even if that
section would not apply if separate returns were filed. Also, the
principles of Sec. 1.382-5(d) (relating to successive ownership changes
and absorption of a section 382 limitation) may apply to adjust the
consolidated section 382 limitation (or subgroup section 382 limitation)
of a loss group (or loss subgroup) to avoid a duplication of value if
there are simultaneous (rather than successive) ownership changes.
(3) Examples. The following examples illustrate the principles of
this paragraph (b):
Example 1. Basic case. (i) L, L1, and L2 compose a loss group. L has
outstanding common stock, the value of which is $100. L1 has outstanding
common stock and preferred stock that is described in section
1504(a)(4). L owns 90 percent of the L1 common stock, and A owns the
remaining 10 percent of the L1 common stock plus all the preferred
stock. The value of the L1 common stock is $40, and the value of the L1
preferred stock is $30. L2 has outstanding common stock, 50 percent of
which is owned by L and 50 percent by L1. The L group has an ownership
change. The following is a graphic illustration of these facts:
[[Page 476]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.011
(ii) Under paragraph (b)(1) of this section, the L group does not
include the value of the stock of any member that is owned directly or
indirectly by another member in computing its consolidated section 382
limitation. Accordingly, the value of the stock of the loss group is
$134, the sum of the value of--
(a) The common stock of L ($100);
(b) The 10 percent of the L1 common stock ($4) owned by A; and
(c) The L1 preferred stock ($30) owned by A.
Example 2--Indirect ownership. (i) L and L1 compose a consolidated
group. L's stock has a value of $100. L owns 80 shares (worth $80) and
corporation M owns 20 shares (worth $20) of the L1 stock. L also owns 79
percent of the stock of corporation M. The L group has an ownership
change. The following is a graphic illustration of these facts:
[[Page 477]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.012
(ii) Under paragraph (b)(1) of this section, because of L's more
than 5 percent ownership interest in M, a nonmember, L is considered to
indirectly own 15.8 shares of the L1 stock held by M (79% x 20
shares). The value of the L loss group is $104.20, the sum of the values
of--
(a) The L stock ($100); and
(b) The L1 stock not owned directly or indirectly by L (21% x $20,
or $4.20).
(c) Recognized built-in gain of a loss group or loss subgroup--(1)
In general. If a loss group (or loss subgroup) has a net unrealized
built-in gain, any recognized built-in gain of the loss group (or loss
subgroup) is taken into account under section 382(h) in determining the
consolidated section 382 limitation (or subgroup section 382
limitation).
(2) Adjustments. Appropriate adjustments must be made so that any
recognized built-in gain of a member that increases more than one
section 382 limitation (whether consolidated, subgroup, or separate)
does not effect a duplication in the amount of consolidated taxable
income that can be offset by pre-change net operating losses. For
example, a consolidated section 382 limitation that is increased by
recognized built-in gains is reduced to the extent that pre-change net
operating losses of a loss subgroup absorb additional consolidated
taxable income because the same recognized built-in gains caused an
increase in that loss subgroup's section 382 limitation. In addition,
recognized built-in gain may not increase the amount of consolidated
taxable income that can be offset by recognized built-in losses.
(d) Continuity of business--(1) In general. A loss group (or a loss
subgroup) is treated as a single entity for purposes of determining
whether it satisfies the continuity of business enterprise requirement
of section 382(c)(1).
(2) Example. The following example illustrates the principle of this
paragraph (d):
Example. Continuity of business enterprise. L owns all the stock of
two subsidiaries, L1 and L2. The L group has an ownership change. It has
pre-change consolidated attributes attributable to L2. Each of the
members has historically conducted a separate line of business. Each
line of business is approximately equal in value. One year after the
ownership change, L discontinues its separate business and the business
of L2. The separate business of L1 is continued for the remainder of the
2 year period following the ownership change. The continuity of business
enterprise requirement of section 382(c)(1) is met even though the
separate businesses of L and L2 are discontinued.
(e) Limitations of losses under other rules. If a section 382
limitation for a
[[Page 478]]
post-change year exceeds the consolidated taxable income that may be
offset by pre-change attributes for any reason, including the
application of the limitation of Sec. 1.1502-21(c), the amount of the
excess is carried forward under section 382(b)(2) (relating to the
carryforward of unused section 382 limitation).
[T.D. 8824, 64 FR 36153, July 2, 1999]
Sec. 1.1502-94 Coordination with section 382 and the regulations thereunder when a corporation becomes a member of a consolidated group.
(a) Scope--(1) In general. This section applies section 382 and the
regulations thereunder to a corporation that is a new loss member of a
consolidated group. A corporation is a new loss member if it--
(i) Carries over a net operating loss that arose (or is treated
under Sec. 1.1502-21(c) as arising) in a SRLY with respect to the
current group, and that is not described in Sec. 1.1502-91(d)(1); or
(ii) Has a net unrealized built-in loss (determined under paragraph
(c) of this section immediately before it becomes a member of the
current group by treating that day as a change date) that is not taken
into account under Sec. 1.1502-91(d)(2) in determining whether two or
more corporations compose a loss subgroup.
(2) Successor corporation as new loss member. A new loss member also
includes any successor to a corporation that has a net operating loss
carryover arising in a SRLY and that is treated as remaining in
existence under Sec. 1.382-2(a)(1)(ii) following a transaction described
in section 381(a).
(3) Coordination in the case of a loss subgroup. For rules regarding
the determination of whether there is an ownership change of a loss
subgroup with respect to a net operating loss or a net unrealized built-
in loss described in Sec. 1.1502-91(d) (relating to the definition of
loss subgroup) and the computation of a subgroup section 382 limitation
following such an ownership change, see Secs. 1.1502-92 and 1.1502-93.
(4) End of separate tracking of certain losses. If Sec. 1.1502-96(a)
(relating to the end of separate tracking of attributes) applies to a
new loss member, then, while that member remains a member of the
consolidated group, there is an ownership change with respect to its
attributes described in Sec. 1.1502-96(a)(2) only if the consolidated
group is a loss group and has an ownership change under Sec. 1.1502-
92(b)(1)(i) (or that member has an ownership change under Sec. 1.1502-
96(b) (relating to ownership changes of subsidiaries)). If, however, the
new loss member has had an ownership change before Sec. 1.1502-96(a)
applies, see Sec. 1.1502-96(c) for the continuing application of the
section 382 limitation with respect to the member's pre-change losses.
(5) Cross-reference. See section 382(a) and Sec. 1.1502-96(c) for
the continuing effect of an ownership change after a corporation becomes
or ceases to be a member.
(b) Application of section 382 to a new loss member--(1) In general.
Section 382 and the regulations thereunder apply to a new loss member to
determine, on a separate entity basis, whether and to what extent a
section 382 limitation applies to limit the amount of consolidated
taxable income that may be offset by the new loss member's pre-change
separate attributes. For example, if an ownership change with respect to
the new loss member occurs under section 382 and the regulations
thereunder, the amount of consolidated taxable income for any post-
change year that may be offset by the new loss member's pre-change
separate attributes shall not exceed the section 382 limitation as
determined separately under section 382(b) with respect to that member
for such year. If the post-change year includes the change date, section
382(b)(3)(A) is applied so that the section 382 limitation of the new
loss member does not apply to the portion of the taxable income for such
year that is allocable to the period in such year on or before the
change date. See generally Sec. 1.382-6 (relating to the allocation of
income and loss).
(2) Adjustment to value. Appropriate adjustments must be made to the
extent necessary to prevent any duplication of the value of the stock of
a member, even though corporations that do not file consolidated returns
may not be required to make such an adjustment. For example, the
principles of
[[Page 479]]
Sec. 1.1502-93(b)(2)(ii) (relating to adjustments to value) apply in
determining the value of a new loss member.
(3) Pre-change separate attribute defined. A pre-change separate
attribute of a new loss member is--
(i) Any net operating loss carryover of the new loss member
described in paragraph (a)(1) of this section; and
(ii) Any recognized built-in loss of the new loss member.
(4) Examples. The following examples illustrate the principles of
this paragraph (b):
Example 1. Basic case. (i) A and P each own 50 percent of the L
stock. On December 19, Year 6, P purchases 30 percent of the L stock
from A for cash. L has net operating losses arising in Year 1 and Year 2
that it carries over to Year 6 and Year 7. The following is a graphic
illustration of these facts:
[[Page 480]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.013
(ii) L is a new loss member because it has net operating loss
carryovers that arose in a SRLY with respect to the P group and L is not
a member of a loss subgroup under Sec. 1.1502-91(d). Under section 382
and the regulations thereunder, L is a loss corporation on December 19,
Year 6, that day is a testing
[[Page 481]]
date for L, and the testing period for L commences on December 20, Year
3.
(iii) P's purchase of L stock does not cause an ownership change of
L on December 19, Year 6, with respect to the net operating loss
carryovers from Year 1 and Year 2 under section 382 and Sec. 1.382-2T.
The use of the loss carryovers, however, is subject to limitation under
Sec. 1.1502-21(c).
Example 2. Multiple new loss members. (i) The facts are the same as
in Example 1, and, on December 31, Year 6, L purchases all the stock of
L1 from B for cash. L1 has a net operating loss of $40 arising in Year 3
that it carries over to Year 7. The following is a graphic illustration
of these facts:
[[Page 482]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.014
(ii) L1 is a new loss member because it has a net operating loss
carryover from Year 3 that arose in a SRLY with respect to the P group
and L1 is not a member of a loss subgroup under Sec. 1.1502-91(d)(1).
[[Page 483]]
(iii) L's purchase of all the stock of L1 causes an ownership change
of L1 on December 31, Year 6, under section 382 and Sec. 1.382-2T.
Accordingly, a section 382 limitation based on the value of the L1 stock
immediately before the ownership change limits the amount of
consolidated taxable income of the P group for any post-change year that
may be offset by L1's loss from Year 3.
(iv) L1's ownership change upon becoming a member of the P group is
an ownership change described in Sec. 1.1502-96(a). Thus, starting on
January 1, Year 7, the P group no longer separately tracks owner shifts
of the stock of L1 with respect to L1's loss from Year 3, and the P
group is a loss group because L1's Year 3 loss is treated as a loss
described in Sec. 1.1502-91(c).
Example 3. Ownership changes of new loss members. (i) The facts are
the same as in Example 2, and, on July 30, Year 7, C purchases all the
stock of P for cash.
(ii) L is a new loss member on July 30, Year 7, because its Year 1
and Year 2 losses arose in SRLYs with respect to the P group and it is
not a member of a loss subgroup under Sec. 1.1502-91(d)(1). The testing
period for L commences on August 1, Year 4. C's purchase of all the P
stock causes an ownership change of L on July 30, Year 7, under section
382 and Sec. 1.382-2T with respect to its Year 1 and Year 2 losses.
Accordingly, a section 382 limitation based on the value of the L stock
immediately before the ownership change limits the amount of
consolidated taxable income of the P group for any post-change year that
may be offset by L's Year 1 and Year 2 losses. See Sec. 1.1502-21(c) for
rules relating to an additional limitation.
(iii) The P group is a loss group on July 30, Year 7, because it is
entitled to use L1's loss from Year 3, and such loss is no longer
treated as a loss of a new loss member starting the day after L1's
ownership change on December 31, Year 6. See Secs. 1.1502-96(a) and
1.1502-91(c)(2). C's purchase of all the P stock causes an ownership
change of P, and therefore the P loss group, on July 30, Year 7, with
respect to L1's Year 3 loss. Accordingly, a consolidated section 382
limitation based on the value of the P stock immediately before the
ownership change limits the amount of consolidated taxable income of the
P group for any post-change year that may be offset by L1's Year 3 loss.
(c) Built-in gains and losses. As the context may require, the
principles of Secs. 1.1502-91(g) and (h) and 1.1502-93(c) (relating to
built-in gains and losses) apply to a new loss member on a separate
entity basis. See Sec. 1.1502-91(g)(4). See Sec. 1.1502-13 (including
Example 10 of Sec. 1.1502-13(c)(7)) for rules relating to the treatment
of intercompany transactions.
(d) Information statements. The common parent of a consolidated
group that has a new loss member subject to paragraph (b)(1) of this
section during a consolidated return year must file the information
statement required by Sec. 1.382-2T(a)(2)(ii) because of any owner
shift, equity structure shift, or other transaction described in
Sec. 1.382-2T(a)(2)(i). Instead of filing a separate statement for each
new loss member, the common parent may file a single statement described
in Sec. 1.382-2T(a)(2)(ii) with respect to the stock ownership of the
common parent (which is treated as a loss corporation). In addition to
the information concerning stock ownership of the common parent, the
single statement must identify each new loss member and state which new
loss members, if any, have had ownership changes during the consolidated
return year. The new loss member is, however, required to maintain the
records necessary to determine if it has an ownership change. This
paragraph (d) applies with respect to the attributes of a new loss
member until an event occurs which ends separate tracking under
Sec. 1.1502-96(a). After that time, the information statement described
in Sec. 1.1502-92(e)(1) must be filed with respect to these attributes.
[T.D. 8824, 64 FR 36155, July 2, 1999]
Sec. 1.1502-95 Rules on ceasing to be a member of a consolidated group (or loss subgroup).
(a) In general--(1) Consolidated group. This section provides rules
for applying section 382 on or after the day that a member ceases to be
a member of a consolidated group (or loss subgroup). The rules concern
how to determine whether an ownership change occurs with respect to
losses of the member, and how a consolidated section 382 limitation (or
subgroup section 382 limitation) and a loss group's (or loss subgroup's)
net unrealized built-in gain or loss is apportioned to the member. As
the context requires, a reference in this section to a loss group, a
member, or a corporation also includes a reference to a loss subgroup,
and a reference to a consolidated section 382 limitation also includes a
reference to a subgroup section 382 limitation.
[[Page 484]]
(2) Election by common parent. Only the common parent (not the loss
subgroup parent) may make the election under paragraph (c) of this
section to apportion a consolidated section 382 limitation (or subgroup
section 382 limitation) or a loss group's (or loss subgroup's) net
unrealized built-in gain.
(3) Coordination with Secs. 1.1502-91 through 1.1502-93. For rules
regarding the determination of whether there is an ownership change of a
loss subgroup and the computation of a subgroup section 382 limitation
following such an ownership change, see Secs. 1.1502-91 through 1.1502-
93.
(b) Separate application of section 382 when a member leaves a
consolidated group--(1) In general. Except as provided in Secs. 1.1502-
91 through 1.1502-93 (relating to rules applicable to loss groups and
loss subgroups), section 382 and the regulations thereunder apply to a
corporation on a separate entity basis after it ceases to be a member of
a consolidated group (or loss subgroup). Solely for purposes of
determining whether a corporation has an ownership change--
(i) Any portion of a consolidated net operating loss that is
apportioned to the corporation under Sec. 1.1502-21(b) is treated as a
net operating loss of the corporation beginning on the first day of the
taxable year in which the loss arose;
(ii) The testing period may include the period during which (or
before which) the corporation was a member of the group (or loss
subgroup); and
(iii) Except to the extent provided in Sec. 1.1502-96(d) (relating
to reattributed losses), the day it ceases to be a member of a
consolidated group is treated as a testing date of the corporation
within the meaning of Sec. 1.382-2(a)(4).
(2) Effect of a prior ownership change of the group. If a loss group
has had an ownership change under Sec. 1.1502-92 before a corporation
ceases to be a member of a consolidated group (the former member)--
(i) Any pre-change consolidated attribute that is subject to a
consolidated section 382 limitation continues to be treated as a pre-
change loss with respect to the former member after it is apportioned to
the former member and, if any net unrealized built-in loss is allocated
to the former member under paragraph (e) of this section, any recognized
built-in loss of the former member is a pre-change loss of the member;
(ii) The section 382 limitation with respect to such pre-change
attribute is zero unless the common parent, under paragraph (c) of this
section, apportions to the former member all or part of the consolidated
section 382 limitation applicable to such attribute. The limitation
applicable to a pre-change attribute other than a recognized built-in
loss may be increased to the extent that the common parent has
apportioned all or part of the loss group's net unrealized built-in gain
to the former member, and the former member recognizes built-in gain
during the recognition period;
(iii) The testing period for determining a subsequent ownership
change with respect to such pre-change attribute (or such net unrealized
built-in loss, if any) begins no earlier than the first day following
the loss group's most recent change date; and
(iv) As generally provided under section 382, an ownership change of
the former member that occurs on or after the day it ceases to be a
member of a loss group may result in an additional, lesser limitation
amount with respect to such losses.
(3) Application in the case of a loss subgroup. If two or more
former members are included in the same loss subgroup immediately after
they cease to be members of a consolidated group, the principles of
paragraphs (b), (c) and (e) of this section apply to the loss subgroup.
Therefore, for example, an apportionment by the common parent under
paragraph (c) of this section is made to the loss subgroup rather than
separately to its members. If the common parent of the consolidated
group apportions all or part of a limitation (or net unrealized built-in
gain) separately to one or more former members that are included in a
loss subgroup because the common parent of the acquiring group makes an
election under Sec. 1.1502-91(d)(4) with respect to those members, the
aggregate of those separate amounts is treated as the amount apportioned
to the loss subgroup. Such separate apportionment may occur, for
[[Page 485]]
example, because the election under Sec. 1.1502-91(d)(4) has not been
filed at the time that the election of apportionment is made under
paragraph (f) of this section.
(4) Examples. The following examples illustrate the principles of
this paragraph (b):
Example 1. Treatment of departing member as a separate corporation
throughout the testing period. (i) A owns all the L stock. L owns all
the stock of L1 and L2. The L group has a consolidated net operating
loss arising in Year 1 that is carried over to Year 3. On January 12,
Year 2, A sells 30 percent of the L stock to B. On February 7, Year 3, L
sells 40 percent of the L2 stock to C, and L2 ceases to be a member of
the group. A portion of the Year 1 consolidated net operating loss is
apportioned to L2 under Sec. 1.1502-21(b) and is carried to L2's first
separate return year, which ends December 31, Year 3. The following is a
graphic illustration of these facts:
[[Page 486]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.015
(ii) Under paragraph (b)(1) of this section, L2 is a loss
corporation on February 7, Year 3. Under paragraph (b)(1)(iii) of this
section, February 7, Year 3, is a testing date. Under paragraph
(b)(1)(ii) of this section, the testing period for L2 with respect to
this testing date commences on January 1, Year 1, the first day of the
taxable year in which the
[[Page 487]]
portion of the consolidated net operating loss apportioned to L2 arose.
Therefore, in determining whether L2 has an ownership change on February
7, Year 3, B's purchase of 30 percent of the L stock and C's purchase of
40 percent of the L2 stock are each owner shifts. L2 has an ownership
change under section 382(g) and Sec. 1.382-2T because B and C have
increased their ownership interests in L2 by 18 and 40 percentage
points, respectively, during the testing period.
Example 2. Effect of prior ownership change of loss group. (i) L
owns all the L1 stock and L1 owns all the L2 stock. The L loss group had
an ownership change under Sec. 1.1502-92 in Year 2 with respect to a
consolidated net operating loss arising in Year 1 and carried over to
Year 2 and Year 3. The consolidated section 382 limitation computed
solely on the basis of the value of the stock of L is $100. On December
31, Year 2, L1 sells 25 percent of the stock of L2 to B. L2 is
apportioned a portion of the Year 1 consolidated net operating loss
which it carries over to its first separate return year ending after
December 31, Year 2. L2's separate section 382 limitation with respect
to this loss is zero unless L elects to apportion all or a part of the
consolidated section 382 limitation to L2. (See paragraph (c) of this
section for rules regarding the apportionment of a consolidated section
382 limitation.) L apportions $50 of the consolidated section 382
limitation to L2, and the remaining $50 of the consolidated section 382
limitation stays with the loss group composed of L and L1.
(ii) On December 31, Year 3, L1 sells its remaining 75 percent stock
interest in L2 to C, resulting in an ownership change of L2. L2's
section 382 limitation computed on the change date with respect to the
value of its stock is $30. Accordingly, L2's section 382 limitation for
post-change years ending after December 31, Year 3, with respect to its
pre-change losses, including the consolidated net operating losses
apportioned to it from the L group, is $30, adjusted for a short taxable
year, carryforward of unused limitation, or any other adjustment
required under section 382.
(c) Apportionment of a consolidated section 382 limitation--(1) In
general. The common parent may elect to apportion all or any part of a
consolidated section 382 limitation to a former member (or loss
subgroup). The common parent also may elect to apportion all or any part
of the loss group's net unrealized built-in gain to a former member (or
loss subgroup).
(2) Amount which may be apportioned--(i) Consolidated section 382
limitation. The common parent may apportion all or part of each element
of the consolidated section 382 limitation determined under Sec. 1.1502-
93. For this purpose, the consolidated section 382 limitation consists
of two elements--
(A) The value element, which is the element of the limitation
determined under section 382(b)(1) (relating to value multiplied by the
long-term tax-exempt rate) without regard to such adjustments as those
described in section 382(b)(2) (relating to the carryforward of unused
section 382 limitation), section 382(b)(3)(B)(relating to the section
382 limitation for the post-change year that includes the change date),
section 382(h)(relating to built-in gains and section 338 gains), and
section 382(m)(2)(relating to short taxable years); and
(B) The adjustment element, which is so much (if any) of the
limitation for the taxable year during which the former member ceases to
be a member of the consolidated group that is attributable to a
carryover of unused limitation under section 382(b)(2) or to recognized
built-in gains under 382(h).
(ii) Net unrealized built-in gain. The aggregate amount of the loss
group's net unrealized built-in gain that may be apportioned to one or
more former members that cease to be members during the same
consolidated return year cannot exceed the loss group's excess,
immediately after the close of that year, of net unrealized built-in
gain over recognized built-in gain, determined under section
382(h)(1)(A)(ii) (relating to a limitation on recognized built-in gain).
For this purpose, net unrealized built-in gain apportioned to former
members in prior consolidated return years is treated as recognized
built-in gain in those years.
(3) Effect of apportionment on the consolidated group--(i)
Consolidated section 382 limitation. The value element of the
consolidated section 382 limitation for any post-change year ending
after the day that a former member (or loss subgroup) ceases to be a
member(s) is reduced to the extent that it is apportioned under this
paragraph (c). The consolidated section 382 limitation for the post-
change year in which the former member (or loss subgroup) ceases to be a
member(s) is also
[[Page 488]]
reduced to the extent that the adjustment element for that year is
apportioned under this paragraph (c).
(ii) Net unrealized built-in gain. The amount of the loss group's
net unrealized built-in gain that is apportioned to the former member
(or loss subgroup) is treated as recognized built-in gain for a prior
taxable year ending in the recognition period for purposes of applying
the limitation of section 382(h)(1)(A)(ii) to the loss group's
recognition period taxable years beginning after the consolidated return
year in which the former member (or loss subgroup) ceases to be a
member.
(4) Effect on corporations to which an apportionment is made--(i)
Consolidated section 382 limitation. The amount of the value element
that is apportioned to a former member (or loss subgroup) is treated as
the amount determined under section 382(b)(1) for purposes of
determining the amount of that corporation's (or loss subgroup's)
section 382 limitation for any taxable year ending after the former
member (or loss subgroup) ceases to be a member(s). Appropriate
adjustments must be made to the limitation based on the value element so
apportioned for a short taxable year, carryforward of unused limitation,
or any other adjustment required under section 382. The adjustment
element apportioned to a former member (or loss subgroup) is treated as
an adjustment under section 382(b)(2) or section 382(h), as appropriate,
for the first taxable year after the member (or members) ceases to be a
member (or members).
(ii) Net unrealized built-in gain. For purposes of determining the
amount by which the former member's (or loss subgroup's) section 382
limitation for any taxable year beginning after the former member (or
loss subgroup) ceases to be a member(s) is increased by its recognized
built-in gain--
(A) The amount of net unrealized built-in gain apportioned to a
former member (or loss subgroup) is treated as if it were an amount of
net unrealized built-in gain determined under section
382(h)(1)(A)(i)(without regard to the threshold of section 382(h)(3)(B))
with respect to such member or loss subgroup, and that amount is not
reduced under section 382(h)(1)(A)(ii) by the loss group's recognized
built-in gain;
(B) The former member's (or loss subgroup's) 5 year recognition
period begins on the loss group's change date;
(C) In applying section 382(h)(1)(A)(ii), the former member (or loss
subgroup) takes into account only its prior taxable years that begin
after it ceases to be a member of the loss group; and
(D) The former member's (or loss subgroup's) recognized built-in
gain on the disposition of an asset is determined under section
382(h)(2)(A), treating references to the change date in that section as
references to the loss group's change date.
(5) Deemed apportionment when loss group terminates. If a loss group
terminates, to the extent the consolidated section 382 limitation or net
unrealized built-in gain is not apportioned under paragraph (c)(1) of
this section, the consolidated section 382 limitation or net unrealized
built-in gain is deemed to be apportioned to the loss subgroup that
includes the common parent, or, if there is no loss subgroup that
includes the common parent immediately after the loss group terminates,
to the common parent. A loss group terminates on the first day of the
first taxable year that is a separate return year with respect to each
member of the former loss group.
(6) Appropriate adjustments when former member leaves during the
year. Appropriate adjustments are made to the consolidated section 382
limitation for the consolidated return year during which the former
member (or loss subgroup) ceases to be a member(s) to reflect the
inclusion of the former member in the loss group for a portion of that
year.
(7) Examples. The following examples illustrate the principles of
this paragraph (c):
Example 1. Consequence of apportionment. (i) L owns all the L1 stock
and L1 owns all the L2 stock. The L group has a $200 consolidated net
operating loss arising in Year 1 that is carried over to Year 2. At the
close of December 31, Year 1, the group has an ownership change under
Sec. 1.1502-92. The ownership change results in a consolidated section
382 limitation of $10 based on the value of the stock of the group. On
August 29, Year 2, L1 sells 30 percent of the stock of L2 to A. L2 is
[[Page 489]]
apportioned $90 of the group's $200 consolidated net operating loss
under Sec. 1.1502-21(b). L, the common parent, elects to apportion $6 of
the consolidated section 382 limitation to L2. The following is a
graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR02JY99.016
(ii) For its separate return years ending after December 31, Year 2,
L2's section 382 limitation with respect to the $90 of the group's net
operating loss apportioned to it is $6, adjusted, as appropriate, for
any short taxable year, unused section 382 limitation, or other
adjustment. For its consolidated return year ending December 31, Year 2
the L group's consolidated section 382 limitation with respect to the
remaining $110 of pre-change consolidated attribute is $4 ($10 minus the
$6 value element apportioned to L2), adjusted, as appropriate, for any
short taxable year, unused section 382 limitation, or other adjustment.
(iii) For the L group's consolidated return year ending December 31,
Year 2, the value element of its consolidated section 382 limitation is
increased by $4 (rounded to the nearest dollar), to account for the
period during which L2 was a member of the L group ($6, the consolidated
section 382 limitation apportioned to L2, times 241/365, the ratio of
the number of days during Year 2 that L2 is a member of the group to the
number of days in the group's consolidated return year). See paragraph
(c)(6) of this section. Therefore, the value element of the consolidated
section 382 limitation for Year 2 of the L group is $8 (rounded to the
nearest dollar).
(iv) The section 382 limitation for L2's short taxable year ending
December 31, Year 2, is $2 (rounded to the nearest dollar), which is the
amount that bears the same relationship to $6, the value element of the
consolidated section 382 limitation apportioned to L2, as the number of
days during that short taxable year, 124 days, bears to 365. See
Sec. 1.382-5(c).
Example 2. Consequence of no apportionment. The facts are the same
as in Example 1, except that L does not elect to apportion any portion
of the consolidated section 382 limitation to L2. For its separate
return years ending after August 29, Year 2, L2's section 382 limitation
with respect to the $90 of the group's pre-change consolidated attribute
apportioned to L2 is zero under paragraph (b)(2)(ii) of this section.
Thus, the $90 consolidated net operating loss apportioned to L2 cannot
offset L2's taxable income in any of its separate return years ending
after August 29, Year 2. For its consolidated return
[[Page 490]]
years ending after August 29, Year 2, the L group's consolidated section
382 limitation with respect to the remaining $110 of pre-change
consolidated attribute is $10, adjusted, as appropriate, for any short
taxable year, unused section 382 limitation, or other adjustment.
Example 3. Apportionment of adjustment element. The facts are the
same as in Example 1, except that L2 ceases to be a member of the L
group on August 29, Year 3, and the L group has a $4 carryforward of an
unused consolidated section 382 limitation (under section 382(b)(2)) to
the Year 3 consolidated return year. The carryover of unused limitation
increases the consolidated section 382 limitation for the Year 3
consolidated return year from $10 to $14. L may elect to apportion all
or any portion of the $10 value element and all or any portion of the $4
adjustment element to L2.
(d) Rules pertaining to ceasing to be a member of a loss subgroup--
(1) In general. A corporation ceases to be a member of a loss subgroup
on the earlier of--
(i) The first day of the first taxable year for which it files a
separate return; or
(ii) The first day that it ceases to bear a relationship described
in section 1504(a)(1) to the loss subgroup parent (treating for this
purpose the loss subgroup parent as the common parent described in
section 1504(a)(1)(A)).
(2) Exceptions. Paragraph (d)(1)(ii) of this section does not apply
to a member of a loss subgroup while that member remains a member of the
current group--
(i) If an election under Sec. 1.1502-91(d)(4)(relating to treating
the subgroup parent requirement as satisfied) applies to the members of
the loss subgroup;
(ii) Starting on the day after the change date (but not earlier than
the date the loss subgroup becomes a member of the group), if there is
an ownership change of the loss subgroup within six months before, on,
or after becoming members of the group; or
(iii) Starting the day after the period of 5 consecutive years
following the day that the loss subgroup become members of the group
during which the loss subgroup has not had an ownership change.
(3) Examples. The principles of this paragraph (d) are illustrated
by the following examples:
Example 1. Basic case. (i) P owns all the L stock, L owns all the L1
stock and L1 owns all the L2 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 2. On
December 11, Year 2, P sells all the stock of L to corporation M. Each
of L, L1, and L2 is apportioned a portion of the Year 1 consolidated net
operating loss, and thereafter each joins with M in filing consolidated
returns. Under Sec. 1.1502-92, the L loss subgroup has an ownership
change on December 11, Year 2. The L loss subgroup has a subgroup
section 382 limitation of $100. The following is a graphic illustration
of these facts:
[[Page 491]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.017
(ii) On May 22, Year 3, L1 sells 40 percent of the L2 stock to A. L2
carries over a portion of the P group's net operating loss from Year 1
to its separate return year ending December 31, Year 3. Under paragraph
(d)(1) of this section, L2 ceases to be a member of the L loss subgroup
on May 22, Year 3, which is both (1) the first day of the first taxable
year
[[Page 492]]
for which it files a separate return and (2) the day it ceases to bear a
relationship described in section 1504(a)(1) to the loss subgroup
parent, L. The net operating loss of L2 that is carried over from the P
group is treated as a pre-change loss of L2 for its separate return
years ending after May 22, Year 3. Under paragraphs (a)(2) and (b)(2) of
this section, the separate section 382 limitation with respect to this
loss is zero unless M elects to apportion all or a part of the subgroup
section 382 limitation of the L loss subgroup to L2.
Example 2. Formation of a new loss subgroup. The facts are the same
as in Example 1, except that A purchases 40 percent of the L1 stock from
L rather than purchasing L2 stock from L1. L1 and L2 file a consolidated
return for their first taxable year ending after May 22, Year 3, and
each of L1 and L2 carries over a part of the net operating loss of the P
group that arose in Year 1. Under paragraph (d)(1) of this section, L1
and L2 cease to be members of the L loss subgroup on May 22, Year 3. The
net operating losses carried over from the P group are treated as pre-
change subgroup attributes of the loss subgroup composed of L1 and L2.
The subgroup section 382 limitation with respect to those losses is zero
unless M elects to apportion all or part of the subgroup section 382
limitation of the L loss subgroup to the L1 loss subgroup. The following
is a graphic illustration of these facts:
[[Page 493]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.018
Example 3. Ownership change upon becoming members of the group. (i)
A owns all the stock of P, and P owns all the stock of L1 and L2. The P
group has a consolidated net operating loss arising in Year 1 that is
carried over to Year 3 and Year 4. Corporation M acquires all the stock
of P on November 11, Year 3, and P, L1, and L2 thereafter file
consolidated
[[Page 494]]
returns with M. M's acquisition results in an ownership change of the P
loss subgroup under Sec. 1.1502-92(b)(1)(ii).
(ii) P distributes the L2 stock to M on October 7, Year 4, and L2
ceases to bear the relationship described in section 1504(a)(1) to P,
the P loss subgroup parent. However, under paragraph (d)(2) of this
section, L2 does not cease to be a member of the P loss subgroup because
the P loss subgroup had an ownership change upon becoming members of the
M group and L2 remains in the M group.
Example 4. Ceasing to bear a section 1504 (a)(1) to the loss
subgroup parent. (i) A owns all the stock of P, and P owns all the stock
of L1 and L2. The P group has a consolidated net operating loss arising
in Year 1 that is carried over to Year 7. At the close of Year 2, X
acquires all of the stock of P, causing an ownership change of the loss
subgroup composed of P, L1 and L2 under Sec. 1.1502-92(b)(1)(ii). In
Year 4, M, which is owned by the same person that owns X, acquires all
of the stock of P, and the M acquisition does not cause a second
ownership change of the P loss subgroup.
(ii) P distributes the L2 stock to M on February 3, Year 6 (less
than 5 years after the P loss subgroup became members of the M group)
and L2 ceases to bear the relationship described in section 1504(a)(1)
to P, the loss subgroup parent. Thus, the section 382 limitation from
the Year 2 ownership change that applies with respect to the pre-change
attributes attributable to L2 is zero except to the extent M elects to
apportion all or part of the P loss subgroup section 382 limitation to
L2.
Example 5. Relationship through a successor. The facts are the same
as in Example 3, except that M's acquisition of the P stock does not
result in an ownership change of the P loss subgroup, and, instead of
P's distributing the stock of L2, L2 merges into L1 on October 7, Year
4. L1 (as successor to L2 in the merger within the meaning of
Sec. 1.1502-1(f)(4)) continues to bear a relationship described in
section 1504(a)(1) to P, the loss subgroup parent. Thus, L2 does not
cease to be a member of the P loss subgroup as a result of the merger.
Example 6. Reattribution of net operating loss carryover under
Sec. 1.1502-20(g). The facts are the same as in Example 3, except that,
instead of distributing the L2 stock to M, P sells that stock to B, and,
under Sec. 1.1502-20(g), M reattributes $10 of L2's net operating loss
carryover to itself. Under Sec. 1.1502-20(g), M succeeds to the
reattributed loss as if the loss were succeeded to in a transaction
described in section 381(a). M, as successor to L2, does not cease to be
a member of the P loss subgroup.
(e) Allocation of net unrealized built-in loss--(1) In general. This
paragraph (e) provides rules for the allocation of a loss group's (or
loss subgroup's) net unrealized built-in loss if a member ceases to be a
member of a loss group (or loss subgroup). This paragraph (e) applies
if--
(i) A loss group (or loss subgroup) has a net unrealized built-in
loss on a change date; and
(ii) Immediately after the close of the consolidated return year in
which the departing member ceases to be a member, the amount of the loss
group's (or loss subgroup's) excess of net unrealized built-in loss over
recognized built-in loss, determined under section 382(h)(1)(B)(ii)
(relating to a limitation on recognized built-in loss), is greater than
zero. (The amount of such excess is referred to as the remaining NUBIL
balance.) In applying section 382(h)(1)(B)(ii) for this purpose, net
unrealized built-in loss allocated to departing members in prior
consolidated return years is treated as recognized built-in loss in
those years.
(2) Amount of allocation--(i) In general. The amount of net
unrealized built-in loss allocated to a departing member is equal to the
remaining NUBIL balance, multiplied by a fraction. The numerator of the
fraction is the amount of the built-in loss, taken into account on the
change date under Sec. 1.1502-91(g), in the assets held by the departing
member immediately after the member ceases to be a member of the loss
group (or loss subgroup). The denominator of the fraction is the sum of
the numerator, plus the amount of the built-in loss, taken into account
under Sec. 1.1502-91(g) on the change date, in the assets held by the
loss group (or loss subgroup) immediately after the close of the taxable
year in which the departing member ceases to be a member. (Fluctuations
in value of the assets between the change date and the date that the
member ceases to be a member of the group (or loss subgroup), or the
close of the taxable year in which the member ceases to be a member of
the loss group, are disregarded.) Because the amount of built-in loss on
the change date with respect to a departing member's assets is taken
into account (rather than that member's separately computed net
unrealized built-in loss
[[Page 495]]
on the change date), a departing member can be apportioned all or part
of the loss group's net unrealized built-in loss, even if the departing
member had a separately computed net unrealized built-in gain on the
change date. Amounts taken into account under section 382(h)(6)(C)
(relating to certain deduction items) are treated as if they were assets
in determining the numerator and denominator of the fraction.
(ii) Transferred basis property and deferred gain or loss. For
purposes of paragraph (b)(2)(i) of this section, assets held by the
departing member immediately after it ceases to be a member of the group
(or by other members immediately after the close of the taxable year)
include--
(A) Assets held at that time that are transferred basis property
that was held by any member of the group (or loss subgroup) on the
change date; and
(B) Assets held at that time by any member of the consolidated group
with respect to which gain or loss of the group member or loss subgroup
member at issue has been deferred in an intercompany transaction and has
not been taken into account.
(iii) Assets for which gain or loss has been recognized. For
purposes of paragraph (b)(2)(i) of this section, assets held by the
departing member immediately after it ceases to be a member of the group
(or by other members immediately after the close of the taxable year) do
not include assets with respect to which gain or loss has previously
been recognized and taken into account during the recognition period
(including gain or loss recognized in an intercompany transaction and
taken into account immediately before the member leaves the group).
Appropriate adjustments must be made if gain or loss on an asset has
been only partially recognized and taken into account.
(iv) Exchanged basis property. The rules of Sec. 1.1502-91(h) apply
for purposes of this paragraph (e) (disregarding stock received from the
departing member or another member that is a member immediately after
the close of the taxable year).
(v) Two or more members depart during the same year. If two or more
members cease to be members during the same consolidated return year,
appropriate adjustments must be made to the denominator of the fraction
for each departing member by treating the other departing members as if
they had not ceased to be members during that year and as if the assets
held by those other departing members immediately after they cease to be
members of the group (or loss subgroup) are assets held by the group
immediately after the close of the taxable year.
(vi) Anti-abuse rule. If assets are transferred between members or a
member ceases to be a member with a principal purpose of causing or
affecting the allocation of amounts under this paragraph (e),
appropriate adjustments must be made to eliminate any benefit of such
acquisition, disposition, or allocation.
(3) Effect of allocation on the consolidated group. The amount of
the net unrealized built-in loss that is allocated to the former member
is treated as recognized built-in loss for a prior taxable year ending
in the recognition period for purposes applying the limitation of
section 382(h)(1)(B)(ii) to a loss group's (or loss subgroup's)
recognition period taxable years beginning after the consolidated return
year in which the former member ceases to be a member.
(4) Effect on corporations to which the allocation is made. For
purposes of determining the amount of the former member's recognized
built-in losses in any taxable year beginning after the former member
ceases to be a member--
(i) The amount of the loss group's (or loss subgroup's) net
unrealized built-in loss that is allocated to the former member is
treated as if it were an amount of net unrealized built-in loss
determined under section 382(h)(1)(B)(i)(without regard to the threshold
of section 382(h)(3)(B)) with respect to such member or loss subgroup,
and that amount is not reduced under section 382(h)(1)(B)(ii) by the
loss group's (or loss subgroup's) recognized built-in losses;
(ii) The former member's 5 year recognition period begins on the
loss group's (or loss subgroup's) change date;
(iii) In applying section 382(h)(1)(B)(ii), the former member
[[Page 496]]
takes into account only its prior taxable years that begin after it
ceases to be a member of the loss group (or loss subgroup); and
(iv) The former member's recognized built-in loss on the disposition
of an asset is determined under section 382(h)(2)(B), treating
references to the change date in that section as references to the loss
group's (or loss subgroup's) change date.
(5) Subgroup principles. If two or more former members are members
of the same consolidated group (the second group) immediately after they
cease to be members of the current group, the principles of paragraphs
(e)(1), (2) and (4) of this section apply to those former members on an
aggregate basis. Thus, for example, the amount of net unrealized built-
in loss allocated to those members is based on the assets held by those
members immediately after they cease to be members of the current group
and the limitation of section 382(h)(1)(B)(ii) on recognized built-in
losses is applied by taking into account the aggregate amount of net
unrealized built-in loss allocated to the former members and the
aggregate recognized losses of those members in taxable years beginning
after they cease to be members of the current group. If one or more of
such members cease to be members of the second group, the principles of
this paragraph (e) are applied with respect to those members to allocate
to them all or part of any remaining unrecognized amount of net
unrealized built-in loss allocated to the members that became members of
the second group.
(6) Apportionment of consolidated section 382 limitation (or
subgroup section 382 limitation)--(i) In general. For rules relating to
the apportionment of a consolidated section 382 limitation (or subgroup
section 382 limitation) to a former member, see paragraph (c) of this
section.
(ii) Special rule for former members that become members of the same
consolidated group. If recognized built-in losses of one or more former
members would be subject to a consolidated section 382 limitation (or
subgroup section 382 limitation) if recognized immediately before the
member (or members) cease to be members of the group, an apportionment
of that limitation may be made, under paragraph (c) of this section, to
a loss subgroup that includes such member (or members), and the
recognized built-in losses (if any) of that member (or members) will be
subject to that apportioned limitation. If two or more of such former
members are not included in a loss subgroup immediately after they cease
to be members of the group (for example, because they do not have net
operating loss carryovers or, in the aggregate, a net unrealized built-
in loss), but are members of the same consolidated group, an
apportionment of the consolidated section 382 limitation (or subgroup
section 382 limitation) may be made to them as if they were a loss
subgroup.
(7) Examples. The following examples illustrate the principles of
this paragraph (e):
Example 1. Basic allocation case. (i) P owns all of the stock of L1
and L2. On September 4, Year 1, A purchases all of the P stock, causing
an ownership change of the P group. On that date P has two assets (other
than the L1 and L2 stock), asset 1 with an adjusted basis of $40 and a
fair market value of $15 and asset 2 with an adjusted basis of $50 and a
fair market value of $100. L1 has two assets, asset 3 , with a fair
market value of $50 and an adjusted basis of $100, and asset 4, with an
adjusted basis of $125 and a fair market value of $75. L2 has two
assets, asset 5, with a fair market value of $150 and an adjusted basis
of $100, and asset 6, with an adjusted basis of $90 and a fair market
value of $40. Thus, the P loss group has a net unrealized built-in loss
of $75.
(ii) On March 19, Year 3, P sells all of the L2 stock to M. At that
time, asset 5, which has appreciated in value, has a fair market value
of $250 and an adjusted basis of $100. Asset 6, which has declined in
value, has an adjusted basis of $90 and a fair market value of $10.
(iii) On April 8, Year 3, P sells asset 1, and has a recognized
built-in loss of $25 that is subject to the P group's section 382
limitation. On November 11, Year 4, L2 sells asset 6 for its then fair
market value, $10, recognizing a loss of $80. On June 3, Year 5, L1
sells asset 4, recognizing a loss of $50.
(iv) Immediately after the close of Year 3, the P loss group's
remaining NUBIL balance is $50 ($75 net unrealized built-in loss reduced
by the $25 recognized built-in loss of P). The portion of the remaining
NUBIL balance that is allocated to L2 is $17 (rounded to the nearest
dollar). Seventeen dollars is the
[[Page 497]]
product obtained by multiplying $50 (the remaining NUBIL balance) by
$50/$150. The numerator of the fraction ($50) is the amount of built-in
loss in asset 6, taken into account on the change date under
Sec. 1.1502-91(g). The denominator ($150) is the sum of the numerator
($50) and the amount of built-in loss in assets 3 and 4, taken into
account on the change date under Sec. 1.1502-91(g) ($100). The built-in
loss in asset 1 is not included in the denominator of the fraction
because it is not held by the P group immediately after the close of
Year 3.
(v) Seventeen dollars of L2's $80 loss on the sale of asset 6 is a
recognized built-in loss and subject to a section 382 limitation of
zero, unless P apportions some or all of the P group's consolidated
section 382 limitation to L2 (adjusted for a short taxable year,
carryover of unused limitation, or any other adjustment required under
section 382).
(vi) Thirty-three dollars of L1's $50 loss on the sale of asset 4 is
subject to the P group's consolidated section 382 limitation, reduced by
the amount of such limitation apportioned to L2, and adjusted for any
short taxable year, a carryforward of unused limitation, or other
adjustment. (In applying section 382(h)(1)(B)(ii) with respect to Year
5, the P group's net unrealized built-in loss is reduced by P's $25
recognized built-in loss in Year 3 and the $17 of net unrealized built-
in loss allocated to L2, thus limiting the P group's recognized built-in
loss in Year 5 to $33.)
Example 2. Two members depart in the same year. The facts are the
same as in Example 1, except that P sells all of the stock of L1 to C on
November 1, Year 3. The amount of net unrealized built-in loss
apportioned to L2 (rounded to the nearest dollar) is $17 ($50 remaining
NUBIL balance x $50/$150). The amount of net unrealized built-in loss
apportioned to L1 (rounded to the nearest dollar) is $33 ($50 remaining
NUBIL balance x $100/$150).
(8) Reporting requirement. If a net unrealized built-in loss is
allocated under this paragraph (e), the common parent must file a
statement with its income tax return for the taxable year in which the
former member(s) (or a new loss subgroup that includes that member)
ceases to be a member. The statement must provide the name and employer
identification number (E.I.N.) of the departing member, the amount of
remaining NUBIL balance for the taxable year in which the member
departs, and the amount of the net unrealized built-in loss allocated to
the departing member. The common parent must also deliver a copy of the
statement to the former member on or before the day the group files its
income tax return for the consolidated return year that the former
member ceases to be a member. A copy of the statement must be attached
to the first income tax return of the former member (or the first return
in which the former member joins) that is filed after the close of the
consolidated return year of the group of which the former member (or a
new loss subgroup that includes that member) cease to be a member. This
paragraph (e)(8) does not apply if the required information (other than
the amount of remaining NUBIL balance) is included in a statement of
election under paragraph (f) of this section (relating to apportioning a
section 382 limitation).
(f) Filing the election to apportion the section 382 limitation and
net unrealized built-in gain--(1) Form of the election to apportion. An
election under paragraph (c) of this section must be made by the common
parent. The election must be made in the form of the following
statement: ``THIS IS AN ELECTION UNDER Sec. 1.1502-95 OF THE INCOME TAX
REGULATIONS TO APPORTION ALL OR PART OF THE [insert THE CONSOLIDATED
SECTION 382 LIMITATION, THE SUBGROUP SECTION 382 LIMITATION, THE LOSS
GROUP'S NET UNREALIZED BUILT-IN GAIN, THE LOSS SUBGROUP'S NET UNREALIZED
BUILT-IN GAIN, as appropriate] TO [insert name and E.I.N. of the
corporation (or the corporations that compose a new loss subgroup) to
which allocation is made]''. The declaration must also include the
following information, as appropriate--
(i) The date of the ownership change that resulted in the
consolidated section 382 limitation (or subgroup section 382 limitation)
or the loss group's (or loss subgroup's) net unrealized built-in gain;
(ii) The amount of the departing member's (or loss subgroup's) pre-
change net operating loss carryovers and the taxable years in which they
arose that will be subject to the limitation that is being apportioned
to that member (or loss subgroup);
(iii) The amount of any net unrealized built-in loss allocated to
the departing member (or loss subgroup) under paragraph (e) of this
section,
[[Page 498]]
which, if recognized, can be a pre-change attribute subject to the
limitation that is being apportioned;
(iv) If a consolidated section 382 limitation (or subgroup section
382 limitation) is being apportioned, the amount of the consolidated
section 382 limitation (or subgroup section 382 limitation) for the
taxable year during which the former member (or new loss subgroup)
ceases to be a member of the consolidated group (determined without
regard to any apportionment under this section);
(v) If any net unrealized built-in gain is being apportioned, the
amount of the loss group's (or loss subgroup's) net unrealized built-in
gain (as determined under paragraph (c) (2)(ii) of this section) that
may be apportioned to members that ceased to be members during the
consolidated return year;
(vi) The amount of the value element and adjustment element of the
consolidated section 382 limitation (or subgroup section 382 limitation)
that is apportioned to the former member (or new loss subgroup) pursuant
to paragraph (c) of this section;
(vii) The amount of the loss group's (or loss subgroup's) net
unrealized built-in gain that is apportioned to the former member (or
new loss subgroup) pursuant to paragraph (c) of this section;
(viii) If the former member is allocated any net unrealized built-in
loss under paragraph (e) of this section, the amount of any adjustment
element apportioned to the former member that is attributable to
recognized built-in gains (determined in a manner that will enable both
the group and the former member to apply the principles of Sec. 1.1502-
93(c));
(ix) The name and E.I.N. of the common parent making the
apportionment.
(2) Signing of the election. The election statement must be signed
by both the common parent and the former member (or, in the case of a
loss subgroup, the common parent and the loss subgroup parent) by
persons authorized to sign their respective income tax returns. If the
allocation is made to a loss subgroup for which an election under
Sec. 1.1502-91(d)(4) is made, and not separately to its members, the
election statement under this paragraph (e) must be signed by the common
parent and any member of the new loss subgroup by persons authorized to
sign their respective income tax returns.
(3) Filing of the election. The election statement must be filed by
the common parent of the group that is apportioning the consolidated
section 382 limitation (or the subgroup section 382 limitation) or the
loss group's net unrealized built-in gain (or loss subgroup's net
unrealized built-in gain) with its income tax return for the taxable
year in which the former member (or new loss subgroup) ceases to be a
member. The common parent must also deliver a copy of the statement to
the former member (or the members of the new loss subgroup) on or before
the day the group files its income tax return for the consolidated
return year that the former member (or new loss subgroup) ceases to be a
member. A copy of the statement must be attached to the first return of
the former member (or the first return in which the members of a new
loss subgroup join) that is filed after the close of the consolidated
return year of the group of which the former member (or the members of a
new loss subgroup) ceases to be a member.
(4) Revocation of election. An election statement made under
paragraph (c) of this section is revocable only with the consent of the
Commissioner.
[T.D. 8824, 64 FR 36159, July 2, 1999]
Sec. 1.1502-96 Miscellaneous rules.
(a) End of separate tracking of losses--(1) Application. This
paragraph (a) applies to a member (or a loss subgroup) with a net
operating loss carryover that arose (or is treated under Sec. 1.1502-
21(c) as arising) in a SRLY, or a member (or loss subgroup) with a net
unrealized built-in loss determined at the time that the member (or loss
subgroup) becomes a member of the consolidated group if there is--
(i) An ownership change of the member (or loss subgroup) within six
months before, on, or after becoming a member of the group; or
(ii) A period of 5 consecutive years following the day that the
member (or loss subgroup) becomes a member of a group during which the
member (or
[[Page 499]]
loss subgroup) has not had an ownership change.
(2) Effect of end of separate tracking--(i) Net operating loss
carryovers. If this paragraph (a) applies with respect to a member (or
loss subgroup) with a net operating loss carryover, then, starting on
the day after the earlier of the change date (but not earlier than the
day the member (or loss subgroup) becomes a member of the consolidated
group) or the last day of the 5 consecutive year period described in
paragraph (a)(1)(ii) of this section, such loss carryover is treated as
described in Sec. 1.1502-91(c)(1)(i). The preceding sentence also
applies for purposes of determining whether there is an ownership change
with respect to such loss carryover following such change date or 5
consecutive year period. Thus, for example, starting the day after the
change date (but not earlier than the day the member (or loss subgroup)
becomes a member of the consolidated group) or the end of the 5
consecutive year period--
(A) The consolidated group which includes the new loss member or
loss subgroup is no longer required to separately track owner shifts of
the stock of the new loss member or subgroup parent to determine if an
ownership change occurs with respect to the loss carryover of the new
loss member or members included in the loss subgroup;
(B) The group is a loss group because the member's loss carryover is
treated as a loss described in Sec. 1.1502-91(c)(1)(i);
(C) There is an ownership change with respect to such loss carryover
only if the group has an ownership change; and
(D) If the group has an ownership change, such loss carryover is a
pre-change consolidated attribute subject to the loss group's
consolidated section 382 limitation.
(ii) Net unrealized built-in losses. If this paragraph (a) applies
with respect to a new loss member described in Sec. 1.1502-94(a)(1)(ii)
(or a loss subgroup described in Sec. 1.1502-91(d)(2)) then, starting on
the day after the earlier of the change date (but not earlier than the
day the member (or loss subgroup) becomes a member of the group) or the
last day of the 5 consecutive year period described in paragraph
(a)(1)(ii) of this section, the member (or members of the loss subgroup)
are treated, for purposes of applying Sec. 1.1502-91(g)(2)(ii), as if
they have been affiliated with the common parent for 5 consecutive
years. Starting on that day, the member's (or the members of the loss
subgroup's) separately computed net unrealized built-in loss is included
in the determination whether the group has a net unrealized built-in
loss, and there is an ownership change with respect to the member's
separately computed net unrealized built-in loss only if the group
(including the member) has a net unrealized built-in loss and has an
ownership change. Thus, for example, starting the day after the change
date (but not earlier than the day the member (or loss subgroup) becomes
a member of the consolidated group), or the end of the 5 consecutive
period
(A) The consolidated group which includes the new loss member or
loss subgroup is no longer required to separately track owner shifts of
the stock of the new loss member or subgroup parent to determine if an
ownership change occurs with respect to the net unrealized built-in loss
of the new loss member or members of the loss subgroup;
(B) The group includes the member's (or the loss subgroup members')
separately computed net unrealized built-in loss in determining whether
it is a loss group under Sec. 1.1502-91(c)(1)(iii);
(C) There is an ownership change with respect to such net unrealized
built-in loss only if the group is a loss group and has an ownership
change; and
(D) If the group has an ownership change, the member's separately
computed net unrealized built-in loss and its assets are taken into
account in determining the group's pre-change consolidated attributes
described in Sec. 1.1502-91(e)(1) (relating to recognized built-in
losses) that are subject to the group's consolidated section 382
limitation.
(iii) Common parent not common parent for five years. If the common
parent has become the common parent of an existing group within the
previous 5-year period in a transaction described in Sec. 1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying
[[Page 500]]
paragraphs (a)(2)(ii) and (3) of this section. In such a case, as the
context requires, references to the common parent are to the former
common parent.
(3) Continuing effect of end of separate tracking--(i) In general.
As the context may require, a current group determines which of its
members are included in a loss subgroup on any testing date by taking
into account the application of this section in the former group. See
the example in Sec. 1.1502-91(f)(2). For this purpose, corporations that
are treated under paragraph (a)(2)(ii) of this section as having been
affiliated with the common parent of the former group for 5 consecutive
years are also treated as having been affiliated with any other members
that have been (or are treated as having been) affiliated with the
common parent. The corporations are treated as having been affiliated
with such other members for the same period of time that those members
have been (or are treated as having been) affiliated with the common
parent. If two or more corporations become members of the group at the
same time, but paragraph (a)(1) of this section does not apply to every
such corporation, then immediately after the corporations become members
of the group, the corporations to which paragraph (a)(1) of this section
applied are treated as not having been previously affiliated, for
purposes of applying this paragraph (a)(3), with the corporations to
which paragraph (a)(2)(ii) of this section did not apply.
(ii) Example. The following example illustrates the principles of
this paragraph (a)(3):
Example. (i) L has owned all the stock of L1 for three years. At the
close of December 31, Year 1, the M group purchases all the L stock, and
L and L1 become members of the M group. Other than the stock of L1, L
has one asset (the L loss asset) with a net unrealized built-in loss of
$200 on this date. L1 has one asset with a net unrealized built-in gain
of $50 (the L1 gain asset). L and L1 do not compose a loss subgroup
because they do not meet the five year affiliation requirement of
Sec. 1.1502-91(d)(2)(i). L is a new loss member, and M's purchase of L
causes an ownership change of L. At the close of December 31, Year 4, at
a time when L1 has been affiliated with the M group for three years and
has been affiliated with L for six years, the S group purchases all the
M stock. On this date, the L loss asset has a net unrealized built-in
loss of $300, the L1 gain asset has a net unrealized built-in gain of
$80, and M, the common parent of the M group, has one asset with a net
unrealized built-in gain of $200.
(ii) Paragraph (a)(1) of this section applies to L because L is a
new loss member described in Sec. 1.1502-94(a)(1)(ii) that has an
ownership change upon becoming a member of the M group on December 31,
Year 1. Accordingly, L is treated as having been affiliated with M for 5
consecutive years, and the L loss asset with a net unrealized built-in
loss of $300 is included in the determination whether the M group has a
net unrealized built-in loss.
(iii) The S group determines which of its members are included in a
loss subgroup by taking into account application of paragraph (a) of
this section in the M group. For this purpose, application of paragraph
(a) of this section causes L to be treated as having been affiliated
with M (or as having been a member of the M group) for 5 consecutive
years as of January 1, Year 2. Therefore, the S group includes L in the
determination whether the M subgroup acquired by S on December 31, Year
4, has a net unrealized built-in loss.
(iv) Because paragraph (a)(1) of this section applied to L when L
became a member of the M group, but did not apply to L1, L is treated as
not having been affiliated with L1 before L and L1 joined the M group.
Also, L1 is not included in the determination whether the M subgroup has
a net unrealized built-in loss because L1 has not been continuously
affiliated with members of the M group for the five consecutive year
period ending immediately before they become members of the S group. See
Sec. 1.1502-91(g)(2).
(4) Special rule for testing period. For purposes of determining the
beginning of the testing period for a loss group, the member's (or loss
subgroup's) net operating loss carryovers (or net unrealized built-in
loss) described in paragraph (a)(2) of this section are considered to
arise--
(i) In a case described in paragraph (a)(1)(i) of this section, in a
taxable year that begins not earlier than the later of the day following
the change date or the day that the member becomes a member of the
group; and
(ii) In a case described in paragraph (a)(1)(ii) of this section, in
a taxable year that begins 3 years before the end of the 5 consecutive
year period.
(5) Limits on effects of end of separate tracking. The rule
contained in this paragraph (a) applies solely for purposes of
Secs. 1.1502-91 through 1.1502-95 and this section (other than paragraph
[[Page 501]]
(b)(2)(ii)(B) of this section (relating to the definition of pre-change
attributes of a subsidiary)) and Sec. 1.1502-98, and not for purposes of
other provisions of the consolidated return regulations. However, the
rule contained in this paragraph (a) does apply in Secs. 1.1502-15(g),
1.1502-21(g) and 1.1502-22(g) for purposes of determining the
composition of loss subgroups defined in Sec. 1.1502-91(d). See also
paragraph (c) of this section for the continuing effect of an ownership
change with respect to pre-change attributes.
(b) Ownership change of subsidiary--(1) Ownership change of a
subsidiary because of options or plan or arrangement. Notwithstanding
Sec. 1.1502-92, a subsidiary may have an ownership change for purposes
of section 382 with respect to its attributes which a group or loss
subgroup includes in making a determination under Sec. 1.1502-91(c)(1)
(relating to the definition of loss group) or Sec. 1.1502-91(d)
(relating to the definition of loss subgroup). The subsidiary has such
an ownership change if it has an ownership change under the principles
of Sec. 1.1502-95(b) and section 382 and the regulations thereunder
(determined on a separate entity basis by treating the subsidiary as not
being a member of a consolidated group) in the event of--
(i) The deemed exercise under Sec. 1.382-4(d) of an option or
options (other than an option with respect to stock of the common
parent) held by a person (or persons acting pursuant to a plan or
arrangement) to acquire more than 20 percent of the stock of the
subsidiary; or
(ii) An increase by 1 or more 5-percent shareholders, acting
pursuant to a plan or arrangement to avoid an ownership change of a
subsidiary, in their percentage ownership interest in the subsidiary by
more than 50 percentage points during the testing period of the
subsidiary through the acquisition (or deemed acquisition pursuant to
Sec. 1.382-4(d)) of ownership interests in the subsidiary and in higher-
tier members with respect to the subsidiary.
(2) Effect of the ownership change--(i) In general. If a subsidiary
has an ownership change under paragraph (b)(1) of this section, the
amount of consolidated taxable income for any post-change year that may
be offset by the pre-change losses of the subsidiary shall not exceed
the section 382 limitation for the subsidiary. For purposes of this
limitation, the value of the subsidiary is determined solely by
reference to the value of the subsidiary's stock.
(ii) Pre-change losses. The pre-change losses of a subsidiary are--
(A) Its allocable part of any consolidated net operating loss which
is attributable to it under Sec. 1.1502-21(b) (determined on the last
day of the consolidated return year that includes the change date) that
is not carried back and absorbed in a taxable year prior to the year
including the change date;
(B) Its net operating loss carryovers that arose (or are treated
under Sec. 1.1502-21(c) as having arisen) in a SRLY; and
(C) Its recognized built-in loss with respect to its separately
computed net unrealized built-in loss, if any, determined on the change
date.
(3) Coordination with Secs. 1.1502-91, 1.1502-92, and 1.1502-94. If
an increase in percentage ownership interest causes an ownership change
with respect to an attribute under this paragraph (b) and under
Sec. 1.1502-92 on the same day, the ownership change is considered to
occur only under Sec. 1.1502-92 and not under this paragraph (b). See
Sec. 1.1502-94 for anti-duplication rules relating to value.
(4) Example. The following example illustrates paragraph (b)(1)(ii)
of this section:
Example. Plan to avoid an ownership change of a subsidiary. (i) L
owns all the stock of L1, L1 owns all the stock of L2, L2 owns all the
stock of L3, and L3 owns all the stock of L4. The L group has a
consolidated net operating loss arising in Year 1 that is carried over
to Year 2. L has assets other than its L1 stock with a value of $900.
L1, L2, and L3 own no assets other than their L2, L3, and L4 stock. L4
has assets with a value of $100. During Year 2, A, B, C, and D, acting
pursuant to a plan to avoid an ownership change of L4, acquire the
following ownership interests in the members of the L loss group: (A) on
September 11, Year 2, A acquires 20 percent of the L1 stock from L and B
acquires 20 percent of the L2 stock from L1; and (B) on September 20,
Year 2, C acquires 20 percent of the stock of L3 from L2 and D acquires
20 percent of the stock of L4 from L3.
[[Page 502]]
(ii) The acquisitions by A, B, C, and D pursuant to the plan have
increased their respective percentage ownership interests in L4 by
approximately 10, 13, 16, and 20 percentage points, for a total of
approximately 59 percentage points during the testing period. This more
than 50 percentage point increase in the percentage ownership interest
in L4 causes an ownership change of L4 under paragraph (b)(2) of this
section.
(c) Continuing effect of an ownership change. A loss corporation (or
loss subgroup) that is subject to a limitation under section 382 with
respect to its pre-change losses continues to be subject to the
limitation regardless of whether it becomes a member or ceases to be a
member of a consolidated group. See Sec. 1.382-5(d) (relating to
successive ownership changes and absorption of a section 382
limitation).
(d) Losses reattributed under Sec. 1.1502-20(g)--(1) In general.
This paragraph (d) contains rules relating to net operating carryovers
that are reattributed to the common parent under Sec. 1.1502-20(g).
References in this paragraph (d) to a subsidiary are references to the
subsidiary (or lower tier subsidiary) whose net operating loss carryover
is reattributed to the common parent.
(2) Deemed section 381(a) transaction. Under Sec. 1.1502-20 (g)(1),
the common parent succeeds to the reattributed losses as if the losses
were succeeded to in a transaction described in section 381(a). In
general, Secs. 1.1502-91 through 1.1502-95, this section, and
Sec. 1.1502-98 are applied to the reattributed net operating loss
carryovers in accordance with that characterization. See generally,
Sec. 1.382-2(a)(1)(ii) (relating to distributor or transferor loss
corporations in transactions under section 381), Sec. 1.1502-(1)(f)(4)
(relating to the definition of predecessor and successor) and
Sec. 1.1502-91(j) (relating to predecessor and successor corporations).
For example, if the reattributed net operating loss carryover is a pre-
change attribute subject to a section 382 limitation, it remains subject
to that limitation following the reattribution. In certain cases, the
limitation applicable to the reattributed loss is zero unless the common
parent apportions all or part of the limitation to itself. (See
paragraph (d)(4) of this section.)
(3) Rules relating to owner shifts--(i) In general. Any owner shift
of the subsidiary (including any deemed owner shift resulting from
section 382(g)(4)(D) or 382(l)(3)) in connection with the disposition of
the stock of the subsidiary is not taken into account in determining
whether there is an ownership change with respect to the reattributed
net operating loss carryover. However, any owner shift with respect to
the successor corporation that is treated as continuing in existence
under Sec. 1.382-2(a)(1)(ii) must be taken into account for such purpose
if such owner shift is effected by the reattribution and an owner shift
of the stock of the subsidiary not held directly or indirectly by the
common parent would have been taken into account if such shift had
occurred immediately before the reattribution. See paragraph (d)(3)(ii)
Example 2 of this section.
(ii) Examples. The following examples illustrate the principles of
this paragraph (d)(3):
Example 1. No owner shift for reattributed loss. (i) P, the common
parent of a consolidated group, owns 60% of the stock of L, and B owns
the remaining 40%. L has a net operating loss carryover of $100 from
year 1 that it carries over to Years 2, 3, and 4. At the beginning of
Year 2, P purchases 40% of the L stock from B, which does not cause an
ownership change of L. On December 31, Year 3, P sells all of the L
stock to M. Pursuant to Sec. 1.1502-20(g), P reattributes $10 of L's
$100 net operating loss carryover to itself, and L carries $90 of its
net operating loss carryover to its Year 4.
(ii) The sale of the L stock to M does not cause an owner shift that
is taken into account in determining if there is an ownership change
with respect to the $10 reattributed loss. Following the reattribution,
Sec. 1.1502-94(b) continues to apply to determine if there is an
ownership change with respect to the $10 reattributed loss, until, under
paragraph (a) of this section, the loss is treated as described in
Sec. 1.1502-91(c)(1)(i). In applying Sec. 1.1502-94(b), the 40
percentage point increase by the P shareholders prior to the
reattribution is taken into account. The sale of the L stock to M does
cause an ownership change of L with respect to the $90 of its net
operating loss that it carries over to Year 4.
Example 2. Owner shift for reattributed loss. The facts are the same
as in Example 1, except that P only purchases 20% of the L stock from B
and sells 80% of the L stock to M. L is a new loss member, and, under
Sec. 1.1502-94(b)(1), an owner shift of the stock of L not held directly
or indirectly by the common parent (the 20% of L stock still held by B)
would have been taken into account if
[[Page 503]]
such shift had occurred immediately before the reattribution. Following
the reattribution, Sec. 1.1502-94(b) continues to apply to determine if
there is an ownership change with respect to the $10 reattributed loss,
until, under paragraph (a) of this section, the loss is treated as
described in Sec. 1.1502-91(c)(1)(i). With respect to the $10
reattributed loss, the P shareholders have increased their percentage
ownership interest by 40 percentage points. The P shareholders have
increased their ownership interests by 20 percentage points as a result
of P's purchase of stock from B, and, under Sec. 1.382-2(a)(1)(ii), are
treated as increasing their interests by an additional 20 percentage
points as a result of the reattribution. (The acquisition of the L stock
by M does not, however, effect an owner shift for the $10 of
reattributed loss.) The sale of the L stock to M causes an ownership
change of L with respect to the $90 of net operating loss that L carries
over to Year 4.
(4) Rules relating to the section 382 limitation--(i) Reattributed
loss is a pre-change separate attribute of a new loss member. If the
reattributed net operating loss carryover is a pre-change separate
attribute of a new loss member that is subject to a separate section 382
limitation prior to the disposition of subsidiary stock, the common
parent's limitation with respect to that loss is zero, except to the
extent that the common parent apportions to itself, under paragraph
(d)(5) of this section, all or part of such limitation. A separate
section 382 limitation is the limitation described in Sec. 1.1502-94(b)
that applies to a pre-change separate attribute.
(ii) Reattributed loss is a pre-change subgroup attribute. If the
reattributed net operating loss carryover is a pre-change subgroup
attribute subject to a subgroup section 382 limitation prior to the
disposition of subsidiary stock, and, immediately after the
reattribution, the common parent is not a member of the loss subgroup,
the section 382 limitation with respect to that net operating loss
carryover is zero, except to the extent that the common parent
apportions to itself, under paragraph (d)(5) of this section, all or
part of the subgroup section 382 limitation. See, however, Sec. 1.1502-
95(d)(3) Example 6, for an illustration of a case where the common
parent, as successor to the subsidiary, is a member of the loss subgroup
immediately after the reattribution.
(iii) Potential application of section 382(l)(1). In general, the
value of the stock of the common parent is used to determine the section
382 limitation for an ownership change with respect to the reattributed
net operating loss carryover that occurs at the time of, or after, the
reattribution. For example, if the net operating loss carryover is a
pre-change consolidated attribute, the value of the stock of the common
parent is used to determine the section 382 limitation, and no
adjustment to that value is required because of the deemed section
381(a) transaction. However, if the net operating loss carryover is a
pre-change separate attribute of a new loss member (or is a pre-change
attribute of a loss subgroup member and the common parent was not the
loss subgroup parent immediately before the reattribution), the deemed
section 381(a) transaction is considered to constitute a capital
contribution with respect to the new loss member (or loss subgroup
member) for purposes of section 382(l)(1). Accordingly, if that section
applies because the deemed capital contribution is (or is considered
under section 382(l)(1)(B) to be) part of a plan described in section
382(l)(1)(A), the value of the stock of the common parent after the
deemed section 381(a) transaction must be adjusted to reflect the
capital contribution. Ordinarily, this will require the value of the
stock of the common parent to be reduced to an amount that represents
the value of the stock of the subsidiary (or loss subgroup of which the
subsidiary was a member) when the reattribution occurred.
(iv) Duplication or omission of value. In determining any section
382 limitation with respect to the reattributed net operating loss
carryover and with respect to other pre-change losses, appropriate
adjustments must be made so that value is not improperly omitted or
duplicated as a result of the reattribution. For example, if the
subsidiary has an ownership change upon its departure, and the common
parent (as successor) has an ownership change with respect to the
reattributed pre-change separate attribute upon its reattribution under
paragraph (d)(3)(i) of this
[[Page 504]]
section, proper adjustments must be made so that the value of the
subsidiary is not taken into account more than once in determinining the
section 382 limitation for the reattributed loss and the loss that is
not reattributed.
(v) Special rule for continuity of business requirement. If the
reattributed net operating loss carryover is a pre-change attribute of
new loss member and the reattribution occurs within the two year period
beginning on the change date, then, starting immediately after the
reattribution, the continuity of business requirement of section
382(c)(1) is applied with respect to the business enterprise of the
common parent. Similar principles apply if the reattributed net
operating loss carryover is a pre-change subgroup attribute and, on the
day after the reattribution, the common parent is not a member of the
loss subgroup.
(5) Election to reattribute section 382 limitation--(i) Effect of
election. The common parent may elect to apportion to itself all or part
of any separate section 382 limitation or subgroup section 382
limitation to which the net operating loss carryover is subject
immediately before the reattribution. However, no net unrealized built-
in gain of the member (or loss subgroup) whose net operating loss
carryover is reattributed can be apportioned to the common parent. The
principles of Sec. 1.1502-95(c) apply to the apportionment, treating, as
the context requires, references to the former member as references to
the common parent, and references to the consolidated section 382
limitation as references to the separate section 382 limitation (or
subgroup section 382 limitation) that is being apportioned. Thus, for
example, the common parent can reattribute to itself all or part of the
value element or adjustment element of the limitation, and any part of
such element that is apportioned requires a corresponding reduction in
such element of the separate section 382 limitation of the subsidiary
whose net operating loss carryover is reattributed (or in the subgroup
section 382 limitation if the reattributed loss is a pre-change subgroup
attribute). Appropriate adjustments must be made to the separate section
382 limitation (or subgroup section 382 limitation) for the consolidated
return year in which the reattribution is made to reflect that the
reattributed net operating loss carryover is an attribute acquired by
the common parent during the year in a transaction to which section
381(a) applies. The election is made by the common parent as part of the
election to reattribute the net operating loss carryover. See
Sec. 1.1502-20(g)(4) for the time and manner of making the election.
(ii) Examples. The following examples illustrate the principles of
this paragraph (d)(5):
Example 1. Consequence of apportionment. (i) P, the common parent of
a consolidated group, purchases all of the stock of L on December 31,
Year 1. L carries over a net operating loss arising in Year 1 to each of
the next 5 taxable years. The purchase of the L stock causes an
ownership change of L, and results in a separate section 382 limitation
of $10 for L's net operating loss carryover based on the value of the L
stock. On July 2, Year 3, P sells 30 percent of the L stock to A. Under
Sec. 1.1502-20(g), P elects to apportion to itself $110 of L's $200 net
operating loss carryover. P also elects to apportion to itself $6 of the
$10 value element of the separate section 382 limitation.
(ii) For the consolidated return years ending after December 31,
Year 3, P's separate section 382 limitation with respect to the
reattributed net operating loss carryover is $6, adjusted as appropriate
for any short taxable year, unused section 382 limitation, or other
adjustment. For the P group's consolidated return year ending December
31, Year 3, the separate section 382 limitation for L's net operating
loss carryover is $8, the sum of $5 and $3. Five dollars of the
limitation is the amount that bears the same relationship to $10 as the
number of days in the period ending with the deemed section 381(a)
transaction, 183 days, bears to 365. Three dollars of the limitation is
the amount that bears the same relationship to $6 as the number of days
in the period between July 3 and December 31, 182, bears to 365.
(iii) For L's taxable years ending after December 31, Year 3, L's
separate section 382 limitation for its $90 of net operating loss
carryover that was not reattributed to P is $4, adjusted as appropriate
for any short taxable year, unused section 382 limitation, or other
adjustment. For L's short taxable year ending December 31, Year 3, the
section 382 limitation for its $90 of net operating loss carryover is
$2, the amount that bears the same relationship to $4 (the portion of
the value element that was not apportioned to P), as the number of days
during the short
[[Page 505]]
taxable year, 182 days, bears to 365. See Sec. 1.382-5(c).
Example 2. No apportionment required for consolidated pre-change
attribute. (i) P, the common parent of a consolidated group, forms L.
For Year 1, L has an operating loss of $70 that is not absorbed and is
included in the group's consolidated net operating loss that is carried
over to subsequent years. On January 1 of Year 3, A buys all of the P
stock and the P group has an ownership change. The consolidated section
382 limitation based on the value of the P stock is $10.
(ii) On April 13 of Year 4, P sells all of the stock of L to B and,
under Sec. 1.1502-20(g), elects to reattribute to itself $45 of L's net
operating loss carryover. Following the reattribution, the $45 portion
of the Year 1 net operating loss carryover retains its character as a
pre-change consolidated attribute, and remains subject to so much of the
$10 consolidated section 382 limitation as P does not elect to apportion
to L under Sec. 1.1502-95(c).
(e) Time and manner of making election under Sec. 1.1502-91(d)(4)--
(1) In general. This paragraph (e) prescribes the time and manner of
making the election under Sec. 1.1502-91(d)(4), relating to treating two
or more corporations as treating the section 1504(a)(1) requirement of
Sec. 1.1502-91(d)(1)(ii) and (d)(2)(ii) as satisfied.
(2) Election statement. An election under Sec. 1.1502-91(d)(4) must
be made by the common parent. The election must be made in the form of
the following statement: ``THIS IS AN ELECTION UNDER Sec. 1.1502-
91(d)(4) TO TREAT THE FOLLOWING CORPORATIONS AS MEETING THE REQUIREMENTS
OF Sec. 1.1502-91 (d)(1)(ii) AND (d)(2)(ii) IMMEDIATELY AFTER THEY
BECAME MEMBERS OF THE GROUP.'' [List separately the name of each
corporation, its E.I.N., and the date that it became a member of the
group]. If separate elections are being made for corporations that
became members at different times or that were acquired from different
affiliated groups, provide a separate statement and list for each
election.
(3) The election statement must be filed by the common parent with
its income tax return for the consolidated return year in which the
members with respect to which the election is made become members of the
group. Such election must be filed on or before the due date for such
income tax return, including extensions.
(4) An election made under this paragraph (e) is irrevocable.
[T.D. 8824, 64 FR 36170, July 2, 1999]
Sec. 1.1502-97 Special rules under section 382 for members under the jurisdiction of a court in a title 11 or similar case. [Reserved]
Sec. 1.1502-98 Coordination with section 383.
The rules contained in Secs. 1.1502-91 through 1.1502-96 also apply
for purposes of section 383, with appropriate adjustments to reflect
that section 383 applies to credits and net capital losses. Similarly,
in the case of net capital losses, general business credits, and excess
foreign taxes that are pre-change attributes, Sec. 1.383-1 applies the
principles of Secs. 1.1502-91 through 1.1502-96. For example, if a loss
group has an ownership change under Sec. 1.1502-92 and has a carryover
of unused general business credits from a pre-change consolidated return
year to a post-change consolidated return year, the amount of the
group's regular tax liability for the post-change year that can be
offset by the carryover cannot exceed the consolidated section 383
credit limitation for that post-change year, determined by applying the
principles of Secs. 1.383-1(c)(6) and 1.1502-93 (relating to the
computation of the consolidated section 382 limitation).
[T.D. 8824, 64 FR 36174, July 2, 1999]
Sec. 1.1502-99 Effective dates.
(a) In general. Except as provided in paragraphs (b) and (c) of this
section, Secs. 1.1502-91 through 1.1502-96 and Sec. 1.1502-98 apply to
any testing date on or after June 25, 1999. Sections 1.1502-94 through
1.1502-96 also apply to a corporation that becomes a member of a group
or ceases to be a member of a group (or loss subgroup) on any date on or
after June 25, 1999.
(b) Special rules--(1) Election to treat subgroup parent requirement
as satisfied. Section 1.1502-91(d)(4), Sec. 1.1502-91(d)(7), Example 4,
Sec. 1.1502-92(b)(1)(iii), Sec. 1.1502-92(b)(2), Example 5, the last two
sentences of Sec. 1.1502-95(b)(3), Sec. 1.1502-95(d)(2)(i), and
Sec. 1.1502-96(e)(all of which relate to the election under Sec. 1.1502-
[[Page 506]]
91(d)(4) to treat the loss subgroup parent requirement as satisfied)
apply to corporations that become members of a consolidated group in
taxable years for which the due date of the income tax return (without
extensions) is after June 25, 1999.
(2) Principal purpose of avoiding a limitation. The third sentence
of Sec. 1.1502-91(d)(5) (relating to members excluded from a loss
subgroup) applies to corporations that become members of a consolidated
group on or after June 25, 1999.
(3) Ceasing to be a member of a loss subgroup--(i) Ownership change
of a loss subgroup. Section 1.1502-95(d)(2)(ii) and Sec. 1.1502-
95(d)(3), Example 3 apply to corporations that cease to bear a
relationship described in section 1504(a)(1) to a loss subgroup parent
in taxable years for which the due date of the income tax return
(without extensions) is after June 25, 1999.
(ii) Expiration of 5-year period. Section 1.1502-95(d)(2)(iii)
applies with respect to the day after the last day of any 5 consecutive
year period described in that section that ends in a taxable year for
which the due date of the income tax return (without extensions) is
after June 25, 1999.
(4) Reattribution of net operating loss carryovers under
Sec. 1.1502-20(g). Section 1.1502-96(d) applies to reattributions of net
operating loss carryovers (or capital loss carryovers) in taxable years
for which the due date of the income tax return (without extensions) is
after June 25, 1999; except that the election under Sec. 1.1502-96(d)(5)
(relating to an election to reattribute section 382 limitation) can be
made with any election under Sec. 1.1502-20(g)(4) to reattribute to the
common parent a net operating loss or net capital loss that is timely
filed on or after June 25, 1999.
(5) Election to apportion net unrealized built-in gain. In the case
of corporations that cease to be members of a loss group (or loss
subgroup) before June 25, 1999 in a taxable year for which the due date
of the income tax return (without extensions) is after June 25, 1999,
Sec. 1.1502-95(a), (b), (c), and (f) apply to those corporations if the
common parent makes the election described in the second sentence of
paragraph (c)(1) of Sec. 1.1502-95 in the time and manner prescribed in
paragraph (f) of Sec. 1.1502-95.
(c) Testing period may include a period beginning before June 25,
1999--
(1) In general. A testing period for purposes of Secs. 1.1502-91
through 1.1502-96 and 1.1502-98 may include a period beginning before
June 25, 1999. Thus, for example, in applying Sec. 1.1502-
92(b)(1)(i)(relating to the determination of an ownership change of a
loss group), the determination of the lowest percentage of ownership
interest of any 5-percent shareholder of the common parent during a
testing period ending on a testing date occurring on or after June 25,
1999 takes into account the period beginning before June 25, 1999,
except to the extent that the period is more than 3 years before the
testing date or is otherwise before the beginning of the testing period.
See Sec. 1.1502-92(b)(1).
(2) Transition rule for net unrealized built-in loss. A loss group
(or loss subgroup) that has a net unrealized built-in loss on a testing
date on or after June 25, 1999 may apply Sec. 1.1502-91A(g) (and
Sec. 1.1502-96A(a) as it relates to Sec. 1.1502-91A(g)) for the period
ending on the day before June 25, 1999 to determine under Sec. 1.382-
2T(d)(ii)(A) the earliest date that its testing period begins (treating
the day before June 25, 1999 as the end of a taxable year.) Thus, for
example, if a consolidated group with no net operating losses has a net
unrealized built-in loss determined under Sec. 1.1502-91(g) on a testing
date after June 25, 1999, but, under Sec. 1.1502-91A(g), does not have a
net unrealized built-in loss for the period ending on the day before
June 25, 1999, the group's testing period begins no earlier than June
25, 1999.
[T.D. 8824, 64 FR 36174, July 2, 1999]
Sec. 1.1502-100 Corporations exempt from tax.
(a) In general--(1) Computation of tax liability. The tax liability
for a consolidated return year of a group of two or more corporations
described in section 1504(e) which are exempt from taxation under
section 501 (hereinafter referred to in this section as ``exempt
group'') shall be determined on a consolidated basis by applying the
provisions of subchapter F of chapter 1 of the code in
[[Page 507]]
the manner provided in this section. See section 1504(e) for tax-exempt
corporations eligible to file a consolidated return.
(2) Applicability of other consolidated return provisions. The
provisions of Sec. 1.1502-1 through Sec. 1.1502-80 shall be applicable
to an exempt group to the extent they are not inconsistent with the
provisions of this section or the provisions of subchapter F of chapter
1 of the Code. For purposes of applying the provisions of Sec. 1.1502-1
through Sec. 1.1502-80 to an exempt group, the following substitutions
shall be made:
(i) The term ``exempt group'' shall be substituted for the term
``group'',
(ii) The terms ``unrelated business taxable income'', ``separate
unrelated business taxable income'', and ``consolidated unrelated
business taxable income'' shall be substituted for the terms ``taxable
income'', ``separate taxable income'', and ``consolidated taxable
income'', and
(iii) The term ``consolidated liability for tax determined under
Sec. 1.1502-2'' (or an equivalent term) shall mean the consolidated
liability for tax of an exempt group determined under paragraph (b) of
this section.
(b) Consolidated liability for tax. The tax liability for a
consolidated return year of an exempt group is the tax imposed by
section 511(a) or section 1201(a) on the consolidated unrelated business
taxable income for the year (determined under paragraph (c) of this
section), and by allowing the credits and surtax exemption provided in
Sec. 1.1502-2.
(c) Consolidated unrelated business taxable income. The consolidated
unrelated business taxable income for a consolidated return year shall
be determined by taking into account:
(1) The separate unrelated business taxable income of each member of
the exempt group (determined under paragraph (d) of this section);
(2) Any consolidated net operating loss deduction (determined under
Sec. 1.1502-21A or 1.1502-21 (as appropriate) subject to the limitations
provided in section 512(b)(6);
(3) Any consolidated charitable contribution deduction (determined
under Sec. 1.1502-24) subject to the limitations provided in section
512(b)(10); and
(4) Any consolidated net gain or net loss from the disposition of
debt-financed property (as defined in section 514(b)) taken into account
as provided by section 514(a), or from the cutting of timber to which
section 631 applies.
(d) Separate unrelated business taxable income. The separate
unrelated business taxable income of a member of an exempt group shall
be computed in accordance with the provisions of section 512 covering
the determination of unrelated business taxable income of separate
corporations, except that:
(1) The provisions of paragraphs (a) through (k) and (o) of
Sec. 1.1502-12 shall apply; and
(2) No charitable contributions deduction shall be taken into
account under section 512(b)(10).
See sections 511(c) and 512(a)(3)(C) for special rules applicable to
organizations described in section 501(c)(2).
[T.D. 7595, 44 FR 10382, Feb. 20, 1979, as amended by T.D. 8677, 61 FR
33325, June 27, 1996; T.D. 8823, 64 FR 36101, July 2, 1999]
Sec. 1.1503-1 Computation and payment of tax.
(a) General rule. In any case in which a consolidated return is
filed or required to be filed, the tax shall be determined, computed,
assessed, collected, and adjusted in accordance with the regulations
prescribed under section 1502 promulgated prior to the last date
prescribed by law for the filing of such return.
(b) Limitation. If the affiliated group includes one or more Western
Hemisphere trade corporations (as defined in section 921) or one or more
regulated public utilities (as defined in section 1503 (c)), the
increase in tax described in section 1503 (a) shall be applied in a
manner provided in the regulations under section 1502.
[T.D. 6500, 25 FR 12105, Nov. 26, 1960, as amended by T.D. 7244, 37 FR
28897, Dec. 30, 1972]
Sec. 1.1503-2 Dual consolidated loss.
(a) Purpose and scope. This section provides rules for the
application of section 1503(d), concerning the determination and use of
dual consolidated losses. Paragraph (b) of this section provides a
general rule prohibiting a dual consolidated loss from offsetting
[[Page 508]]
the taxable income of a domestic affiliate. Paragraph (c) of this
section provides definitions of the terms used in this section.
Paragraph (d) of this section provides rules for calculating the amount
of a dual consolidated loss and for adjusting the basis of stock of a
dual resident corporation. Paragraph (e) of this section contains an
anti-avoidance provision. Paragraph (f) of this section applies the
rules of paragraph (d) of this section to the computation of foreign tax
credit limitations. Paragraph (g) of this section provides certain
exceptions to the limitation rule of paragraph (b) of this section.
Finally, paragraph (h) of this section provides the effective date of
the regulations and a provision for the retroactive application of the
regulations to qualifying taxpayers.
(b) In general--(1) Limitation on the use of a dual consolidated
loss to offset income of a domestic affiliate. Except as otherwise
provided in this section, a dual consolidated loss of a dual resident
corporation cannot offset the taxable income of any domestic affiliate
in the taxable year in which the loss is recognized or in any other
taxable year, regardless of whether the loss offsets income of another
person under the income tax laws of a foreign country and regardless of
whether the income that the loss may offset in the foreign country is,
has been, or will be subject to tax in the United States. Pursuant to
paragraph (c) (1) and (2) of this section, the same limitation shall
apply to a dual consolidated loss of a separate unit of a domestic
corporation as if the separate unit were a wholly owned subsidiary of
such corporation.
(2) Limitation on the use of a dual consolidated loss to offset
income of a successor-in-interest. A dual consolidated loss of a dual
resident corporation also cannot be used to offset the taxable income of
another corporation by means of a transaction in which the other
corporation succeeds to the tax attributes of the dual resident
corporation under section 381 of the Code. Similarly, a dual
consolidated loss of a separate unit of a domestic corporation cannot be
used to offset income of the domestic corporation following the
termination, liquidation, sale, or other disposition of the separate
unit. However, if a dual resident corporation transfers its assets to
another corporation in a transaction subject to section 381, and the
acquiring corporation is a dual resident corporation of the same foreign
country of which the transferor dual resident corporation is a resident,
or a domestic corporation that carries on the business activities of the
transferor dual resident corporation as a separate unit, then income
generated by the transferee dual resident corporation, or separate unit,
may be offset by the carryover losses of the transferor dual resident
corporation. In addition, if a domestic corporation transfers a separate
unit to another domestic corporation in a transaction subject to section
381, the income generated by the separate unit following the transfer
may be offset by the carryover losses of the separate unit.
(3) Application of rules to multiple tiers of separate units. If a
separate unit of a domestic corporation is owned indirectly through
another separate unit, the principles of paragraph (b) (1) and (2) of
this section shall apply as if the upper-tier separate unit were a
subsidiary of the domestic corporation and the lower-tier separate unit
were a lower-tier subsidiary.
(4) Examples. The following examples illustrate the application of
this paragraph (b).
Example 1. P, a domestic corporation, owns all of the outstanding
stock of DRC, a domestic corporation. P and DRC file a consolidated U.S.
income tax return. DRC is managed and controlled in Country W, a country
that determines the tax residence of corporations according to their
place of management and control. Therefore, DRC is a dual resident
corporation and any net operating loss it incurs is a dual consolidated
loss. In Years 1 through 3, DRC incurs dual consolidated losses. Under
this paragraph (b), the dual consolidated losses may not be used to
offset P's income on the group's consolidated U.S. income tax return. At
the end of Year 3, DRC sells all of its assets and discontinues its
business operations. DRC is then liquidated into P, pursuant to the
provisions of section 332. Normally, under section 381, P would succeed
to, and be permitted to utilize, DRC's net operating loss carryovers.
However, this paragraph (b) prohibits the dual consolidated losses of
DRC from reducing P's income for U.S. tax purposes. Therefore, DRC's net
operating loss carryovers will not be available to offset P's income.
[[Page 509]]
Example 2. The facts are the same as in Example 1, except that DRC
does not sell its assets and, following the liquidation of DRC, P
continues to operate DRC's business as a separate unit (e.g., a branch).
DRC's loss carryovers are available to offset P's income generated by
the assets previously owned by DRC and now held by the separate unit.
(c) Definitions. The following definitions shall apply for purposes
of this section.
(1) Domestic corporation. The term ``domestic corporation'' has the
meaning assigned to it by section 7701(a) (3) and (4). The term also
includes any corporation otherwise treated as a domestic corporation by
the Code, including, but not limited to, sections 269B, 953(d), and 1504
(d). For purposes of this section, any separate unit of a domestic
corporation, as defined in paragraph (c) (3) and (4) of this section,
shall be treated as a separate domestic corporation.
(2) Dual resident corporation. A dual resident corporation is a
domestic corporation that is subject to the income tax of a foreign
country on its worldwide income or on a residence basis. A corporation
is taxed on a residence basis if it is taxed as a resident under the
laws of the foreign country. An S corporation, as defined in section
1361, is not a dual resident corporation. For purposes of this section,
any separate unit of a domestic corporation, as defined in paragraph (c)
(3) and (4) of this section, shall be treated as a dual resident
corporation. Unless otherwise indicated, any reference in this section
to a dual resident corporation refers also to a separate unit.
(3) Separate unit--(i) The term ``separate unit'' shall mean any of
the following:
(A) A foreign branch, as defined in Sec. 1.367(a)-6T(g) (or a
successor regulation), that is owned either directly by a domestic
corporation or indirectly by a domestic corporation through ownership of
a partnership or trust interest (regardless of whether the partnership
or trust is a United States person);
(B) an interest in a partnership; or
(C) an interest in a trust.
(ii) If two or more foreign branches located in the same foreign
country are owned by a single domestic corporation and the losses of
each branch are made available to offset the income of the other
branches under the tax laws of the foreign country, within the meaning
of paragraph (c)(15)(ii) of this section, then the branches shall be
treated as one separate unit.
(4) Hybrid entity separate unit. The term ``separate unit'' includes
an interest in an entity that is not taxable as an association for U.S.
income tax purposes but is subject to income tax in a foreign country as
a corporation (or otherwise at the entity level) either on its worldwide
income or on a residence basis.
(5) Dual consolidated loss--(i) In general. The term ``dual
consolidated loss'' means the net operating loss (as defined in section
172(c) and the regulations thereunder) of a domestic corporation
incurred in a year in which the corporation is dual resident
corporation. The dual consolidated loss shall be computed under
paragraph (d)(1) of this section. The fact that a particular item taken
into account in computing a dual resident corporation's net operating
loss is not taken into account in computing income subject to a foreign
country's income tax shall not cause such item to be excluded from the
calculation of the dual consolidated loss.
(ii) Exceptions. A dual consolidated loss shall not include the
following--
(A) A net operating loss incurred by a dual resident corporation in
a foreign country whose income tax laws--
(1) Do not permit the dual resident corporation to use its losses,
expenses or deductions to offset the income of any other person that is
recognized in the same taxable year in which the losses, expenses or
deductions are incurred; and
(2) Do not permit the losses, expenses or deductions of the dual
resident corporation to be carried over or back to be used, by any
means, to offset the income of any other person in other taxable years;
or
(B) A net operating loss incurred during that portion of the taxable
year prior to the date on which the domestic corporation becomes a dual
resident corporation or subsequent to the date on which the domestic
corporation ceases to be a dual resident corporation. For purposes of
determining the
[[Page 510]]
amount of the net operating loss incurred in that portion of the taxable
year prior to the date on which the domestic corporation becomes a dual
resident corporation or subsequent to the date on which the domestic
corporation ceases to be a dual resident corporation, in no event shall
more than the aggregate of the equal daily portion of the net operating
loss commensurate with the portion of the taxable year during which the
domestic corporation was not a dual resident corporation be allocated to
that portion of the taxable year in which the domestic corporation was
not a dual resident corporation.
(iii) Dual consolidated losses of separate units that are
partnership interests, including interests in hybrid entities.
[Reserved]
(6) Subject to tax. For purposes of determining whether a domestic
corporation is subject to the income tax of a foreign country on its
income, the fact that the corporation has no actual income tax liability
to the foreign country for a particular taxable year shall not be taken
into account.
(7) Foreign country. For purposes of this section, possessions of
the United States shall be considered foreign countries.
(8) Consolidated group. The term ``consolidated group'' means an
affiliated group, as defined in section 1504(a), with which a dual
resident corporation or domestic owner files a consolidated U.S. income
tax return.
(9) Domestic owner. The term ``domestic owner'' means a domestic
corporation that owns one or more separate units.
(10) Affiliated dual resident corporation or affiliated domestic
owner. The term ``affiliated dual resident corporation'' or ``affiliated
domestic owner'' means a dual resident corporation or domestic owner
that is a member of a consolidated group.
(11) Unaffiliated dual resident corporation or unaffiliated domestic
owner. The term ``unaffiliated dual resident corporation'' or
``unaffiliated domestic owner'' means a dual resident corporation or
domestic owner that is an unaffiliated domestic corporation.
(12) Successor-in-interest. The term ``successor-in-interest'' means
an acquiring corporation that succeeds to the tax attributes of an
acquired corporation by means of a transaction subject to section 381.
(13) Domestic affiliate. The term ``domestic affiliate'' means any
member of an affiliated group, without regard to the exceptions
contained in section 1504(b) (other than section 1504(b)(3)) relating to
includible corporations.
(14) Unaffiliated domestic corporation. The term ``unaffiliated
domestic corporation'' means a domestic corporation that is not a member
of an affiliated group.
(15) Use of loss to offset income of a domestic affiliate or another
person--(i) A dual consolidated loss shall be deemed to offset income of
a domestic affiliate in the year it is included in the computation of
the consolidated taxable income of a consolidated group. The fact that
no tax benefit results from the inclusion of the dual consolidated loss
in the computation of the group's consolidated taxable income in the
taxable year shall not be taken into account.
(ii) Except as provided in paragraph (c)(15)(iii) of this section, a
loss, expense, or deduction taken into account in computing a dual
consolidated loss shall be deemed to offset income of another person
under the income tax laws of a foreign country in the year it is made
available for such offset. The fact that the other person does not have
sufficient income in that year to benefit from such an offset shall not
be taken into account. However, where the laws of a foreign country
provide an election that would enable a dual resident corporation or
separate unit to use its losses, expenses, or deductions to offset
income of another person, the losses, expenses, or deductions shall be
considered to offset such income only if the election is made.
(iii) The losses, expenses, or deductions taken into account in
computing a dual resident corporation's or separate unit's dual
consolidated loss shall not be deemed to offset income of another person
under the income tax laws of a foreign country for purposes of this
section, if under the laws of the foreign country the losses, expenses,
or deductions of the dual resident corporation or separate unit are used
to
[[Page 511]]
offset the income of another dual resident corporation or separate unit
within the same consolidated group (or income of another separate unit
that is owned by the unaffiliated domestic owner of the first separate
unit). If the losses, expenses, or deductions of a dual resident
corporation or separate unit are made available under the laws of a
foreign country to offset the income of other dual resident corporations
or separate units within the same consolidated group (or other separate
units owned by the unaffiliated domestic owner of the first separate
unit), as well as the income of another person, and the laws of the
foreign country do not provide applicable rules for determining which
person's income is offset by the losses, expenses, or deductions, then
for purposes of this section, the losses, expenses or deductions shall
be deemed to offset the income of the other dual resident corporations
or separate units, to the extent of such income, before being considered
to offset the income of the other person.
(iv) Except to the extent paragraph (g)(1) of this section applies,
where the income tax laws of a foreign country deny the use of losses,
expenses, or deductions of a dual resident corporation to offset the
income of another person because the dual resident corporation is also
subject to income taxation by another country on its worldwide income or
on a residence basis, the dual resident corporation shall be treated as
if it actually had offset its dual consolidated loss against the income
of another person in such foreign country.
(16) Examples. The following examples illustrate this paragraph (c).
Example 1. X, a member of a consolidated group, conducts business
through a branch in Country Y. Under Country Y's income tax laws, the
branch is taxed as a permanent establishment and its losses may be used
under the Country Y form of consolidation to offset the income of Z, a
Country Y affiliate of X. In Year 1, the branch of X incurs an overall
loss that would be treated as a net operating loss if the branch were a
separate domestic corporation. Under paragraph (c)(3) of this section,
the branch of X is treated as a separate domestic corporation and a dual
resident corporation. Thus, under paragraph (c)(5), its loss constitutes
a dual consolidated loss. Unless X qualifies for an exception under
paragraph (g) of this section, paragraph (b) of this section precludes
the use of the branch's loss to offset any income of X not derived from
the branch operations or any income of a domestic affiliate of X.
Example 2. A and B are members of a consolidated group. FC is a
Country X corporation that is wholly owned by B. A and B organize a
partnership, P, under the laws of Country X. P conducts business in
Country X and its business activity constitutes a foreign branch within
the meaning of paragraph (c)(3)(i)(A) of this section. P also earns U.S.
source income that is unconnected with the branch operations and,
therefore, is not subject to tax by Country X. Under the laws of Country
X, the branch can consolidate with FC. The interests in P held by A and
B are each treated as a dual resident corporation. The branch is also
treated as a separate dual resident corporation. Unless an exception
under paragraph (g) of this section applies, any dual consolidated loss
incurred by P's branch cannot offset the U.S. source income earned by P
or any other income of A or B.
Example 3. X is classified as a partnership for U.S. income tax
purposes. A, B, and C are the sole partners of X. A and B are domestic
corporations and C is a Country Y corporation. For U.S. income tax
purposes, each partner has an equal interest in each item of partnership
profit or loss. Under Country Y's law, X is classified as a corporation
and its income and losses may be used under the Country Y form of
consolidation to offset the income of companies that are affiliates of
X. Under paragraph (c)(3) and (4) of this section, the partnership
interests held by A and B are treated as separate domestic corporations
and as dual resident corporations. Unless an exception under paragraph
(g) of this section applies, losses allocated to A and B can only be
used to offset profits of X allocated to A and B, respectively.
Example 4. P, a domestic corporation, files a consolidated U.S.
income tax return with its two wholly-owned domestic subsidiaries, DRC1
and DRC2. Each subsidiary is also treated as a Country Y resident for
Country Y tax purposes. Thus, DRC1 and DRC2 are dual resident
corporations. DRC1 owns FC, a Country Y corporation. Country Y's tax
laws permit affiliated resident corporations to file a form of
consolidated return. In Year 1, DRC1 incurs a $200 net operating loss
for both U.S. and Country Y tax purposes, while DRC2 recognizes $200 of
income under the tax laws of each country. FC also earns $200 of income
for Country Y tax purposes. DRC1, DRC2, and FC file a Country Y
consolidated return. However, Country Y has no applicable rules for
determining which income is offset by DRC1's $200 loss. Under paragraph
(c)(15)(iii) of this section, the loss shall be treated as offsetting
DRC2's $200 of income. Because DRC1 and DRC2 are members of the same
consolidated group, for purposes of this section, the offset of DRC1's
loss against the income of DRC2 is not considered a use of
[[Page 512]]
the loss against the income of another person under the laws of a
foreign country.
Example 5. DRC, a domestic corporation, files a consolidated U.S.
income tax return with its parent, P. DRC is also subject to tax in
Country Y on its worldwide income. Therefore, DRC is a dual resident
corporation and any net operating loss incurred by DRC is a dual
consolidated loss. Country Y's tax laws permit corporations that are
subject to tax on their worldwide income to use the Country Y form of
consolidation, thus enabling eligible corporations to use their losses
to offset income of affiliates. However, to prevent corporations like
DRC from offsetting losses against income of affiliates in Country Y and
then again offsetting the losses against income of foreign affiliates
under the tax laws of another country, Country Y prevents a corporation
that is also subject to the income tax of another country on its
worldwide income or on a residence basis from using the Country Y form
of consolidation. There is no agreement, as described in paragraph
(g)(1) of this section, between the United States and Country Y. Because
of Country Y's statute, DRC will be treated as having actually offset
its losses against the income of affiliates in Country Y under paragraph
(c)(15)(iv) of this section. Therefore, DRC will not be able to file an
agreement described in paragraph (g)(2) of this section and offset its
losses against the income of P or any other domestic affiliate.
(d) Special rules for accounting for dual consolidated losses--(1)
Determination of amount of dual consolidated loss--(i) Dual resident
corporation that is a member of a consolidated group. For purposes of
determining whether a dual resident corporation that is a member of a
consolidated group has a dual consolidated loss for the taxable year,
the dual resident corporation shall compute its taxable income (or loss)
in accordance with the rules set forth in the regulations under section
1502 governing the computation of consolidated taxable income, taking
into account only the dual resident corporation's items of income, gain,
deduction, and loss for the year. However, for purposes of this
computation, the following items shall not be taken into account:
(A) Any net capital loss of the dual resident corporation; and
(B) Any carryover or carryback losses.
(ii) Dual resident corporation that is a separate unit of a domestic
corporation. For purposes of determining whether a separate unit has a
dual consolidated loss for the taxable year, the separate unit shall
compute its taxable income (or loss) as if it were a separate domestic
corporation and a dual resident corporation in accordance with the
provisions of paragraph (d)(1)(i) of this section, using only those
items of income, expense, deduction, and loss that are otherwise
attributable to such separate unit.
(2) Effect of a dual consolidated loss. For any taxable year in
which a dual resident corporation or separate unit has a dual
consolidated loss to which paragraph (b) of this section applies, the
following rules shall apply.
(i) If the dual resident corporation is a member of a consolidated
group, the group shall compute its consolidated taxable income without
taking into account the items of income, loss, or deduction taken into
account in computing the dual consolidated loss. The dual consolidated
loss may be carried over or back for use in other taxable years as a
separate net operating loss carryover or carryback of the dual resident
corporation arising in the year incurred. It shall be treated as a loss
incurred by the dual resident corporation in a separate return
limitation year and (without regard to whether the dual resident
corporation is a common parent) shall be subject to all of the
limitations of Sec. Sec. 1.1502-21A(c) or 1.1502-21(c), as appropriate
(relating to limitations on net operating loss carryovers and carrybacks
from separate return limitation years).
(ii) The unaffiliated domestic owner of a separate unit, or the
consolidated group of an affiliated domestic owner, shall compute its
taxable income without taking into account the items of income, loss or
deduction taken into account in computing the separate unit's dual
consolidated loss. The dual consolidated loss shall be treated as a loss
incurred by a separate corporation and its use shall be subject to all
of the limitations of Sec. Sec. 1.1502-21A(c) or 1.1502-21(c), as
appropriate, as if the separate unit were filing a consolidated return
with the unaffiliated domestic owner or with the consolidated group of
the affiliated domestic owner.
(3) Basis adjustments for dual consolidated losses--(i) Dual
resident corporation that is a member of an affiliated
[[Page 513]]
group. When a dual resident corporation is a member of a consolidated
group, each other member owning stock in the dual resident corporation
shall adjust the basis of the stock in the following manner.
(A) Positive adjustments. Positive adjustments shall be made in
accordance with the principles of Sec. 1.1502-32(b)(1), except that
there shall be no positive adjustment under Sec. 1.1502-32(b)(1)(ii) for
any amount of the dual consolidated loss that is not absorbed as a
result of the application of paragraph (b) of this section. In addition,
there shall be no positive adjustment for any amount included in income
pursuant to paragraph (g)(2)(vii) of this section.
(B) Negative adjustments. Negative adjustments shall be made in
accordance with the principles of Sec. 1.1502-32(b)(2), except that
there shall be no negative adjustment under Sec. 1.1502-32(b)(2)(ii) for
the amount of the dual consolidated loss subject to paragraph (b) of
this section that is absorbed in a carryover year.
(ii) Dual resident corporation that is a separate unit arising from
an interest in a partnership. Where a separate unit is an interest in a
partnership, the domestic owner shall adjust its basis in the separate
unit in accordance with section 705, except that no increase in basis
shall be permitted for any amount included as income pursuant to
paragraph (g)(2)(vii) of this section.
(4) Examples. The following examples illustrate this paragraph (d).
Example 1. (i) P, S1, S2, and T are domestic corporations. P owns
all of the stock of S1 and S2. S2 owns all of the stock of T. T is a
resident of Country FC for Country FC income tax purposes. Therefore, T
is a dual resident corporation. P, S1, S2, and T file a consolidated
U.S. income tax return. X and Y are corporations that are not members of
the consolidated group.
(ii) At the beginning of Year 1, P has a basis of $1000 in the stock
of S2. S2 has a $500 basis in the stock of T.
(iii) In Year 1, T incurs interest expense in the amount of $100. In
addition, T sells a noncapital asset, u, in which it has a basis of $10,
to S1 for $50. T also sells a noncapital asset, v, in which it has a
basis of $200, to S1 for $100. The sales of u and v are intercompany
transactions described in Sec. 1.1502-13. T also sells a capital asset,
z, in which it has a basis of $180, to Y for $90. In Year 1, S1 earns
$200 of separate taxable income, calculated in accordance with
Sec. 1.1502-12, as well as $90 of capital gain from a sale of an asset
to X. P and S2 have no items of income, loss, or deduction for Year 1.
(iv) In Year 1, T has a dual consolidated loss of $100 (attributable
to its interest expense). T's $90 capital loss is not included in the
computation of the dual consolidated loss. Instead, T's capital loss is
included in the computation of the consolidated group's capital gain net
income under Sec. 1.1502-22(c) and is used to offset S1's $90 capital
gain.
(v) No elective agreement, as described in paragraph (g)(1) of this
section, exists between the United States and Country FC. For Country FC
tax purposes, T's $100 loss is offset against the income of a Country FC
affiliate. Therefore, T is not eligible for the exception provided in
paragraph (g)(2) of this section.
(vi) Because T has a dual consolidated loss for the year, the
consolidated taxable income of the consolidated group is calculated
without regard to T's items of income, loss or deduction taken into
account in computing the dual consolidated loss. Therefore, the
consolidated taxable income of the consolidated group is $200 (the sum
of $200 of separate taxable income earned by S1 plus $90 of capital gain
earned by S1 minus $90 of capital loss incurred by T). The $40 gain
recognized by T upon the sale of item u to S1 and the $100 loss
recognized by T upon the sale of item v to S1 are deferred pursuant to
Sec. 1.1502-13(c)(1).
(vii) S2 may not make the positive adjustment provided for in
Sec. 1.1502-32(b)(1)(ii) to its basis in the stock of T for the $100
dual consolidated loss incurred by T. In addition, no positive
adjustment in the basis of the stock is required for T's $90 capital
loss because the loss has been absorbed by the consolidated group. S2,
however, must make the negative adjustment provided for in Sec. 1.1502-
32(b)(2)(i) for its allocable part of T's deficit in earnings and
profits for the taxable year attributable to both T's $100 dual
consolidated loss and T's $90 capital loss. Thus, as provided in
Sec. 1.1502-32(e)(1), S2 must make a $190 net negative adjustment to its
basis in the stock of T, reducing its basis to $310. As provided in
Sec. 1.1502-33(c)(4)(ii)(a), S2's earnings and profits for Year 1 will
reflect S2's decrease in its basis in T stock for the taxable year.
Since S2 has no other earnings and profits for the taxable year, S2 has
a $190 deficit in earnings and profits for the year. As provided in
Sec. 1.1502-32(b)(2)(i), P must make a negative adjustment to its basis
in the stock of S2 for its allocable part of S2's deficit in earnings
and profits for the taxable year. Thus, P must make a $190 net negative
adjustment to its basis in S2 stock, reducing its basis to $810.
Example 2. (i) The facts are the same as in Example 1, except that
in Year 2, S1 sells items u and v to X for no gain or loss. The
[[Page 514]]
disposition of items u and v outside of the consolidated group restores
the deferred loss and gain to T. T also incurs $100 of interest expense
in Year 2. In addition, T sells a noncapital asset, r, in which it has a
basis of $100, to Y for $300. P and S2 have no items of income, loss, or
deduction for Year 2.
(ii) T has $40 of separate taxable income in Year 2, computed as
follows:
($100) interest expense
($100) sale of item v to S1
$ 40 sale of item u to S1
$200 sale of item r to Y
--------
$ 40
Thus, T has no dual consolidated loss for the year.
(iii) Since T does not have a dual consolidated loss for the taxable
year, the group's consolidated taxable income is calculated in
accordance with the general rule of Sec. 1.1502-11 and not in accordance
with paragraph (d)(2) of this section. T is the only member of the
consolidated group that has any income or loss for the taxable year.
Thus, the consolidated taxable income of the group, computed without
regard to T's dual consolidated loss carryover, is $40.
(iv) As provided by Sec. 1.1502-21A(c), the amount of the dual
consolidated loss arising in Year 1 that is included in the group's
consolidated net operating loss deduction for Year 2 is $40 (that is,
the consolidated taxable income computed without regard to the
consolidated net operating loss deduction minus such consolidated
taxable income recomputed by excluding the items of income and deduction
of T). Thus, the group has no consolidated taxable income for the year.
(v) S2 must make the positive adjustment provided for in Sec. 1.502-
32(b)(1)(i) to its basis in T stock for its allocable part of T's
undistributed earnings and profits for the taxable year. S2 cannot make
the negative adjustment provided for in Sec. 1.1502-32(b)(2)(ii) for the
dual consolidated loss of T incurred in Year 1 and absorbed in Year 2.
Thus, as provided in Sec. 1.1502-32(e)(2), S2 must make a $40 net
positive adjustment to its basis in T stock, increasing its basis to
$350. As provided in Sec. 1.1502-33(c)(4)(ii)(a), S2's earnings and
profits for Year 2 will reflect S2's increase in its basis in T stock
for the taxable year. Since S2 has no other earnings and profits for the
taxable year, S2 has $40 of earnings and profits for the year. As
provided in Sec. 1.1502-32(b)(1)(i), P must make a positive adjustment
to its basis in the stock of S2 for its allocable part of the
undistributed earnings and profits of S2 for the taxable year. Thus, P
must make a $40 net positive adjustment to its basis in S2 stock,
increasing its basis to $850.
(e) Special rule for use of dual consolidated loss to offset tainted
income--(1) In general. The dual consolidated loss of any dual resident
corporation that ceases to be a dual resident corporation shall not be
used to offset income of such corporation to the extent that such income
is tainted income, as defined in paragraph (e)(2) of this section.
(2) Tainted income defined. Tainted income is any income derived
from tainted assets, as defined in paragraph (e)(3) of this section,
beginning on the date such assets are acquired by the dual resident
corporation. In the absence of evidence establishing the actual amount
of income that is attributable to the tainted assets, the portion of a
corporation's income in a particular taxable year that is treated as
tainted income shall be an amount equal to the corporation's taxable
income for the year multiplied by a fraction, the numerator of which is
the fair market value of the tainted asset at the end of the taxable
year and the denominator of which is the fair market value of the total
assets owned by the corporation at the end of the taxable year.
Documentation submitted to establish the actual amount of income that is
attributable to the tainted assets must be attached to the consolidated
group's or unaffiliated dual resident corporation's timely filed tax
return for the taxable year in which the income is recognized.
(3) Tainted assets defined. Tainted assets are any asset acquired by
a dual resident corporation in a non-recognition transaction, as defined
in section 7701(a)(45), or any assets otherwise transferred to the
corporation as a contribution to capital, at any time during the three
taxable years immediately preceding the taxable year in which the
corporation ceases to be a dual resident corporation or at any time
thereafter. Tainted assets shall not include assets that were acquired
by such dual resident corporation on or before December 31, 1986.
(4) Exceptions. Income derived from assets acquired by a dual
resident corporation shall not be subject to the limitation described in
paragraph (e)(1) of this section, if--
(i) For the taxable year in which the assets were acquired, the
corporation did not have a dual consolidated loss (or a carry forward of
a dual consolidated loss to such year); or
[[Page 515]]
(ii) The assets were acquired as replacement property in the
ordinary course of business.
(f) Computation of foreign tax credit limitations. If a dual
resident corporation or separate unit is subject to paragraph (d)(2) of
this section, the consolidated group or unaffiliated domestic owner
shall compute its foreign tax credit limitation by applying the
limitations of paragraph (d)(2). Thus, the dual consolidated loss is not
taken into account until the year in which it is absorbed.
(g) Exception--(1) Elective agreement in place between the United
States and a foreign country. Paragraph (b) of this section shall not
apply to a dual consolidated loss to the extent the dual resident
corporation, or domestic owner of a separate unit, elects to deduct the
loss in the United States pursuant to an agreement entered into between
the United States and a foreign country that puts into place an elective
procedure through which losses offset income in only one country.
(2) Elective relief provision--(i) In general. Paragraph (b) of this
section shall not apply to a dual consolidated loss if the consolidated
group, unaffiliated dual resident corporation, or unaffiliated domestic
owner elects to be bound by the provisions of this paragraph (g)(2). In
order to elect relief under this paragraph (g)(2), the consolidated
group, unaffiliated dual resident corporation, or unaffiliated domestic
owner must attach to its timely filed U.S. income tax return for the
taxable year in which the dual consolidated loss is incurred an
agreement described in this paragraph (g)(2)(i). The agreement must be
signed under penalties of perjury by the person who signs the return and
must include the following items, in paragraphs labeled to correspond
with the items set forth below:
(A) A statement that the document submitted is an election and an
agreement under the provisions of Sec. 1.1503-2(g)(2) of the Income Tax
Regulations;
(B) The name, address, identifying number, and place and date of
incorporation of the dual resident corporation, and the country or
countries that tax the dual resident corporation on its worldwide income
or on a residence basis, or, in the case of a separate unit,
identification of the separate unit, including the name under which it
conducts business, its principal activity, and the country in which its
principal place of business is located;
(C) An agreement by the consolidated group, unaffiliated dual
resident corporation, or unaffiliated domestic owner to comply with all
of the provisions of paragraphs (g)(2) (iii) through (vii) of
Sec. 1.1503-2;
(D) A statement of the amount of the dual consolidated loss covered
by the agreement;
(E) A certification that no portion of the dual resident
corporation's or separate unit's loss, expenses, or deductions taken
into account in computing the dual consolidated loss has been, or will
be, used to offset the income of any other person under the income tax
laws of a foreign country; and
(F) A certification that arrangements have been made to ensure that
no portion of the dual consolidated loss will be used to offset the
income of another person under the laws of a foreign country and that
the consolidated group, unaffiliated dual resident corporation, or
unaffiliated domestic owner will be informed of any such foreign use of
any portion of the dual consolidated loss.
(ii) Consistency rule--(A) If any loss, expense, or deduction taken
into account in computing the dual consolidated loss of a dual resident
corporation or separate unit is used under the laws of a foreign country
to offset the income of another person, then the following other dual
consolidated losses (if any) shall be treated as also having been used
to offset income of another person under the laws of such foreign
country, but only if the income tax laws of the foreign country permit
any loss, expense, or deduction taken into account in computing the
other dual consolidated loss to be used to offset the income of another
person in the same taxable year;
(1) Any dual consolidated loss of a dual resident corporation that
is a member of the same consolidated group of which the first dual
resident corporation or domestic owner is a member, if any loss,
expense, or deduction taken into account in computing
[[Page 516]]
such dual consolidated loss is recognized under the income tax laws of
such country in the same taxable year; and
(2) Any dual consolidated loss of a separate unit that is owned by
the same domestic owner that owns the first separate unit, or that is
owned by any member of the same consolidated group of which the first
dual resident corporation or domestic owner is a member, if any loss,
expense, or deduction taken into account in computing such dual
consolidated loss is recognized under the income tax laws of such
country in the same taxable year.
(B) The following examples illustrate the application of this
paragraph (g)(2)(ii).
Example 1. P, a domestic corporation, owns A and B, which are
domestic corporations, and C, a Country X corporation. A is subject to
the income tax laws of Country X on a residence basis and, thus, is a
dual resident corporation. B conducts business in Country X through a
branch, which is a separate unit under paragraph (c)(3) of this section.
The income tax laws of Country X permit branches of foreign corporations
to elect to file consolidated returns with Country X affiliates. In Year
1, A incurs a dual consolidated loss, which is used to offset the income
of C under the Country X form of consolidation. The branch of B also
incurs a net operating loss. However, B elects not to use the loss on a
Country X consolidated return to offset the income of foreign
affiliates. The use of A's loss to offset the income of C in Country X
will cause the separate unit of B to be treated as if it too had used
its dual consolidated loss to offset the income of an affiliate in
Country X. Therefore, an election and agreement under this paragraph
(g)(2) cannot be made with respect to the separate unit's dual
consolidated loss.
Example 2. The facts are the same as in Example 1, except that the
income tax laws of Country X do not permit branches of foreign
corporations to file consolidated income tax returns with Country X
affiliates. Therefore, an election and agreement described in this
paragraph (g)(2) may be made for the dual consolidated loss incurred by
the separate unit of B.
(iii) Triggering events requiring the recapture of dual consolidated
losses--(A) The consolidated group, unaffiliated dual resident
corporation, or unaffiliated domestic owner must agree that, if there is
a triggering event described in this paragraph (g)(2)(iii), and no
exception applies under paragraph (g)(2)(iv) of this section, the
consolidated group, unaffiliated dual resident corporation, or
unaffiliated domestic owner will recapture and report as income the
amount of the dual consolidated loss provided in paragraph (g)(2)(vii)
of this section on its tax return for the taxable year in which the
triggering event occurs (or, when the triggering event is a use of the
loss for foreign purposes, the taxable year that includes the last day
of the foreign tax year during which such use occurs). In addition, the
consolidated group, unaffiliated dual resident corporation, or
unaffiliated domestic owner must pay any applicable interest charge
required by paragraph (g)(2)(vii) of this section. For purposes of this
section, any of the following events shall constitute a triggering
event:
(1) In any taxable year up to and including the 15th taxable year
following the year in which the dual consolidated loss that is the
subject of the agreement filed under this paragraph (g)(2) was incurred,
any portion of the losses, expenses, or deductions taken into account in
computing the dual consolidated loss is used by any means to offset the
income of any other person under the income tax laws of a foreign
country;
(2) An affiliated dual resident corporation or affiliated domestic
owner ceases to be a member of the consolidated group that filed the
election. For purposes of this paragraph (g)(2)(iii)(A)(2), a dual
resident corporation or domestic owner shall be considered to cease to
be a member of the consolidated group if it is no longer a member of the
group within the meaning of Sec. 1.1502-1(b), or if the group ceases to
exist because the common parent is no longer in existence or is no
longer a common parent or the group no longer files on the basis of a
consolidated return. Such disaffiliation, however, shall not constitute
a triggering event if the taxpayer demonstrates, to the satisfaction of
the Commissioner, that the dual resident corporation's or separate
unit's losses, expenses, or deductions cannot be used to offset income
of another person under the laws of a foreign country at any time after
the affiliated dual resident corporation
[[Page 517]]
or affiliated domestic owner ceases to be a member of the consolidated
group;
(3) An unaffiliated dual resident corporation or unaffiliated
domestic owner becomes a member of a consolidated group. Such
affiliation of the dual resident corporation or domestic owner, however,
shall not constitute a triggering event if the taxpayer demonstrates, to
the satisfaction of the Commissioner, that the losses, expenses, or
deductions of the dual resident corporation or separate unit cannot be
used to offset the income of another person under the laws of a foreign
country at any time after the dual resident corporation or domestic
owner becomes a member of the consolidated group.
(4) A dual resident corporation transfers assets in a transaction
that results, under the laws of a foreign country, in a carryover of its
losses, expenses, or deductions. For purposes of this paragraph
(g)(2)(iii)(A)(4), a transfer, either in a single transaction or a
series of transactions within a twelve-month period, of 50% or more of
the dual resident corporation's assets (measured by the fair market
value of the assets at the time of such transfer (or for multiple
transactions, at the time of the first transfer)) shall be deemed a
triggering event, unless the taxpayer demonstrates, to the satisfaction
of the Commissioner, that the transfer of assets did not result in a
carryover under foreign law of the dual resident corporation's losses,
expenses, or deductions to the transferee of the assets;
(5) A domestic owner of a separate unit transfers assets of the
separate unit in a transaction that results, under the laws of a foreign
country, in a carryover of the separate unit's losses, expenses, or
deductions. For purposes of this paragraph (g)(2)(iii)(A)(5), a
transfer, either in a single transaction or a series of transactions
over a twelve-month period, of 50% or more of the separate unit's assets
(measured by the fair market value of the assets at the time of the
transfer (or for multiple transfers, at the time of the first
transfer)), shall be deemed a triggering event, unless the taxpayer
demonstrates, to the satisfaction of the Commissioner, that the transfer
of assets did not result in a carryover under foreign law of the
separate unit's losses, expenses, or deductions to the transferee of the
assets;
(6) An unaffiliated dual resident corporation or unaffiliated
domestic owner becomes a foreign corporation by means of a transaction
(e.g., a reorganization) that, for foreign tax purposes, is not treated
as involving a transfer of assets (and carryover of losses) to a new
entity. Such a transaction, however, shall not constitute a triggering
event if the taxpayer demonstrates, to the satisfaction of the
Commissioner, that the dual resident corporation's or separate unit's
losses, expenses, or deductions cannot be used to offset income of
another person under the laws of the foreign country at any time after
the unaffiliated dual resident corporation or unaffiliated domestic
owner becomes a foreign corporation.
(7) A domestic owner of a separate unit, either in a single
transaction or a series of transactions within a twelve-month period,
sells, or otherwise disposes of, 50% or more of the interest in the
separate unit (measured by voting power or value) owned by the domestic
owner on the last day of the taxable year in which the dual consolidated
loss was incurred. For purposes of this paragraph (g)(2)(iii)(A)(7), the
domestic owner shall be deemed to have disposed of its entire interest
in a hybrid entity separate unit if such hybrid entity becomes
classified as a foreign corporation for U.S. tax purposes. The
disposition of 50% or more of the interest in a separate unit, however,
shall not constitute a triggering event if the taxpayer demonstrates, to
the satisfaction of the Commissioner, that the losses, expenses, or
deductions of the separate unit cannot be used to offset income of
another person under the laws of the foreign country at any time after
the disposition of the interest in the separate unit; or
(8) The consolidated group, unaffiliated dual resident corporation,
or unaffiliated domestic owner fails to file a certification required
under paragraph (g)(2)(vi)(B) of this section.
(B) A taxpayer wishing to rebut the presumption of a triggering
event described in paragraphs (g)(2)(iii)(A)(2)
[[Page 518]]
through (7) of this section, by demonstrating that the losses, expenses,
or deductions of the dual resident corporation or separate unit cannot
be carried over or otherwise used under the laws of the foreign country,
must attach documents demonstrating such facts to its timely filed U.S.
income tax return for the year in which the presumed triggering event
occurs.
(C) The following example illustrates this paragraph (g)(2)(iii).
Example. DRC, a domestic corporation, is a member of CG, a
consolidated group. DRC is a resident Country Y for Country Y income tax
purposes. Therefore, DRC is a dual resident corporation. In Year 1, DRC
incurs a dual consolidated loss of $100. CG files an agreement described
in paragraph (g)(2) of this section and, thus, the $100 dual
consolidated loss is included in the computation of CG's consolidated
taxable income. In Year 6, all of the stock of DRC is sold to P, a
domestic corporation that is a member of NG, another consolidated group.
The sale of DRC to P is a triggering event under paragraph
(g)(2)(iii)(A) of this section, requiring the recapture of the dual
consolidated loss. However, the laws of Country Y provide for a five-
year carryover period for losses. At the time of DRC's disaffiliation
from CG, the losses, expenses and deductions that were included in the
computation of the dual consolidated loss had expired for Country Y
purposes. Therefore, upon adequate documentation that the losses,
expenses, or deductions have expired for Country Y purposes, CG can
rebut the presumption that a triggering event has occurred.
(iv) Exceptions--(A) Acquisition by a member of the consolidated
group. The following events shall not constitute triggering events,
requiring the recapture of the dual consolidated loss under paragraph
(g)(2)(vii) of this section:
(1) An affiliated dual resident corporation or affiliated domestic
owner ceases to be a member of a consolidated group solely by reason of
a transaction in which a member of the same consolidated group succeeds
to the tax attributes of the dual resident corporation or domestic owner
under the provisions of section 381;
(2) Assets of an affiliated dual resident corporation or assets of a
separate unit of an affiliated domestic owner are acquired by a member
of its consolidated group in any other transaction; or
(3) An affiliated domestic owner of a separate unit transfers its
interest in the separate unit to another member of its consolidated
group.
(B) Acquisition by an unaffiliated domestic corporation or a new
consolidated group--(1) If the requirements of paragraph
(g)(2)(iv)(B)(2) of this section are met, the following events shall not
constitute triggering events, requiring the recapture of the dual
consolidated loss under paragraph (g)(2)(vii) of this section:
(i) An affiliated dual resident corporation or affiliated domestic
owner becomes an unaffiliated domestic corporation or a member of a new
consolidated group;
(ii) An unaffiliated dual resident corporation or unaffiliated
domestic owner becomes a member of a consolidated group;
(iii) Assets of a dual resident corporation or a separate unit are
acquired by an unaffiliated domestic corporation or a member of a new
consolidated group; or
(iv) A domestic owner of a separate unit transfers its interest in
the separate unit to an unaffiliated domestic corporation or to a member
of a new consolidated group.
(2) If all of the following requirements are satisfied, the events
listed in paragraph (g)(2)(iv)(B)(1) of this section shall not
constitute triggering events requiring recapture under paragraph
(g)(2)(vii) of this section.
(i) The consolidated group, unaffiliated dual resident corporation,
or unaffiliated domestic owner that filed the agreement under this
paragraph (g)(2) and the unaffiliated domestic corporation or new
consolidated group must enter into a closing agreement with the Internal
Revenue Service providing that the consolidated group, unaffiliated dual
resident corporation, or unaffiliated domestic owner and the
unaffiliated domestic corporation or new consolidated group will be
jointly and severally liable for the total amount of the recapture of
dual consolidated loss and interest charge required in paragraph
(g)(2)(vii) of this section, if there is a triggering event described in
paragraph (g)(2)(iii) of this section;
(ii) The unaffiliated domestic corporation or new consolidated group
[[Page 519]]
must agree to treat any potential recapture amount under paragraph
(g)(2)(vii) of this section as unrealized built-in gain for purposes of
section 384(a), subject to any applicable exceptions thereunder;
(iii) The unaffiliated domestic corporation or new consolidated
group must file an agreement described in paragraph (g)(2)(i) of this
section with its timely filed income tax return for the taxable year in
which the event described in paragraph (g)(2)(iv)(B)(1) of this section
occurs. The agreement must be signed under penalties of perjury by the
person who signs the tax return of the unaffiliated domestic corporation
or new consolidated group.
(C) Subsequent triggering events. Any triggering event described in
paragraph (g)(2)(iii) of this section that occurs subsequent to one of
the transactions described in paragraph (g)(2)(iv) (A) or (B) of this
section and does not fall within the exceptions provided in paragraph
(g)(2)(iv) (A) or (B) of this section shall require recapture under
paragraph (g)(2)(vii) of this section.
(v) Ordering rules for determining the foreign use of losses. If the
laws of a foreign country provide for the use of losses of a dual
resident corporation to offset the income of another person but do not
provide applicable rules for determining the order in which such losses
are used to offset the income of another person in a taxable year, then
for purposes of this section, the following rules shall govern:
(A) If under the laws of the foreign country the dual resident
corporation has losses from different taxable years, the dual resident
corporation shall be deemed to use first the losses from the earliest
taxable year from which a loss may be carried forward or back for
foreign law purposes.
(B) Any net loss, or income, that the dual resident corporation has
in a taxable year shall first be used to offset net income, or loss,
recognized by affiliates of the dual resident corporation in the same
taxable year before any carryover of the dual resident corporation's
losses is considered to be used to offset any income from the taxable
year.
(C) Where different losses, expenses, or deductions (e.g., capital
losses and ordinary losses) of a dual resident corporation incurred in
the same taxable year are available to offset the income of another
person, the different losses shall be deemed to offset such income on a
pro rata basis.
Example. DRC, a domestic corporation, is taxed as a resident under
the tax laws of Country Y. Therefore, DRC is a dual resident
corporation. FA is a Country Y affiliate of DRC. Country Y's tax laws
permit affiliated corporations to file a form of consolidated return. In
Year 1, DRC incurs a capital loss of $80 which, for Country Y purposes,
offsets completely $30 of capital gain recognized by FA. Neither
corporation has any other taxable income or loss for the year. In Year 1
(and in other years), DRC recognizes the same amount of income for U.S.
purposes as it does for Country Y purposes. Under paragraph (d)(1)(i) of
this section, however, DRC's $80 capital loss is not a dual consolidated
loss. In Year 2, DRC incurs a net operating loss of $100, while FA
incurs a net operating loss of $50. DRC's $100 loss is a dual
consolidated loss. Since the dual consolidated loss is not used to
offset the income of another person under Country Y law, DRC is
permitted to file an agreement described in this paragraph (g)(2). In
Year 3, DRC has a net operating loss of $10 and FA has capital gains of
$60. For Country Y purposes, DRC's $10 net operating loss is used to
offset $10 of FA's $60 capital gain. DRC's $10 loss is a dual
consolidated loss. Because the loss is used to offset FA's income, DRC
will not be able to file an agreement under this paragraph (g)(2) with
respect to the loss. Country Y permits FA's remaining $50 of Year 3
income to be offset by carryover losses. However, Country Y has no
applicable rules for determining which carryover losses from Years 1 and
2 are used to offset such income. Under the ordering rules of paragraph
(g)(2)(v)(A) of this section, none of DRC's $100 Year 2 loss will be
deemed to offset FA's remaining $50 of Year 3 income. Instead, the $50
of capital loss carryover from Year 1 will be considered to offset the
income.
(vi) Reporting requirements--(A) In general. The consolidated group,
unaffiliated dual resident corporation, or unaffiliated domestic owner
must answer the applicable questions regarding dual consolidated losses
on its U.S. income tax return filed for the year in which the dual
consolidated loss is incurred and for each of the following fifteen
taxable years.
(B) Annual certification. Except as provided in paragraph
(g)(2)(vi)(C) of this section, until and unless Form 1120 (or the
Schedules thereto) contains
[[Page 520]]
questions pertaining to dual consolidated losses, the consolidated
group, unaffiliated dual resident corporation, or unaffiliated domestic
owner must file with its income tax return for each of the fifteen
taxable years following the taxable year in which the dual consolidated
loss is incurred a certification that the losses, expenses, or
deductions that make up the dual consolidated loss have not been used to
offset the income of another person under the tax laws of a foreign
country. The annual certification must be signed under penalties of
perjury by a person authorized to sign the agreement described in
paragraph (g)(2)(i) of this section. The certification must identify the
dual consolidated loss to which it pertains by setting forth the
taxpayer's year in which the loss was incurred and the amount of such
loss. In addition, the certification must warrant that arrangements have
been made to ensure that the loss will not be used to offset the income
of another person under the laws of a foreign country and that the
taxpayer will be informed of any such foreign use of any portion of the
loss. If dual consolidated losses of more than one taxable year are
subject to the rules of this paragraph (g)(2)(vi)(B), the certifications
for those years may be combined in a single document but each dual
consolidated loss must be separately identified.
(C) Exception. A consolidated group or unaffiliated domestic owner
is not required to file annual certifications under paragraph
(g)(2)(vi)(B) of this section with respect to a dual consolidated loss
of any separate unit other than a hybrid entity separate unit.
(vii) Recapture of loss and interest charge--(A) Presumptive rule--
(1) Amount of recapture. Except as otherwise provided in this paragraph
(g)(2)(vii), upon the occurrence of a triggering event described in
paragraph (g)(2)(iii) of this section, the taxpayer shall recapture and
report as gross income the total amount of the dual consolidated loss to
which the triggering event applies on its income tax return for the
taxable year in which the triggering event occurs (or, when the
triggering event is a use of the loss for foreign tax purposes, the
taxable year that includes the last day of the foreign tax year during
which such use occurs).
(2) Interest charge. In connection with the recapture, the taxpayer
shall pay an interest charge. Except as otherwise provided in this
paragraph (g)(2)(vii), such interest shall be determined under the rules
of section 6601(a) as if the additional tax owed as a result of the
recapture had accrued and been due and owing for the taxable year in
which the losses, expenses, or deductions taken into account in
computing the dual consolidated loss gave rise to a tax benefit for U.S.
income tax purposes. For purposes of this paragraph (g)(2)(vii)(A)(2), a
tax benefit shall be considered to have arisen in a taxable year in
which such losses, expenses or deductions reduced U.S. taxable income.
(B) Rebuttal of presumptive rule--(1) Amount of recapture. The
amount of dual consolidated loss that must be recaptured under this
paragraph (g)(2)(vii) may be reduced if the taxpayer demonstrates, to
the satisfaction of the Commissioner, the offset permitted by this
paragraph (g)(2)(vii)(B). The reduction in the amount of recapture is
the amount by which the dual consolidated loss would have offset other
taxable income reported on a timely filed U.S. income tax return for any
taxable year up to and including the year of the triggering event if
such loss had been subject to the restrictions of paragraph (b) of this
section (and therefore had been subject to the separate return
limitation year restrictions of Sec. Sec. 1.1502-21A(c) or 1.1502-21(c)
(as appropriate) commencing in the taxable year in which the loss was
incurred. A taxpayer utilizing this rebuttal rule must attach to its
timely filed U.S. income tax return a separate accounting showing that
the income for each year that offsets the dual resident corporation's or
separate unit's recapture amount is attributable only to the dual
resident corporation or separate unit.
(2) Interest charge. The interest charge imposed under this
paragraph (g)(2)(vii) may be appropriately reduced if the taxpayer
demonstrates, to the satisfaction of the Commissioner, that the net
interest owed would have been
[[Page 521]]
less than that provided in paragraph (g)(2)(vii)(A)(2) of this section
if the taxpayer had filed an amended return for the year in which the
loss was incurred, and for any other affected years up to and including
the year of recapture, treating the dual consolidated loss as a loss
subject to the restrictions of paragraph (b) of this section (and
therefore subject to the separate return limitation year restrictions of
Sec. Sec. 1.1502-21A(c) or 1.1502-21(c) (as appropriate). A taxpayer
utilizing this rebuttal rule must attach to its timely filed U.S. income
tax return a computation demonstrating the reduction in the net interest
owed as a result of treating the dual consolidated loss as a loss
subject to the restrictions of paragraph (b) of this section.
(C) Computation of taxable income in year of recapture--(1)
Presumptive rule. Except as otherwise provided in paragraph
(g)(2)(vii)(C)(2) of this section, for purposes of computing the taxable
income for the year of recapture, no current, carryover or carryback
losses of the dual resident corporation or separate unit, of other
members of the consolidated group, or of the domestic owner that are not
attributable to the separate unit, may offset and absorb the recapture
amount.
(2) Rebuttal of presumptive rule. The recapture amount included in
gross income may be offset and absorbed by that portion of the
taxpayer's (consolidated or separate) net operating loss carryover that
is attributable to the dual consolidated loss being recaptured, if the
taxpayer demonstrates, to the satisfaction of the Commissioner, the
amount of such portion of the carryover. A taxpayer utilizing this
rebuttal rule must attach to its timely filed U.S. income tax return a
computation demonstrating the amount of net operating loss carryover
that, under this paragraph (g)(2)(vii)(C)(2), may absorb the recapture
amount included in gross income.
(D) Character and source of recapture income. The amount recaptured
under this paragraph (g)(2)(vii) shall be treated as ordinary income in
the year of recapture. The amount recaptured shall be treated as income
having the same source and falling within the same separate category for
purposes of section 904 as the dual consolidated loss being recaptured.
(E) Reconstituted net operating loss. Commencing in the taxable year
immediately following the year in which the dual consolidated loss is
recaptured, the dual resident corporation or separate unit shall be
treated as having a net operating loss in an amount equal to the amount
actually recaptured under paragraph (g)(2)(vii) (A) or (B) of this
section. This reconstituted net operating loss shall be subject to the
restrictions of paragraph (b) of this section (and therefore, the
separate return limitation year restrictions of Sec. Sec. 1.1502-21A(c)
or 1.1502-21T(c) (as appropriate). The net operating loss shall be
available only for carryover, under section 172(b), to taxable years
following the taxable year of recapture. For purposes of determining the
remaining carryover period, the loss shall be treated as if it had been
recognized in the taxable year in which the dual consolidated loss that
is the basis of the recapture amount was incurred.
(F) Consequences of failing to comply with recapture provisions--(1)
In general. If the taxpayer fails to comply with the recapture
provisions of this paragraph (g)(2)(vii) upon the occurrence of a
triggering event, then the dual resident corporation or separate unit
that incurred the dual consolidated loss (or a successor-in-interest)
shall not be eligible for the relief provided in paragraph (g)(2) of
this section with respect to any dual consolidated losses incurred in
the five taxable years beginning with the taxable year in which
recapture is required.
(2) Exceptions. In the case of a triggering event other than a use
of the losses, expenses, or deductions taken into account in computing
the dual consolidated loss to offset income of another person under the
income tax laws of a foreign country, this rule shall not apply in the
following circumstances:
(i) The failure to recapture is due to reasonable cause; or
(ii) A taxpayer seeking to rebut the presumption of a triggering
event satisfies the filing requirements of paragraph (g)(2)(iii)(B) of
this section.
(G) Examples. The following examples illustrate this paragraph
(g)(2)(vii).
[[Page 522]]
Example 1. P, a domestic corporation, files a consolidated return
with DRC, a dual resident corporation. In Year 1, DRC incurs a dual
consolidated loss of $100 and P earns $100. P files an agreement under
this paragraph (g)(2). Therefore, the consolidated group is permitted to
offset P's $100 of income with DRC's $100 loss. In Year 2, DRC earns
$30, which is completely offset by a $30 net operating loss incurred by
P. In Year 3, DRC earns income of $25 while P recognizes no income or
loss. In addition, there is a triggering event in Year 3. Therefore,
under the presumptive rule of paragraph (g)(2)(vii)(A) of this section,
DRC must recapture $100. However, the $100 recapture amount may be
reduced by $25 (the amount by which the dual consolidated loss would
have offset other taxable income if it had been subject to the separate
return limitation year restrictions from Year 1) upon adequate
documentation of such offset under paragraph (g)(2)(vii)(B)(1) of this
section. Commencing in Year 4, the $100 (or $75) recapture amount is
treated as a loss incurred by DRC in a separate return limitation year,
subject to the restrictions of Sec. Sec. 1.1502-21A(c) or 1.1502-21(c),
as appropriate. The carryover period of the loss, for purposes of
section 172(b), will start from Year 1, when the dual consolidated loss
was incurred.
Example 2. The facts are the same as in Example 1, except that in
Year 2, DRC earns $75 and P earns $50. In Year 3, DRC earns $25 while P
earns $30. A triggering event occurs in Year 3. The $100 presumptive
amount of recapture can be reduced to zero by the $75 and $25 earned by
DRC in Years 2 and 3, respectively, upon adequate documentation of such
offset under paragraph (g)(2)(vii)(B)(1) of this section. Nevertheless,
an interest charge will be owed. Under the presumptive rule of paragraph
(g)(2)(vii)(A)(2) of this section, interest will be charged on the
additional tax owed on the $100 of recapture income as if the tax had
accrued in Year 1 (the year in which the dual consolidated loss reduced
the income of P). However, the net interest will be reduced to the
amount that would have been owed if the consolidated group had filed
amended returns, treating the dual consolidated loss as a loss subject
to the separate return limitation year restrictions of Sec. 1.1502-
21A(c) or 1.1502-21(c), as appropriate, upon adequate documentation of
such reduction of interest under paragraph (g)(2)(vii)(B)(2) of this
section.
Example 3. P, a domestic corporation, owns DRC, a domestic
corporation that is subject to the income tax laws of Country Z on a
residence basis. DRC owns FE, a Country Z corporation. In Year 1, DRC
incurs a net operating loss for U.S. tax purposes. Under the tax laws of
Country Z, the loss is not recognized until Year 3. The Year 1 net
operating loss is a dual consolidated loss under paragraph (c)(5) of
this section. The consolidated group elects relief under paragraph
(g)(2) of this section by filing the appropriate agreement and uses the
dual consolidated loss on its U.S. income tax return. In Year 3, the
dual consolidated loss is used under the laws of Country Z to offset the
income of FE, which is a triggering event under paragraph (g)(2)(iii) of
this section. However, the consolidated group does not recapture the
dual consolidated loss. The consolidated group's failure to comply with
the recapture provisions of this paragraph (g)(2)(vii) prevents DRC from
being eligible for the relief provided under paragraph (g)(2) of this
section for any dual consolidated losses incurred in Years 3 through 7,
inclusive.
(h) Effective date--(1) In general. These regulations are effective
for taxable years beginning on or after October 1, 1992. Section 1.1503-
2A is effective for taxable years beginning after December 31, 1986, and
before October 1, 1992.
(2) Taxpayers that have filed for relief under Sec. 1.1503-2A--(i)
In general. Except as provided in paragraph (h)(ii)(b) of this section,
taxpayers that have filed agreements described in Sec. 1.1503-2A(c)(3)
or certifications described in Sec. 1.1503-2A(d)(3) shall continue to be
subject to the provisions of such agreements or certifications,
including the amended return or recapture requirements applicable in the
event of a triggering event, for the remaining term of such agreements
or certifications.
(ii) Special transition rule. A taxpayer that has filed an agreement
described in Sec. 1.1503-2A(c)(3) or a certification described in
Sec. 1.1503-2A(d)(3) and that is in compliance with the provisions of
Sec. 1.1503-2A may elect to replace such agreement or certification with
an agreement described in paragraph (g)(2)(i) of this section. However,
a taxpayer making this election must replace all agreements and
certifications filed under Sec. 1.1503-2A. If the taxpayer is a
consolidated group, the election must be made with respect to all dual
resident corporations or separate units within the group. Likewise, if
the taxpayer is an unaffiliated domestic owner, the election must be
made with respect to all separate units of the domestic owner. The
taxpayer must file the replacement agreement with its timely filed
income tax return for its first taxable year commencing on or after
October 1, 1992, stating that such agreement is a replacement for the
[[Page 523]]
agreement filed under Sec. 1.1503-2A(c)(3) or the certification filed
under Sec. 1.1503-2A(d)(3) and identifying the taxable year for which
the original agreement or certification was filed. A single agreement
described in paragraph (g)(2)(i) of this section may be filed to replace
more than one agreement or certification filed under Sec. 1.1503-2A;
however, each dual consolidated loss must be separately identified. A
taxpayer may also elect to apply Sec. 1.1503-2 for all open years, with
respect to agreements filed under Sec. 1.1503-2A(c)(3) or certifications
filed under Sec. 1.1503-2A(d)(3), in cases where the agreement or
certification is no longer in effect and the taxpayer has complied with
the provisions of Sec. 1.1503-2A. For example, a taxpayer may have had a
triggering event under Sec. 1.1503-2A that is not a triggering event
under Sec. 1.1503-2. If the taxpayer fully complied with the
requirements of the agreement entered into under Sec. 1.1503-2A(c)(3)
and filed amended U.S. income tax returns within the time required under
Sec. 1.1503-2A(c)(3), the taxpayer may file amended U.S. income tax
returns consistent with the position that the earlier triggering event
is no longer a triggering event.
(3) Taxpayers that are in compliance with Sec. 1.1503-2A but have
not filed for relief thereunder. A taxpayer that is in compliance with
the provisions of Sec. 1.1503-2A but has not filed an agreement
described in Sec. 1.1503-2A(c)(3) or a certification described in
Sec. 1.1503-2A(d)(3) may elect to have the provisions of Sec. 1.1503-2
apply for any open year. In particular, a taxpayer may elect to apply
the provisions of Sec. 1.1503-2 in a case where the dual consolidated
loss has been subjected to the separate return limitation year
restrictions of Sec. 1.1502-21A(c) or 1.1502-21(c) (as appropriate) but
the losses, expenses, or deductions taken into account in computing the
dual consolidated loss have not been used to offset the income of
another person for foreign tax purposes. However, if a taxpayer is a
consolidated group, the election must be made with respect to all dual
resident corporations or separate units within the group. Likewise, if
the taxpayer is an unaffiliated domestic owner, the election must be
made with respect to all separate units of the domestic owner.
[T.D. 8434, 57 FR 41084, Sept. 9, 1992; 57 FR 48722, Oct. 28, 1992; 57
FR 57280, Dec. 3, 1992; 58 FR 13413, Mar. 11, 1993, as amended by T.D.
8597, 60 FR 36680, July 18, 1995; T.D. 8677, 61 FR 33325, June 27, 1996;
T.D. 8823, 64 FR 36101, July 2, 1999]
Sec. 1.1504-0 Outline of provisions.
In order to facilitate the use of Secs. 1.1504-1 through 1.1504-4,
this section lists the captions contained in Secs. 1.1504-1 through
1.1504-4.
Sec. 1.1504-1 Definitions.
Sec. 1.1504-2 [Reserved]
Sec. 1.1504-3 [Reserved]
Sec. 1.1504-4 Treatment of warrants, options, convertible obligations,
and other similar interests.
(a) Introduction.
(1) General rule.
(2) Exceptions.
(b) Options not treated as stock or as exercised.
(1) General rule.
(2) Options treated as exercised.
(i) In general.
(ii) Aggregation of options.
(iii) Effect of treating option as exercised.
(A) In general.
(B) Cash settlement options, phantom stock, stock appreciation
rights, or similar interests.
(iv) Valuation.
(3) Example.
(c) Definitions.
(1) Issuing corporation.
(2) Related or sequential option.
(3) Related persons.
(4) Measurement date.
(i) General rule.
(ii) Issuances, transfers, or adjustments not treated as measurement
dates.
(iii) Transactions increasing likelihood of exercise.
(iv) Measurement date for options issued pursuant to a plan.
(v) Measurement date for related or sequential options.
(vi) Example.
(5) In-the-money.
(d) Options.
(1) Instruments treated as options.
(2) Instruments generally not treated as options.
(i) Options on section 1504(a)(4) stock.
(ii) Certain publicly traded options.
(A) General rule.
(B) Exception.
(iii) Stock purchase agreements.
(iv) Escrow, pledge, or other security agreements.
(v) Compensatory options.
[[Page 524]]
(A) General rule.
(B) Exceptions.
(vi) Options granted in connection with a loan.
(vii) Options created pursuant to a title 11 or similar case.
(viii) Convertible preferred stock.
(ix) Other enumerated instruments.
(e) Elimination of federal income tax liability.
(f) Substantial amount of federal income tax liability.
(g) Reasonable certainty of exercise.
(1) Generally.
(i) Purchase price.
(ii) In-the-money option.
(iii) Not in-the-money option.
(iv) Exercise price.
(v) Time of exercise.
(vi) Related or sequential options.
(vii) Stockholder rights.
(viii) Restrictive covenants.
(ix) Intention to alter value.
(x) Contingencies.
(2) Cash settlement options, phantom stock, stock appreciation
rights, or similar interests.
(3) Safe harbors.
(i) Options to acquire stock.
(ii) Options to sell stock.
(iii) Options exercisable at fair market value.
(iv) Exceptions.
(v) Failure to satisfy safe harbor.
(h) Examples.
(i) Effective date.
[T.D. 8462, 57 FR 61800, Dec. 29, 1992]
Sec. 1.1504-1 Definitions.
The privilege of filing consolidated returns is extended to all
includible corporations constituting affiliated groups as defined in
section 1504. See the regulations under Sec. 1.1502 for a description of
an affiliated group and the corporations which may be considered as
includible corporations.
[T.D. 6500, 25 FR 12106, Nov. 26, 1960]
Secs. 1.1504-2--1.1504-3 [Reserved]
Sec. 1.1504-4 Treatment of warrants, options, convertible obligations, and other similar interests.
(a) Introduction--(1) General rule. This section provides
regulations under section 1504(a)(5) (A) and (B) regarding the
circumstances in which warrants, options, obligations convertible into
stock, and other similar interests are treated as exercised for purposes
of determining whether a corporation is a member of an affiliated group.
The fact that an instrument may be treated as an option under these
regulations does not prevent such instrument from being treated as stock
under general principles of law. Except as provided in paragraph (a)(2)
of this section, this section applies to all provisions under the
Internal Revenue Code and the regulations to which affiliation within
the meaning of section 1504(a) (with or without the exceptions in
section 1504(b)) is relevant, including those provisions that refer to
section 1504(a)(2) (with or without the exceptions in section 1504(b))
without referring to affiliation, provided that the 80 percent voting
power and 80 percent value requirements of section 1504(a)(2) are not
modified therein.
(2) Exceptions. This section does not apply to sections 163(j),
864(e), or 904(i) or to the regulations thereunder. This section also
does not apply to any other provision specified by the Internal Revenue
Service in regulations, a revenue ruling, or revenue procedure. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(b) Options not treated as stock or as excerised--(1) General rule.
Except as provided in paragraph (b)(2) of this section, an option is not
considered either as stock or as exercised. Thus, options are
disregarded in determining whether a corporation is a member of an
affiliated group unless they are described in paragraph (b)(2) of this
section.
(2) Options treated as exercised--(i) In general. Solely for
purposes of determining whether a corporation is a member of an
affiliated group, an option is treated as exercised if, on a measurement
date with respect to such option--
(A) It could reasonably be anticipated that, if not for this
section, the issuance or transfer of the option in lieu of the issuance,
redemption, or transfer of the underlying stock would result in the
elimination of a substantial amount of federal income tax liability (as
described in paragraphs (e) and (f) of this section); and
(B) It is reasonably certain that the option will be exercised (as
described in paragraph (g) of this section).
(ii) Aggregation of options. All options with the same measurement
date are aggregated in determining whether the issuance or transfer of
an option in lieu
[[Page 525]]
of the issuance, redemption, or transfer of the underlying stock would
result in the elimination of a substantial amount of federal income tax
liability.
(iii) Effect of treating option as exercised--(A) In general. An
option that is treated as exercised is treated as exercised for purposes
of determining the percentage of the value of stock owned by the holder
and other parties, but is not treated as exercised for purposes of
determining the percentage of the voting power of stock owned by the
holder and other parties.
(B) Cash settlement options, phantom stock, stock appreciation
rights, or similar interests. If a cash settlement option, phantom
stock, stock appreciation right, or similar interest is treated as
exercised, the option is treated as having been converted into stock of
the issuing corporation. If the amount to be received upon the exercise
of such an option is determined by reference to a multiple of the
increase in the value of a share of the issuing corporation's stock on
the exercise date over the value of a share of the stock on the date the
option is issued, the option is treated as converted into a
corresponding number of shares of such stock. Appropriate adjustments
must be made in any situation in which the amount to be received upon
exercise of the option is determined in another manner.
(iv) Valuation. For purposes of section 1504(a)(2)(B) and this
section, all shares of stock within a single class are considered to
have the same value. Thus, control premiums and minority and blockage
discounts within a single class are not taken into account.
(3) Example. The provisions of paragraph (b)(2) of this section may
be illustrated by the following example:
Example. (i) Corporation P owns all 100 shares of the common stock
of Corporation S, the only class of S stock outstanding. Each share of S
stock has a fair market value of $10 and has one vote. On June 30, 1992,
P issues to Corporation X an option to acquire 80 shares of the S stock
from P.
(ii) If, under the provisions of this section, the option is treated
as exercised, then, solely for purposes of determining affiliation, P is
treated as owning only 20 percent of the value of the outstanding S
stock and X is treated as owing the remaining 80 percent of the value of
the S stock. P is still treated as owning all of the voting power of S.
Accordingly, because P is treated as owning less than 80 percent of the
value of the outstanding S stock, P and S are no longer affiliated.
However, because X is not treated as owning any of the voting power of
S, X and S are also not affiliated.
(c) Definitions. For purposes of this section--
(1) Issuing corporation. ``Issuing corporation'' means the
corporation whose stock is subject to an option.
(2) Related or sequential option. ``Related or sequential option''
means an option that is one of a series of options issued to the same or
related persons. For purposes of this section, any options issued to the
same person or related persons within a two-year period are presumed to
be part of a series of options. This presumption may be rebutted if the
facts and circumstances clearly establish that the options are not part
of a series of options. Any options issued to the same person or related
persons more than two years apart are presumed not to be part of a
series of options. This presumption may be rebutted if the facts and
circumstances clearly establish that the options are part of a series of
options.
(3) Related persons. Persons are related if they are related within
the meaning of section 267(b) (without the application of sections
267(c) and 1563(e)(1)) or 707(b)(1), substituting ``10 percent'' for
``50 percent'' wherever it appears.
(4) Measurement date--(i) General rule. ``Measurement date'' means a
date on which an option is issued or transferred or on which the terms
of an existing option or the underlying stock are adjusted (including an
adjustment pursuant to the terms of the option or the underlying stock).
(ii) Issuances, transfers, or adjustments not treated as measurement
dates. A measurement date does not include a date on which--
(A) An option is issued or transferred by gift, at death, or between
spouses or former spouses under section 1041;
(B) An option is issued or transferred--
(1) Between members of an affiliated group (determined with the
exceptions in section 1504(b) and without the application of this
section); or
[[Page 526]]
(2) Between persons none of which is a member of the affiliated
group (determined without the exceptions in section 1504(b) and without
the application of this section), if any, of which the issuing
corporation is a member, unless--
(i) Any such person is related to (or acting in concert with) the
issuing corporation or any member of its affiliated group; and
(ii) The issuance or transfer is pursuant to a plan a principal
purpose of which is to avoid the application of section 1504 and this
section;
(C) An adjustment occurs in the terms or pursuant to the terms of an
option or the underlying stock that does not materially increase the
likelihood that the option will be exercised; or
(D) A change occurs in the exercise price of an option or in the
number of shares that may be issued or transferred pursuant to the
option as determined by a bona fide, reasonable, adjustment formula that
has the effect of preventing dilution of the interests of the holders of
the options.
(iii) Transactions increasing likelihood of exercise. If a change or
alteration referred to in this paragraph (c)(4)(iii) is made for a
principal purpose of increasing the likelihood that an option will be
exercised, a measurement date also includes any date on which--
(A) The capital structure of the issuing corporation is changed; or
(B) The fair market value of the stock of the issuing corporation is
altered through a transfer of assets to or from the issuing corporation
(other than regular, ordinary dividends) or by any other means.
(iv) Measurement date for options issued pursuant to a plan. In the
case of options issued pursuant to a plan, a measurement date for any of
the options constitutes a measurement date for all options issued
pursuant to the plan that are outstanding on the measurement date.
(v) Measurement date for related or sequential options. In the case
of related or sequential options, a measurement date for any of the
options constitutes a measurement date for all related or sequential
options that are outstanding on the measurement date.
(vi) Example. The provisions of paragraph (c)(4)(v) of this section
may be illustrated by the following example.
Example. (i) Corporation P owns all 80 shares of the common stock of
Corporation S, the only class of S stock outstanding. On January 1,
1992, S issues a warrant, exercisable within 3 years, to U, an unrelated
corporation, to acquire 10 newly issued shares of S common stock. On
July 1, 1992, S issues a second warrant to U to acquire 10 additional
newly issued shares of S common stock. On January 1, 1993, S issues a
third warrant to T, a wholly owned subsidiary of U, to acquire 10 newly
issued shares of S common stock. Assume that the facts and circumstances
do not clearly establish that the options are not part of a series of
options.
(ii) January 1, 1992, July 1, 1992, and January 1, 1993, constitute
measurement dates for the first warrant, the second warrant, and the
third warrant, respectively, because the warrants were issued on those
dates.
(iii) Because the first and second warrants were issued within two
years of each other, and both warrants were issued to U, the warrants
constitute related or sequential options. Accordingly, July 1, 1992,
constitutes a measurement date for the first warrant as well as for the
second warrant.
(iv) Because the first, second, and third warrants were all issued
within two years of each other, and were all issued to the same or
related persons, the warrants constitute related or sequential options.
Accordingly, January 1, 1993, constitutes a measurement date for the
first and second warrants, as well as for the third warrant.
(5) In-the-money. ``In-the-money'' means the exercise price of the
option is less than (or in the case of an option to sell stock, greater
than) the fair market value of the underlying stock.
(d) Options--(1) Instruments treated as options. For purposes of
this section, except to the extent otherwise provided in this paragraph
(d), the following are treated as options:
(i) A call option, warrant, convertible obligation, put option,
redemption agreement (including a right to cause the redemption of
stock), or any other instrument that provides for the right to issue,
redeem, or transfer stock (including an option on an option); and
(ii) A cash settlement option, phantom stock, stock appreciation
right, or any other similar interest (except for stock).
(2) Instruments generally not treated as options. For purposes of
this section,
[[Page 527]]
the following will not be treated as options:
(i) Options on section 1504(a)(4) stock. Options on stock described
in section 1504(a)(4);
(ii) Certain publicly traded options--(A) General rule. Options
which on the measurement date are traded on (or subject to the rules of)
a qualified board or exchange as defined in section 1256(g)(7), or on
any other exchange, board of trade, or market specified by the Internal
Revenue Service in regulations, a revenue ruling, or revenue procedure.
See Sec. 601.601(d)(2)(ii)(b) of this chapter;
(B) Exception. Paragraph (d)(2)(ii)(A) of this section does not
apply to options issued, transferred, or listed with a principal purpose
of avoiding the application of section 1504 and this section. For
example, a principal purpose of avoiding the application of section 1504
and this section may exist if warrants, convertible or exchangeable debt
instruments, or other similar instruments have an exercise price (or, in
the case of convertible or exchangeable instruments, a conversion or
exchange premium) that is materially less than, or a term that is
materially longer than, those that are customary for publicly traded
instruments of their type. A principal purpose may also exist if a large
percentage of an issuance of an instrument is placed with one investor
(or group of investors) and a very small percentage of the issuance is
traded on a qualified board or exchange;
(iii) Stock purchase agreements. Stock purchase agreements or
similar arrangements whose terms are commercially reasonable and in
which the parties' obligations to complete the transaction are subject
only to reasonable closing conditions;
(iv) Escrow, pledge, or other security agreements. Agreements for
holding stock in escrow or under a pledge or other security agreement
that are part of a typical commercial transaction and that are subject
to customary commercial conditions;
(v) Compensatory options--(A) General rule. Stock appreciation
rights, warrants, stock options, phantom stock, or other similar
instruments provided to employees, directors, or independent contractors
in connection with the performance of services for the corporation or a
related corporation (and that is not excessive by reference to the
services performed) and which--
(1) Are nontransferable within the meaning of Sec. 1.83-3(d); and
(2) Do not have a readily ascertainable fair market value as defined
in Sec. 1.83-7(b) on the measurement date;
(B) Exceptions. (1) Paragraph (d)(2)(v)(A) of this section does not
apply to options issued or transferred with a principal purpose of
avoiding the application of section 1504 and this section; and
(2) Paragraph (d)(2)(v)(A) of this section ceases to apply to
options that become transferable;
(vi) Options granted in connection with a loan. Options granted in
connection with a loan if the lender is actively and regularly engaged
in the business of lending and the options are issued in connection with
a loan to the issuing corporation that is commercially reasonable. This
paragraph (d)(2)(vi) continues to apply if the option is transferred
with the loan (or if a portion of the option is transferred with a
corresponding portion of the loan). However, if the option is
transferred without a corresponding portion of the loan, this paragraph
(d)(2)(vi) ceases to apply;
(vii) Options created pursuant to a title 11 or similar case.
Options created by the solicitation or receipt of acceptances to a plan
of reorganization in a title 11 or similar case (within the meaning of
section 368(a)(3)(A)), the option created by the confirmation of the
plan, and any option created under the plan prior to the time the plan
becomes effective;
(viii) Convertible preferred stock. Convertible preferred stock,
provided the terms of the conversion feature do not permit or require
the tender of any consideration other than the stock being converted;
and
(ix) Other enumerated instruments. Any other instruments specified
by the Internal Revenue Service in regulations, a revenue ruling, or
revenue procedure. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
(e) Elimination of federal income tax liability. For purposes of
this section, the
[[Page 528]]
elimination of federal income tax liability includes the elimination or
deferral of federal income tax liability. In determining whether there
is an elimination of federal income tax liability, the tax consequences
to all involved parties are considered. Examples of elimination of
federal income tax liability include the use of a loss or deduction that
would not otherwise be utilized, the acceleration of a loss or deduction
to a year earlier than the year in which the loss or deduction would
otherwise be utilized, the deferral of gain or income to a year later
than the year in which the gain or income would otherwise be reported,
and the acceleration of gain or income to a year earlier than the year
in which the gain or income would otherwise be reported, if such gain or
income is offset by a net operating loss or net capital loss that would
otherwise expire unused. The elimination of federal income tax liability
does not include the deferral of gain with respect to the stock subject
to the option that would be recognized if such stock were sold on a
measurement date.
(f) Substantial amount of federal income tax liability. The
determination of what constitutes a substantial amount of federal income
tax liability is based on all the facts and circumstances, including the
absolute amount of the elimination, the amount of the elimination
relative to overall tax liability, and the timing of items of income and
deductions, taking into account present value concepts.
(g) Reasonable certainty of exercise--(1) Generally. The
determination of whether, as of a measurement date, an option is
reasonably certain to be exercised is based on all the facts and
circumstances, including:
(i) Purchase price. The purchase price of the option in absolute
terms and in relation to the fair market value of the stock or the
exercise price of the option;
(ii) In-the-money option. Whether and to what extent the option is
in-the-money on the measurement date;
(iii) Not in-the-money option. If the option is not in-the-money on
the measurement date, the amount or percentage by which the exercise
price of the option is greater than (or in the case of an option to sell
stock, is less than) the fair market value of the underlying stock;
(iv) Exercise price. Whether the exercise price of the option is
fixed or fluctuates depending on the earnings, value, or other
indication of economic performance of the issuing corporation;
(v) Time of exercise. The time at which, or the period of time
during which, the option can be exercised;
(vi) Related or sequential options. Whether the option is one in a
series of related or sequential options;
(vii) Stockholder rights. The existence of an arrangement (either
within the option agreement or in a related agreement) that, directly or
indirectly, affords managerial or economic rights in the issuing
corporation that ordinarily would be afforded to owners of the issuing
corporation's stock (e.g., voting rights, dividend rights, or rights to
proceeds on liquidation) to the person who would acquire the stock upon
exercise of the option or a person related to such person. For this
purpose, managerial or economic rights in the issuing corporation
possessed because of actual stock ownership in the issuing corporation
are not taken into account;
(viii) Restrictive covenants. The existence of restrictive covenants
or similar arrangements (either within the option agreement or in a
related agreement) that, directly or indirectly, prevent or limit the
ability of the issuing corporation to undertake certain activities while
the option is outstanding (e.g., covenants limiting the payment of
dividends or borrowing of funds);
(ix) Intention to alter value. Whether it was intended that through
a change in the capital structure of the issuing corporation or a
transfer of assets to or from the issuing corporation (other than
regular, ordinary dividends) or by any other means, the fair market
value of the stock of the issuing corporation would be altered for a
principal purpose of increasing the likelihood that the option would be
exercised; and
(x) Contingencies. Any contingency (other than the mere passage of
time) to which the exercise of the option is subject (e.g., a public
offering of the issuing corporation's stock or reaching a certain level
of earnings).
[[Page 529]]
(2) Cash settlement options, phantom stock, stock appreciation
rights, or similar interests. A cash settlement option, phantom stock,
stock appreciation right, or similar interest is treated as reasonably
certain to be exercised if it is reasonably certain that the option will
have value at some time during the period in which the option may be
exercised.
(3) Safe harbors--(i) Options to acquire stock. Except as provided
in paragraph (g)(3)(iv) of this section, an option to acquire stock is
not considered reasonably certain, as of a measurement date, to be
exercised if--
(A) The option may be exercised no more than 24 months after the
measurement date and the exercise price is equal to or greater than 90
percent of the fair market value of the underlying stock on the
measurement date; or
(B) The terms of the option provide that the exercise price of the
option is equal to or greater than the fair market value of the
underlying stock on the exercise date.
(ii) Options to sell stock. Except as provided in paragraph
(g)(3)(iv) of this section, an option to sell stock is not considered
reasonably certain, as of a measurement date, to be exercised if--
(A) The option may be exercised no more than 24 months after the
measurement date and the exercise price is equal to or less than 110
percent of the fair market value of the underlying stock on the
measurement date; or
(B) The terms of the option provide that the exercise price of the
option is equal to or less than the fair market value of the underlying
stock on the exercise date.
(iii) Options exercisable at fair market value. For purposes of
paragraphs (g)(3)(i)(B) and (g)(3)(ii)(B) of this section, an option
whose exercise price is determined by a formula is considered to have an
exercise price equal to the fair market value of the underlying stock on
the exercise date if the formula is agreed upon by the parties when the
option is issued in a bona fide attempt to arrive at fair market value
on the exercise date and is to be applied based upon the facts in
existence on the exercise date.
(iv) Exceptions. The safe harbors of this paragraph (g)(3) do not
apply if--
(A) An arrangement exists that provides the holder or a related
party with stockholder rights described in paragraph (g)(1)(vii) of this
section (except for rights arising upon a default under the option or a
related agreement);
(B) It is intended that through a change in the capital structure of
the issuing corporation or a transfer of assets to or from the issuing
corporation (other than regular, ordinary dividends) or by any other
means, the fair market value of the stock of the issuing corporation
will be altered for a principal purpose of increasing the likelihood
that the option will be exercised; or
(C) The option is one in a series of related or sequential options,
unless all such options satisfy paragraph (g)(3) (i) or (ii) of this
section.
(v) Failure to satisfy safe harbor. Failure of an option to satisfy
one of the safe harbors of this paragraph (g)(3) does not affect the
determination of whether an option is treated as reasonably certain to
be exercised.
(h) Examples. The provisions of this section may be illustrated by
the following examples. These examples assume that the measurement dates
set forth in the examples are the only measurement dates that have taken
place or will take place.
Example 1. (i) P is the common parent of a consolidated group,
consisting of P, S, and T. P owns all 100 shares of S's only class of
stock, which is voting common stock. P also owns all the stock of T. On
June 30, 1992, when the fair market value of the S stock is $40 per
share, P sells to U, an unrelated corporation, an option to acquire 40
shares of the S stock that P owns at an exercise price of $30 per share,
exercisable at any time within 3 years after the granting of the option.
P and T have had substantial losses for 5 consecutive years while S has
had substantial income during the same period. Because P, S, and T have
been filing consolidated returns, P and T have been able to use all of
their losses to offset S's income. It is anticipated that P, S, and T
will continue their earnings histories for several more years. On July
31, 1992, S declares and pays a dividend of $1 per share to P.
(ii) If P, S, and T continue to file consolidated returns after June
30, 1992, it could reasonably be anticipated that P, S, and T would
eliminate a substantial amount of federal income tax liability by using
P's and T's future losses to offset S's income in consolidated returns.
Furthermore, based on the
[[Page 530]]
difference between the exercise price of the option and the fair market
value of the S stock, it is reasonably certain, on June 30, 1992, a
measurement date, that the option will be exercised. Therefore, the
option held by U is treated as exercised. As a result, for purposes of
determining whether P and S are affiliated, P is treated as owning only
60 percent of the value of outstanding shares of S stock and U is
treated as owning the remaining 40 percent. P is still treated as owning
100 percent of the voting power. Because members of the P group are no
longer treated as owning stock possessing 80 percent of the total value
of the S stock as of June 30, 1992, S is no longer a member of the P
group. Additionally, P is not entitled to a 100 percent dividends
received deduction under section 243(a)(3) because P and S are also
treated as not affiliated for purposes of section 243. P is only
entitled to an 80 percent dividends received deduction under section
243(c).
Example 2. (i) The facts are the same as in Example 1 except that
rather than P issuing an option to acquire 40 shares of S stock to U on
June 30, 1992, P, pursuant to a plan, issues an option to U1 on July 1,
1992, to acquire 20 shares of S stock, and issues an option to U2 on
July 2, 1992, to acquire 20 shares of S stock.
(ii) Because the options issued to U1 and U2 were issued pursuant to
a plan, July 2, 1992, constitutes a measurement data for both options.
Therefore, both options are aggregated in determining whether the
issuance of the options, rather than the sale of the S stock, would
result in the elimination of a substantial amount of federal income tax
liability. Accordingly, as in Example 1, because the continued
affiliation of P, S, and T could reasonably be anticipated to result in
the elimination of a substantial amount of federal income tax liability
and the options are reasonably certain to be exercised, the options are
treated as exercised for purposes of determining whether P and S are
affiliated, and P and S are no longer affiliated as of July 2, 1992.
Example 3. (i) The facts are the same as in Example 1 except that
the option gives U the right to acquire all 100 shares of the S stock,
and U is the common parent of a consolidated group. The U group has had
substantial losses for 5 consecutive years and it is anticipated that
the U group will continue its earnings history for several more years.
(ii) If P sold the S stock, in lieu of the option, to U, S would
become a member of the U group. Because the U group files consolidated
returns, if P sold the S stock to U, U would be able to use its future
losses to offset future income of S. When viewing the transaction from
the effect on all parties, the sale of the option, in lieu of the
underlying S stock, does not result in the elimination of federal income
tax liability because S's income would be offset by the losses of
members of either the P or U group. Accordingly, the option is
disregarded and S remains a member of the P group.
Example 4. (i) P is the common parent of a consolidated group,
consisting of P and S. P owns 90 of the 100 outstanding shares of S's
only class of stock, which is voting common stock, and U, an unrelated
corporation, owns the remaining 10 shares. On August 31, 1992, when the
fair market value of the S stock is $100 per share, P sells a call
option to U that entitles U to purchase 20 shares of S stock from P, at
any time before August 31, 1993, at an exercise price of $115 per share.
The call option does not provide U with any voting rights, dividend
rights, or any other managerial or economic rights ordinarily afforded
to owners of the S stock. There is no intention on August 31, 1992, to
alter the value of S to increase the likelihood of the exercise of the
call option.
(ii) Because the exercise price of the call option is equal to or
greater than 90 percent of the fair market value of the S stock on
August 31, 1992, a measurement date, the option may be exercised no more
than 24 months after the measurement date, and none of the items
described in paragraph (g)(3)(iv) of this section that preclude
application of the safe harbor are present, the safe harbor of paragraph
(g)(3)(i) of this section applies and the call option is treated as if
it is not reasonably certain to be exercised. Therefore, regardless of
whether the continued affiliation of P and S would result in the
elimination of a substantial amount of federal income tax liability, the
call option is disregarded in determining whether S remains a member of
the P group.
Example 5. (i) The facts are the same as in Example 4 except that
the call option gives U the right to vote similar to that of a
shareholder.
(ii) Under paragraph (g)(3)(iv) of this section, the safe harbor of
paragraph (g)(3)(i) of this section does not apply because the call
option entitles U to voting rights equivalent to that of a shareholder.
Accordingly, all of the facts and circumstances surrounding the sale of
the call option must be taken into consideration in determining whether
it is reasonably certain that the call option will be exercised.
Example 6. (i) In 1992, two unrelated corporations, X and Y, decide
to engage jointly in a new business venture. To accomplish this purpose,
X organizes a new corporation, S, on September 30, 1992. X acquires 100
shares of the voting common stock of S, which are the only shares of S
stock outstanding. Y acquires a debenture of S which is convertible, on
September 30, 1995, into 100 shares of S common stock. If the conversion
right is not exercised, X will have the right, on September 30, 1995, to
put 50 shares of its S stock to Y in exchange for 50 percent of
[[Page 531]]
the debenture held by Y. The likelihood of the success of the venture is
uncertain. It is anticipated that S will generate substantial losses in
its early years of operation. X expects to have substantial taxable
income during the three years following the organization of S.
(ii) Under the terms of this arrangement, it is reasonably certain
on September 30, 1992, a measurement date, that on September 30, 1995,
either through Y's exercise of its conversion right or X's right to put
S stock to Y, that Y will own 50 percent of the S stock. Additionally,
it could reasonably be anticipated, on September 30, 1992, a measurement
date, that the affiliation of X and S would result in the elimination of
a substantial amount of federal income tax liability. Accordingly, for
purposes of determining whether X and S are affiliated, X is treated as
owning only 50 percent of the value of the S stock as of September 30,
1992, a measurement date, and S is not a member of the X affiliated
group.
Example 7. (i) The facts are the same as in Example 6 except that
rather than acquiring 100 percent of the S stock and the right to put S
stock to Y, X acquires only 80 percent of the S stock, while S, rather
than acquiring a convertible debenture, acquires 20 percent of the S
stock, and an option to acquire an additional 30 percent of the S stock.
The terms of the option are such that the option will only be exercised
if the new business venture succeeds.
(ii) In contrast to Example 6, because of the true business risks
involved in the start-up of S and whether the business venture will
ultimately succeed, along with the fact that X does not have an option
to put S stock to Y, it is not reasonably certain on September 30, 1992,
a measurement date, that the option will be exercised and that X will
only own 50 percent of the S stock on September 30, 1995. Accordingly,
the option is disregarded in determining whether S is a member of the X
group.
(i) Effective date. This section applies, generally, to options with
a measurement date on or after February 28, 1992. This section does not
apply to options issued prior to February 28, 1992, which have a
measurement date on or after February 28, 1992, if the measurement date
for the option occurs solely because of an adjustment in the terms of
the option pursuant to the terms of the option as it existed on February
28, 1992. Paragraph (b)(2)(iv) of this section applies to stock
outstanding on or after February 28, 1992.
[T.D. 8462, 57 FR 61801, Dec. 29, 1992; 58 FR 7041, Feb. 3, 1993]
Regulations Applicable for Tax Years for Which a Return Is Due on or
Before August 11, 1999
Sec. 1.1502-9A Application of overall foreign loss recapture rules to corporations filing consolidated returns due on or before August 11, 1999.
(a) Scope--(1) Effective date. This section applies only to
consolidated return years for which the due date of the income tax
return (without extensions) is on or before August 11, 1999.
(2) In general. Affiliated group of corporations filing a
consolidated return sustains an overall foreign loss (a consolidated
overall foreign loss) in any taxable year in which its gross income from
sources without the United States subject to a separate limitation (as
defined in Sec. 1.904(f)-1(c)(2)) is exceeded by the sum of the
deductions properly allocated and apportioned thereto. However, for
taxable years prior to 1983, affiliated groups may have determined their
overall foreign losses for income subject to the passive interest
limitation, DISC dividend limitation, and general limitation on a
combined basis in accordance with the rules in Sec. 1.904(f)-1(c)(1).
The rules contained in Secs. 1.904(f)-1 through 1.904(f)-6 are
applicable to affiliated groups filing consolidated returns. This
section provides special rules for applying those sections to such
groups. Paragraph (b) provides rules for additions and subtractions of a
portion of overall foreign losses to and from consolidated overall
foreign loss accounts. Paragraph (c) requires that separate notional
overall foreign loss accounts be kept for each member of the group that
contributes to a consolidated overall foreign loss account and provides
for allocation of a portion of the group's overall foreign loss account
to a member when the member leaves the group prior to recapture of the
entire amount of the loss account. These rules are similar to the rules
provided in Sec. 1.1502-21(b)(2) (or Sec. 1.1502-79A, as appropriate)
concerning the apportionment of consolidated net operating losses to a
member who leaves the group. However, the rules differ somewhat because
the absorption rule of Sec. 1.1502-21(b)(1) (or Sec. 1.1502-79A, as
appropriate) is applied year-by-year, consistently with the sequence
rules of
[[Page 532]]
section 172(b), and recapture of overall foreign losses is based on
overall foreign loss accounts that may consist of losses in more than
one year. Paragraph (d) provides rules for recapture of amounts in
consolidated overall foreign loss accounts. Paragraph (e) provides
special rules pertaining to section 904(f)(3) dispositions between
members of a group. Paragraphs (b), (c), and (e) also contain special
rules that apply to overall foreign losses that arise in separate return
limitation years; the principles therein also apply to overall foreign
losses when there has been a consolidated return change of ownership (as
defined in Sec. 1.1502-1(g)). See Sec. 1.1502-9T(b)(1)(v) for the rule
that ends the separate return limitation year limitation for
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998, and Sec. 1.1502-
9T(b)(1)(vi) for an election to continue the separate return limitation
year limitation for consolidated return years beginning before January
1, 1998. See also Sec. 1.1502-3T(c)(4) for an optional effective date
rule (generally making the rules of paragraphs (b)(1)(iii) and (iv) of
this section inapplicable for a consolidated return year beginning after
December 31, 1996, if the due date of the income tax return (without
extensions) for such year is on or before March 13, 1998).
(b) Consolidated overall foreign loss accounts. Any group that
sustains an overall foreign loss (or acquires a member with a balance in
an overall foreign loss account) must establish a consolidated overall
foreign loss account for such loss, and amounts shall be added to and
subtracted from such account as provided in Secs. 1.904(f)-1 through
1.904(f)-6 and this section.
(1) Additions to the consolidated overall foreign loss accounts--(i)
Consolidated overall foreign losses. Any consolidated overall foreign
loss shall be added to the applicable consolidated overall foreign loss
account for such separate limitation, to the extent that the overall
foreign loss has reduced United States source income, in accordance with
the rules of Secs. 1.904(f)-1 and 1.904(f)-3.
(ii) Overall foreign losses from separate return years. If a
corporation joins in the filing of a consolidated return in a taxable
year in which such corporation has a balance in an overall foreign loss
account from a prior separate return year that is not a separate return
limitation year, such balance shall be added to the applicable
consolidated overall foreign loss account in such year and treated as a
consolidated overall foreign loss incurred in the previous year (and
shall therefore be subject to recapture, in accordance with paragraph
(d) of this section, beginning in the same year in which it is added to
the consolidated overall foreign loss account).
(iii) Overall foreign losses from separate return limitation years.
If a corporation joins in the filing of a consolidated return in a
taxable year in which such corporation has a balance in an overall
foreign loss account from a prior separate return limitation year, such
balance shall be added to the applicable consolidated overall foreign
loss account in such consolidated return year to the extent of the
lesser of the balance in the overall foreign loss account from the
separate return limitation year or 50 percent (or such larger percentage
as the taxpayer may elect) of the difference between the consolidated
foreign source taxable income subject to the same separate limitation
(computed in accordance with Secs. 1.904(f)-2(b) and 1.1502-4(d)(1))
minus such consolidated foreign source taxable income recomputed by
excluding the items of income and deduction of such corporation (but not
less than zero). The amount added to a consolidated overall foreign loss
account in any taxable year under this paragraph (b)(1)(iii) shall be
treated as a consolidated overall foreign loss in the previous year (and
shall therefore be subject to recapture, in accordance with paragraph
(d) of this section, beginning in the same year in which it is added to
the consolidated overall foreign loss account).
(iv) Overall foreign losses that are part of a net operating loss or
net capital loss carried over from a separate return limitation year.
Overall foreign losses that are part of a net operating loss or net
capital loss carryover from a separate return limitation year of a
member that is absorbed in a consolidated return year shall be treated
as though
[[Page 533]]
they were added to an overall foreign loss account in a separate return
limitation year of such member and will be subject to the limitation on
recapture of SRLY losses contained in paragraph (b)(1)(iii) of this
section. See paragraph (c)(2) of this section for rules regarding the
addition of such losses to the applicable overall foreign loss account
of such member.
(v) Special effective date for SRLY limitation. Except as provided
in paragraph (b)(1)(vi) of this section, paragraphs (b)(1)(iii) and (iv)
of this section apply only to consolidated return years for which the
due date of the income tax return (without extensions) is on or before
March 13, 1998. For consolidated return years for which the due date of
the income tax return (without extensions) is after March 13, 1998, the
rules of paragraph (b)(1)(ii) of this section shall apply to overall
foreign losses from separate return years that are separate return
limitation years. For purposes of applying paragraph (b)(1)(ii) of this
section in such years, the group treats a member with a balance in an
overall foreign loss account from a separate return limitation year on
the first day of the first consolidated return year for which the due
date of the income tax return (without extensions) is after March 13,
1998, as a corporation joining the group on such first day. An overall
foreign loss that is part of a net operating loss or net capital loss
carryover from a separate return limitation year of a member that is
absorbed in a consolidated return year for which the due date of the
income tax return (without extensions) is after March 13, 1998, shall be
added to the appropriate consolidated overall foreign loss account in
the year that it is absorbed. For consolidated return years for which
the due date of the income tax return (without extensions) is after
March 13, 1998, similar principles apply to overall foreign losses when
there has been a consolidated return change of ownership (regardless of
when the change of ownership occurred). See also Sec. 1.1502-3T(c)(4)
for an optional effective date rule (generally making this paragraph
(b)(1)(v) applicable to a consolidated return year beginning after
December 31, 1996, if the due date of the income tax return (without
extensions) for such year is on or before March 13, 1998).
(vi) Election to defer application of special effective date. A
consolidated group may elect not to apply paragraph (b)(1)(v) of this
section to consolidated return years beginning before January 1, 1998.
To make this election, a consolidated group must write ``Election
Pursuant to Notice 98-40'' across the top of page 1 of an original or
amended tax return for each consolidated return year subject to the
election. For the first consolidated return year to which the overall
foreign loss provisions of paragraph (b)(1)(v) of this section apply
(i.e., the first year beginning on or after January 1, 1998), such
consolidated group must write ``Notice 98-40 Election in Effect in Prior
Years'' across the top of page 1 of the consolidated tax return for that
year. For purposes of applying paragraph (b)(1)(ii) of this section with
respect to such year, any member with a balance in an overall foreign
loss account from a separate return limitation year on the first day of
such year shall be treated as joining the group on such first day.
(2) Reductions of the consolidated overall foreign loss accounts--
(i) Amounts allocated to members leaving the group. When a member leaves
the group, each applicable consolidated overall foreign loss account
shall be reduced by the amount allocated from such account to such
member in accordance with paragraph (c)(3)(i) of this section.
(ii) Amounts recaptured. A consolidated overall foreign loss account
shall be reduced by the amount of any overall foreign loss under the
same separate limitation that is recaptured from consolidated income in
accordance with Sec. 1.904(f)-2.
(c) Allocation of overall foreign losses among members of an
affiliated group--(1) Notional overall foreign loss accounts. Separate
notional overall foreign loss accounts shall be established for each
member of a group that contributes to a consolidated overall foreign
loss account. Additions to and reductions of such notional accounts
shall be made when additions or reductions are made to consolidated
overall foreign loss accounts in accordance with paragraph (b) of this
section and Sec. 1.904(f)-1.
[[Page 534]]
(i) Additions to notional accounts--(A) Consolidated overall foreign
losses. When a consolidated overall foreign loss is added to a
consolidated overall foreign loss account, each member shall add its pro
rata share of the amount of such loss to the member's notional overall
foreign loss account. A member's pro rata share of a consolidated
overall foreign loss for any taxable year is determined by multiplying
the consolidated loss by a fraction.The numerator of this fraction is
the amount by which the member's separate gross income for the taxable
year from sources without the United States subject to the applicable
separate limitation is exceeded by the sum of the deductions properly
allocated and apportioned thereto (including such member's share of any
consolidated net operating loss deduction and consolidated net capital
loss carryovers and carrybacks to the taxable year), for each member
with such deductions in excess of such income. The denominator of this
fraction is the sum of the numerators of this fraction for all such
members of the group.
(B) Overall foreign losses from separate return years and separate
return limitation years. When an amount from a member's overall foreign
loss account from a separate return year or separate return limitation
year is added to a consolidated overall foreign loss account in
accordance with paragraph (b)(1) (ii) or (iii) of this section, such
amount shall also be added to that member's notional overall foreign
loss account for such separate limitation.
(ii) Reductions of notional accounts. When a consolidated overall
foreign loss account is reduced by recapture, in accordance with
paragraph (b)(2)(ii) of this section, each member of the group shall
reduce its notional overall foreign loss account for that separate
limitation by its pro rata share of the amount by which the consolidated
overall foreign loss account is reduced. A member's pro rata share of
the amount by which a consolidated overall foreign loss account is
reduced and determined by multiplying the amount recaptured by a
fraction, the numerator of which is the amount in such member's notional
account under such separate limitation, and the denominator of which is
the amount in the consolidated overall foreign loss account under such
separate limitation before reduction for the amount recaptured for that
taxable year.
(2) Overall foreign losses that are part of a net operating loss or
net capital loss from a separate return limitation year. An overall
foreign loss that is part of a net operating loss or net capital loss
carryover from a separate return limitation year of a member that is
absorbed in a consolidated return year shall be treated as an overall
foreign loss of such member (rather than the group) and shall be added
to such member's separate overall foreign loss account to the extent it
reduces United States source income, in accordance with Sec. 1.904(f)-
1(d)(5). Such overall foreign losses shall be added to the appropriate
consolidated overall foreign loss account in later years in accordance
with paragraph (b)(1)(iii) of this section.
(3) Allocation of a portion of overall foreign loss accounts to a
member leaving the group--(i) Consolidated overall foreign losses. When
a corporation ceases to be a member of an affiliated group filing
consolidated returns, a portion of the balance in each applicable
consolidated overall foreign loss account shall be allocated to such
corporation. The amount allocated to such corporation shall be equal to
the amount, if any, in such member's notional overall foreign loss
account under the same separate limitation.
(ii) Overall foreign losses from separate return limitation years.
When a corporation ceases to be a member of an affiliated group filing
consolidated returns, it shall take with it the remaining portion of
each separate overall foreign loss account for overall foreign losses
from separate return limitation years (including amounts added to such
accounts under paragraph (c)(2) of this section).
(d) Recapture of consolidated overall foreign losses. The amount in
any consolidated overall foreign loss account shall be recaptured under
Secs. 1.904(f)-1 through 1.904(f)-6 by recharacterizing consolidated
foreign source taxable income subject to the separate limitation under
which the loss arose as United States source taxable income. For
purposes of recapture, consolidated foreign source taxable income
subject
[[Page 535]]
to the separate limitation under which the loss arose shall be
determined in accordance with Secs. 1.904(f)-2 and 1.1502-4. Amounts in
a member's excess loss account that are included in income under
Sec. 1.1502-19 shall be subject to recapture to the extent that they are
included in consolidated foreign source taxable income subject to the
separate limitation under which the loss arose.
(e) Dispositions of property between members of the same affiliated
group during a consolidated return year--(1) In general. Except as
provided in paragraph (2) with respect to overall foreign losses of a
selling member from a separate return limitation year, the rules of
Sec. 1.1502-13 with respect to intercompany transactions will apply to
dispositions of property to which section 904(f)(3)(A) applies.
(2) Recapture of overall foreign loss from a separate return
limitation year. Paragraph (1) will not apply and gain will be
recognized to the extent that the selling member has a balance in its
overall foreign loss account from a separate return limitation year
unless the selling member adds the entire amount of its overall foreign
loss account from separate return limitation years to the applicable
consolidated overall foreign loss account and treats such amount as an
overall foreign loss incurred in the previous year. Such loss shall be
subject to recapture, in accordance with paragraph (d) of Sec. 1.1502-9,
beginning in the same year in which it is added to the consolidated
overall foreign loss account.
(f) Illustrations. The provisions of this section are illustrated by
the following examples. All foreign source income or loss in these
examples is subject to the general limitation.
Example (1). A, B, and C are the members of an affiliated group of
corporations (as defined in section 1504), and all use the calendar year
as their taxable year. For 1983, A, B, and C file a consolidated return.
ABC has United States source income of $1,000 and foreign source losses
(overall foreign loss) of $400. In accordance with paragraph (b)(1)(i)
of this section, ABC adds $400 to its consolidated overall foreign loss
account at the end of 1983. For 1983, the separate foreign source
taxable income (or loss) of A is $400, of B is ($200), and of C is
($600). Under paragraph (c)(1) of this section, B and C must establish
separate notional overall foreign loss accounts. Under paragraph
(c)(1)(i)(A) of this section, the amount added to each notional account
is the pro rata share of the consolidated overall foreign loss of each
member contributing to such loss. The pro rata share is determined by
multiplying the consolidated loss by the member's proportionate share of
the total foreign source losses of all members having such losses. B's
foreign source loss if $200 and C's foreign source loss is $600,
totaling $800. B must add $400x200/800, or $100, to its notional overall
foreign loss account. C must add $400x600/800, or $300, to its notional
overall foreign loss account.
Example (2). The facts are the same as in example (1). In 1984, ABC
has consolidated foreign source taxable income of $200. Under paragraph
(d) of this section and Sec. 1.904(f)-2, ABC is required to recapture
$100 of the amount in its consolidated overall foreign loss account,
which reduces that account by $100 under paragraph (b)(2)(ii) of this
section. In accordance with paragraph (c)(1)(ii) of this section, B
reduces its notional account by $100x100/400, or $25, and C reduces it
notional account by $100x300/400, or $75. At the end of 1984 ABC has
$300 in its consolidated overall foreign loss account, B has $75 in its
notional account, and C has $225 in its notional account.
Example (3). D and E are members of an affiliated group and file
separate returns using the calendar year as their taxable year for 1980.
In 1980, D has an overall foreign loss of $200, which it adds to its
overall foreign loss account, and E has no overall foreign losses. For
1981, D and E file a consolidated return, and DE must establish a
consolidated overall foreign loss account, to which D's overall foreign
loss from 1980 is added under paragraph (b)(1)(ii) of this section. D
also adds the same amount $200 to its notional account under paragraph
(c)(1)(i)(B) of this section. In 1981, DE has consolidated foreign
source taxable income of $300. Since the amount added to the
consolidated overall foreign loss account in 1981 is treated as a
consolidated overall foreign loss from 1980, DE must recapture $150 in
1981 under paragraph (d) of this section and Sec. 1.904(f)-2. DE's
consolidated overall foreign loss account is reduced by $150 under
paragraph (b)(2)(ii) of this section, and D's notional account is
reduced by $150 under paragraph (c)(1)(ii) of this section, leaving
balances of $50 in each of those accounts at the end of 1981.
Example (4). F and G are not members of an affiliated group in 1980,
and G has an overall foreign loss of $200, which it adds to its overall
foreign loss account. F has no overall foreign loss. On January 1, 1981,
F acquires G, and FG files a consolidated return for the calendar year
1981. In 1981, F has no foreign source taxable income or loss, and G has
$100 of foreign source taxable income. FG's consolidated foreign source
taxable income, $100, minus such income without G's items of
[[Page 536]]
income and deduction, $0, is $100. Therefore 50% of that amount, $50, of
G's overall foreign loss from its 1980 separate return limitation year
is added to FG's consolidated overall foreign loss account under
paragraph (b)(1)(iii) of this section, and the same amount is added to
G's notional account under paragraph (c)(1)(i)(B) of this section. In
accordance with paragraph (d) of this section and Sec. 1.904(f)-2, FG
must recapture the $50 balance in its consolidated overall foreign loss
account in 1981 because the amount added from G's separate return
limitation year is treated as a 1980 consolidated overall foreign loss.
At the end of 1981, FG has a balance of $0 in its consolidated overall
foreign loss account, G has $0 in its notional account, and G also has
$150 remaining from its 1980 overall foreign loss that has not yet been
added to the consolidated overall foreign loss account.
On January 1, 1982, F sells G and G leaves the affiliated group.
Under paragraph (c)(3)(i) of this section, G takes with it the balance
in its overall foreign loss account from 1980 (its prior separate return
limitation year) that has not been added to the consolidated account. G
has $150 of overall foreign loss in its overall foreign loss account.
Because the amount in the consolidated overall foreign loss account is
zero, no amount from that account is allocated to G.
Example (5). (i) In 1982 corporation H has United States source
income of $300 and foreign source losses of $500, resulting in a net
operating loss of $200 and a balance in H's overall foreign loss account
at the end of 1982 of $300.
(ii) On January 1, 1983, H is acquired by J, and for the calendar
year 1983 JH files a consolidated return. JH has consolidated taxable
income of $700 in 1983, including a consolidated net operating loss
deduction of $100. This net operating loss deduction is $100 of H's $200
net operating loss from 1982 (a separate return limitation year), which
is limited by Sec. 1.1502-21A(c). For 1983, H has separate taxable
income of $100, comprised of $100 of United States source taxable income
and zero foreign source taxable income, and J has separate taxable
income of $700, comprised of $700 of United States source taxable income
and zero foreign source taxable income. Under paragraph (c)(2) of this
section, H adds $100 to its separate overall foreign loss account, since
that amount of its net operating loss has reduced United States source
income. H has $400 in its separate overall foreign loss account at the
end of 1983, none of which has been added to a consolidated overall
foreign loss account.
(iii) In 1984, H has separate taxable income of $400, comprised of
$100 of United States source taxable income and $300 of foreign source
taxable income. J has separate taxable income of $900, comprised of $700
of United States source taxable income and $200 of foreign source
taxable income. JH has consolidated taxable income of $1200, which
includes $100 of consolidated net operating loss deduction from H's 1982
net operating loss. Since this net operating loss deduction is allocated
to foreign source income, it does not reduce United States source income
and will not be added to an overall foreign loss account. Under
paragraph (b)(1)(iii) of this section, $100, from H's overall foreign
loss is added to the consolidated overall foreign loss account computed
as follows:
Consolidated foreign source taxable income................. $400
Consolidated foreign source taxable income recomputed by -200
excluding H's foreign source income and deduction.........
------------
$200...................................................
x 50%.................................................. $100
Amount from H's separate return limitation year overall $100
foreign loss account added to the consolidated overall
foreign loss account......................................
This amount is subject to recapture beginning in the same taxable year,
as it is treated as a consolidated overall foreign loss incurred in a
previous year. Therefore, under paragraph (d) of this section and
Sec. 1.904(f)-2 JH also recaptures this $100, reducing the consolidated
overall foreign loss account to $0. H has $300 remaining in its separate
overall foreign loss account at the end of 1984.
(iv) In 1985, H has separate taxable income of $400, comprised of
$100 of United States source taxable income and $300 of foreign source
taxable income. J has separate taxable income of $300 comprised of $600
of United States source taxable income and $300 of foreign source
losses. JH has consolidated taxable income of $700, all of which is
United States source. Under paragraph (b)(1)(iii) of this section an
additional $150 from H's separate overall foreign loss is added to the
consolidated overall foreign loss account, computed as follows:
Consolidated foreign source taxable income................. $0
Consolidated foreign source taxable income recomputed by -(300)
excluding H's foreign source income and deductions........
------------
300....................................................
x 50%.................................................. $150
Amount from H's separate return limitation year overall $150
foreign loss account added to the consolidated overall
foreign loss account......................................
Thus, an additional $150 of H's separate overall foreign loss is added
to the consolidated overall foreign loss account, and, under paragraph
(c)(1)(i)(B) of this section, the same
[[Page 537]]
amount is added to J's notional account. While this amount is subject to
recapture beginning in the same taxable year, JH has no consolidated
foreign source taxable income in 1985, so no overall foreign loss is
recaptured. H has a remaining balance of $150 in its separate return
limitation year overall foreign loss account and HJ has $150 in its
consolidated overall foreign loss account.
Example (6). A, B, and C are members of an affiliated group of
corporations (as defined in section 1504), and all use the calendar year
as their taxable year. For 1986, A, B, and C file a consolidated return.
A has an overall foreign loss account which arose in a separate return
limitation year. The amount in the overall foreign loss account is
$2,000. A makes a disposition of all its assets to B on January 1, 1986.
The gain on the transfer is $1,500, all of which would be recognized
under section 904(f)(3). However, if A adds the total amount of its
overall foreign loss from separate return limitation years to ABC's
consolidated overall foreign loss account, no gain will be recognized on
the transfer until the intercompany gain is taken into account under
Sec. 1.1502-13. In the interim, any foreign source gain of the
purchasing member (or any other member of the consolidated group) may be
used to recapture on a consolidated basis the amount in ABC's
consolidated overall foreign loss account.
[T.D. 8153, 52 FR 32005, Aug. 25, 1987; 52 FR 43434, Nov. 12, 1987, as
amended by T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8677, 61 FR
33323, June 27, 1996; T.D. 8766, 63 FR 12643, Mar. 16, 1998; T.D. 8800,
63 FR 71590, Dec. 29, 1998; T.D. 8823, 64 FR 36099, July 2, 1999;
Redesignated and amended by T.D. 8833, 64 FR 43615, Aug. 11, 1999]
Regulations Applicable to Taxable Years Before January 1, 1997
Sec. 1.1502-15A Limitations on the allowance of built-in deductions for consolidated return years beginning before January 1, 1997.
(a) Limitation on built-in deductions--(1) General rule. Built-in
deductions (as defined in subparagraph (2) of this paragraph) for a
taxable year shall be subject to the limitation of Sec. 1.1502-21A(c)
(determined without regard to such deductions and without regard to net
operating loss carryovers to such year) and the limitation of
Sec. 1.1502-22A(c) (determined without regard to such deductions and
without regard to capital loss carryovers to such year). If as a result
of applying such limitations, built-in deductions are not allowable in
such consolidated return year, such deductions shall be treated as a net
operating loss or net capital loss (as the case may be) sustained in
such year and shall be carried to those taxable years (consolidated or
separate) to which a consolidated net operating loss or a consolidated
net capital loss could be carried under Secs. 1.1502-21A, 1.1502-22A and
1.1502-79A, (or Secs. 1.1502-21T and 1.1502-22T, as appropriate) except
that such losses shall be treated as losses subject to the limitations
contained in Sec. Sec. 1.1502-21T(c) or 1.1502-22T(c) (or
Sec. Sec. 1.1502-21A(c), 1.1502-22A(c), as appropriate), as the case may
be. Thus, for example, if member X sells a capital asset during a
consolidated return year at a $1,000 loss and such loss is treated as a
built-in deduction, then such loss shall be subject to the limitation
contained in Sec. 1.1502-22(c), which, in general, would allow such loss
to be offset only against X's own capital gain net income (net capital
gain for taxable years beginning before January 1, 1977). Assuming X had
no capital gain net income (net capital gain for taxable years beginning
before January 1, 1977) reflected in such year (after taking into
account its capital losses, other than capital loss carryovers and the
built-in deduction), such $1,000 loss shall be treated as a net capital
loss and shall be carried over for 5 years under Sec. 1.1502-22, subject
to the limitation contained in Sec. 1.1502-22(c) for consolidated return
years.
(2) Built-in deductions. (i) For purposes of this paragraph, the
term ``built-in deductions'' for a consolidated return year means those
deductions or losses of a corporation which are recognized in such year,
or which are recognized in a separate return year and carried over in
the form of a net operating or net capital loss to such year, but which
are economically accrued in a separate return limitation year (as
defined in Sec. 1.1502-1(f)). Such term does not include deductions or
losses incurred in rehabilitating such corporation. Thus, for example,
assume P is the common parent of a group filing consolidated returns on
the basis of a calendar year and that P purchases all of the stock of S
on December 31, 1966. Assume further that on December 31, 1966, S owns a
capital asset with an adjusted basis of $100 and a fair market
[[Page 538]]
value of $50. If the group files a consolidated return for 1967, and S
sells the asset for $30, $50 of the $70 loss is treated as a built-in
deduction, since it was economically accrued in a separate return
limitation year. If S sells the asset for $80 instead of $30, the $20
loss is treated as a built-in deduction. On the other hand, if such
asset is a depreciable asset and is not sold by S, depreciation
deductions attributable to the $50 difference between basis and fair
market value are treated as built-in deductions.
(ii) In determining, for purposes of subdivision (i) of this
subparagraph, whether a deduction or loss with respect to any asset is
economically accrued in a separate return limitation year, the term
``predecessor'' as used in Sec. 1.1502-1(f)(1) shall include any
transferor of such asset if the basis of the asset in the hands of the
transferee is determined (in whole or in part) by reference to its basis
in the hands of such transferor.
(3) Transitional rule. If the assets which produced the built-in
deductions were acquired (either directly or by acquiring a new member)
by the group on or before January 4, 1973, and the separate return
limitation year in which such deductions were economically accrued ended
before such date, then at the option of the taxpayer, the provisions of
this paragraph before amendment by T.D. 7246 shall apply, and, in
addition, if such assets were acquired on or before April 17, 1968, and
the separate return limitation year in which the built-in deductions
were economically accrued ended on or before such date, then at the
option of the taxpayer, the provisions of Sec. 1.1502-31A(b)(9)(as
contained in the 26 C.F.R. edition revised as of April 1, 1996) shall
apply in lieu of this paragraph.
(4) Exceptions. (i) Subparagraphs (1), (2), and (3) of this
paragraph shall not limit built-in deductions in a taxable year with
respect to assets acquired (either directly or by acquiring a new
member) by the group if:
(a) The group acquired the assets more than 10 years before the
first day of such taxable year, or
(b) Immediately before the group acquired the assets, the aggregate
of the adjusted basis of all assets (other than cash, marketable
securities, and goodwill) acquired from the transferor or owned by the
new member did not exceed the fair market value of all such assets by
more than 15 percent.
(ii) For purposes of subdivision (i)(b) of this subparagraph, a
security is not a marketable security if immediately before the group
acquired the assets:
(a) The fair market value of the security is less than 95 percent of
its adjusted basis, or
(b) The transferor or new member had held the security for at least
24 months, or
(c) The security is stock in a corporation at least 50 percent of
the fair market value of the outstanding stock of which is owned by the
transferor or new member.
(b) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21T does not apply. See Sec. 1.1502-21T(g)
for effective dates of that section.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 6909, 31 FR
16695, Dec. 30, 1966; T.D. 7246, 37 FR 761, Jan. 4, 1972; T.D. 7728, 45
FR 72650, Nov. 3, 1980; T.D. 8677, 61 FR 33323, June 27, 1996.
Redesignated and amended by T.D. 8677, 61 FR 33326, June 27, 1996]
Sec. 1.1502-21A Consolidated net operating loss deduction generally applicable for consolidated return years beginning before January 1, 1997.
(a) In general. The consolidated net operating loss deduction shall
be an amount equal to the aggregate of the consolidated net operating
loss carryovers and carrybacks to the taxable year (as determined under
paragraph (b) of this section).
(b) Consolidated net operating loss carryovers and carrybacks--(1)
In general. The consolidated net operating loss carryovers and
carrybacks to the taxable year shall consist of any consolidated net
operating losses (as determined under paragraph (f) of this section) of
the group, plus any net operating losses sustained by members of the
group in separate return years, which may be carried over or back to the
taxable year under the principles of section 172(b). However, such
consolidated carryovers and carrybacks shall not include any
consolidated net operating loss apportioned to a corporation
[[Page 539]]
for a separate return year pursuant to Sec. 1.1502-79A(a), and shall be
subject to the limitations contained in paragraphs (c), (d), and (e) of
this section and to the limitation contained in Sec. 1.1502-15A (or
Sec. 1.1502-11(c), as appropriate).
(2) Rules for applying section 172(b)(1)--(i) Regulated
transportation corporations. For purposes of applying section
172(b)(1)(C) (relating to net operating losses sustained by regulated
transportation corporations), in the case of a consolidated net
operating loss sustained in a taxable year for which a member of the
group was a regulated transportation corporation (as defined in section
172(j)(1)), the portion, if any, of such consolidated net operating loss
which is attributable to such corporation (as determined under this
paragraph shall be a carryover to the sixth taxable year following the
loss year only if such corporation is a regulated transportation
corporation for such sixth year, and shall be a carryover to the seventh
taxable year following the loss year only if such corporation is a
regulated transportation corporation for both such sixth and seventh
years.
(ii) Trade expansion losses. In the case of a carryback of a
consolidated net operating loss from a taxable year for which a member
of the group has been issued a certification under section 317 of the
Trade Expansion Act of 1962 and with respect to which the requirements
of section 172(b)(3)(A) have been met, section 172(b)(1)(A)(ii) shall
apply only to the portion of such consolidated net operating loss
attributable to such member.
(iii) Foreign expropriation losses. An election under section
172(b)(3)(C) (relating to 10-year carryover of portion of net operating
loss attributable to a foreign expropriation loss) may be made for a
consolidated return year only if the sum of the foreign expropriation
losses (as defined in section 172(k)) of the members of the group for
such year equals or exceeds 50 percent of the consolidated net operating
loss for such year. If such election is made, the amount which may be
carried over under section 172(b)(1)(D) is the smaller of (a) the sum of
such foreign expropriation losses, or (b) the consolidated net operating
loss.
(3) Absorption rules. For purposes of determining the amount, if
any, of a net operating loss (whether consolidated or separate) which
can be carried to a taxable year (consolidated or separate), the amount
of such net operating loss which is absorbed in a prior consolidated
return year under section 172(b)(2) shall be determined by:
(i) Applying all net operating losses which can be carried to such
prior year in the order of the taxable years in which such losses were
sustained, beginning with the taxable year which ends earliest, and
(ii) Applying all such losses which can be carried to such prior
year from taxable years ending on the same date on a pro rata basis,
except that any portion of a net operating loss attributable to a
foreign expropriation loss to which section 172(b)(1)(D) applies shall
be applied last.
(c) Limitation on net operating loss carryovers and carrybacks from
separate return limitation years--(1) General rule. In the case of a net
operating loss of a member of the group arising in a separate return
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such
member (and in a separate return limitation year of any predecessor of
such member), the amount which may be included under paragraph (b) of
this section (computed without regard to the limitation contained in
paragraph (d) of this section) in the consolidated net operating loss
carryovers and carrybacks to a consolidated return year of the group
shall not exceed the amount determined under subparagraph (2) of this
paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph with respect to a member of the group
is the excess, if any, of:
(i) Consolidated taxable income (computed without regard to the
consolidated net operating loss deduction), minus such consolidated
taxable income recomputed by excluding the items of income and deduction
of such member, over
(ii) The net operating losses attributable to such member which may
be carried to the consolidated return year arising in taxable years
ending prior to
[[Page 540]]
the particular separate return limitation year.
(3) Examples. The provisions of this paragraph and paragraphs (a)
and (b) of this section may be illustrated by the following examples:
Example (1). (i) Corporation P formed corporations S and T on
January 1, 1965. P, S, and T filed separate returns for the calendar
year 1965, a year for which an election under section 1562 was
effective. T's return for that year reflected a net operating loss of
$10,000. The group filed a consolidated return for 1966 reflecting
consolidated taxable income of $30,000 (computed without regard to the
consolidated net operating loss deduction). Among the transactions
occurring during 1966 were the following:
(a) P sold goods to T deriving deferred profits of $7,000 on such
sales, $2,000 of which was restored to consolidated taxable income on
the sale of such goods to outsiders;
(b) T sold a machine to S deriving a deferred profit of $5,000,
$1,000 of which was restored to consolidated taxable income as a result
of S's depreciation deductions;
(c) T distributed a $3,000 dividend to P; and
(d) In addition to the transactions described above, T had other
taxable income of $6,000.
(ii) The carryover of T's 1965 net operating loss to 1966 is subject
to the limitation contained in this paragraph, since 1965 was a separate
return limitation year (an election under section 1562 was effective for
such year). Thus, only $7,000 of T's $10,000 net operating loss is a
consolidated net operating loss carryover to 1966, since such carryover
is limited to consolidated taxable income (computed without regard to
the consolidated net operating loss deduction), $30,000, minus such
consolidated taxable income recomputed by excluding the items of income
and deduction of T, $23,000 (i.e., consolidated taxable income computed
without regard to the $1,000 restoration of T's deferred gain and T's
$6,000 of other income). In making such recomputation, no change is made
in the effect on consolidated taxable income of P's sale to T, or of the
dividend from T to P.
Example (2). (i) Corporation P was formed on January 1, 1966. P
filed separate returns for the calendar years 1966 and 1967 reflecting
net operating losses of $4,000 and $12,000, respectively. P purchased
corporation S on March 15, 1967. S was formed on February 1, 1966, and
filed a separate return for the taxable year ending January 31, 1967. S
also filed a short period return for the period from February 1 to
December 31, 1967, and joined with P in filing a consolidated return for
1968. S sustained net operating losses of $5,000 and $6,000 for its
taxable years ending January 31, 1967, and December 31, 1967,
respectively. An election under section 1562 was not effective for P and
S during the period involved. Consolidated taxable income for 1968
(computed without regard to the consolidated net operating loss
deduction) was $16,000; such consolidated taxable income recomputed by
disregarding the items of income and deduction of S was $9,000.
(ii) In order of time, the following losses are absorbed in 1968:
(a) P's $4,000 net operating loss for the calendar year 1966 (such
loss is not subject to the limitation contained in this paragraph since
P is the common parent corporation for 1968);
(b) S's $5,000 net operating loss for the year ended January 31,
1967. Such loss is subject to the limitation contained in this
paragraph, since S was not a member of the group on each day of such
year. However, such loss can be carried over and absorbed in full since
such limitation is $7,000 (consolidated taxable income computed without
regard to the consolidated net operating loss deduction, $16,000, minus
such consolidated taxable income recomputed, $9,000); and
(c) $6,000 of P's net operating loss and $1,000 of S's net operating
loss for the taxable years ending December 31, 1967. This is determined
by applying the losses from such year which can be carried to 1968 (P's
$12,000 loss and $2,000 of S's $6,000 loss, since such $6,000 loss is
limited under this paragraph) on a pro rata basis against the amount of
such losses which can be absorbed in that year, $7,000 (consolidated
taxable income of $16,000 less the $9,000 of losses absorbed from prior
years). The carryover of S's loss to 1968 is subject to the limitation
contained in that paragraph, since S was not a member of the group on
each day of its taxable year ending December 31, 1967. Such loss is
limited to $2,000, the excess of $7,000 (as determined under (ii)(b))
over $5,000 (S's carryover from the year ended January 31, 1967). If a
consolidated return is filed in 1969, the consolidated net operating
loss carryovers will consist of P's unabsorbed loss of $6,000 ($12,000
minus $6,000) from 1967 and, subject to the limitation contained in this
paragraph, S's unabsorbed loss of $5,000 ($6,000 minus $1,000) from its
year ended December 31, 1967.
(d) Limitation on carryovers where there has been a consolidated
return change of ownership--(1) General rule. If a consolidated return
change of ownership (as defined in paragraph (g) of Sec. 1.1502-1)
occurs during the taxable year or an earlier taxable year, the amount
which may be included under paragraph (b) of this section in the
consolidated net operating loss carryovers to the taxable year with
respect to the aggregate of the net operating losses attributable to old
members of the
[[Page 541]]
group (as defined in paragraph (g)(3) of Sec. 1.1502-1) arising in
taxable years (consolidated or separate) ending on the same day and
before the taxable year in which the consolidated return change of
ownership occurred shall not exceed the amount determined under
subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph shall be the excess of:
(i) The consolidated taxable income for the taxable year (determined
without regard to the consolidated net operating loss deduction)
recomputed by including only the items of income and deduction of the
old members of the group, over
(ii) The sum of the net operating losses attributable to the old
members of the group which may be carried to the taxable year arising in
taxable years ending prior to the particular loss year or years.
(3) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. (i) Corporation P is formed on January 1, 1967, and on the
same day it forms corporation S. P and S file a consolidated return for
the calendar year 1967, reflecting a consolidated net operating loss of
$500,000. On January 1, 1968, individual X purchases all of the
outstanding stock of P. X subsequently contributes $1,000,000 to P and P
purchases the stock of corporation T. P, S, and T file a consolidated
return for 1968 reflecting consolidated taxable income of $600,000
(computed without regard to the consolidated net operating loss
deduction). Such consolidated taxable income recomputed by including
only the items of income and deduction of P and S is $350,000.
(ii) Since a consolidated return change of ownership took place in
1968 (there was more than a 50 percent change of ownership of P), the
amount of the consolidated net operating loss from 1967 which can be
carried over to 1968 is limited to $350,000, the excess of $350,000
(consolidated taxable income recomputed by including only the items of
income and deduction of the old members of the group, P and S) over zero
(the amount of the consolidated net operating loss carryovers
attributable to the old members of the group arising in taxable years
ending before 1967).
(4) Cross-reference. See Sec. 1.1502-21T(d)(1) for the rule that
applies the principles of this paragraph (d) in consolidated return
years beginning on or after January 1, 1997, with respect to a
consolidated return change of ownership occurring before January 1,
1997.
(e) Limitations on net operating loss carryovers under section 382--
(1) Section 382(a). (i) If at the end of a taxable year (consolidated or
separate) there has been an increase in ownership of the stock of the
common parent of a group (within the meaning of section 382(a)(1) (A)
and (B)), and any member of the group has not continued to carry on a
trade or business substantially the same as that conducted before any
such increase (within the meaning of section 382(a)(1)(C)), then the
portion of any consolidated net operating loss sustained in prior
taxable years attributable to such member (as determined under this
paragraph shall not be allowed as a carryover to such taxable year or to
any subsequent taxable year.
(ii) If the provisions of section 382(a) disallow the deduction of a
net operating loss carryover from a separate return year of a member of
the group to a subsequent taxable year, no amount shall be included
under paragraph (b) of this section as a consolidated net operating loss
carryover to such a subsequent consolidated return year with respect to
such separate return year of such member.
(iii) The provisions of this subparagraph may be illustrated by the
following example:
Example. P, S, and T file a consolidated return for the calendar
year 1969, reflecting a consolidated net operating loss attributable in
part to each member. P owns 80 percent of S's stock and S owns 80
percent of T's stock. On January 1, 1970, A purchases 50 percent of P's
stock. During 1970 T's business is discontinued. Since there has been a
50 percentage point increase in ownership of P, the common parent of the
group, and since T has not continued to carry on the same trade or
business after such increase, the portion of the 1969 consolidated net
operating loss attributable to T shall not be included in any net
operating loss deduction for 1970 or for any subsequent taxable years,
whether consolidated or separate.
(2) Section 382(b). If a net operating loss carryover from a
separate return year of a predecessor of a member of the group to the
taxable year is reduced under the provisions of section 382(b), the
amount included under paragraph (b) of this section with respect to such
predecessor shall be so reduced.
[[Page 542]]
(3) Effective date. This paragraph (e) disallows or reduces the net
operating loss carryovers of a member as a result of a transaction to
which old section 382 (as defined in Sec. 1.382-2T(f)(21)) applies. See
Sec. 1.1502-21T(d)(2) for the rule that applies the principles of this
paragraph (e) in consolidated return years beginning on or after January
1, 1997, with respect to such a transaction.
(f) Consolidated net operating loss. The consolidated net operating
loss shall be determined by taking into account the following:
(1) The separate taxable income (as determined under Sec. 1.1502-12)
of each member of the group, computed without regard to any deduction
under section 242;
(2) Any consolidated capital gain net income (net capital gain for
taxable years beginning before January 1, 1977);
(3) Any consolidated section 1231 net loss;
(4) Any consolidated charitable contributions deduction;
(5) Any consolidated dividends received deduction (determined under
Sec. 1.1502-26 without regard to paragraph (a)(2) of that section); and
(6) Any consolidated section 247 deduction (determined under
Sec. 1.1502-27 without regard to paragraph (a)(1)(ii) of that section).
(g) Groups that include insolvent financial institutions. For rules
applicable to relinquishing the entire carryback period with respect to
losses attributable to insolvent financial institutions, see
Sec. 301.6402-7 of this chapter.
(h) Effective date. Except as provided in Sec. 1.1502-21T (d)(1),
(d)(2), and (g)(3), this section applies to consolidated return years
beginning before January 1, 1997.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980; T.D. 8387, 56 FR 67489, Dec. 31, 1991; T.D. 8446,
57 FR 53034, Nov. 6, 1992; T.D. 8677, 61 FR 33323, June 27, 1996.
Redesignated and amended by T.D. 8677, 61 FR 33328, June 27, 1996]
Sec. 1.1502-22A Consolidated net capital gain or loss generally applicable for consolidated return years beginning before January 1, 1997.
(a) Computation--(1) Consolidated capital gain net income. The
consolidated capital gain net income (net capital gain for taxable years
beginning before January 1, 1977) for the taxable year shall be
determined by taking into account:
(i) The aggregate of the capital gains and losses (determined
without regard to gains or losses to which section 1231 applies or net
capital loss carryovers or carrybacks) of the members of the group for
the consolidated return year,
(ii) The consolidated section 1231 net gain for such year (computed
in accordance with Sec. Sec. 1.1502-23A or 1.1502-23T), and
(iii) The consolidated net capital loss carryovers or carrybacks to
such year (as determined under paragraph (b) of this section).
(2) Consolidated net capital loss. The consolidated net capital loss
shall be determined under subparagraph (1) of this paragraph but without
regard to subdivision (iii) thereof.
(3) Special rules. For purposes of this section, capital gains and
losses on intercompany transactions and transactions with respect to
stock, bonds, and other obligations of a member of the group shall be
reflected as provided in Secs. 1.1502-13, and 1.1502-19, and capital
losses shall be limited as provided in Sec. Sec. 1.1502-15A and 1.1502-
11(c).
(4) [Reserved]
(5) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. (i) Corporations P, S, and T file consolidated returns on a
calendar year basis for 1966 and 1967. The members had the following
transactions involving capital assets during 1967: P sold an asset with
a $10,000 basis to S for $17,000 and none of the circumstances of
restoration described in Sec. 1.1502-13 occurred by the end of the
consolidated return year; S sold an asset to individual A for $7,000
which S had purchased during 1966 from P for $10,000, and with respect
to which P had deferred a gain of $2,000; T sold an asset with a basis
of $10,000 to individual B for $25,000. The group has a consolidated net
capital loss carryover to the taxable year of $10,000.
(ii) The consolidated net capital gain of the group is $4,000,
determined as follows: P's net capital gain of $2,000, representing the
deferred gain on the sale to S during the taxable year 1966, restored
into income during taxable year 1967 (the $7,000 gain on P's deferred
intercompany transaction is not taken into account for the current
year), plus T's net capital gain of $15,000, minus S's net capital loss
of $3,000 and the consolidated net capital loss carryover of $10,000.
[[Page 543]]
(b) Consolidated net capital loss carryovers and carrybacks--(1) In
general. The consolidated net capital loss carryovers and carrybacks to
the taxable year shall consist of any consolidated net capital losses of
the group, plus any net capital losses of members of the group arising
in separate return years of such members, which may be carried to the
taxable year under the principles of section 1212(a). However, such
consolidated carryovers and carrybacks shall not include any
consolidated net capital loss apportioned to a corporation for a
separate return year pursuant to Sec. 1.1502-79A(b) (or Sec. 1.1502-
22T(b), as appropriate) and shall be subject to the limitations
contained in paragraphs (c) and (d) of this section. For purposes of
section 1212(a)(1), the portion of any consolidated net capital loss for
any taxable year attributable to a foreign expropriation capital loss is
the amount of the foreign expropriation capital losses of all the
members for such year (but not in excess of the consolidated net capital
loss for such year).
(2) Absorption rules. For purposes of determining the amount, if
any, of a net capital loss (whether consolidated or separate) which can
be carried to a taxable year (consolidated or separate), the amount of
such net capital loss which is absorbed in a prior consolidated return
year under section 1212(a)(1) shall be determined by:
(i) Applying all net capital losses which can be carried to such
prior year in the order of the taxable years in which such losses were
sustained, beginning with the taxable year which ends earliest, and
(ii) Applying all such losses which can be carried to such prior
year from taxable years ending on the same date on a prorata basis,
except that any portion of a net capital loss attributable to a foreign
expropriation capital loss to which section 1212(a)(1)(B) applies shall
be applied last.
(c) Limitation on net capital loss carryovers and carrybacks from
separate return limitation years--(1) General rule. In the case of a net
capital loss of a member of the group arising in a separate return
limitation year (as defined in paragraph (f) of Sec. 1.1502-1) of such
member (and in a separate return limitation year of any predecessor of
such member), the amount that may be included under paragraph (b) of
this section (computed without regard to the limitation contained in
paragraph (d) of this section) shall not exceed the amount determined
under subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph with respect to a member of the group
is the excess, if any, of:
(i) The consolidated capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) for the taxable year
(computed without regard to any net capital loss carryovers and
carrybacks), minus such consolidated capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) for the
taxable year recomputed by excluding the capital gains and losses and
the gains and losses to which section 1231 applies of such member, over
(ii) The net capital losses attributable to such member which can be
carried to the taxable year arising in taxable years ending prior to the
particular separate return limitation year.
(d) Limitation on capital loss carryovers where there has been a
consolidated return change of ownership--(1) General rule. If a
consolidated return change of ownership (as defined in paragraph (g) of
Sec. 1.1502-1) occurs during the taxable year or an earlier taxable
year, the amount which may be included under paragraph (b) of this
section in the consolidated net capital loss carryovers to the taxable
year with respect to the aggregate of the net capital losses
attributable to old members of the group (as defined in paragraph (g)(3)
of Sec. 1.1502-1) arising in taxable years (consolidated or separate)
ending on the same day and before the taxable year in which the
consolidated return change of ownership occurred shall not exceed the
amount determined under subparagraph (2) of this paragraph.
(2) Computation of limitation. The amount referred to in
subparagraph (1) of this paragraph shall be the excess of:
(i) The consolidated capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) (determined without
regard to any net
[[Page 544]]
capital loss carryovers for the taxable year) recomputed by including
only capital gains and losses and gains and losses to which section 1231
applies of the old members of the group, over
(ii) The aggregate net capital losses attributable to the old
members of the group which may be carried to the taxable year arising in
taxable years ending prior to the particular loss year or years.
(3) Cross-reference. See Sec. 1.1502-22T(d) for the rule that
applies the principles of this paragraph (d) in consolidated return
years beginning on or after January 1, 1997, with respect to a
consolidated return change of ownership occurring before January 1,
1997.
(e) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-21T(g)
for effective dates of that section.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7728, 45 FR
72650, Nov. 3, 1980; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8677,
33323, June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR
33333, June 27, 1996]
Sec. 1.1502-23A Consolidated net section 1231 gain or loss generally applicable for consolidated return years beginning before January 1, 1997.
(a) The consolidated section 1231 net gain or loss for the taxable
year shall be determined by taking into account the aggregate of the
gains and losses to which section 1231 applies of the members of the
group for the consolidated return year. Section 1231 gains and losses on
intercompany transactions shall be reflected as provided in Sec. 1.1502-
13. Section 1231 losses that are ``built-in deductions'' shall be
subject to the limitations of Secs. 1.1502-21A(c) and 1.1502-22A(c), as
provided in Sec. 1.1502-15A(a) (or Sec. 1.1502-21T(c) in effect prior to
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, and
1.1502-22T(c) in effect prior to June 25, 1999, as contained in 26 CFR
part 1 revised April 1, 1999, as provided in 1.1502-15T(a) in effect
prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1,
1999) or (1.1502-21(c) and 1.1502-22(c), as provided in 1.1502-15(a), as
applicable), as appropriate).
(b) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21(h) or 1.1502-21T(g) in effect prior to
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as
applicable does not apply. See Sec. 1.1502-21(h) or 1.1502-21T(g) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable for effective dates of these sections.
[T.D. 7246, 38 FR 763, Jan. 4, 1973, as amended by T.D. 8677, 33323,
June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR 33334, June
27, 1996; T.D. 8823, 64 FR 36099, July 2, 1999]
Sec. 1.1502-41A Determination of consolidated net long-term capital gain and consolidated net short-term capital loss generally applicable for consolidated
return years beginning before January 1, 1997.
(a) Consolidated net long-term capital gain. The consolidated net
long-term capital gain shall be determined by taking into account (1)
those gains and losses to which Sec. 1.1502-22A(a) applies which are
treated as long term under section 1222, and (2) the consolidated
section 1231 net gain (computed in accordance with Sec. 1.1502-23A).
(b) Consolidated net short-term capital loss. The consolidated net
short-term capital loss shall be determined by taking into account (1)
those gains and losses to which Sec. 1.1502-22A(a) applies which are
treated as short term under section 1222, and (2) the consolidated net
capital loss carryovers and carrybacks to the taxable year (as
determined under Sec. 1.1502-22A(b)).
(c) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21(h) or 1.1502-21T(g) in effect prior to
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as
applicable does not apply. See Sec. 1.1502-21(h) or 1.1502-21T(g) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable for effective dates of these sections.
[T.D, 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8677, 61 FR
33323, June 27, 1996. Redesignated and amended by T.D. 8677, 61 FR
33334, June 27, 1996; T.D. 8823, 64 FR 36099, 36100, July 2, 1999]
[[Page 545]]
Sec. 1.1502-79A Separate return years generally applicable for consolidated return years beginning before January 1, 1997.
(a) Carryover and carryback of consolidated net operating losses to
separate return years--(1) In general. (i) If a consolidated net
operating loss can be carried under the principles of section 172(b) and
paragraph (b) of Sec. 1.1502-21A to a separate return year of a
corporation (or could have been so carried if such corporation were in
existence) which was a member in the year in which such loss arose, then
the portion of such consolidated net operating loss attributable to such
corporation (as determined under subparagraph (3) of this paragraph)
shall be apportioned to such corporation (and any successor to such
corporation in a transaction to which section 381(a) applies) and shall
be a net operating loss carryover or carryback to such separate return
year; accordingly, such portion shall not be included in the
consolidated net operating loss carryovers or carrybacks to the
equivalent consolidated return year. Thus, for example, if a member
filed a separate return for the third year preceding a consolidated
return year in which a consolidated net operating loss was sustained and
if any portion of such loss is apportioned to such member for such
separate return year, such portion may not be carried back by the group
to its third year preceding such consolidated return year.
(ii) If a corporation ceases to be a member during a consolidated
return year, any consolidated net operating loss carryover from a prior
taxable year must first be carried to such consolidated return year,
notwithstanding that all or a portion of the consolidated net operating
loss giving rise to the carryover is attributable to the corporation
which ceases to be a member. To the extent not absorbed in such
consolidated return year, the portion of the consolidated net operating
loss attributable to the corporation ceasing to be a member shall then
be carried to such corporation's first separate return year.
(iii) For rules permitting the reattribution of losses of a
subsidiary to the common parent in the case of loss disallowance or
basis reduction on the disposition or deconsolidation of stock of the
subsidiary, see Sec. 1.1502-20.
(2) Nonapportionment to certain members not in existence.
Notwithstanding subparagraph (1) of this paragraph, the portion of a
consolidated net operating loss attributable to a member shall not be
apportioned to a prior separate return year for which such member was
not in existence and shall be included in the consolidated net operating
loss carrybacks to the equivalent consolidated return year of the group
(or, if such equivalent year is a separate return year, then to such
separate return year), provided that such member was a member of the
group immediately after its organization.
(3) Portion of consolidated net operating loss attributable to a
member. The portion of a consolidated net operating loss attributable to
a member of a group is an amount equal to the consolidated net operating
loss multiplied by a fraction, the numerator of which is the separate
net operating loss of such corporation, and the denominator of which is
the sum of the separate net operating losses of all members of the group
in such year having such losses. For purposes of this subparagraph, the
separate net operating loss of a member of the group shall be determined
under Sec. 1.1502-12 (except that no deduction shall be allowed under
section 242), adjusted for the following items taken into account in the
computation of the consolidated net operating loss:
(i) The portion of the consolidated dividends received deduction,
the consolidated charitable contributions deductions, and the
consolidated section 247 deduction, attributable to such member;
(ii) Such member's capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) (determined without
regard to any net capital loss carryover attributable to such member);
(iii) Such member's net capital loss and section 1231 net loss,
reduced by the portion of the consolidated net capital loss attributable
to such member (as determined under paragraph (b)(2) of this section);
and
(iv) The portion of any consolidated net capital loss carryover
attributable
[[Page 546]]
to such member which is absorbed in the taxable year.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). (i) Corporation P was formed on January 1, 1966. P
filed a separate return for the calendar year 1966. On March 15, 1967, P
formed corporation S. P and S filed a consolidated return for 1967. On
January 1, 1968, P purchased all the stock of corporation T, which had
been formed in 1967 and had filed a separate return for its taxable year
ending December 31, 1967.
(ii) P, S, and T join in the filing of a consolidated return for
1968, which return reflects a consolidated net operating loss of
$11,000. $2,000 of such consolidated net operating loss is attributable
to P, $3,000 to S, and $6,000 to T. Such apportionment of the
consolidated net operating loss was made on the basis of the separate
net operating losses of each member as determined under subparagraph (3)
of this paragraph.
(iii) $5,000 of the 1968 consolidated net operating loss can be
carried back to P's separate return for 1966. Such amount is the portion
of the consolidated net operating loss attributable to P and S. Even
though S was not in existence in 1966, the portion attributable to S can
be carried back to P's separate return year, since S (unlike T) was a
member of the group immediately after its organization. The 1968
consolidated net operating loss can be carried back against the group's
income in 1967 except to the extent (i.e., $6,000) that it is
apportioned to T for its 1967 separate return year and to the extent
that it was absorbed in P's 1966 separate return year. The portion of
the 1968 consolidated net operating loss attributable to T ($6,000) is a
net operating loss carryback to its 1967 separate return.
Example (2). (i) Assume the same facts as in example (1). Assume
further that on June 15, 1969, P sells all the stock of T to an
outsider, that P and S file a consolidated return for 1969 (which
includes the income of T for the period January 1 through June 15), and
that T files a separate return for the period June 16 through December
31, 1969.
(ii) The 1968 consolidated net operating loss, to the extent not
absorbed in prior years, must first be carried to the consolidated
return year 1969. Any portion of the $6,000 amount attributable to T
which is not absorbed in T's 1967 separate return year or in the 1969
consolidated return year shall then be carried to T's separate return
year ending December 31, 1969.
(b) Carryover and carryback of consolidated net capital loss to
separate return years--(1) In general. If a consolidated net capital
loss can be carried under the principles of section 1212(a) and
paragraph (b) of Sec. 1.1502-22A to a separate return year of a
corporation (or could have been so carried if such corporation were in
existence) which was a member of the group in the year in which such
consolidated net capital loss arose, then the portion of such
consolidated net capital loss attributable to such corporation (as
determined under subparagraph (2) of this paragraph) shall be
apportioned to such corporation (and any successor to such corporation
in a transaction to which section 381(a) applies) under the principles
of paragraph (a) (1), (2) and (3) of this section and shall be a net
capital loss carryback or carryover to such separate return year.
(2) Portion of consolidated net capital loss attributable to a
member. The portion of a consolidated net capital loss attributable to a
member of a group is an amount equal to such consolidated net capital
loss multiplied by a fraction, the numerator of which is the net capital
loss of such member, and the denominator of which is the sum of the net
capital losses of those members of the group having net capital losses.
For purposes of this subparagraph, the net capital loss of a member of
the group shall be determined by taking into account the following:
(i) Such member's capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) or loss (determined
without regard to any net capital loss carryover or carryback); and
(ii) Such member's section 1231 net loss, reduced by the portion of
the consolidated section 1231 net loss attributable to such member.
(c) through (e) [Reserved]
(f) Effective date. Paragraphs (a) and (b) of this section apply to
losses arising in consolidated return years to which Sec. 1.1502-21T(g)
does not apply. For this purpose net operating loss deductions,
carryovers, and carrybacks arise in the year from which they are
carried. See Sec. 1.1502-21T(g) for effective dates of that section.
[T.D. 8677, 61 FR 33334, June 27, 1996]
[[Page 547]]
Regulations Applying Section 382 With Respect to Testing Dates (and
Corporations Joining or Leaving Consolidated Groups) Before June 25,
1999
Sec. 1.1502-90A Table of contents.
The following list contains the major headings in Secs. 1.1502-91A
through 1.1502-99A:
Sec. 1.1502-91A Application of Section 382 With Respect to a
Consolidated Group Generally Applicable for Testing Dates Before June
25, 1999.
(a) Determination and effect of an ownership change.
(1) In general.
(2) Special rule for post-change year that includes the change date.
(3) Cross reference.
(b) Definitions and nomenclature.
(c) Loss group.
(1) Defined.
(2) Coordination with rule that ends separate tracking.
(3) Example.
(d) Loss subgroup.
(1) Net operating loss carryovers.
(2) Net unrealized built-in loss.
(3) Loss subgroup parent.
(4) Principal purpose of avoiding a limitation.
(5) Special rules.
(6) Examples.
(e) Pre-change consolidated attribute.
(1) Defined.
(2) Example.
(f) Pre-change subgroup attribute.
(1) Defined.
(2) Example.
(g) Net unrealized built-in gain and loss.
(1) In general.
(2) Members included.
(i) Consolidated group.
(ii) Loss subgroup.
(3) Acquisitions of built-in gain or loss assets.
(4) Indirect ownership.
(h) Recognized built-in gain or loss.
(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a member.
(3) Deferred gain or loss.
(4) Exchanged basis property.
(i) [Reserved]
(j) Predecessor and successor corporations.
Sec. 1.1502-92A Ownership change of a loss group or a loss subgroup
generally applicable for testing dates before June 25, 1999.
(a) Scope.
(b) Determination of an ownership change.
(1) Parent change method.
(i) Loss group.
(ii) Loss subgroup.
(2) Examples.
(3) Special adjustments.
(i) Common parent succeeded by a new common parent.
(ii) Newly created loss subgroup parent.
(iii) Examples.
(4) End of separate tracking of certain losses.
(c) Supplemental rules for determining ownership change.
(1) Scope.
(2) Cause for applying supplemental rule.
(3) Operating rules.
(4) Supplemental ownership change rules.
(i) Additional testing dates for the common parent (or loss subgroup
parent).
(ii) Treatment of subsidiary stock as stock of the common parent (or
loss subgroup parent).
(iii) 5-percent shareholder of the common parent (or loss subgroup
parent).
(5) Examples.
(d) Testing period following ownership change under this section.
(e) Information statements.
(1) Common parent of a loss group.
(2) Abbreviated statement with respect to loss subgroups.
Sec. 1.1502-93A Consolidated section 382 limitation (or subgroup
section 382 limitation) generally applicable for testing dates before
June 25, 1999.
(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation).
(1) In general.
(2) Coordination with apportionment rule.
(b) Value of the loss group (or loss subgroup).
(1) Stock value immediately before ownership change.
(2) Adjustment to value.
(3) Examples.
(c) Recognized built-in gain of a loss group or loss subgroup.
(d) Continuity of business.
(1) In general.
(2) Example.
(e) Limitations of losses under other rules.
Sec. 1.1502-94A Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated group
generally applicable for corporations becoming members of a group before
June 25, 1999.
(a) Scope.
(1) In general.
(2) Successor corporation as new loss member.
(3) Coordination in the case of a loss subgroup.
(4) End of separate tracking of certain losses.
(5) Cross-reference.
(b) Application of section 382 to a new loss member.
(1) In general.
(2) Adjustment to value.
(3) Pre-change separate attribute defined.
(4) Examples.
(c) Built-in gains and losses.
[[Page 548]]
(d) Information statements.
Sec. 1.1502-95A Rules on ceasing to be a member of a consolidated
group (or loss subgroup) generally applicable for corporations ceasing
to be members before June 25, 1999.
(a) In general.
(1) Consolidated group.
(2) Election by common parent.
(3) Coordination with Secs. 1.1502-91T through 1.1502-93T.
(b) Separate application of section 382 when a member leaves a
consolidated group.
(1) In general.
(2) Effect of a prior ownership change of the group.
(3) Application in the case of a loss subgroup.
(4) Examples.
(c) Apportionment of a consolidated section 382 limitation.
(1) In general.
(2) Amount of apportionment.
(3) Effect of apportionment on the consolidated section 382 limitation.
(4) Effect on corporations to which the consolidated section 382
limitation is apportioned.
(5) Deemed apportionment when loss group terminates.
(6) Appropriate adjustments when former member leaves during the year.
(7) Examples.
(d) Rules pertaining to ceasing to be a member of a loss subgroup.
(1) In general.
(2) Examples.
(e) Filing the election to apportion.
(1) Form of the election to apportion.
(2) Signing of the election.
(3) Filing of the election.
(4) Revocation of election.
Sec. 1.1502-96A Miscellaneous rules generally applicable for
testing dates before June 25, 1999.
(a) End of separate tracking of losses.
(1) Application.
(2) Effect of end of separate tracking.
(3) Continuing effect of end of separate tracking.
(4) Special rule for testing period.
(5) Limits on effects of end of separate tracking.
(b) Ownership change of subsidiary.
(1) Ownership change of a subsidiary because of options or plan or
arrangement.
(2) Effect of the ownership change.
(i) In general.
(ii) Pre-change losses.
(3) Coordination with Secs. 1.1502-91T, 1.1502-92T, and 1.1502-94T.
(4) Example.
(c) Continuing effect of an ownership change.
Sec. 1.1502-97A Special rules under section 382 for members under
the jurisdiction of a court in a title 11 or similar case. [Reserved]
Sec. 1.1502-98A Coordination with section 383 generally applicable
for testing dates (or members joining or leaving a group) before June
25, 1999.
Sec. 1.1502-99A Effective dates.
(a) Effective date.
(1) In general.
(2) Anti-duplication rules for recognized built-in gain.
(b) Testing period may include a period beginning before January 1,
1997.
(c) Transition rules.
(1) Methods permitted.
(i) In general.
(ii) Adjustments to offset excess limitation.
(iii) Coordination with effective date.
(2) Permitted methods.
(d) Amended returns.
(e) Section 383.
[T.D. 8678, 61 FR 33336, June 27, 1996. Redesignated and amended by T.D.
8824, 64 FR 36127, July 2, 1999]
Sec. 1.1502-91A Application of section 382 with respect to a consolidated group generally applicable for testing dates before June 25, 1999.
(a) Determination and effect of an ownership change--(1) In general.
This section and Secs. 1.1502-92A and 1.1502-93A set forth the rules for
determining an ownership change under section 382 for members of
consolidated groups and the section 382 limitations with respect to
attributes described in paragraphs (e) and (f) of this section. These
rules generally provide that an ownership change and the section 382
limitation are determined with respect to these attributes for the group
(or loss subgroup) on a single entity basis and not for its members
separately. Following an ownership change of a loss group (or a loss
subgroup) under Sec. 1.1502-92A, the amount of consolidated taxable
income for any post-change year which may be offset by pre-change
consolidated attributes (or pre-change subgroup attributes) shall not
exceed the consolidated section 382 limitation (or subgroup section 382
limitation) for such year as determined under Sec. 1.1502-93A.
(2) Special rule for post-change year that includes the change date.
If the post-change year includes the change date, section 382(b)(3)(A)
is applied so that the consolidated section 382 limitation (or subgroup
section 382 limitation) does not apply to the portion of consolidated
taxable income that is allocable to the period in the year on or before
the change date. See generally Sec. 1.382-6 (relating to the allocation
of
[[Page 549]]
income and loss). The allocation of consolidated taxable income for the
post-change year that includes the change date must be made before
taking into account any consolidated net operating loss deduction (as
defined in Sec. 1.1502-21(a) or 1.1502-21T(a) in effect prior to June
25, 1999, as contained in 26 CFR part 1 revised April 1, 1999, as
applicable).
(3) Cross reference. See Secs. 1.1502-94A and 1.1502-95A for rules
that apply section 382 to a corporation that becomes or ceases to be a
member of a group or loss subgroup.
(b) Definitions and nomenclature. For purposes of this section and
Secs. 1.1502-92A through 1.1502-99A, unless otherwise stated:
(1) The definitions and nomenclature contained in section 382 and
the regulations thereunder (including the nomenclature and assumptions
relating to the examples in Sec. 1.382-2T(b)) and this section and
Secs. 1.1502-92A through 1.1502-99A apply; and
(2) In all examples, all groups file consolidated returns, all
corporations file their income tax returns on a calendar year basis, the
only 5-percent shareholder of a corporation is a public group, the facts
set forth the only owner shifts during the testing period, and each
asset of a corporation has a value equal to its adjusted basis.
(c) Loss group--(1) Defined. A loss group is a consolidated group
that:
(i) Is entitled to use a net operating loss carryover to the taxable
year that did not arise (and is not treated under Sec. 1.1502-21T(c) as
arising) in a SRLY;
(ii) Has a consolidated net operating loss for the taxable year in
which a testing date of the common parent occurs (determined by treating
the common parent as a loss corporation); or
(iii) Has a net unrealized built-in loss (determined under paragraph
(g) of this section by treating the date on which the determination is
made as though it were a change date).
(2) Coordination with rule that ends separate tracking. A
consolidated group may be a loss group because a member's losses that
arose in (or are treated as arising in) a SRLY are treated as described
in paragraph (c)(1)(i) of this section. See Sec. 1.1502-96A(a).
(3) Example. The following example illustrates the principles of
this paragraph (c).
Example. Loss group. (a) L and L1 file separate returns and each has
a net operating loss carryover arising in Year 1 that is carried over to
Year 2. A owns 40 shares and L owns 60 shares of the 100 outstanding
shares of L1 stock. At the close of Year 1, L buys the 40 shares of L1
stock from A. For Year 2, L and L1 file a consolidated return. The
following is a graphic illustration of these facts:
[[Page 550]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.002
(b) L and L1 become a loss group at the beginning of Year 2 because
the group is entitled to use the Year 1 net operating loss carryover of
L, the common parent, which did not arise (and is not treated under
Sec. 1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable as
arising) in a SRLY. See Sec. 1.1502-94A for rules relating to the
application of section 382 with respect to L1's net operating loss
carryover from Year 1 which did arise in a SRLY.
(d) Loss subgroup--(1) Net operating loss carryovers. Two or more
corporations that become members of a consolidated group (the current
group) compose a loss subgroup if:
[[Page 551]]
(i) They were affiliated with each other in another group (the
former group), whether or not the group was a consolidated group;
(ii) They bear the relationship described in section 1504(a)(1) to
each other through a loss subgroup parent immediately after they become
members of the current group; and
(iii) At least one of the members carries over a net operating loss
that did not arise (and is not treated under Sec. 1.1502-21(c) or
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26 CFR
part 1 revised April 1, 1999, as applicable as arising) in a SRLY with
respect to the former group.
(2) Net unrealized built-in loss. Two or more corporations that
become members of a consolidated group compose a loss subgroup if they:
(i) Have been continuously affiliated with each other for the 5
consecutive year period ending immediately before they become members of
the group;
(ii) Bear the relationship described in section 1504(a)(1) to each
other through a loss subgroup parent immediately after they become
members of the current group; and
(iii) Have a net unrealized built-in loss (determined under
paragraph (g) of this section on the day they become members of the
group by treating that day as though it were a change date).
(3) Loss subgroup parent. A loss subgroup parent is the corporation
that bears the same relationship to the other members of the loss
subgroup as a common parent bears to the members of a group.
(4) Principal purpose of avoiding a limitation. The corporations
described in paragraph (d)(1) or (2) of this section do not compose a
loss subgroup if any one of them is formed, acquired, or availed of with
a principal purpose of avoiding the application of, or increasing any
limitation under, section 382. Instead, Sec. 1.1502-94A applies with
respect to the attributes of each such corporation. This paragraph
(d)(4) does not apply solely because, in connection with becoming
members of the group, the members of a group (or loss subgroup) are
rearranged to bear a relationship to the other members described in
section 1504(a)(1).
(5) Special rules. See Sec. 1.1502-95A(d) for rules concerning when
a corporation ceases to be a member of a loss subgroup. See also
Sec. 1.1502-96A(a) for a special rule regarding the end of separate
tracking of SRLY losses of a member that has an ownership change or that
has been a member of a group for at least 5 consecutive years.
(6) Examples. The following examples illustrate the principles of
this paragraph (d).
Example 1. Loss subgroup. (a) P owns all the L stock and L owns all
the L1 stock. The P group has a consolidated net operating loss arising
in Year 1 that is carried to Year 2. On May 2, Year 2, P sells all the
stock of L to A, and L and L1 thereafter file consolidated returns. A
portion of the Year 1 consolidated net operating loss is apportioned
under Sec. 1.1502-21(b) or 1.1502-21T(b) in effect prior to June 25,
1999, as contained in 26 CFR part 1 revised April 1, 1999, as applicable
to each of L and L1, which they carry over to Year 2. The following is a
graphic illustration of these facts:
[[Page 552]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.003
(b) (1) L and L1 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section because--
(i) They were affiliated with each other in the P group (the former
group);
(ii) They bear a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
became members of the L group; and
(iii) At least one of the members (here, both L and L1) carries over
a net operating loss to the L group (the current group) that did not
arise in a SRLY with respect to the P group.
(2) Under paragraph (d)(3) of this section, L is the loss subgroup
parent of the L loss subgroup.
Example 2. Loss subgroup--section 1504(a)(1) relationship. (a) P
owns all the stock of L and
[[Page 553]]
L1. L owns all the stock of L2. L1 and L2 own 40 percent and 60 percent
of the stock of L3, respectively. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 2. On May
22, Year 2, P sells all the stock of L and L1 to P1, the common parent
of another consolidated group. The Year 1 consolidated net operating
loss is apportioned under Sec. 1.1502-21(b) or 1.1502-21T(b) in effect
prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1,
1999, as applicable, and each of L, L1, L2, and L3 carries over a
portion of such loss to the first consolidated return year of the P1
group ending after the acquisition. The following is a graphic
illustration of these facts:
[[Page 554]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.004
(b) L and L2 compose a loss subgroup within the meaning of paragraph
(d)(1) of this section. Neither L1 nor L3 is included in a loss subgroup
because neither bears a relationship described in section 1504(a)(1)
through a loss subgroup parent to any other member of the former group
immediately after becoming members of the P1 group.
Example 3. Loss subgroup--section 1504(a)(1) relationship. The facts
are the same as in Example 2, except that the stock of L1 is transferred
to L in connection with the sale of the
[[Page 555]]
L stock to P1. L, L1, L2, and L3 compose a loss subgroup within the
meaning of paragraph (d)(1) of this section because--
(1) They were affiliated with each other in the P group (the former
group);
(2) They bear a relationship described in section 1504(a)(1) to each
other through a loss subgroup parent (L) immediately after they become
members of the P1 group; and
(3) At least one of the members (here, each of L, L1, L2, and L3)
carries over to the P1 group (the current group) a net operating loss
that did not arise in a SRLY with respect to the P group (the former
group).
(e) Pre-change consolidated attribute--(1) Defined. A pre-change
consolidated attribute of a loss group is--
(i) Any loss described in paragraph (c)(1) (i) or (ii) of this
section (relating to the definition of loss group) that is allocable to
the period ending on or before the change date; and
(ii) Any recognized built-in loss of the loss group.
(2) Example. The following example illustrates the principle of this
paragraph (e).
Example. Pre-change consolidated attribute. (a) The L group has a
consolidated net operating loss arising in Year 1 that is carried over
to Year 2. The L loss group has an ownership change at the beginning of
Year 2.
(b) The net operating loss carryover of the L loss group from Year 1
is a pre-change consolidated attribute because the L group was entitled
to use the loss in Year 2, the loss did not arise in a SRLY with respect
to the L group, and therefore the loss was described in paragraph
(c)(1)(i) of this section. Under paragraph (a) of this section, the
amount of consolidated taxable income of the L group for Year 2 that may
be offset by this loss carryover may not exceed the consolidated section
382 limitation of the L group for that year. See Sec. 1.1502-93A for
rules relating to the computation of the consolidated section 382
limitation.
(f) Pre-change subgroup attribute--(1) Defined. A pre-change
subgroup attribute of a loss subgroup is--
(i) Any net operating loss carryover described in paragraph
(d)(1)(iii) of this section (relating to the definition of loss
subgroup); and
(ii) Any recognized built-in loss of the loss subgroup.
(2) Example. The following example illustrates the principle of this
paragraph (f).
Example. Pre-change subgroup attribute. (a) P is the common parent
of a consolidated group. P owns all the stock of L, and L owns all the
stock of L1. L2 is not a member of an affiliated group, and has a net
operating loss arising in Year 1 that is carried over to Year 2. On
December 11, Year 2, L1 acquires all the stock of L2, causing an
ownership change of L2. During Year 2, the P group has a consolidated
net operating loss that is carried over to Year 3. On November 2, Year
3, M acquires all the L stock from P. M, L, L1, and L2 thereafter file
consolidated returns. All of the P group Year 2 consolidated net
operating loss is apportioned under Sec. 1.1502-21(b) or 1.1502-21T(b)
in effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable to L and L2, which they carry over to the M
group.
(b)(1) L, L1, and L2 compose a loss subgroup because--
(i) They were affiliated with each other in the P group (the former
group);
(ii) They bore a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
became members of the L group; and
(iii) At least one of the members (here, both L and L2) carries over
a net operating loss to the M group (the current group) that is
described in paragraph (d)(1)(iii) of this section.
(2) For this purpose, L2's loss from Year 1 that was a SRLY loss
with respect to the P group (the former group) is treated as described
in paragraph (d)(1)(iii) of this section because of the application of
the principles of Sec. 1.1502-96A(a). See paragraph (d)(5) of this
section. M's acquisition results in an ownership change of L, and
therefore the L loss subgroup under Sec. 1.1502-92A(a)(2). See
Sec. 1.1502-93A for rules governing the computation of the subgroup
section 382 limitation.
(c) In the M group, L2's Year 1 loss continues to be subject to a
section 382 limitation resulting from the ownership change that occurred
on December 11, Year 2. See Sec. 1.1502-96A(c).
(g) Net unrealized built-in gain and loss--(1) In general. The
determination whether a consolidated group (or loss subgroup) has a net
unrealized built-in gain or loss under section 382(h)(3) is based on the
aggregate amount of the separately computed net unrealized built-in
gains or losses of each member that is included in the group (or loss
subgroup) under paragraph (g)(2) of this section, including items of
built-in income and deduction described in section 382(h)(6). Thus, for
example, amounts deferred under section 267, or under Sec. 1.1502-13
(other than amounts deferred with respect to the stock of a
[[Page 556]]
member (or an intercompany obligation) included in the group (or loss
subgroup) under paragraph (g)(2) of this section) are built-in items.
The threshold requirement under section 382(h)(3)(B) applies on an
aggregate basis and not on a member-by-member basis. The separately
computed amount of a member included in a group or loss subgroup does
not include any unrealized built-in gain or loss on stock (including
stock described in section 1504(a)(4) and Sec. 1.382-2T(f)(18)(ii) and
(iii)) of another member included in the group or loss subgroup (or on
an intercompany obligation). However, a member of a group or loss
subgroup includes in its separately computed amount the unrealized
built-in gain or loss on stock of another member (or on an intercompany
obligation) not included in the group or loss subgroup. If a member is
not included in a group (or loss subgroup) under paragraph (g)(2) of
this section, the determination of whether the member has a net
unrealized built-in gain or loss under section 382(h)(3) is made on a
separate entity basis. See Sec. 1.1502-94A(c) (relating to built-in gain
or loss of a new loss member) and Sec. 1.1502-96A(a) (relating to the
end of separate tracking of certain losses).
(2) Members included--(i) Consolidated group. The members included
in the determination whether a consolidated group has a net unrealized
built-in gain or loss are all members of the group on the day that the
determination is made other than--
(A) A new loss member with a net unrealized built-in loss described
in Sec. 1.1502-94A(a)(1)(ii); and
(B) Members included in a loss subgroup described in Sec. 1.1502-
91A(d)(2).
(ii) Loss subgroup. The members included in the determination
whether a loss subgroup has a net unrealized built-in gain or loss are
those members described in paragraphs (d)(2)(i) and (ii) of this
section.
(3) Acquisitions of built-in gain or loss assets. A member of a
consolidated group (or loss subgroup) may not, in determining its
separately computed net unrealized built-in gain or loss, include any
gain or loss with respect to assets acquired with a principal purpose to
affect the amount of its net unrealized built-in gain or loss. A group
(or loss subgroup) may not, in determining its net unrealized built-in
gain or loss, include any gain or loss of a member acquired with a
principal purpose to affect the amount of its net unrealized built-in
gain or loss.
(4) Indirect ownership. A member's separately computed net
unrealized built-in gain or loss is adjusted to the extent necessary to
prevent any duplication of unrealized gain or loss attributable to the
member's indirect ownership interest in another member through a
nonmember if the member has a 5-percent or greater ownership interest in
the nonmember.
(h) Recognized built-in gain or loss--(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a member.
Gain or loss recognized by a member on the disposition of stock
(including stock described in section 1504(a)(4) and Sec. 1.382-
2T(f)(18)(ii) and (iii)) of another member or an intercompany obligation
disposed of before June 25, 1999 is treated as a recognized built-in
gain or loss under section 382(h)(2) (unless disallowed under
Sec. 1.1502-20 or otherwise), even though gain or loss on such stock or
obligation was not included in the determination of a net unrealized
built-in gain or loss under paragraph (g)(1) of this section.
(3) Deferred gain or loss. Gain or loss that is deferred under
provisions such as section 267 and Sec. 1.1502-13 is treated as
recognized built-in gain or loss only to the extent taken into account
by the group during the recognition period.
(4) Exchanged basis property. If the adjusted basis of any asset is
determined, directly or indirectly, in whole or in part, by reference to
the adjusted basis of another asset held by the member at the beginning
of the recognition period, the asset is treated, with appropriate
adjustments, as held by the member at the beginning of the recognition
period.
(i) [Reserved]
(j) Predecessor and successor corporations. A reference in this
section and Secs. 1.1502-92A through 1.1502-99A to a corporation,
member, common parent, loss subgroup parent, or subsidiary includes, as
the context may require, a
[[Page 557]]
reference to a predecessor or successor corporation. For example, the
determination whether a successor satisfies the continuous affiliation
requirement of paragraph (d)(2)(i) of this section is made by reference
to its predecessor.
[T.D. 8678, 61 FR 33337, June 27, 1996, as amended by T.D. 8823, 64 FR
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125,
36127, July 2, 1999]
Sec. 1.1502-92A Ownership change of a loss group or a loss subgroup generally applicable for testing dates before June 25, 1999.
(a) Scope. This section provides rules for determining if there is
an ownership change for purposes of section 382 with respect to a loss
group or a loss subgroup. See Sec. 1.1502-94A for special rules for
determining if there is an ownership change with respect to a new loss
member and Sec. 1.1502-96A(b) for special rules for determining if there
is an ownership change of a subsidiary.
(b) Determination of an ownership change--(1) Parent change method--
(i) Loss group. A loss group has an ownership change if the loss group's
common parent has an ownership change under section 382 and the
regulations thereunder. Solely for purposes of determining whether the
common parent has an ownership change--
(A) The losses described in Sec. 1.1502-91A(c) are treated as net
operating losses (or a net unrealized built-in loss) of the common
parent; and
(B) The common parent determines the earliest day that its testing
period can begin by reference to only the attributes that make the group
a loss group under Sec. 1.1502-91A(c).
(ii) Loss subgroup. A loss subgroup has an ownership change if the
loss subgroup parent has an ownership change under section 382 and the
regulations thereunder. The principles of Sec. 1.1502-95A(b) (relating
to ceasing to be a member of a consolidated group) apply in determining
whether the loss subgroup parent has an ownership change. Solely for
purposes of determining whether the loss subgroup parent has an
ownership change--
(A) The losses described in Sec. 1.1502-91A(d) are treated as net
operating losses (or a net unrealized built-in loss) of the loss
subgroup parent;
(B) The day that the members of the loss subgroup become members of
the group (or a loss subgroup) is treated as a testing date within the
meaning of Sec. 1.382-2(a)(4); and
(C) The loss subgroup parent determines the earliest day that its
testing period can begin under Sec. 1.382-2T(d)(3) by reference to only
the attributes that make the members a loss subgroup under Sec. 1.1502-
91A(d).
(2) Examples. The following examples illustrate the principles of
this paragraph (b).
Example 1. Loss group--ownership change of the common parent. (a) A
owns all the L stock. L owns 80 percent and B owns 20 percent of the L1
stock. For Year 1, the L group has a consolidated net operating loss
that resulted from the operations of L1 and that is carried over to Year
2. The value of the L stock is $1000. The total value of the L1 stock is
$600 and the value of the L1 stock held by B is $120. The L group is a
loss group under Sec. 1.1502-91A(c)(1) because it is entitled to use its
net operating loss carryover from Year 1. On August 15, Year 2, A sells
51 percent of the L stock to C. The following is a graphic illustration
of these facts:
[[Page 558]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.005
(b) Under paragraph (b)(1)(i) of this section, section 382 and the
regulations thereunder are applied to L to determine whether it (and
therefore the L loss group) has an ownership change with respect to its
net operating loss carryover from Year 1 attributable to L1 on August
15, Year 2. The sale of the L stock to C causes an ownership change of L
under Sec. 1.382-2T and of the L loss group under paragraph (b)(1)(i) of
this section. The amount of consolidated taxable income of the L loss
group for any post-change taxable year that may be offset by its pre-
change consolidated attributes (that is, the net operating loss
carryover from Year 1 attributable to L1) may not exceed the
consolidated section 382 limitation for the L loss group for the taxable
year.
Example 2. Loss group--owner shifts of subsidiaries disregarded. (a)
The facts are the same as in Example 1, except that on August 15, Year
2, A sells only 49 percent of the L stock to C and, on December 12, Year
3, in an unrelated transaction, B sells the 20 percent of the L1 stock
to D. A's sale of the L stock to C does not cause an ownership change of
L under Sec. 1.382-2T nor of the L loss group under paragraph (b)(1)(i)
of this section. The following is a graphic illustration of these facts:
[[Page 559]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.006
(b) B's subsequent sale of L1 stock is not taken into account for
purposes of determining whether the L loss group has an ownership change
under paragraph (b)(1)(i) of this section, and, accordingly, there is no
ownership change of the L loss group. See paragraph (c) of this section,
however, for a supplemental ownership change method that would apply to
cause an ownership change if the purchases by C and D were pursuant to a
plan or arrangement.
Example 3. Loss subgroup--ownership change of loss subgroup parent
controls. (a) P owns all the L stock. L owns 80 percent and A owns 20
percent of the L1 stock. The P group has a consolidated net operating
loss arising in Year 1 that is carried over to Year 2. On September 9,
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a
portion of the Year 1 consolidated net operating loss under Sec. 1.1502-
21(b) or 1.1502-21T(b) in effect prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as applicable, which it carries
over to its next taxable year. L and L1 file a consolidated return for
their first taxable year ending after the sale to B. The following is a
graphic illustration of these facts:
[[Page 560]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.007
(b) Under Sec. 1.1502-91A(d)(1), L and L1 compose a loss subgroup on
September 9, Year 2, the day that they become members of the L group.
Under paragraph (b)(1)(ii) of this section, section 382 and the
regulations thereunder are applied to L to determine whether it (and
therefore the L loss subgroup) has an ownership change with respect to
the portion of the Year 1 consolidated net operating loss that is
apportioned to L1 on September 9, Year 2. L has an ownership change
resulting from P's sale of 51 percent of the L stock to A. Therefore,
the L loss subgroup has an ownership change with respect to that loss.
Example 4. Loss group and loss subgroup--contemporaneous ownership
changes. (a) A owns all the stock of corporation M, M owns 35 percent
and B owns 65 percent of the L
[[Page 561]]
stock, and L owns all the L1 stock. The L group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 2. On May
19, Year 2, B sells 45 percent of the L stock to M for cash. M, L, and
L1 thereafter file consolidated returns. L and L1 are each apportioned a
portion of the Year 1 consolidated net operating loss, which they carry
over to the M group's Year 2 and Year 3 consolidated return years. The M
group has a consolidated net operating loss arising in Year 2 that is
carried over to Year 3. On June 9, Year 3, A sells 70 percent of the M
stock to C. The following is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.008
[[Page 562]]
(b) Under Sec. 1.1502-91A(d)(1), L and L1 compose a loss subgroup on
May 19, Year 2, the day they become members of the M group. Under
paragraph (b)(1)(ii) of this section, section 382 and the regulations
thereunder are applied to L to determine whether L (and therefore the L
loss subgroup) has an ownership change with respect to the loss
carryovers from Year 1 on May 19, Year 2, a testing date because of B's
sale of L stock to M. The sale of L stock to M results in only a 45
percentage point increase in A's ownership of L stock. Thus, there is no
ownership change of L (or the L loss subgroup) with respect to those
loss carryovers under paragraph (b)(1)(ii) of this section on that day.
(c) June 9, Year 3, is also a testing date with respect to the L
loss subgroup because of A's sale of M stock to C. The sale results in a
56 percentage point increase in C's ownership of L stock, and L has an
ownership change. Therefore, the L loss subgroup has an ownership change
on that day with respect to the loss carryovers from Year 1.
(d) Paragraph (b)(1)(i) of this section requires that section 382
and the regulations thereunder be applied to M to determine whether M
(and therefore the M loss group) has an ownership change with respect to
the net operating loss carryover from Year 2 on June 9, Year 3, a
testing date because of A's sale of M stock to C. The sale results in a
70 percentage point increase in C's ownership of M stock, and M has an
ownership change. Therefore, the M loss group has an ownership change on
that day with respect to that loss carryover.
(3) Special adjustments--(i) Common parent succeeded by a new common
parent. For purposes of determining if a loss group has an ownership
change, if the common parent of a loss group is succeeded or acquired by
a new common parent and the loss group remains in existence, the new
common parent is treated as a continuation of the former common parent
with appropriate adjustments to take into account shifts in ownership of
the former common parent during the testing period (including shifts
that occur incident to the common parent's becoming the former common
parent).
(ii) Newly created loss subgroup parent. For purposes of determining
if a loss subgroup has an ownership change, if the member that is the
loss subgroup parent has not been the loss subgroup parent for at least
3 years as of a testing date, appropriate adjustments must be made to
take into account owner shifts of members of the loss subgroup so that
the structure of the loss subgroup does not have the effect of avoiding
an ownership change under section 382. (See paragraph (b)(3)(iii)
Example 3 of this section.)
(iii) Examples. The following examples illustrate the principles of
this paragraph (b)(3).
Example 1. New common parent acquires old common parent. (a) A, who
owns all the L stock, sells 30 percent of the L stock to B on August 26,
Year 1. L owns all the L1 stock. The L group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 3. On July
16, Year 2, A and B transfer their L stock to a newly created holding
company, HC, in exchange for 70 percent and 30 percent, respectively, of
the HC stock. HC, L, and L1 thereafter file consolidated returns. Under
the principles of Sec. 1.1502-75(d), the L loss group is treated as
remaining in existence, with HC taking the place of L as the new common
parent of the loss group. The following is a graphic illustration of
these facts:
[[Page 563]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.009
(b) On November 11, Year 3, A sells 25 percent of the HC stock to B.
For purposes of determining if the L loss group has an ownership change
under paragraph (b)(1)(i) of this section on November 11, Year 3, HC is
treated as a continuation of L under paragraph (b)(3)(i) of this section
because it acquired L and became the common parent
[[Page 564]]
without terminating the L loss group. Accordingly, HC's testing period
commences on January 1, Year 1, the first day of the taxable year of the
L loss group in which the consolidated net operating loss that is
carried over to Year 3 arose (see Sec. 1.382-2T(d)(3)(i)). Immediately
after the close of November 11, Year 3, B's percentage ownership
interest in the common parent of the loss group (HC) has increased by 55
percentage points over its lowest percentage ownership during the
testing period (zero percent). Accordingly, HC and the L loss group have
an ownership change on that day.
Example 2. common parent in case in which common parent ceases to
exist. (a) A, B, and C each own one-third of the L stock. L owns all the
L1 stock. The L group has a consolidated net operating loss arising in
Year 2 that is carried over to Year 3. On November 22, Year 3, L is
merged into P, a corporation owned by D, and L1 thereafter files
consolidated returns with P. A, B, and C, as a result of owning stock of
L, own 90 percent of P's stock after the merger. D owns the remaining 10
percent of P's stock. The merger of L into P qualifies as a reverse
acquisition of the L group under Sec. 1.1502-75(d)(3)(i), and the L loss
group is treated as remaining in existence, with P taking the place of L
as the new common parent of the L group. The following is a graphic
illustration of these facts:
[[Page 565]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.010
(b) For purposes of determining if the L loss group has an ownership
change on November 22, Year 3, the day of the merger, P is treated as a
continuation of L so that the testing period for P begins on January 1,
Year 2, the first day of the taxable year of the L loss group in which
the consolidated net operating loss that is carried over to Year 3
arose. Immediately after the close of November 22, Year 3, D is the only
5-percent shareholder that has increased his ownership interest in P
during the testing period (from zero to 10 percentage points).
(c) The facts are the same as in paragraph (a) of this Example 2,
except that A has held 23\1/3\ shares (23\1/3\ percent) of L's stock for
five years, and A purchased an additional 10 shares of L stock from E
two years before the merger. Immediately after the close of the day of
the merger (a testing date), A's ownership interest in P, the common
parent of the L loss group, has increased by 6\2/3\ percentage points
over her lowest percentage
[[Page 566]]
ownership during the testing period (23\1/3\ percent to 30 percent).
(d) The facts are the same as in (a) of this Example 2, except that
P has a net operating loss arising in Year 1 that is carried to the
first consolidated return year ending after the day of the merger.
Solely for purposes of determining whether the L loss group has an
ownership change under paragraph (b)(1)(i) of this section, the testing
period for P commences on January 1, Year 2. P does not determine the
earliest day for its testing period by reference to its net operating
loss carryover from Year 1, which Secs. 1502-1(f)(3) and 1.1502-
75(d)(3)(i) treat as arising in a SRLY. See Sec. 1.1502-94A to determine
the application of section 382 with respect to P's net operating loss
carryover.
Example 3. Newly acquired loss subgroup parent. (a) P owns all the L
stock and L owns all the L1 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 3. On
January 19, Year 2, L issues a 20 percent stock interest to B. On
February 5, Year 3, P contributes its L stock to a newly formed
subsidiary, HC, in exchange for all the HC stock, and distributes the HC
stock to its sole shareholder A. HC, L, and L1 thereafter file
consolidated returns. A portion of the P group's Year 1 consolidated net
operating loss is apportioned to L and L1 under Sec. 1.1502-21T(b) and
is carried over to the HC group's year ending after February 5, Year 3.
HC, L, and L1 compose a loss subgroup within the meaning of Sec. 1.1502-
91A(d) with respect to the net operating loss carryovers from Year 1.
The following is a graphic illustration of these facts:
[[Page 567]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.011
(b) February 5, Year 3, is a testing date for HC as the loss
subgroup parent with respect to the net operating loss carryovers of L
and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section. For
purposes of determining whether HC has an ownership change on the
testing date, appropriate adjustments must be made with respect to the
changes in the percentage ownership of the stock of HC because HC was
not the loss subgroup parent for at least 3 years prior to the day on
which it became a member of the HC loss subgroup (a testing date). The
appropriate adjustments include adjustments so that HC succeeds to the
owner shifts of other members of the former group. Thus, HC succeeds to
the owner shift of L that resulted from the sale of the 20 percent
interest to B in determining whether the HC loss subgroup has an
ownership change on February 5, Year 3, and
[[Page 568]]
on any subsequent testing date that includes January 19, Year 2.
(4) End of separate tracking of certain losses. If Sec. 1.1502-
96A(a) (relating to the end of separate tracking of attributes) applies
to a loss subgroup, then, while one or more members that were included
in the loss subgroup remain members of the consolidated group, there is
an ownership change with respect to their attributes described in
Sec. 1.1502-96A(a)(2) only if the consolidated group is a loss group and
has an ownership change under paragraph (b)(1)(i) of this section (or
such a member has an ownership change under Sec. 1.1502-96A(b) (relating
to ownership changes of subsidiaries)). If, however, the loss subgroup
has had an ownership change before Sec. 1.1502-96A(a) applies, see
Sec. 1.1502-96A(c) for the continuing application of the subgroup's
section 382 limitation with respect to its pre-change subgroup
attributes.
(c) Supplemental rules for determining ownership change--(1) Scope.
This paragraph (c) contains a supplemental rule for determining whether
there is an ownership change of a loss group (or loss subgroup). It
applies in addition to, and not instead of, the rules of paragraph (b)
of this section. Thus, for example, if the common parent of the loss
group has an ownership change under paragraph (b) of this section, the
loss group has an ownership change even if, by applying this paragraph
(c), the common parent would not have an ownership change.
(2) Cause for applying supplemental rule. This paragraph (c) applies
to a loss group (or loss subgroup) if--
(i) Any 5-percent shareholder of the common parent (or loss subgroup
parent) increases its percentage ownership interest in the stock of
both--
(A) A subsidiary of the loss group (or loss subgroup) other than by
a direct or indirect acquisition of stock of the common parent (or loss
subgroup parent); and
(B) The common parent (or loss subgroup parent); and
(ii) Those increases occur within a 3 year period ending on any day
of a consolidated return year or, if shorter, the period beginning on
the first day following the most recent ownership change of the loss
group (or loss subgroup).
(3) Operating rules. Solely for purposes of this paragraph (c)--
(i) A 5-percent shareholder of the common parent (or loss subgroup
parent) is treated as increasing its percentage ownership interest in
the common parent (or loss subgroup parent) or a subsidiary to the
extent, if any, that any person acting pursuant to a plan or arrangement
with the 5-percent shareholder increases its percentage ownership
interest in the stock of that entity;
(ii) The rules in section 382(l)(3) and Secs. 1.382-2T(h) and 1.382-
4(d) (relating to constructive ownership) apply with respect to the
stock of the subsidiary by treating such stock as stock of a loss
corporation; and
(iii) In the case of a loss subgroup, a subsidiary includes any
member of the loss subgroup other than the loss subgroup parent. (The
loss subgroup parent is, however, a subsidiary of the loss group of
which it is a member.)
(4) Supplemental ownership change rules. The determination whether
the common parent (or loss subgroup parent) has an ownership change is
made by applying paragraph (b)(1) of this section as modified by the
following additional rules--
(i) Additional testing dates for the common parent (or loss subgroup
parent). A testing date for the common parent (or loss subgroup parent)
also includes--
(A) Each day on which there is an increase in the percentage
ownership of stock of a subsidiary as described in paragraph (c)(2) of
this section; and
(B) The first day of the first consolidated return year for which
the group is a loss group (or the members compose a loss subgroup);
(ii) Treatment of subsidiary stock as stock of the common parent (or
loss subgroup parent). The common parent (or loss subgroup parent) is
treated as though it had issued to the person acquiring (or deemed to
acquire) the subsidiary stock an amount of its own stock (by value) that
equals the value of the subsidiary stock represented by the percentage
increase in that person's ownership of the subsidiary (determined on a
separate entity basis). A similar principle applies if the increase
[[Page 569]]
in percentage ownership interest is effected by a redemption or similar
transaction; and
(iii) 5-percent shareholder of the common parent (or loss subgroup
parent). Any person described in paragraph (c)(3)(i) of this section who
is acting pursuant to the plan or arrangement is treated as a 5-percent
shareholder of the common parent (or loss subgroup parent).
(5) Examples. The following examples illustrate the principles of
this paragraph (c).
Example 1. Stock of the common parent under supplemental rules. (a)
A owns all the L stock. L is not a member of an affiliated group and has
a net operating loss carryover arising in Year 1 that is carried over to
Year 6. On September 20, Year 6, L transfers all of its assets and
liabilities to a newly created subsidiary, S, in exchange for S stock. L
and S thereafter file consolidated returns. On November 23, Year 6, B
contributes cash to L in exchange for a 45 percent ownership interest in
L and contributes cash to S for a 20 percent ownership interest in S.
(b) B is a 5-percent shareholder of L who increases his percentage
ownership interest in L and S during the 3 year period ending on
November 23, Year 6. Under paragraph (c)(4)(ii) of this section, the
determination whether L (the common parent of a loss group) has an
ownership change on November 23, Year 6 (or on any testing date in the
testing period which includes November 23, Year 6), is made by applying
paragraph (b)(1)(i) of this section and by treating the value of B's 20
percent ownership interest in S as if it were L stock issued to B.
Example 2. Plan or arrangement--public offering of subsidiary stock.
(a) A owns all the stock of L and L owns all the stock of L1. The L
group has a consolidated net operating loss arising in Year 1 that
resulted from the operations of L1 and that is carried over to Year 2.
As part of a plan, A sells 49 percent of the L stock to B on October 7,
Year 2, and L1 issues new stock representing a 20 percent ownership
interest in L1 to the public on November 6, Year 2. The following is a
graphic illustration of these facts:
[[Page 570]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.012
(b) A's sale of the L stock to B does not cause an ownership change
of the L loss group on October 7, Year 2, under the rules of Sec. 1.382-
2T and paragraph (b)(1)(i) of this section.
(c) Because the issuance of L1 stock to the public occurs in
connection with B's acquisition of L stock pursuant to a plan, paragraph
(c)(4) of this section applies to determine whether the L loss group has
an ownership change on November 6, Year 2 (or on any testing date for
which the testing period includes November 6, Year 2).
(d) Testing period following ownership change under this section. If
a loss group (or a loss subgroup) has had an ownership change under this
section, the
[[Page 571]]
testing period for determining a subsequent ownership change with
respect to pre-change consolidated attributes (or pre-change subgroup
attributes) begins no earlier than the first day following the loss
group's (or loss subgroup's) most recent change date.
(e) Information statements.--(1) Common parent of a loss group. The
common parent of a loss group must file the information statement
required by Sec. 1.382-2T(a)(2)(ii) for a consolidated return year
because of any owner shift, equity structure shift, or the issuance or
transfer of an option--
(i) With respect to the common parent and with respect to any
subsidiary stock subject to paragraph (c) of this section; and
(ii) With respect to an ownership change described in Sec. 1.1502-
96A(b) (relating to ownership changes of subsidiaries).
(2) Abbreviated statement with respect to loss subgroups. The common
parent of a consolidated group that has a loss subgroup during a
consolidated return year must file the information statement required by
Sec. 1.382-2T(a)(2)(ii) because of any owner shift, equity structure
shift, or issuance or transfer of an option with respect to the loss
subgroup parent and with respect to any subsidiary stock subject to
paragraph (c) of this section. Instead of filing a separate statement
for each loss subgroup parent, the common parent (which is treated as a
loss corporation) may file the single statement described in paragraph
(e)(1) of this section. In addition to the information concerning stock
ownership of the common parent, the single statement must identify each
loss subgroup parent and state which loss subgroups, if any, have had
ownership changes during the consolidated return year. The loss subgroup
parent is, however, still required to maintain the records necessary to
determine if the loss subgroup has an ownership change. This paragraph
(e)(2) applies with respect to the attributes of a loss subgroup until,
under Sec. 1.1502-96A(a), the attributes are no longer treated as
described in Sec. 1.1502-91A(d) (relating to the definition of loss
subgroup). After that time, the information statement described in
paragraph (e)(1) of this section must be filed with respect to those
attributes.
[T.D. 8678, 61 FR 33341, June 27, 1996, as amended by T.D. 8823, 64 FR
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125,
36127, July 2, 1999]
Sec. 1.1502-93A Consolidated section 382 limitation (or subgroup section 382 limitation) generally applicable for testing dates before June 25, 1999.
(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation)--(1) In general. Following an ownership
change, the consolidated section 382 limitation (or subgroup section 382
limitation) for any post-change year is an amount equal to the value of
the loss group (or loss subgroup), as defined in paragraph (b) of this
section, multiplied by the long-term tax-exempt rate that applies with
respect to the ownership change, and adjusted as required by section 382
and the regulations thereunder. See, for example, section 382(b)(2)
(relating to the carryforward of unused section 382 limitation), section
382(b)(3)(B) (relating to the section 382 limitation for the post-change
year that includes the change date), section 382(m)(2) (relating to
short taxable years), and section 382(h) (relating to recognized built-
in gains and section 338 gains).
(2) Coordination with apportionment rule. For special rules relating
to apportionment of a consolidated section 382 limitation (or a subgroup
section 382 limitation) when one or more corporations cease to be
members of a loss group (or a loss subgroup) and to aggregation of
amounts so apportioned, see Sec. 1.1502-95A(c).
(b) Value of the loss group (or loss subgroup)--(1) Stock value
immediately before ownership change. Subject to any adjustment under
paragraph (b)(2) of this section, the value of the loss group (or loss
subgroup) is the value, immediately before the ownership change, of the
stock of each member, other than stock that is owned directly or
indirectly by another member. For this purpose--
(i) Ownership is determined under Sec. 1.382-2T;
(ii) A member is considered to indirectly own stock of another
member
[[Page 572]]
through a nonmember only if the member has a 5-percent or greater
ownership interest in the nonmember; and
(iii) Stock includes stock described in section 1504(a)(4) and
Sec. 1.382-2T(f)(18)(ii) and (iii).
(2) Adjustment to value. The value of the loss group (or loss
subgroup), as determined under paragraph (b)(1) of this section, is
adjusted under any rule in section 382 or the regulations thereunder
requiring an adjustment to such value for purposes of computing the
amount of the section 382 limitation. See, for example, section
382(e)(2) (redemptions and corporate contractions), section 382(l)(1)
(certain capital contributions) and section 382(l)(4) (ownership of
substantial nonbusiness assets). The value of the loss group (or loss
subgroup) determined under this paragraph (b) is also adjusted to the
extent necessary to prevent any duplication of the value of the stock of
a member. For example, the principles of Sec. 1.382-8 (relating to
controlled groups of corporations) apply in determining the value of a
loss group (or loss subgroup) if, under Sec. 1.1502-91A(g)(2), members
are not included in the determination whether the group (or loss
subgroup) has a net unrealized built-in loss.
(3) Examples. The following examples illustrate the principles of
this paragraph (b).
Example 1. Basic case. (a) L, L1, and L2 compose a loss group. L has
outstanding common stock, the value of which is $100. L1 has outstanding
common stock and preferred stock that is described in section
1504(a)(4). L owns 90 percent of the L1 common stock, and A owns the
remaining 10 percent of the L1 common stock plus all the preferred
stock. The value of the L1 common stock is $40, and the value of the L1
preferred stock is $30. L2 has outstanding common stock, 50 percent of
which is owned by L and 50 percent by L1. The L group has an ownership
change. The following is a graphic illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.013
(b) Under paragraph (b)(1) of this section, the L group does not
include the value of the stock of any member that is owned directly or
indirectly by another member in computing its consolidated section 382
limitation. Accordingly, the value of the stock of the loss group is
$134, the sum of the value of--
(1) The common stock of L ($100);
(2) the 10 percent of the L1 common stock ($4) owned by A; and
(3) The L1 preferred stock ($30) owned by A.
Example 2. Indirect ownership. (a) L and L1 compose a consolidated
group. L's stock has a value of $100. L owns 80 shares (worth $80) and
corporation M owns 20 shares (worth $20) of the L1 stock. L also owns 79
percent of the stock of corporation M. The L group has an ownership
change. The following is a graphic illustration of these facts:
[[Page 573]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.014
(b) Under paragraph (b)(1) of this section, because of L's more than
5 percent ownership interest in M, a nonmember, L is considered to
indirectly own 15.8 shares of the L1 stock held by M (79% x 20 shares).
The value of the L loss group is $104.20, the sum of the values of--
(1) The L stock ($100); and
(2) The L1 stock not owned directly or indirectly by L (21% x $20,
or $4.20).
(c) Recognized built-in gain of a loss group or loss subgroup. If a
loss group (or loss subgroup) has a net unrealized built-in gain, any
recognized built-in gain of the loss group (or loss subgroup) is taken
into account under section 382(h) in determining the consolidated
section 382 limitation (or subgroup section 382 limitation). See
Sec. 1.1502-99A(a)(2) for a special rule relating to the application of
Sec. 1.502-93(c)(2) to consolidated return years for which the due date
of the return is after June 25, 1999.
(d) Continuity of business--(1) In general. A loss group (or a loss
subgroup) is treated as a single entity for purposes of determining
whether it satisfies the continuity of business enterprise requirement
of section 382(c)(1).
(2) Example. The following example illustrates the principle of this
paragraph (d).
Example. Continuity of business enterprise. L owns all the stock of
two subsidiaries, L1 and L2. The L group has an ownership change. It has
pre-change consolidated attributes attributable to L2. Each of the
members has historically conducted a separate line of business. Each
line of business is approximately equal in value. One year after the
ownership change, L discontinues its separate business and the business
of L2. The separate business of L1 is continued for the remainder of the
2 year period following the ownership change. The continuity of business
enterprise requirement of section 382(c)(1) is met even though the
separate businesses of L and L2 are discontinued.
(e) Limitations of losses under other rules. If a section 382
limitation for a post-change year exceeds the consolidated taxable
income that may be offset by pre-change attributes for any reason,
including the application of the limitation of Sec. 1.1502-21(c) or
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26 CFR
part 1 revised April 1, 1999, as applicable, the amount of the excess is
carried forward under section 382(b)(2) (relating to the carryforward of
unused section 382 limitation).
[T.D. 8678, 61 FR 33351, June 27, 1996, as amended by T.D. 8823, 64 FR
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125,
36128, July 2, 1999]
[[Page 574]]
Sec. 1.1502-94A Coordination with section 382 and the regulations thereunder when a corporation becomes a member of a consolidated group) generally applicable for corporations becoming members of a group before June 25, 1999.
(a) Scope--(1) In general. This section applies section 382 and the
regulations thereunder to a corporation that is a new loss member of a
consolidated group. A corporation is a new loss member if it--
(i) Carries over a net operating loss that arose (or is treated
under Sec. 1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25,
1999, as contained in 26 CFR part 1 revised April 1, 1999, as
applicable, as arising) in a SRLY with respect to the current group, and
that is not described in Sec. 1.1502-91A(d)(1); or
(ii) Has a net unrealized built-in loss (determined under paragraph
(c) of this section on the day it becomes a member of the current group
by treating that day as a change date) that is not taken into account
under Sec. 1.1502-91A(d)(2) in determining whether two or more
corporations compose a loss subgroup.
(2) Successor corporation as new loss member. A new loss member also
includes any successor to a corporation that has a net operating loss
carryover arising in a SRLY and that is treated as remaining in
existence under Sec. 1.382-2(a)(1)(ii) following a transaction described
in section 381(a).
(3) Coordination in the case of a loss subgroup. For rules regarding
the determination of whether there is an ownership change of a loss
subgroup with respect to a net operating loss or a net unrealized built-
in loss described in Sec. 1.1502-91A(d) (relating to the definition of
loss subgroup) and the computation of a subgroup section 382 limitation
following such an ownership change, see Secs. 1.1502-92A and 1.1502-93A.
(4) End of separate tracking of certain losses. If Sec. 1.1502-
96A(a) (relating to the end of separate tracking of attributes) applies
to a new loss member, then, while that member remains a member of the
consolidated group, there is an ownership change with respect to its
attributes described in Sec. 1.1502-96A(a)(2) only if the consolidated
group is a loss group and has an ownership change under Sec. 1.1502-
92A(b)(1)(i) (or that member has an ownership change under Sec. 1.1502-
96A(b) (relating to ownership changes of subsidiaries)). If, however,
the new loss member has had an ownership change before Sec. 1.1502-
96A(a) applies, see Sec. 1.1502-96A(c) for the continuing application of
the section 382 limitation with respect to the member's pre-change
losses.
(5) Cross-reference. See section 382(a) and Sec. 1.1502-96A(c) for
the continuing effect of an ownership change after a corporation becomes
or ceases to be a member.
(b) Application of section 382 to a new loss member--(1) In general.
Section 382 and the regulations thereunder apply to a new loss member to
determine, on a separate entity basis, whether and to what extent a
section 382 limitation applies to limit the amount of consolidated
taxable income that may be offset by the new loss member's pre-change
separate attributes. For example, if an ownership change with respect to
the new loss member occurs under section 382 and the regulations
thereunder, the amount of consolidated taxable income for any post-
change year that may be offset by the new loss member's pre-change
separate attributes shall not exceed the section 382 limitation as
determined separately under section 382(b) with respect to that member
for such year. If the post-change year includes the change date, section
382(b)(3)(A) is applied so that the section 382 limitation of the new
loss member does not apply to the portion of the taxable income for such
year that is allocable to the period in such year on or before the
change date. See generally Sec. 1.382-6 (relating to the allocation of
income and loss).
(2) Adjustment to value. The value of the new loss member is
adjusted to the extent necessary to prevent any duplication of the value
of the stock of a member. For example, the principles of Sec. 1.382-8T
(relating to controlled groups of corporations) apply in determining the
value of a new loss member.
(3) Pre-change separate attribute defined. A pre-change separate
attribute of a new loss member is--
(i) Any net operating loss carryover of the new loss member
described in paragraph (a)(1) of this section; and
[[Page 575]]
(ii) Any recognized built-in loss of the new loss member.
(4) Examples. The following examples illustrate the principles of
this paragraph (b).
Example 1. Basic case. (a) A and P each own 50 percent of the L
stock. On December 19, Year 6, P purchases 30 percent of the L stock
from A for cash. L has net operating losses arising in Year 1 and Year 2
that it carries over to Year 6 and Year 7. The following is a graphic
illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.015
(b) L is a new loss member because it has net operating loss
carryovers that arose in a SRLY with respect to the P group and L is not
a member of a loss subgroup under Sec. 1.1502-91A(d). Under section 382
and the regulations thereunder, L is a loss corporation on December 19,
Year 6, that day is a testing date for L, and the testing period for L
commences on December 20, Year 3.
[[Page 576]]
(c) P's purchase of L stock does not cause an ownership change of L
on December 19, Year 6, with respect to the net operating loss
carryovers from Year 1 and Year 2 under section 382 and Sec. 1.382-2T.
The use of the loss carryovers, however, is subject to limitation under
Sec. 1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
Example 2. Multiple new loss members. (a) The facts are the same as
in Example 1, and, on December 31, Year 6, L purchases all the stock of
L1 from B for cash. L1 has a net operating loss of $40 arising in Year 3
that it carries over to Year 7. The following is a graphic illustration
of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.016
[[Page 577]]
(b) L1 is a new loss member because it has a net operating loss
carryover from Year 3 that arose in a SRLY with respect to the P group
and L1 is not a member of a loss subgroup under Sec. 1.1502-91A(d)(1).
(c) L's purchase of all the stock of L1 causes an ownership change
of L1 on December 31, Year 6, under section 382 and Sec. 1.382-2T.
Accordingly, a section 382 limitation based on the value of the L1 stock
immediately before the ownership change limits the amount of
consolidated taxable income of the P group for any post-change year that
may be offset by L1's loss from Year 3.
(d) L1's ownership change in connection with its becoming a member
of the P group is an ownership change described in Sec. 1.1502-96A(a).
Thus, starting on January 1, Year 7, the P group no longer separately
tracks owner shifts of the stock of L1 with respect to L1's loss from
Year 3. Instead, the P group is a loss group because of such loss under
Sec. 1.1502-91A(c).
Example 3. Ownership changes of new loss members. (a) The facts are
the same as in Example 2, and, on April 30, Year 7, C purchases all the
stock of P for cash.
(b) L is a new loss member on April 30, Year 7, because its Year 1
and Year 2 losses arose in SRLYs with respect to the P group and it is
not a member of a loss subgroup under Sec. 1.1502-91A(d)(1). The testing
period for L commences on May 1, Year 4. C's purchase of all the P stock
causes an ownership change of L on April 30, Year 7, under section 382
and Sec. 1.382-2T with respect to its Year 1 and Year 2 losses.
Accordingly, a section 382 limitation based on the value of the L stock
immediately before the ownership change limits the amount of
consolidated taxable income of the P group for any post-change year that
may be offset by L's Year 1 and Year 2 losses. See also Sec. 1.1502-21T
in effect prior to June 25, 1999, contained in 26 CFR Part 1, revised
April 1, 1999, or Sec. 1.1502-21, as applicable.
(c) The P group is a loss group on April 30, Year 7, because it is
entitled to use L1's loss from Year 3, and such loss is no longer
treated as a loss of a new loss member starting the day after L1's
ownership change on December 31, Year 6. See Secs. 1.1502-96A(a) and
1.1502-91A(c)(2). C's purchase of all the P stock causes an ownership
change of P, and therefore the P loss group, on April 30, Year 7, with
respect to L1's Year 3 loss. Accordingly, a consolidated section 382
limitation based on the value of the P stock immediately before the
ownership change limits the amount of consolidated taxable income of the
P group for any post-change year that may be offset by L1's Year 3 loss.
(c) Built-in gains and losses. As the context may require, the
principles of Secs. 1.1502-91A(g) and (h) and 1.1502-93A(c) (relating to
built-in gains and losses) apply to a new loss member on a separate
entity basis. See Sec. 1.1502-91A(g)(3).
(d) Information statements. The common parent of a consolidated
group that has a new loss member subject to paragraph (b)(1) of this
section during a consolidated return year must file the information
statement required by Sec. 1.382-2T(a)(2)(ii) because of any owner
shift, equity structure shift, or issuance or transfer of an option with
respect to the new loss member. Instead of filing a separate statement
for each new loss member the common parent may file a single statement
described in Sec. 1.382-2T(a)(2)(ii) with respect to the stock ownership
of the common parent (which is treated as a loss corporation). In
addition to the information concerning stock ownership of the common
parent, the single statement must identify each new loss member and
state which new loss members, if any, have had ownership changes during
the consolidated return year. The new loss member is, however, required
to maintain the records necessary to determine if it has an ownership
change. This paragraph (d) applies with respect to the attributes of a
new loss member until an event occurs which ends separate tracking under
Sec. 1.1502-96A(a). After that time, the information statement described
in Sec. 1.1502-92A(e)(1) must be filed with respect to these attributes.
[T.D. 8678, 61 FR 33352, June 27, 1996, as amended by T.D. 8823, 64 FR
36100, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36125,
36126, 36128, July 2, 1999]
Sec. 1.1502-95A Rules on ceasing to be a member of a consolidated group generally applicable for corporations ceasing to be members before June 25, 1999.
(a) In general--(1) Consolidated group. This section provides rules
for applying section 382 on or after the day that a member ceases to be
a member of a consolidated group (or loss subgroup). The rules concern
how to determine whether an ownership change occurs with respect to
losses of the member, and how a consolidated section 382 limitation (or
subgroup section 382 limitation) is apportioned to the member. As the
context requires, a reference in this section to a loss group, a member,
or a
[[Page 578]]
corporation also includes a reference to a loss subgroup, and a
reference to a consolidated section 382 limitation also includes a
reference to a subgroup section 382 limitation.
(2) Election by common parent. Only the common parent (not the loss
subgroup parent) may make the election under paragraph (c) of this
section to apportion either a consolidated section 382 limitation or a
subgroup section 382 limitation.
(3) Coordination with Secs. 1.1502-91A through 1.1502-93A. For rules
regarding the determination of whether there is an ownership change of a
loss subgroup and the computation of a subgroup section 382 limitation
following such an ownership change, see Secs. 1.1502-91A through 1.1502-
93A.
(b) Separate application of section 382 when a member leaves a
consolidated group--(1) In general. Except as provided in Secs. 1.1502-
91A through 1.1502-93A (relating to rules applicable to loss groups and
loss subgroups), section 382 and the regulations thereunder apply to a
corporation on a separate entity basis after it ceases to be a member of
a consolidated group (or loss subgroup). Solely for purposes of
determining whether a corporation has an ownership change--
(i) Any portion of a consolidated net operating loss that is
apportioned to the corporation under Sec. 1.1502-21(b) or 1.1502-21T(b)
in effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable is treated as a net operating loss of the
corporation beginning on the first day of the taxable year in which the
loss arose;
(ii) The testing period may include the period during which (or
before which) the corporation was a member of the group (or loss
subgroup); and
(iii) Except to the extent provided in Sec. 1.1502-20(g) (relating
to reattributed losses), the day it ceases to be a member of a
consolidated group is treated as a testing date of the corporation
within the meaning of Sec. 1.382-2(a)(4).
(2) Effect of a prior ownership change of the group. If a loss group
has had an ownership change under Sec. 1.1502-92A before a corporation
ceases to be a member of a consolidated group (the former member)--
(i) Any pre-change consolidated attribute that is subject to a
consolidated section 382 limitation continues to be treated as a pre-
change loss with respect to the former member after the attribute is
apportioned to the former member;
(ii) The former member's section 382 limitation with respect to such
attribute is zero except to the extent the common parent apportions
under paragraph (c) of this section all or a part of the consolidated
section 382 limitation to the former member;
(iii) The testing period for determining a subsequent ownership
change with respect to such attribute begins no earlier than the first
day following the loss group's most recent change date; and
(iv) As generally provided under section 382, an ownership change of
the former member that occurs on or after the day it ceases to be a
member of a loss group may result in an additional, lesser limitation
amount with respect to such loss.
(3) Application in the case of a loss subgroup. If two or more
former members are included in the same loss subgroup immediately after
they cease to be members of a consolidated group, the principles of
paragraphs (b) and (c) of this section apply to the loss subgroup.
Therefore, for example, an apportionment by the common parent under
paragraph (c) of this section is made to the loss subgroup rather than
separately to its members. -
(4) Examples. The following examples illustrate the principles of
this paragraph (b).
Example 1. Treatment of departing member as a separate corporation
throughout the testing period. (a) A owns all the L stock. L owns all
the stock of L1 and L2. The L group has a consolidated net operating
loss arising in Year 1 that is carried over to Year 3. On January 12,
Year 2, A sells 30 percent of the L stock to B. On February 7, Year 3, L
sells 40 percent of the L2 stock to C, and L2 ceases to be a member of
the group. A portion of the Year 1 consolidated net operating loss is
apportioned to L2 under Sec. 1.1502-21(b) or 1.1502-21T(b) in effect
prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1,
1999, as applicable and is carried to L2's first separate return year,
which ends December 31, Year 3. The following is a graphic illustration
of these facts:
[[Page 579]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.017
(b) Under paragraph (b)(1) of this section, L2 is a loss corporation
on February 7, Year 3. Under paragraph (b)(1)(iii) of this section,
February 7, Year 3, is a testing date. Under paragraph (b)(1)(ii) of
this section, the testing period for L2 with respect to this testing
date commences on January 1, Year 1, the first day of the taxable year
in which the
[[Page 580]]
portion of the consolidated net operating loss apportioned to L2 arose.
Therefore, in determining whether L2 has an ownership change on February
7, Year 3, B's purchase of 30 percent of the L stock and C's purchase of
40 percent of the L2 stock are each owner shifts. L2 has an ownership
change under section 382(g) and Sec. 1.382-2T because B and C have
increased their ownership interests in L2 by 18 and 40 percentage
points, respectively, during the testing period.
Example 2. Effect of prior ownership change of loss group. (a) L
owns all the L1 stock and L1 owns all the L2 stock. The L loss group had
an ownership change under Sec. 1.1502-92A in Year 2 with respect to a
consolidated net operating loss arising in Year 1 and carried over to
Year 2 and Year 3. The consolidated section 382 limitation computed
solely on the basis of the value of the stock of L is $100. On December
31, Year 2, L1 sells 25 percent of the stock of L2 to B. L2 is
apportioned a portion of the Year 1 consolidated net operating loss
which it carries over to its first separate return year ending after
December 31, Year 2. L2's separate section 382 limitation with respect
to this loss is zero unless L elects to apportion all or a part of the
consolidated section 382 limitation to L2. (See paragraph (c) of this
section for rules regarding the apportionment of a consolidated section
382 limitation.) L apportions $50 of the consolidated section 382
limitation to L2.
(b) On December 31, Year 3, L1 sells its remaining 75 percent stock
interest in L2 to C, resulting in an ownership change of L2. L2's
section 382 limitation computed on the change date with respect to the
value of its stock is $30. Accordingly, L2's section 382 limitation for
post-change years ending after December 31, Year 3, with respect to its
pre-change losses, including the consolidated net operating losses
apportioned to it from the L group, is $30, adjusted as required by
section 382 and the regulations thereunder.
(c) Apportionment of a consolidated section 382 limitation--(1) In
general. The common parent may elect to apportion all or any part of a
consolidated section 382 limitation to a former member (or loss
subgroup). See paragraph (e) of this section for the time and manner of
making the election to apportion.
(2) Amount of apportionment. The common parent may apportion all or
part of each element of the consolidated section 382 limitation
determined under Sec. 1.1502-93A. For this purpose, the consolidated
section 382 limitation consists of two elements--
(i) The value element, which is the element of the limitation
determined under section 382(b)(1) (relating to value multiplied by the
long-term tax-exempt rate) without regard to such adjustments as those
described in section 382(b)(2) (relating to the carryforward of unused
section 382 limitation), section 382(b)(3)(B) (relating to the section
382 limitation for the post-change year that includes the change date),
section 382(h) (relating to built-in gains and section 338 gains), and
section 382(m)(2) (relating to short taxable years); and
(ii) The adjustment element, which is so much (if any) of the
limitation for the taxable year during which the former member ceases to
be a member of the consolidated group that is attributable to a
carryover of unused limitation under section 382(b)(2) or to recognized
built-in gains under 382(h).
(3) Effect of apportionment on the consolidated section 382
limitation. The value element of the consolidated section 382 limitation
for any post-change year ending after the day that a former member (or
loss subgroup) ceases to be a member(s) is reduced to the extent that it
is apportioned under this paragraph (c). The consolidated section 382
limitation for the post-change year in which the former member (or loss
subgroup) ceases to be a member(s) is also reduced to the extent that
the adjustment element for that year is apportioned under this paragraph
(c).
(4) Effect on corporations to which the consolidated section 382
limitation is apportioned. The amount of the value element that is
apportioned to a former member (or loss subgroup) is treated as the
amount determined under section 382(b)(1) for purposes of determining
the amount of that corporation's (or loss subgroup's) section 382
limitation for any taxable year ending after the former member (or loss
subgroup) ceases to be a member(s). Appropriate adjustments must be made
to the limitation based on the value element so apportioned for a short
taxable year, carryforward of unused limitation, or any other adjustment
required under section 382. The adjustment element apportioned to a
former member (or loss subgroup) is treated as an adjustment under
section 382(b)(2) or section
[[Page 581]]
382(h), as appropriate, for the first taxable year after the member (or
members) ceases to be a member (or members).
(5) Deemed apportionment when loss group terminates. If a loss group
terminates, to the extent the consolidated section 382 limitation is not
apportioned under paragraph (c)(1) of this section, the consolidated
section 382 limitation is deemed to be apportioned to the loss subgroup
that includes the common parent, or, if there is no loss subgroup that
includes the common parent immediately after the loss group terminates,
to the common parent. A loss group terminates on the first day of the
first taxable year that is a separate return year with respect to each
member of the former loss group.
(6) Appropriate adjustments when former member leaves during the
year. Appropriate adjustments are made to the consolidated section 382
limitation for the consolidated return year during which the former
member (or loss subgroup) ceases to be a member(s) to reflect the
inclusion of the former member in the loss group for a portion of that
year.
(7) Examples. The following examples illustrate the principles of
this paragraph (c).
Example 1. Consequence of apportionment. (a) L owns all the L1 stock
and L1 owns all the L2 stock. The L group has a $200 consolidated net
operating loss arising in Year 1 that is carried over to Year 2. At the
close of December 31, Year 1, the group has an ownership change under
Sec. 1.1502-92A. The ownership change results in a consolidated section
382 limitation of $10 based on the value of the stock of the group. On
August 29, Year 2, L1 sells 30 percent of the stock of L2 to A. L2 is
apportioned $90 of the group's $200 consolidated net operating loss
under Sec. 1.1502-21(b) or 1.1502-21T(b) in effect prior to June 25,
1999, as contained in 26 CFR part 1 revised April 1, 1999, as
applicable. L, the common parent, elects to apportion $6 of the
consolidated section 382 limitation to L2. The following is a graphic
illustration of these facts:
[GRAPHIC] [TIFF OMITTED] TR27JN96.018
(b) For its separate return years ending after August 29, Year 2
(other than the taxable year ending December 31, Year 2), L2's section
382 limitation with respect to the $90 of the group's net operating loss
apportioned to it is $6, adjusted, as appropriate, for any short taxable
year, unused section 382 limitation, or other adjustment. For its
consolidated return years ending after August 29, Year 2, (other than
the year ending December 31, Year 2) the L group's consolidated section
382 limitation with respect to the remaining $110 of pre-change
consolidated attribute is $4 ($10 minus the $6 value element apportioned
to L2), adjusted, as appropriate, for any short taxable year, unused
section 382 limitation, or other adjustment.
[[Page 582]]
(c) For the L group's consolidated return year ending December 31,
Year 2, the value element of its consolidated section 382 limitation is
increased by $4 (rounded to the nearest dollar), to account for the
period during which L2 was a member of the L group ($6, the consolidated
section 382 limitation apportioned to L2, times 241/365, the ratio of
the number of days during Year 2 that L2 is a member of the group to the
number of days in the group's consolidated return year). See paragraph
(c)(6) of this section. Therefore, the value element of the consolidated
section 382 limitation for Year 2 of the L group is $8 (rounded to the
nearest dollar).
(d) The section 382 limitation for L2's short taxable year ending
December 31, Year 2, is $2 (rounded to the nearest dollar), which is the
amount that bears the same relationship to $6, the value element of the
consolidated section 382 limitation apportioned to L2, as the number of
days during that short taxable year, 124 days, bears to 365. See
Sec. 1.382-4(c).
Example 2. Consequence of no apportionment. The facts are the same
as in Example 1, except that L does not elect to apportion any portion
of the consolidated section 382 limitation to L2. For its separate
return years ending after August 29, Year 2, L2's section 382 limitation
with respect to the $90 of the group's pre-change consolidated attribute
apportioned to L2 is zero under paragraph (b)(2)(ii) of this section.
Thus, the $90 consolidated net operating loss apportioned to L2 cannot
offset L2's taxable income in any of its separate return years ending
after August 29, Year 2. For its consolidated return years ending after
August 29, Year 2, the L group's consolidated section 382 limitation
with respect to the remaining $110 of pre-change consolidated attribute
is $10, adjusted, as appropriate, for any short taxable year, unused
section 382 limitation, or other adjustment.
Example 3. Apportionment of adjustment element. The facts are the
same as in Example 1, except that L2 ceases to be a member of the L
group on August 29, Year 3, and the L group has a $4 carryforward of an
unused consolidated section 382 limitation (under section 382(b)(2)) to
the 1993 consolidated return year.
The carryover of unused limitation increases the consolidated
section 382 limitation for the Year 3 consolidated return year from $10
to $14. L may elect to apportion all or any portion of the $10 value
element and all or any portion of the $4 adjustment element to L2.
(d) Rules pertaining to ceasing to be a member of a loss subgroup--
(1) In general. A corporation ceases to be a member of a loss subgroup--
(i) On the first day of the first taxable year for which it files a
separate return; or
(ii) The first day that it ceases to bear a relationship described
in section 1504(a)(1) to the loss subgroup parent (treating for this
purpose the loss subgroup parent as the common parent described in
section 1504(a)(1)(A)).
(2) Examples. The principles of this paragraph (d) are illustrated
by the following examples.
Example 1. Basic case. (a) P owns all the L stock, L owns all the L1
stock and L1 owns all the L2 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 2. On
December 11, Year 2, P sells all the stock of L to corporation M. Each
of L, L1, and L2 is apportioned a portion of the Year 1 consolidated net
operating loss, and thereafter each joins with M in filing consolidated
returns. Under Sec. 1.1502-92A, the L loss subgroup has an ownership
change on December 11, Year 2. The L loss subgroup has a subgroup
section 382 limitation of $100. The following is a graphic illustration
of these facts:
[[Page 583]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.019
(b) On May 22, Year 3, L1 sells 40 percent of the L2 stock to A. L2
carries over a portion of the P group's net operating loss from Year 1
to its separate return year ending December 31, Year 3. Under paragraph
(d)(1) of this section, L2 ceases to be a member of the L loss subgroup
on May 22, Year 3, which is both (1) the first day of the first taxable
year
[[Page 584]]
for which it files a separate return and (2) the day it ceases to bear a
relationship described in section 1504(a)(1) to the loss subgroup
parent, L. The net operating loss of L2 that is carried over from the P
group is treated as a pre-change loss of L2 for its separate return
years ending after May 22, Year 3. Under paragraphs (a)(2) and (b)(2) of
this section, the separate section 382 limitation with respect to this
loss is zero unless M elects to apportion all or a part of the subgroup
section 382 limitation of the L loss subgroup to L2.
Example 2. Formation of a new loss subgroup. The facts are the same
as in Example 1, except that A purchases 40 percent of the L1 stock from
L rather than purchasing L2 stock from L1. L1 and L2 file a consolidated
return for their first taxable year ending after May 22, Year 3, and
each of L1 and L2 carries over a part of the net operating loss of the P
group that arose in Year 1. Under paragraph (d)(1) of this section, L1
and L2 cease to be members of the L loss subgroup on May 22, Year 3. The
net operating losses carried over from the P group are treated as pre-
change subgroup attributes of the loss subgroup composed of L1 and L2.
The subgroup section 382 limitation with respect to those losses is zero
unless M elects to apportion all or part of the subgroup section 382
limitation of the L loss subgroup to the L1 loss subgroup. The following
is a graphic illustration of these facts:
[[Page 585]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.020
Example 3. Ceasing to bear a section 1504(a)(1) relationship to a
loss subgroup parent. (a) A owns all the stock of P, and P owns all the
stock of L1 and L2. The P group has a consolidated net operating loss
arising in Year 1 that is carried over to Year 3 and Year 4. Corporation
M acquires all the stock of P on November 11, Year 3, and P, L1, and L2
thereafter file consolidated returns with M. M's acquisition results in
an ownership change of the P loss subgroup under Sec. 1.1502-
92A(b)(1)(ii). The following is a graphic illustration of these facts:
[[Page 586]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.021
(b) P distributes the L2 stock to M on October 7, Year 4. L2 ceases
to be a member of the P loss subgroup on October 7, Year 4, the first
day that it ceases to bear the relationship described in section
1504(a)(1) to P, the P loss subgroup parent. See paragraph (d)(1)(ii) of
this section. Thus, the section 382 limitation with respect to the pre-
change
[[Page 587]]
subgroup attributes attributable to L2 is zero except to the extent M
elects to apportion all or a part of the subgroup section 382 limitation
of the P loss subgroup to L2.
Example 4. Relationship through a successor. The facts are the same
as in Example 3, except that, instead of P's distributing the stock of
L2, L2 merges into L1 on October 7, Year 4. L1 (as successor to L2 in
the merger within the meaning of Sec. 1.382-2T(f)(4)) continues to bear
a relationship described in section 1504(a)(1) to P, the loss subgroup
parent. Thus, L2 does not cease to be a member of the P loss subgroup as
a result of the merger.
(e) Filing the election to apportion--(1) Form of the election to
apportion. An election under paragraph (c) of this section must be made
by the common parent. The election must be made in the form of the
following statement: ``THIS IS AN ELECTION UNDER Sec. 1.1502-95A OF THE
INCOME TAX REGULATIONS TO APPORTION ALL OR PART OF THE [insert either
CONSOLIDATED SECTION 382 LIMITATION or SUBGROUP SECTION 382 LIMITATION,
as appropriate] TO [insert name and E.I.N. of the corporation (or the
corporations that compose a new loss subgroup) to which allocation is
made]. The declaration must also include the following information, as
appropriate--
(i) The date of the ownership change that resulted in the
consolidated section 382 limitation (or subgroup section 382
limitation);
(ii) The amount of the consolidated section 382 limitation (or
subgroup section 382 limitation) for the taxable year during which the
former member (or new loss subgroup) ceases to be a member of the
consolidated group (determined without regard to any apportionment under
this section;
(iii) The amount of the value element and adjustment element of the
consolidated section 382 limitation (or subgroup section 382 limitation)
that is apportioned to the former member (or new loss subgroup) pursuant
to paragraph (c) of this section; and
(iv) The name and E.I.N. of the common parent making the
apportionment.
(2) Signing of the election. The election statement must be signed
by both the common parent and the former member (or, in the case of a
loss subgroup, the common parent and the loss subgroup parent) by
persons authorized to sign their respective income tax returns.
(3) Filing of the election. The election statement must be filed by
the common parent of the group that is apportioning the consolidated
section 382 limitation (or the subgroup section 382 limitation) with its
income tax return for the taxable year in which the former member (or
new loss subgroup) ceases to be a member. The common parent must also
deliver a copy of the statement to the former member (or the members of
the new loss subgroup) on or before the day the group files its income
tax return for the consolidated return year that the former member (or
new loss subgroup) ceases to be a member. A copy of the statement must
be attached to the first return of the former member (or the first
return in which the members of a new loss subgroup join) that is filed
after the close of the consolidated return year of the group of which
the former member (or the members of a new loss subgroup) ceases to be a
member.
(4) Revocation of election. An election statement made under
paragraph (c) of this section is revocable only with the consent of the
Commissioner.
[T.D. 8678, 61 FR 33355, June 27, 1996, as amended by T.D. 8823, 64 FR
36101, July 2, 1999. Redesignated and amended by T.D. 8824, 64 FR 36126,
36128, July 2, 1999]
Sec. 1.1502-96A Miscellaneous rules generally applicable for testing dates before June 25, 1999.
(a) End of separate tracking of losses--(1) Application. This
paragraph (a) applies to a member (or a loss subgroup) with a net
operating loss carryover that arose (or is treated under Sec. 1.1502-
21(c) or 1.1502-21T(c) in effect prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as applicable as arising) in a SRLY
(or a net unrealized built-in gain or loss determined at the time that
the member (or loss subgroup) becomes a member of the consolidated group
if there is--
(i) An ownership change of the member (or loss subgroup in
connection with, or after, becoming a member of the group; or
[[Page 588]]
(ii) A period of 5 consecutive years following the day that the
member (or loss subgroup) becomes a member of a group during which the
member (or loss subgroup) has not had an ownership change.
(2) Effect of end of separate tracking. If this paragraph (a)
applies with respect to a member (or loss subgroup), then, starting on
the day after the earlier of the change date (but not earlier than the
day the member (or loss subgroup) becomes a member of the consolidated
group) or the last day of the 5 consecutive year period described in
paragraph (a)(1)(ii) of this section, the member's net operating loss
carryover that arose (or is treated under Sec. 1.1502-21(c) or 1.1502-
21T(c) in effect prior to June 25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable as arising) in a SRLY, is treated
as described in Sec. 1.1502-91A(c)(1)(i). Also, the member's separately
computed net unrealized built-in gain or loss is included in the
determination whether the group has a net unrealized built-in gain or
loss. The preceding sentences also apply for purposes of determining
whether there is an ownership change with respect to such attributes
following such change date (or earlier day) or 5 consecutive year
period. Thus, for example, starting the day after the change date or the
end of the 5 consecutive year period--
(i) The consolidated group which includes the new loss member or
loss subgroup is no longer required to separately track owner shifts of
the stock of the new loss member or loss subgroup parent to determine if
an ownership change occurs with respect to the attributes of the new
loss member or members included in the loss subgroup;
(ii) The group includes the member's attributes in determining
whether it is a loss group under Sec. 1.1502-91A(c);
(iii) There is an ownership change with respect to such attributes
only if the group is a loss group and has an ownership change; and
(iv) If the group has an ownership change, such attributes are pre-
change consolidated attributes subject to the loss group's consolidated
section 382 limitation.
(3) Continuing effect of end of separate tracking. As the context
may require, a current group determines which of its members are
included in a loss subgroup on any testing date by taking into account
the application of this section in the former group. See the example in
Sec. 1.1502-91A(f)(2).
(4) Special rule for testing period. For purposes of determining the
beginning of the testing period for a loss group, the member's (or loss
subgroup's) net operating loss carryovers (or net unrealized built-in
gain or loss) described in paragraph (a)(2) of this section are
considered to arise--
(i) In a case described in paragraph (a)(1)(i) of this section, in a
taxable year that begins not earlier than the later of the day following
the change date or the day that the member becomes a member of the
group; and
(ii) in a case described in paragraph (a)(1)(ii) of this section, in
a taxable year that begins 3 years before the end of the 5 consecutive
year period.
(5) Limits on effects of end of separate tracking. The rule
contained in this paragraph (a) applies solely for purposes of
Secs. 1.1502-91A through 1.1502-95A and this section (other than
paragraph (b)(2)(ii)(B) of this section (relating to the definition of
pre-change attributes of a subsidiary)) and Sec. 1.1502-98A, and not for
purposes of other provisions of the consolidated return regulations,
including, for example, Secs. 1.1502-15 and 1.1502-21 (or Sec. 1.1502-
15T in effect prior to June 25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, and 1.1502-21T in effect prior to June 25, 1999,
as contained in 26 CFR part 1 revised April 1, 1999, as applicable)
(relating to the consolidated net operating loss deduction). See also
paragraph (c) of this section for the continuing effect of an ownership
change with respect to pre-change attributes.
(b) Ownership change of subsidiary--(1) Ownership change of a
subsidiary because of options or plan or arrangement. Notwithstanding
Sec. 1.1502-92A, a subsidiary may have an ownership change for purposes
of section 382 with respect to its attributes which a group or loss
subgroup includes in making a determination under Sec. 1.1502-91A(c)(1)
(relating to the definition of loss group) or Sec. 1.1502-91A(d)
(relating to the definition of loss subgroup). The subsidiary has such
an
[[Page 589]]
ownership change if it has an ownership change under the principles of
Sec. 1.1502-95A(b) and section 382 and the regulations thereunder
(determined on a separate entity basis by treating the subsidiary as not
being a member of a consolidated group) in the event of--
(i) The deemed exercise under Sec. 1.382-4(d) of an option or
options (other than an option with respect to stock of the common
parent) held by a person (or persons acting pursuant to a plan or
arrangement) to acquire more than 20 percent of the stock of the
subsidiary; or
(ii) An increase by 1 or more 5-percent shareholders, acting
pursuant to a plan or arrangement to avoid an ownership change of a
subsidiary, in their percentage ownership interest in the subsidiary by
more than 50 percentage points during the testing period of the
subsidiary through the acquisition (or deemed acquisition pursuant to
Sec. 1.382-4(d)) of ownership interests in the subsidiary and in higher-
tier members with respect to the subsidiary.
(2) Effect of the ownership change--(i) In general. If a subsidiary
has an ownership change under paragraph (b)(1) of this section, the
amount of consolidated taxable income for any post-change year that may
be offset by the pre-change losses of the subsidiary shall not exceed
the section 382 limitation for the subsidiary. For purposes of this
limitation, the value of the subsidiary is determined solely by
reference to the value of the subsidiary's stock.
(ii) Pre-change losses. The pre-change losses of a subsidiary are--
(A) Its allocable part of any consolidated net operating loss which
is attributable to it under Sec. 1.1502-21(b) or 1.1502-21T(b) in effect
prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1,
1999, as applicable (determined on the last day of the consolidated
return year that includes the change date) that is not carried back and
absorbed in a taxable year prior to the year including the change date;
(B) Its net operating loss carryovers that arose (or are treated
under Sec. 1.1502-21(c) or 1.1502-21T(c) in effect prior to June 25,
1999, as contained in 26 CFR part 1 revised April 1, 1999, as applicable
as having arisen) in a SRLY; and
(C) Its recognized built-in loss with respect to its separately
computed net unrealized built-in loss, if any, determined on the change
date.
(3) Coordination with Secs. 1.1502-91A, 1.1502-92A, and 1.1502-94A.
If an increase in percentage ownership interest causes an ownership
change with respect to an attribute under this paragraph (b) and under
Sec. 1.1502-92A on the same day, the ownership change is considered to
occur only under Sec. 1.1502-92A and not under this paragraph (b). See
Sec. 1.1502-94A for anti-duplication rules relating to value.
(4) Example. The following example illustrates paragraph (b)(1)(ii)
of this section.
Example. Plan to avoid an ownership change of a subsidiary. (a) L
owns all the stock of L1, L1 owns all the stock of L2, L2 owns all the
stock of L3, and L3 owns all the stock of L4. The L group has a
consolidated net operating loss arising in Year 1 that is carried over
to Year 2. L has assets other than its L1 stock with a value of $900.
L1, L2, and L3 own no assets other than their L2, L3, and L4 stock. L4
has assets with a value of $100. During Year 2, A, B, C, and D, acting
pursuant to a plan to avoid an ownership change of L4, acquire the
following ownership interests in the members of the L loss group: (A) on
September 11, Year 2, A acquires 20 percent of the L1 stock from L and B
acquires 20 percent of the L2 stock from L1; and (B) on September 20,
Year 2, C acquires 20 percent of the stock of L3 from L2 and D acquires
20 percent of the stock of L4 from L3. The following is a graphic
illustration of these facts:
[[Page 590]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.022
(b) The acquisitions by A, B, C, and D pursuant to the plan have
increased their respective percentage ownership interests in L4 by
approximately 10, 13, 16, and 20 percentage points, for a total of
approximately 59 percentage points during the testing period. This more
than 50 percentage point increase in the percentage ownership interest
in L4 causes an ownership change of L4 under paragraph (b)(2) of this
section.
(c) Continuing effect of an ownership change. A loss corporation (or
loss subgroup) that is subject to a limitation under section 382 with
respect to its
[[Page 591]]
pre-change losses continues to be subject to the limitation regardless
of whether it becomes a member or ceases to be a member of a
consolidated group. See Sec. 1.382-5(d) (relating to successive
ownership changes and absorption of a section 382 limitation).
[T.D. 8678, 61 FR 33362, June 27, 1996; T.D. 8823, 64 FR 36101, July 2,
1999. Redesignated and amended at T.D. 8824, 64 FR 36126, 36128, July 2,
1999]
Sec. 1.1502-97A Special rules under section 382 for members under the jurisdiction of a court in a title 11 or similar case. [Reserved]
[T.D. 8678, 61 FR 33364, June 27, 1996. Redesignated by T.D. 8824, 64 FR
36128, July 2, 1999]
Sec. 1.1502-98A Coordination with section 383 generally applicable for testing dates (or members joining or leaving a group) before June 25, 1999.
The rules contained in Secs. 1.1502-91A through 1.1502-96A also
apply for purposes of section 383, with appropriate adjustments to
reflect that section 383 applies to credits and net capital losses.
Similarly, in the case of net capital losses, general business credits,
and excess foreign taxes that are pre-change attributes, Sec. 1.383-1
applies the principles of Secs. 1.1502-91A through 1.1502-96A. For
example, if a loss group has an ownership change under Sec. 1.1502-92A
and has a carryover of unused general business credits from a pre-change
consolidated return year to a post-change consolidated return year, the
amount of the group's regular tax liability for the post-change year
that can be offset by the carryover cannot exceed the consolidated
section 383 credit limitation for that post-change year, determined by
applying the principles of Secs. 1.383-1(c)(6) and 1.1502-93A (relating
to the computation of the consolidated section 382 limitation).
[T.D. 8678, 61 FR 33364, June 27, 1996. Redesignated and amended by T.D.
8824, 64 FR 36126, 36128, July 2, 1999]
Sec. 1.1502-99A Effective dates.
(a) Effective date--(1) In general. Except as provided in
Sec. 1.1502-99(b), Secs. 1.1502-91A through 1.1502-96A and 1.1502-98A
apply to any testing date on or after January 1, 1997, and before June
25, 1999. Sections 1.1502-94A through 1.1502-96A also apply on any date
on or after January 1, 1997, and before June 25, 1999, on which a
corporation becomes a member of a group or on which a corporation ceases
to be a member of a loss group (or a loss subgroup).
(2) Anti-duplication rules for recognized built-in gain. Section
1.1502-93(c)(2) (relating to recognized built-in gain of a loss group or
loss subgroup) applies to taxable years for which the due date for
income tax returns (without extensions) is after June 25, 1999,
(b) Testing period may include a period beginning before January 1,
1997. A testing period for purposes of Secs. 1.1502-91A through 1.1502-
96A and 1.1502-98A may include a period beginning before January 1,
1997. Thus, for example, in applying Sec. 1.1502-92A(b)(1)(i) (relating
to the determination of an ownership change of a loss group), the
determination of the lowest percentage ownership interest of any 5-
percent shareholder of the common parent during a testing period ending
on a testing date occurring on or after January 1, 1997, takes into
account the period beginning before January 1, 1997, except to the
extent that the period is more than 3 years before the testing date or
is otherwise before the beginning of the testing period. See
Sec. 1.1502-92A(b)(1).
(c) Transition rules--(1) Methods permitted--(i) In general. For the
period ending before January 1, 1997, a consolidated group is permitted
to use any method described in paragraph (c)(2) of this section which is
consistently applied to determine if an ownership change occurred with
respect to a consolidated net operating loss, a net operating loss
carryover (including net operating loss carryovers arising in SRLYs), or
a net unrealized built-in loss. If an ownership change occurred during
that period, the group is also permitted to use any method described in
paragraph (c)(2) of this section which is consistently applied to
compute the amount of the section 382 limitation that applies to limit
the use of taxable income in any post-change year ending before, on, or
after January 1, 1997. The preceding sentence does not preclude the
imposition of an additional, lesser limitation due to a subsequent
ownership change nor, except as
[[Page 592]]
provided in paragraph (c)(1)(iii) of this section, does it permit the
beginning of a new testing period for the loss group.
(ii) Adjustments to offset excess limitation. If an ownership change
occurred during the period ending before January 1, 1997, and a method
described in paragraph (c)(2) of this section was not used for a post-
change year, the members (or group) must reduce the section 382
limitation for post-change years for which an income tax return is filed
after January 1, 1997, to offset, as quickly as possible, the effects of
any section 382 limitation that members took into account in excess of
the amount that would have been allowable under Secs. 1.1502-91A through
1.1502-96A and 1.1502-98A.
(iii) Coordination with effective date. Notwithstanding that a group
may have used a method described in paragraph (c)(2)(ii) or (iii) of
this section for the period before January 1, 1997, Secs. 1.1502-91A
through 1.1502-96A and 1.1502-98A apply to any testing date occurring on
or after January 1, 1997, for purposes of determining whether there is
an ownership change with respect to any losses and, if so, the
collateral consequences. Any ownership change of a member other than the
common parent pursuant to a method described in paragraph (c)(2)(ii) or
(iii) of this section does not cause a new testing period of the loss
group to begin for purposes of applying Sec. 1.1502-92A on or after
January 1, 1997.
(2) Permitted methods. The methods described in this paragraph
(c)(2) are:
(i) A method that does not materially differ from the rules in
Secs. 1.1502-91A through 1.1502-96A and 1.1502-98A (other than those in
Sec. 1.1502-95A(c) and (b)(2)(ii) (relating to the apportionment of a
section 382 limitation) as they would apply to a corporation that ceases
to be a member of the group before January 1, 1997). As the context
requires, the method must treat references to rules in current
regulations as references to rules in regulations generally effective
for taxable years before January 1, 1997. Thus, for example, the
taxpayer must treat a reference to Sec. 1.382-4(d) (relating to options)
as a reference to Sec. 1.382-2T(h)(4) for any testing date to which
Sec. 1.382-2T(h)(4) applies. Similarly, a reference to Sec. 1.1502-21(c)
or 1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable may be a reference to
Sec. 1.1502-21A(c), as appropriate. Furthermore, the method must treat
all corporations that were affiliated on January 1, 1987, and
continuously thereafter as having met the 5 consecutive year requirement
of Sec. 1.1502-91A(d)(2)(i) on any day before January 1, 1992, on which
the determination of net unrealized built-in gain or loss of a loss
subgroup is made;
(ii) A reasonable application of the rules in section 382 and the
regulations thereunder applied to each member on a separate entity
basis, treating each member's allocable part of a consolidated net
operating loss which is attributable to it under Sec. 1.1502-21(b) or
1.1502-21T(b) in effect prior to June 25, 1999, as contained in 26 CFR
part 1 revised April 1, 1999, as applicable as a net operating loss of
that member and applying rules similar to Sec. 1.382-8 to avoid
duplication of value in computing the section 382 limitation for the
member (see Sec. 1.382-8(h) (relating to the effective date and
transition rules regarding controlled groups)); or
(iii) A method approved by the Commissioner upon application by the
common parent.
(d) Amended returns. A group may file an amended return in
connection with an ownership change occurring before January 1, 1997, to
modify the amount of a section 382 limitation with respect to a
consolidated net operating loss, a net operating loss carryover
(including net operating loss carryovers arising in SRLYs), or a
recognized built-in loss (or gain) only if it files amended returns:
(1) For the earliest taxable year ending after December 31, 1986, in
which it had an ownership change, if any, under Sec. 1.1502-92A;
(2) For all subsequent taxable years for which returns have already
been filed as of the date of the amended return;
(3) The modification with respect to all members for all taxable
years ending in 1987 and thereafter complies with Secs. 1.1502-91A
through 1.1502-96A and 1.1502-98A; and
[[Page 593]]
(4) The amended return(s) permitted by the applicable statute of
limitations is/are filed before March 26, 1997.
(e) Section 383. This section also applies for the purposes of
section 383, with appropriate adjustments to reflect that section 383
applies to credits and net capital losses.
[T.D. 8678, 61 FR 33364, June 27, 1996, as amended by T.D. 8823, July 2,
1999. Redesignated and amended by T.D. 8824, 64 FR 36126-36128, July 2,
1999]
DUAL CONSOLIDATED LOSSES INCURRED IN TAXABLE YEARS BEGINNING BEFORE OCTOBER 1, 1992--Table of Contents
Sec. 1.1503-2A Dual consolidated loss.
(a) In general. This section applies for purposes of determining
whether and to what extent the net operating loss of a dual resident
corporation incurred in tax years beginning after December 31, 1986,
shall be allowed to reduce the taxable income of any other member of the
affiliated group. Except as provided in paragraph (c) of this section,
any dual consolidated loss of a domestic corporation incurred in taxable
years beginning after December 31, 1986, cannot reduce the taxable
income of any affiliate of such domestic corporation for that or any
other taxable year, regardless of whether those losses offset income of
another corporation under the income tax laws of the foreign country and
regardless of whether any of the income of any corporation that the loss
may reduce in the foreign country is, has been, or will be subject to
tax in the United States. This rule shall also apply to preclude the use
of a dual consolidated loss to offset any income of an affiliate
(whether or not an election to file a consolidated return has been made)
by means of a transaction subject to section 381 of the Code. For
purposes of the preceding sentence, an ``affiliate'' means any member of
the affiliated group as determined under section 1504(a) without regard
to the exceptions contained in section 1504(b) (other than section
1504(b)(3)) relating to includible corporations. Further, this rule
shall also apply to preclude the use of a dual consolidated loss of a
separate unit by a domestic corporation upon or as a result of the
termination, liquidation, or sale of the separate unit. The following
example illustrates the application of this paragraph (a).
Example. P, a domestic corporation, owns all of the outstanding
stock of DRC, a domestic corporation. DRC is managed and controlled in
Country W, a country which determines the tax residence of corporations
according to place of management and control. Therefore, the income of
DRC is subject to tax in both the United States and in Country W. There
are currently no other corporations in Country W which could use the
losses of DRC to offset income under the income tax laws of Country W. P
no longer wishes to operate DRC as a separate corporation. Therefore DRC
will be liquidated into P under section 332 of the Code. Normally, P,
under section 381, would succeed to and take into account DRC's net
operating loss carryovers. However, this paragraph (a) prohibits the net
operating loss of DRC from reducing P's income (including income of P
generated by assets previously held by DRC) for U.S. tax purposes.
Therefore, DRC's net operating loss carryovers will not be available to
offset P's income unless one of the exceptions described in paragraph
(c) of this section applies.
(b) Definitions. The following definitions apply for purposes of
this section.
(1) Domestic corporation. For purposes of this section, the term
``domestic corporation'' has the meaning assigned to it by sections 7701
(a)(3) and (a)(4) and shall also include any corporation treated as a
domestic corporation by the Internal Revenue Code, including, but not
limited to, section 269B and section 1504(d). Subject to the rules of
paragraph (d) of this section, any separate unit (as defined in
paragraph (b)(4) of this section) of a domestic corporation will be
treated as a separate domestic corporation (and as a dual resident
corporation) for purposes of this section. The following example
illustrates the application of this paragraph (b)(1).
Example. A is a domestic corporation with a branch operation in
Country X. A is owned by FP, a Country X corporation. Country X allows
the Country X branch income and losses of A to be used to offset FP's
losses or income. Under paragraph (d) of this section, the branch
operations of A in Country X will be treated as a separate domestic
corporation and as a dual resident corporation for purposes of this
section. See paragraph (d) of this section for the treatment of any dual
[[Page 594]]
consolidated loss of the branch operations of A.
(2) Dual consolidated loss. The term ``dual consolidated loss''
means the net operating loss (as defined in section 172(c) and the
regulations thereunder) of a domestic corporation incurred in a year in
which the corporation is a dual resident corporation. The fact that a
particular item taken into account in computing such net operating loss
deduction is not taken into account in computing income subject to
income tax in a foreign country shall not cause such item to be excluded
from the calculation of the dual consolidated loss. A dual consolidated
loss shall arise even though no other person, corporation, or entity is
permitted, under the income tax laws of the foreign country, to use by
any means the losses, expenses or deductions of the dual resident
corporation to offset income. A dual consolidated loss shall not
include--
(i) The net operating loss incurred during that portion of the
taxable year prior to the date on which the domestic corporation becomes
a dual resident corporation or subsequent to the date on which the
domestic corporation ceases to be a dual resident corporation. For
purposes of determining the amount of the net operating loss incurred in
that portion of the taxable year prior to the date on which the domestic
corporation becomes a dual resident corporation or subsequent to the
date on which the domestic corporation ceases to be a dual resident
corporation, in no event shall more than a pro rata portion of the net
operating loss commensurate with the portion of the taxable year during
which the domestic corporation was not a dual resident corporation be
allocated to that portion of the taxable year in which the domestic
corporation was not a dual resident corporation; or
(ii) Losses incurred in taxable years beginning on or before
December 31, 1986.
(3) Dual resident corporation. For purposes of this section, a
domestic corporation shall be a dual resident corporation if the
worldwide income of such corporation is subject to the income tax of a
foreign country, or such corporation is subject to the income tax of a
foreign country on a residence basis (and not on a source basis).
(4) Separate unit. Solely for purposes of this section, the term
``separate unit'' shall mean any of the following:
(i) A foreign branch as defined in Sec. 1.367 (a)-6T(g);
(ii) A partnership interest; or
(iii) A trust interest.
(5) Subject to tax. For purposes of determining whether a domestic
corporation is subject to the income tax of a foreign country on its
income, the fact that the corporation has no actual tax liability to the
foreign country for a particular taxable year shall not be taken into
consideration.
(c) Exceptions--(1) No ability to use dual consolidated loss under
foreign law--(i) In general. Paragraph (a) of this section shall not
apply to a dual consolidated loss if--
(A) At no time after December 31, 1986, has there been any other
person, corporation, or entity which, under the income tax laws of the
foreign country, is permitted to use by any means the losses, expenses,
or deductions of the dual resident corporation to offset income; and
(B) Under the income tax laws of the foreign country, the losses,
expenses, or deductions of the dual resident corporation incurred in
taxable years beginning after December 31, 1986, cannot be carried over
or back to be used, by any means, to offset the income of any other
person, corporation, or entity in other years.
(ii) Limitations. For purposes of paragraph (c)(1)(i) of this
section, none of the following circumstances shall constitute a
satisfaction of paragraph (c)(1)(i)(A) of this section--
(A) The failure to make use of an election (including, but not
limited to, the ability to surrender losses, expenses or deductions)
that would enable another person, corporation, or entity to use the
losses, expenses, or deductions of the dual resident corporation to
offset income under the income tax laws of the foreign country;
(B) The fact that the income tax laws of the foreign country deny
the use of losses, expenses, or deductions of its
[[Page 595]]
corporate residents that are also residents for tax purposes of another
country to offset income of another person, corporation, or entity;
(C) The fact that the other person, corporation, or entity does not
have sufficient income to benefit from an offset permitted under the
income tax laws of the foreign country for a particular taxable year; or
(D) The fact that the dual resident corporation has no losses,
expenses, or deductions during a particular taxable year.
(iii) Examples. The following examples illustrate this paragraph
(c)(1).
Example (1). DRC, a domestic corporation, is also subject to tax in
Country Y on its worldwide income. DRC has been filing a consolidated
return for U.S. income tax purposes with DP, its domestic parent. DRC
has also been able to use its losses to offset income of its affiliates
in Country Y by using Country Y's form of consolidation. In order to
prevent companies like DRC from taking losses against income of
affiliates under Country Y law and then again using the losses of DRC to
offset income of affiliates for U.S. tax purposes. Country Y law
prevents a company which is also subject to tax on its worldwide income
in another country, or is subject to tax on a residence basis in another
country, from using the Country Y form of consolidation. DRC is a dual
resident corporation as defined in paragraph (b)(3) of this section.
DRC's losses are dual consolidated losses as defined in paragraph (b)(2)
of this section which under paragraph (a) of this section may not be
used to offset income of any other U.S. affiliate of DRC. The Country Y
statute does not cause the exception provided by this paragraph (c)(1)
to apply.
Example (2). P, a domestic corporation, owns DRC, a domestic
corporation which is also subject to the income tax laws of Country Z on
a residence basis, and FS, a Country Z corporation. Under Country Z
laws, income or losses of DRC may not be consolidated with income or
losses of P or FS. There is, however, a provision under Country Z's law
by which DRC's unused losses could be carried forward, acquired, and
used by FS if DRC is merged into FS. DRC's dual consolidated loss does
not qualify for the exception from application of paragraph (a) provided
by this paragraph (c)(1) because of the loss carryforward provisions
under Country Z's income tax laws. However, DRC may qualify for an
exemption from paragraph (a) of this section under the provisions of
paragraph (c)(3) of this section.
Example (3). DRC is a dual resident corporation subject to tax on a
residence basis in foreign country Y. Under the income tax laws of Y,
DRC could elect to use its losses to offset the income of foreign entity
FE on a Country Y consolidated income tax return for the taxable year
ending December 31, 1987. Regardless of whether such election is made,
DRC fails to satisfy the requirement of paragraph (c)(1)(i)(A) of this
section.
Example (4). The same facts apply as in Example (3), except that
Country Y changes its income tax law, effective as of January 1, 1987,
to prevent the consolidation of losses by dual resident corporations.
Under paragraph (c)(1)(ii)(B) of this section, the fact that this
Country Y legislation prevents DRC from using its losses to offset the
income of FE is disregarded and DRC fails to satisfy the requirement of
paragraph (c)(1)(i)(A) of this section.
Example (5). The same facts apply as in Example (4), except that FE
has no taxable income in taxable years 1987 through 1989. Moreover, DRC
is profitable throughout this period and consequently has no losses
which it could share with FE. Under paragraphs (c)(1)(ii) (C) and (D) of
this section, the fact that FE would not receive a tax benefit from
consolidation with DRC on a Country Y return is disregarded and DRC
fails to satisfy the requirement of paragraph (c)(1)(i)(A) of this
section. Because DRC does not have a net operating loss during 1987
through 1989, section 1503(d) does not affect the consolidation of DRC
on a U.S. return for these years. However, DRC's failure to satisfy
paragraph (c)(1)(i)(A) of this section at all times after December 31,
1986 will make it ineligible for the exception described in paragraph
(c)(1) of this section with respect to any future taxable year in which
it incurs a net operating loss.
Example (6). The same facts apply as in Example (5). In 1990, FE is
transferred and is no longer eligible for consolidation on a Country Y
return. There are no other entities with which DRC could consolidate
under the income tax laws of Y. Nevertheless, since FE and DRC could
have consolidated on a Country Y return during the period after December
31, 1986 and before the transfer of FE, DRC fails to satisfy the
requirement of paragraph (c)(1)(i)(A) of this section in 1990 and in all
future taxable years.
(2) Elective agreement in place between United States and the
foreign country. Paragraph (a) of this section shall not apply to a dual
consolidated loss to the extent such loss is subject to an election by
the dual resident corporation to deduct the loss in the United States
pursuant to an agreement entered into between the United States and the
foreign country which puts into place an elective procedure through
which losses would offset income in only one country.
[[Page 596]]
(3) Agreement to amend returns upon later use of losses, expenses,
or deductions of a dual resident corporation--(i) In general.
Notwithstanding that, under the income tax laws of the foreign country,
the losses, expenses, or deductions of the dual resident corporation can
be carried over or back to offset, by some means, the income of any
other person, corporation, or entity in other taxable years, paragraph
(a) of this section shall not apply to a dual consolidated loss of that
dual resident corporation if the requirements described in this
paragraph (c)(3)(i) are satisfied.
(A) At no time after December 31, 1986, has there been any other
person, corporation, or entity which, under the income tax laws of the
foreign country, is permitted to use by any means the losses, expenses,
or deductions of the dual resident corporation to offset income. For
purposes of the preceding sentence, none of the circumstances described
in paragraphs (c)(1)(ii) (A) through (D) of this section shall
constitute a satisfaction of this paragraph (c)(3)(i)(A).
(B) The affiliated group or, if there is no affiliated group filing
a consolidated return, the dual resident corporation which incurs the
loss, files with its U.S. tax return for the taxable year in which the
dual consolidated loss arises a binding agreement described in
paragraphs (c)(3) (ii) and (iii) of this section. The agreement must be
filed under this paragraph (c)(3) even if the only effect of the dual
consolidated loss is to increase a net operating loss for U.S. tax
purposes.
(ii) Description of agreement. Except as otherwise provided in
paragraph (c)(3)(viii) of this section, the agreement described in this
paragraph (c)(3)(ii) must be attached to, and filed by the due date
(including extensions) of, the tax return of the affiliated group or
dual resident corporation for the taxable year in which the dual
consolidated loss arises. The agreement must be signed under penalties
of perjury by the person who signs the tax return of the group or dual
resident corporation. The agreement must include the following items, in
paragraphs labeled to correspond with the subdivisions set forth below:
(A) The name, address, identifying number, and place and date of
incorporation of the dual resident corporation and the country or
countries which tax the dual resident corporation on a residence basis
or which tax the worldwide income of the dual resident corporation;
(B) A statement that the document submitted constitutes the
agreement of the affiliated group or dual resident corporation in
accordance with the requirements of Sec. 1.1503-2T(c)(3);
(C) A statement of the amount of the dual consolidated loss to be
covered by the agreement and the year in which it arose;
(D) The agreement of the group or dual resident corporation to amend
returns, as described in paragraph (c)(3)(iii) of this section;
(E) A waiver of the period of limitations, as described in paragraph
(c)(3)(iv) of this section; and
(F) An agreement to file with the tax returns of the group or dual
resident corporation for each of the fifteen years following the year
the dual consolidated loss arose a waiver of the period of limitation,
as described in paragrapah (c)(3)(iv) of this section, and a
certification as described in paragraph (c)(3)(v) of this section.
(iii) Terms of agreement. The affiliated group or dual resident
corporation must agree that if there is a ``triggering event'' described
in this paragraph (c)(3)(iii), then, the affiliated group filing a
consolidated return, or if there is no affiliated group filing a
consolidated return, the dual resident corporation, shall, within 90
days after the date of occurrence of the triggering event, file an
amended U.S. income tax return for the taxable year in which the dual
consolidated loss arose reporting the dual consolidated loss on the
amended return as a loss to which paragraph (a) of this section applies.
An amended U.S. income tax return must also be filed for any other
taxable year in which the tax liability increases as a result of such
applications of paragraph (a) of this section. In addition, upon
examination, the group or dual resident corporation must provide to the
District Director a schedule of the amended carryforward and carryback
losses and credits for each of
[[Page 597]]
the group's or dual resident corporation's taxable years for which no
amended return is required to be filed pursuant to this paragraph
(c)(3)(iii). For purposes of section 6601, the last date prescribed for
payment of the additional amount of tax shown on an amended return filed
pursuant to this paragraph (c)(3)(iii) shall be the same date as the
date prescribed for the payment of tax for the taxable year with respect
to which the amended return is filed. Any of the following events shall
constitute a ``triggering event'' for purposes of this section--
(A) There is a failure for any taxable year to file the annual
waiver or certification described in paragraphs (c)(3)(iv) and (v) of
this section.
(B) Prior to the close of the fifteenth taxable year following the
taxable year in which the dual consolidated loss arose, any of the
following events--
(1) There is a failure to satisfy both the requirement of paragraph
(c)(3)(i)(A) of this section and the requirements of paragraph (c)(4) of
this section;
(2) Where the agreement is made by an affiliated group filing a
consolidated return, the dual resident corporation (or its successor-in-
interest) ceases to be a member of the affiliated group;
(3) Where the agreement is made by a dual resident corporation that
is not a member of an affiliated group filing a consolidated return, the
dual resident corporation is no longer in existence; or
(4) Where the dual resident corporation is a separate unit of a
domestic corporation, the domestic corporation sells or transfers the
dual resident corporation.
(iv) Waiver of period of limitation. The affiliated group or the
dual resident corporation (or the successor-in-interest of such group or
dual resident corporation) must file, with the agreement to amend
returns and with the tax return for each of the fifteen taxable years
following the taxable year in which the dual consolidated loss arose, a
waiver of the limitation on assessment of any tax resulting from the
amendment of any return as described in paragraph (c)(3)(iii) of this
section. The waiver shall extend the period for assessment of such tax
to a date not earlier than three years after the return is filed for the
fifteenth taxable year following the taxable year in which the dual
consolidated loss arose. The waiver shall also contain such other terms
with respect to assessment as may be considered by the Commissioner to
be necessary to insure the assessment and collection of the correct tax
liability for each year for which the waiver is required. The waiver
must be signed by a person authorized to sign the agreement described in
paragraph (c)(3)(ii) of this section. A failure, at any time, to comply
with the requirements of this paragraph (c)(3) or with the terms of any
agreement filed pursuant to this paragraph (c)(3) shall extend the
period of assessment of such tax until three years after the date on
which the Internal Revenue Service receives actual notice of the use of
or of the ability to use the losses, expenses, or deductions of the dual
resident corporation to offset the income of another person,
corporation, or entity under the income tax laws of the foreign country.
(v) Annual certification. The affiliated group or the dual resident
corporation (or the successor-in-interest of such group or dual resident
corporation) must file with its income tax return for each of the
fifteen taxable years following the taxable year in which the dual
consolidated loss arose a certification that the losses, expenses, or
deductions of the dual resident corporation were not used or permitted
to be used to offset the income of another person, corporation, or
entity under the income tax laws of a foreign country. The annual
certification pursuant to this paragraph (c)(3)(v) must be signed under
penalties of perjury by a person authorized to sign the agreement
described in paragraph (c)(3)(ii) of this section. The certification
must identify the dual consolidated loss with respect to which it is
given by setting forth the taxpayer's year in which the loss arose and
the amount of such loss and must warrant that arrangements have been
made to insure that the group or dual resident corporation will be
informed of any subsequent use of or ability to use the losses,
expenses, or
[[Page 598]]
deductions of the dual resident corporation to offset the income of
another person, corporation, or entity under the income tax laws of the
foreign country. If dual consolidated losses of more than one taxable
year are subject to the rules of this paragraph (c)(3), the
certifications for those years may be combined in a single document, but
each dual consolidated loss must be separately identified.
(vi) Special rules for a succeeding group or a successor-in-
interest--(A) Ceasing to be a member of the affiliated group. For
purposes of this paragraph (c)(3), and except as otherwise provided in
this paragraph (c)(3)(vi), a dual resident corporation shall be deemed
to have ceased to be a member of the affiliated group that filed the
agreement described in paragraph (c)(3)(ii) of this section if it is no
longer a member of that group, as defined in Sec. 1.1502-1(b), or if the
group ceases to exist because the common parent is no longer in
existence or is no longer a common parent or the group no longer files
on the basis of a consolidated return. However, the obligation to file
an amended return pursuant to the agreement described in paragraph
(c)(3)(ii) of this section shall not apply and the dual resident
corporation shall not be deemed to have ceased to be a member of the
group for purposes of this paragraph (c)(3) where the dual resident
corporation ceases to be a member of the group solely by reason of an
acquisition of its assets by a member of the group in a transaction to
which section 381(a) applies provided the successor-in-interest of the
dual resident corporation continues to be a member of the group.
(B) Special rules for a succeeding group. The obligation to file an
amended return pursuant to the agreement described in paragraph
(c)(3)(ii) of this section shall not apply where the dual resident
corporation becomes a member of a succeeding group as a result of an
acquisition described in Sec. 1.1502-13(f)(2)(i) (a) or (b) (relating
generally to the acquisition of assets of, by, or from a member of the
affiliated group in a tax-free reorganization) and the succeeding group
attaches to, and files with, its timely filed (including extensions) tax
return for the taxable year in which the acquisition takes place a
binding agreement--
(1) Which sets forth the same terms as are described in paragraph
(c)(3)(ii) of this section,
(2) In which the group agrees to be bound by the terms of the
agreement previously filed by the terminating group, and
(3) In which the group agrees to all the terms set forth in
paragraph (c)(3)(iii) of this section.
The agreement must be signed under penalties of perjury by the person
who signs the tax return of the succeeding group.
(C) Special rules for a successor-in-interest. In the case of a dual
resident corporation that was not a member of an affiliated group filing
a consolidated return in the taxable year in which the dual consolidated
loss arose and that filed an agreement described in paragraph (c)(3)(ii)
of this section, the assets of which are acquired in a transaction
described in section 381(a), such corporation shall not be required to
file an amended return pursuant to paragraph (c)(3)(iii)(B)(3) of this
section provided its successor-in-interest attaches a binding agreement
to its timely filed (including extensions) tax return for the taxable
year in which the acquisition takes place. The agreement must be signed
under penalties of perjury by the person who signs the tax return of the
successor-in-interest. The agreement must:
(1) Set forth the same terms as are described in paragraph
(c)(3)(ii) of this section,
(2) State the agreement of the successor-in-interest to be bound by
the terms of the agreement previously filed by the dual resident
corporation, and
(3) State the agreement of the successor-in-interest to all the
terms set forth in paragraph (c)(3)(iii) of this section.
(vii) Definitions. For purposes of this section--
(A) The terms succeeding group and terminating group shall have the
same meaning as in Sec. 1.1502.13(f)(2)(i); and
(B) The term successor-in-interest shall mean an acquiring
corporation that succeeds to the tax attributes of
[[Page 599]]
an acquired corporation under the provisions of section 381 by reason of
a transaction described in section 381(a).
(viii) Transition rules. An affiliated group or a dual resident
corporation (or a succeeding group or a successor-in-interest of a dual
resident corporation) that meets the eligibility requirements described
in paragraph (c)(3)(ix) of this section will be permitted to apply the
transition rules in this paragraph (c)(3)(viii) for taxable years ending
before December 31, 1989.
(A) The agreement in satisfaction of paragraph (c)(3) (ii) or (vi)
of this section may be attached to the timely filed (including
extensions) tax return of the affiliated group or of the dual resident
corporation (or the succeeding group or the successor-in-interest of
such dual resident corporation) for the first taxable year which ends on
or after December 31, 1989. The agreement required for each of the
taxable years ending before December 31, 1989 and for the first taxable
year ending on or after December 31, 1989 may be combined on a single
document.
(B) The requirement of paragraphs (c)(3)(iv) and (c)(3)(v) of this
section regarding the filing of an annual waiver of the period of
limitation and certification shall be satisfied for the taxable years
ending before December 31, 1989, and no failure to file shall be deemed
to have occurred with respect to such taxable years for purposes of
paragraph (c)(3)(iii)(A) of this section if the waivers and
certifications required under paragraphs (c)(3)(iv) and (c)(3)(v) of
this section are filed with the tax return for the first taxable year
ending on or after December 31, 1989.
(ix) Eligibility for transition rules. The rules in paragraph
(c)(3)(viii) of this section shall apply only if, as of the date of the
agreement in satisfaction of paragraph (c)(3) (ii) or (vi) of this
section and filed pursuant to paragraph (c)(3)(viii) of this section,
none of the triggering events described in paragraph (c)(3)(iii)(B) of
this section has occurred.
(4) No ability to use dual consolidated loss under foreign law after
restructuring--(i) In general. Notwithstanding that a dual resident
corporation fails to satisfy either paragraph (c)(1)(i)(A) or
(c)(3)(i)(A) of this section, paragraph (a) of this section shall not
apply to any dual consolidated loss (or portion of a dual consolidated
loss) described in paragraph (c)(4)(iii) of this section provided the
requirements of either paragraph (c)(1)(i)(B) or (c)(3)(i)(B) of this
section are satisfied and a restructuring that meets the requirements of
paragraph (c)(4)(ii) of this section has been completed.
(ii) Qualified restructuring. A restructuring meets the requirements
of this paragraph (c)(4)(ii) if it is completed on or before December
31, 1989, in the foreign country so that at all times from the date of
such restructuring to the close of the taxable year in which the dual
consolidated loss arises, there is no other person, corporation, or
entity which, under the income tax laws of the foreign country, is
permitted to use by any means the losses, expenses, or deductions of the
dual resident corporation to offset income. For purposes of the
preceding sentence, none of the circumstances described in paragraphs
(c)(1)(ii) (A) through (D) of this section shall constitute a
satisfaction of this paragraph (c)(4)(ii).
(iii) Qualified losses. Losses to which paragraph (c)(4)(i) of this
section applies are the dual consolidated losses of a dual resident
corporation that arise in a taxable year beginning after the
restructuring described in paragraph (c)(4)(ii) of this section (or the
portion of any dual consolidated loss that arises during that portion of
the taxable year following the restructuring described in paragraph
(c)(4)(ii) of this section). For purposes of determining the amount of
the dual consolidated loss which arises in that portion of the taxable
year following the restructuring, in no event shall more than a pro rata
portion of the dual consolidated loss commensurate with the portion of
the taxable year beginning with the date of completion of the
restructuring and ending on the last day of that same taxable year be
allocated to that portion of the taxable year following the
restructuring.
(d) Special rule for separate units--(1) Separate units
characterized as corporations under foreign law. If a separate unit of a
domestic corporation consists of an interest in an entity (including a
[[Page 600]]
foreign branch) that for U.S. tax purposes is not taxable as an
association, but the entity is subject to income tax in a foreign
jurisdiction as a corporation either on its worldwide income or on a
residence basis (and not on a source basis), then for purposes of this
section such separate unit of the domestic corporation will be treated
as if it were a dual resident corporation and a wholly-owned domestic
subsidiary of the domestic corporation. For purposes of paragraphs (c)
(3) and (4) of this section, any agreement, waiver and certification
required to be filed with respect to such dual resident corporation
shall be filed with the federal income tax return of the domestic
corporation owning the separate unit or by the affiliated group with
which the domestic corporation files a consolidated return.
(2) Other separate units. Except as provided in paragraph (d)(3) of
this section, if a separate unit of a domestic corporation (other than a
separate unit described in paragraph (d)(1) of this section) is
permitted under the income tax laws of a foreign country--
(i) To use its losses, expenses, or deductions to offset the income
of any other person, corporation, or entity in the taxable year in which
the dual consolidated loss arises; or
(ii) To carry over or back its losses, expenses, or deductions so
that they may offset the income of any other person, corporation, or
entity in other years, then such separate unit will be treated for
purposes of this section as if it were a dual resident corporation and a
wholly-owned domestic subsidiary of the domestic corporation. For
purposes of the preceding sentence, none of the circumstances described
in paragraphs (c)(1)(ii) (A) through (D) of this section shall preclude
a separate unit from being treated as a dual resident corporation and a
separate domestic corporation under this paragraph (d)(2). This
paragraph (d)(2) applies regardless of whether the domestic corporation
is a member of an affiliated group, and, if it is, regardless of whether
the group files a consolidated return.
(3) Certification. Paragraph (d)(2) of this section shall not apply
with respect to any taxable year for which the domestic corporation
owning the separate unit (or the affiliated group of which the domestic
corporation is a member) files a certification as described in this
paragraph (d)(3). The certification must be attached to, and filed by
the due date (including extensions) of, the federal income tax return of
the domestic corporation owning the separate unit (or the affiliated
group with which the domestic corporation files a consolidated return)
for the taxable year to which it applies. With respect to returns filed
without an attached certification for taxable years ending before
December 31, 1989, the certification in satisfaction of this paragraph
(d)(3) may be attached to the return for the first taxable year ending
on or after December 31, 1989. The certification must be signed under
penalties of perjury by the person who signs the return. The
certification must include the following items, in paragraphs labeled to
correspond with the subdivisions set forth below:
(i) A statement that the document submitted constitutes the
certification required under the provisions of Sec. 1.1503-2T(d)(3);
(ii) Identification of the separate unit, including the name under
which it conducts business and its principal activity;
(iii) Identification of the total losses, expenses, and deductions
incurred by the separate unit and included on the tax return for the
taxable year;
(iv) Certification that no portion of the separate unit's losses,
expenses or deductions identified above has been or will be used to
offset the income of any other person, corporation, or entity under the
income tax laws of the foreign country; and
(v) An agreement to comply with the recapture and interest charge
requirements of paragraph (d)(4) of this section.
If the domestic corporation has more than one separate unit, the
certification described above may be made on a single document, but the
total losses, expenses, and deductions must be separately identified for
each separate unit to which the certification applies.
(4) Recapture upon subsequent use. If in any taxable year any
portion of the losses, expenses, or deductions of a separate unit which
were the subject of a
[[Page 601]]
certification filed under paragraph (d)(3) of this section are used by
any means to offset the income of any other person, corporation, or
entity under the income tax laws of a foreign country, then the total
amount of the dual consolidated loss shall be recaptured and reported as
income on the tax return of the domestic corporation (or the affiliated
group with which the domestic corporation files a consolidated return)
for the taxable year that includes the last day of the taxable year for
foreign tax purposes during which such use occurred. In addition, the
domestic corporation owning the separate unit (or the affiliated group
with which the domestic files a consolidated return) shall pay an
interest charge on the amount of additional tax owed as a result of the
recapture described in the preceding sentence. Such interest shall be
determined under the rules of section 6601(a) as if the additional
amount of tax had accrued and been due and owing for the taxable year in
which the losses, expenses, or deductions giving rise to the recapture
gave rise to a tax benefit for U.S. income tax purposes. For purposes of
this paragraph (d)(4), a tax benefit will be considered to have arisen
in a taxable year in which a loss that would have been considered a dual
consolidated loss if paragraph (d)(3) of this section had not applied
has reduced the U.S. income tax liability of the domestic corporation or
of the affiliated group with which it files a consolidated return.
(5) Treatment of separate units as separate entities--(i) In
general. A separate unit of a domestic corporation will be treated as a
separate entity for purposes of determining under this section whether
losses of one entity are permitted under the income tax laws of the
foreign country to offset the income of another entity.
(ii) Exception for separate units in same country. If two or more
separate units (not described in paragraph (d)(1) of this section)
located in the same foreign country are owned by a single domestic
corporation and the income and losses of such units are consolidated on
an income tax return in that foreign country, then the separate units
will be treated as one separate unit for purposes of paragraph (d)(2) of
this section.
(6) Examples. The following examples illustrate this paragraph (d).
Example (1). X, a member of a U.S. affiliated group, has a foreign
branch (as defined in Sec. 1.367(a)-6T(g)) in Country Y. Under the
Country Y income tax laws, the branch will be taxed as a permanent
establishment and its income and losses may be used (on an elective
basis) in the Country Y form of consolidation to offset the income of Z,
an affiliate of X, under Country Y law. The branch of X incurs a net
operating loss during the taxable year ending December 31, 1987. The
foreign branch of X will be treated as a separate domestic corporation
and a dual resident corporation under paragraph (d)(2) of this section,
and its net operating loss will constitute a dual consolidated loss.
Consequently, under paragraph (a) of this section, the branch's net
operating loss may not be used to offset the income of any other U.S.
affiliate or any income of X other than income derived from the branch
operations. However, the branch will not be treated as a dual resident
corporation if X (or the affiliated group of which X is a member) files
a certification for the taxable year as described in paragraph (d)(3) of
this section that its net operating loss was not in fact used by Z (or
any other entity) to offset income under the Country Y income tax laws,
and that such loss will be recaptured if it is so used in the future.
Example (2). X is classified as a partnership for U.S. tax purposes
under Code section 7701 and applicable regulations. A, B and C are the
sole partners of X. A and B are domestic corporations and C is a
resident of foreign country Y. Under Country Y's law, X is classified as
a corporation and its income and losses may be used in the Country Y
form of consolidation to offset the income of the companies that are
affiliates of X. X generates net operating losses. The partnership
interests held by A and B are each treated as separate domestic
corporations and dual resident corporations under paragraph (d)(1) of
this section. A's and B's pro rata share of the losses of X are dual
consolidated losses as defined in paragraph (b)(2) of this section.
Under paragraph (a) of this section, the losses of X may not be used to
offset the income of any other U.S. affiliate. A's pro rata share of
losses of X may be used by A only to offset A's pro rata share of income
of X. However, paragraph (a) of this section shall not apply to A's pro
rata share of losses of X if A meets one of the exceptions described in
paragraph (c) of this section. The same principles apply to limit the
use of losses allocated to B.
Example (3). Domestic corporation W owns two unincorporated business
operations in
[[Page 602]]
Country Y. The two businesses, A and B, constitute separate foreign
branches (as defined in Sec. 1.367(a)-6T(g)). Under the tax laws of
Country Y, A is treated as a separate corporation and taxed on a
residence basis. Thus, A is a separate unit described in paragraph
(d)(1) of this section. B is not a separate unit described in paragraph
(d)(1) of this section. W is a calendar year taxpayer for both United
States and Country Y purposes. During the calendar year ending December
31, 1987, A operated at a loss and B was profitable. Country Y allows
both of W's branches to report their combined operations on a single
income tax return. Thus, the losses incurred by A may be used on the
1987 Country Y return to offset the income of B. A will be treated as a
dual resident corporation under paragraph (d)(1) of this section.
Because A is a separate unit described in paragraph (d)(1) of this
section, paragraph (d)(5)(i) of this section treats A and B as separate
entities for purposes of determining whether the losses, expenses, or
deductions of A may be used to offset the income of another person,
corporation, or entity and the exception in paragraph (d)(5)(ii) of this
section does not apply. Since the loss incurred by A may be used to
offset B's income under foreign tax laws, W will not qualify for the
exceptions described in paragraph (c) of this section. Accordingly, W
will report the income from B on its 1987 U.S. tax return, but will not
be allowed to use the losses from A to offset that income or the income
from any source other than from the operations of A.
(e) Special rule for use of dual consolidated loss to offset tainted
income--(1) In general. The dual consolidated loss of any dual resident
corporation that ceases to be a dual resident corporation shall not be
used to offset income of such corporation to the extent that such income
is tainted income as defined in paragraph (e)(2) of this section.
(2) Tainted income defined. Tainted income is any income derived
from tainted assets (as defined in paragraph (e)(3) of this section),
during the period beginning on the date of the transfer or acquisition
of tainted assets and ending at the close of the fifteenth taxable year
following the taxable year in which the dual resident corporation ceased
to be a dual resident corporation.
(3) Tainted assets defined. Tainted assets are any assets
transferred to or acquired by a dual resident corporation in a non-
recognition transaction (as defined in section 7701(a)(45)) at any time
during the three taxable years immediately preceding the taxable year in
which such dual resident corporation ceased to be a dual resident
corporation or at any time during the 15 taxable years immediately
following the taxable year in which a dual resident corporation ceased
to be a dual resident corporation. Tainted assets shall not include
assets that were transferred to or acquired by such dual resident
corporation on or before December 31, 1986.
(4) Exception. For assets transferred to or acquired by a dual
resident corporation prior to the time it ceased to be a dual resident
corporation, if it can be shown that, for the year in which assets were
transferred to or acquired by such corporation, the corporation did not
incur a dual consolidated loss (or carry forward a dual consolidated
loss to such year) and that there was a valid business reason for the
transfer or acquisition of such assets, the income derived from such
assets shall not be subject to the limitation described in paragraph
(e)(1) of this section.
(f) Special rules for accounting for dual consolidated losses--(1)
Determination of amount of dual consolidated loss--(i) Dual resident
corporation that is a member of an affiliated group. For purposes of
determining whether a dual resident corporation that is a member of an
affiliated group filing a consolidated return has a dual consolidated
loss for the taxable year, the dual resident corporation shall compute
its taxable income (or loss) in accordance with the provisions of
Sec. 1.1502-12 (relating to computation of separate taxable income of a
member of an affiliated group filing a consolidated return), determined
by taking into account the adjustments provided in Sec. 1.1502-
79A(a)(3), that is:
(A) The portion of the consolidated dividends received deduction,
the consolidated charitable contributions deductions, and the
consolidated section 247 deduction, attributable to such member;
(B) Such member's capital gain net income (determined without regard
to any net capital loss carryover attributable to such member);
(C) Such member's net capital loss and section 1231 net loss,
reduced by
[[Page 603]]
the portion of the consolidated net capital loss attributable to such
member (as determined under paragraph (b)(2) of Sec. 1.1502-22; and
(D) The portion of any consolidated net capital loss carryover
attributable to such member which is absorbed in the taxable year.
For purposes of this paragraph (f), any income, gain, or loss of a dual
resident corporation shall not be deferred or eliminated under
Sec. 1.1502-13 (b)(2) or (c), or Sec. 1.1502-14. Further, sections 267
and 163(e)(3) shall not apply.
(ii) Dual resident corporation that is a separate unit of a domestic
corporation. For purposes of determining whether a dual resident
corporation that is a separate unit of a domestic corporation has a dual
consolidated loss for the taxable year, the dual resident corporation
shall compute its taxable income (or loss) as if it were a separate
domestic corporation and a dual resident corporation, using only those
items of income, expenses, and deductions which are otherwise
attributable to such separate unit.
(2) Effect of dual consolidated loss. For any taxable year in which
a dual resident corporation has a dual consolidated loss to which
paragraph (a) of this section applies, the following rules shall apply.
(i) If the dual resident corporation is a member of an affiliated
group filing a consolidated return, then such affiliated group shall
compute its taxable income without regard to the items of income, loss,
or deduction of the dual resident corporation for the taxable year. The
amount of taxable loss of the dual resident corporation for the taxable
year shall be the amount of dual consolidated loss determined under
paragraph (f)(1)(i) of this section. Such loss may be carried over or
back for use in other taxable years as a net operating loss deduction by
the dual resident corporation to the extent permitted under section 172.
However, such loss shall be treated as a loss incurred by the dual
resident corporation in a separate return limitation year, and,
including in the case of a dual resident corporation that is a common
parent, shall be subject to all of the limitations of Sec. Sec. 1.1502-
21A(c)(2) or 1.1502-21(c) (as appropriate) (relating to limitations on
net operating loss carryovers and carrybacks from separate return
limitation years).
(ii) If the dual resident corporation is a separate unit of a
domestic corporation, then such domestic corporation and the affiliated
group with which it may file a consolidated return shall compute taxable
income for the taxable year without regard to the items of income, loss,
or deductions of the dual resident corporation for the current year.
Further, the loss of the dual resident corporation (the separate unit of
the domestic corporation) shall be treated as a loss incurred by a
separate corporation and its use shall be subject to all of the
limitations of Sec. Sec. 1.1502-21A(c)(2) or 1.1502-21(c) (as
appropriate) (relating to limitations on net operating loss carryovers
and carrybacks from separate return limitation years), as if such dual
resident corporation were filing a consolidated return with the domestic
corporation or with the affiliated group with which the domestic
corporation files a consolidated return.
(3) Basis adjustments for dual consolidated losses. When a dual
resident corporation is a member of an affiliated group filing a
consolidated return, each member owning stock in the dual resident
corporation shall adjust the basis of the stock in the manner described
in subparagraphs (i) and (ii) of this paragraph (f)(3).
(i) Positive adjustment. Adjustments shall be made in accordance
with the principles of Sec. 1.1502-32(b)(1), except that there shall be
no positive adjustment under Sec. 1.1502-32(b)(1)(ii) for any amount of
the dual consolidated loss which is not absorbed. There shall be no
positive adjustment for any amount included in income upon the use of a
dual consolidated loss in a foreign country under Sec. 1.1503-2T(c)(3).
(ii) Negative adjustments. Adjustments shall be made in accordance
with the principles of Sec. 1.1502-32(b)(2), except that there shall be
no negative adjustments under Sec. 1.1502-32(b)(2)(ii) for the amount of
the dual consolidated loss.
(4) Examples. The following examples illustrate this paragraph (f).
Example (1). (i) P, S1, S2, and T are domestic corporations. P owns
all of the stock of S1 and S2. S2 owns all of the stock of T. T is
[[Page 604]]
a dual resident corporation. None of the exceptions described in
paragraph (c) apply with respect to T. P, S1, S2, and T have filed and
continue to file a consolidated federal income tax return. X, Y, and
Bank are corporations which are not members of the affiliated group of
which P is the common parent.
(ii) At the beginning of 1989, P had a basis in S2 of $1000. S2 had
a basis in T of $500.
(iii) In 1989, T had an interest expense of $100 on a loan from
Bank. T sold a noncapital item u in which it had a basis of $10 to S1
for $50. T sold noncapital item v in which it had a basis of $200 to S1
for $100. The sale of u and v are deferred intercompany transactions
described in Sec. 1.1502-13(a)(2). S1 had separate taxable income
calculated in accordance with Sec. 1.1502-12 of $200. In addition, S1
sold item w in which it had a basis of $50 to T for $100. The sale of
item w is a deferred intercompany transaction described in Sec. 1.1502-
13(a)(2). P and S2 had no items of income, loss, or deduction for 1989.
(iv) For purposes of determining whether T has a dual consolidated
loss in 1989 and the amount of such dual consolidated loss, T's taxable
income (loss) is calculated under paragraph (f)(1) as follows:
($100) interest expense to Bank
($100) sale of item v to S1
$40 sale of item u to S1
--------
($160)
T therefore has a dual consolidated loss of $160 for 1989.
(v) Because T has a dual consolidated loss for the year, the
consolidated taxable income of the P affiliated group is calculated
without regard to the items of income, loss, or deduction of T. However,
T is still a member of the P affiliated group. Therefore, the
consolidated taxable income of the P group is $200 (attributable solely
to the income of S1). The $50 gain recognized by S1 upon the sale of
item w to T is deferred pursuant to Sec. 1.1502-13(c)(1).
(vi) S2 may not make the positive adjustment provided for in
Sec. 1.1502-32(b)(1)(ii) to its basis in T for the dual consolidated
loss incurred by T. However, S2 must make the negative adjustment
provided for in Sec. 1.1502-32(b)(2)(i) for the amount of its allocable
part of the deficit in earnings and profits of T for the taxable year.
Thus, as provided in Sec. 1.1502-32(e)(1), S2 shall make a net negative
adjustment to its basis in T of $160 and S2's basis in T is now $340. As
provided in Sec. 1.1502-33(b)(4)(ii)(a), S2's earnings and profits for
1989 must reflect S2's decrease in its basis in T stock for the taxable
year. Since S2 has no other earnings and profits for the taxable year,
S2 has a deficit in earnings and profits of $160 for the taxable year.
As provided in Sec. 1.1502-32(b)(2)(i), P must make a negative
adjustment for the amount of its allocable part of the deficit in
earnings and profits of S2 for the taxable year. Thus, P must make a net
negative adjustment to its basis in S2 of $160 and P's basis in S2 is
now $840.
Example (2). (i) The facts are the same as in Example (1), except
that in 1990, S1 sold items u and v to X for no gain or loss. T incurred
an interest expense of $100 on a loan from Bank. T also sold item q in
which it had a basis of $50 to S1 for $100. T also sold item r in which
it had a basis of $100 to Y for $300. P and S2 had no items of income,
loss, or deduction for 1990.
(ii) For purposes of determining whether T has a dual consolidated
loss in 1990 and the amount of such dual consolidated loss, T's taxable
income (loss) is:
($100) interest expense to Bank
$50 sale of item q to S1
$200 sale of item r to Y
--------
$150
T therefore has no dual consolidated loss for 1990.
(iii) Since T does not have a dual consolidated loss for the taxable
year, the group's consolidated taxable income is calculated in
accordance with the general rule of Sec. 1.1502-11 and not in accordance
with the rule of Sec. 1.1503-2T(f)(2). T has separate taxable income
calculated in accordance with Sec. 1.1502-12 of $100. On the disposition
of items u and v outside the P affiliated group, no gain or loss is
restored to income to T in accordance with Sec. 1.1502-13(f)(1)(i)
because the gain or loss on these items was not deferred, pursuant to
Sec. 1.1503-2T(f)(3). The $50 gain on the sale of item q from T to S1 is
an intercompany transaction on which the gain or loss recognized is
deferred pursuant to Sec. 1.1502-13(c)(1). The consolidated taxable
income of the P affiliated group computed without regard to the
consolidated net operating loss deduction is $100.
(iv) As provided by Sec. 1.1502-21A(c)(2) of the regulations, the
amount of the dual consolidated loss arising in 1989 which may be
absorbed by the P affiliated group in 1990 is $100; that is, the
consolidated taxable income computed without regard to the consolidated
net operating loss deduction minus such consolidated taxable income
recomputed by excluding the items of income and deduction of T. Section
1.1502-21A(c) allows $100 of the dual consolidated loss to be included
in the consolidated net operating loss deduction for 1990. The
consolidated taxable income of the P group for 1990 is $0.
(v) S2 must make the positive adjustment provided for in
Sec. 1.1502-32(b)(1)(i) to its basis in T for the amount of its
allocable part of the undistributed earnings and profits of T for the
taxable year. S2 can not make the negative adjustment provided for in
Sec. 1.1502-32(b)(2)(ii) for the dual consolidated loss of T incurred in
1989 and absorbed in 1990. Thus,
[[Page 605]]
as provided in Sec. 1.1502-32(e)(2), S2 shall make a net positive
adjustment to its basis in T of $100 and S2's basis in T is now $440. As
provided in Sec. 1.1502-33(b)(4)(ii)(a), S2's earnings and profits for
1989 must reflect S2's increase in its basis in T stock for the taxable
year. Since S2 has no other earnings and profits for the taxable year,
S2 has earnings and profits of $100 for the taxable year. As provided in
Sec. 1.1502-32(b)(1)(i), P must make a positive adjustment for the
amount of its allocable part of the undistributed earnings and profits
of S2 for the taxable year. Thus, P must make a net positive adjustment
to its basis in S2 of $100 and P's basis in S2 is now $940.
[T.D. 8261, 54 FR 37317, Sept. 8, 1989. Redesignated by T.D. 8434, 57 FR
41093, Sept. 9, 1992, as amended by T.D. 8677, 61 FR 33325, June 27,
1996; T.D. 8823, 64 FR 36101, July 2, 1999]
RELATED RULES--Table of Contents
Sec. 1.1551-1 Disallowance of surtax exemption and accumulated earnings credit.
(a) In general. If:
(1) Any corporation transfers, on or after January 1, 1951, and
before June 13, 1963, all or part of its property (other than money) to
a transferee corporation,
(2) Any corporation transfers, directly or indirectly, after June
12, 1963, all or part of its property (other than money) to a transferee
corporation, or
(3) Five or fewer individuals are in control of a corporation and
one or more of them transfer, directly or indirectly, after June 12,
1963, property (other than money) to a transferee corporation, and the
transferee was created for the purpose of acquiring such property or was
not actively engaged in business at the time of such acquisition, and if
after such transfer the transferor or transferors are in control of the
transferee during any part of the taxable year of the transferee, then
for such taxable year of the transferee the Secretary or his delegate
may disallow the surtax exemption defined in section 11(d) or the
accumulated earnings credit of $150,000 ($100,000 in the case of taxable
years beginning before January 1, 1975) provided in paragraph (2) or (3)
of section 535(c), unless the transferee establishes by the clear
preponderance of the evidence that the securing of such exemption or
credit was not a major purpose of the transfer.
(b) Purpose of section 1551. The purpose of section 1551 is to
prevent avoidance or evasion of the surtax imposed by section 11(c) or
of the accumulated earnings tax imposed by section 531. It is not
intended, however, that section 1551 be interpreted as delimiting or
abrogating any principle of law established by judicial decision, or any
existing provisions of the Code, such as sections 269 and 482, which
have the effect of preventing the avoidance or evasion of income taxes.
Such principles of law and such provisions of the Code, including
section 1551, are not mutually exclusive, and in appropriate cases they
may operate together or they may operate separately.
(c) Application of section 269(b) to cases covered by section 1551.
The provisions of section 269(b) and the authority of the district
director thereunder, to the extent not inconsistent with the provisions
of section 1551, are applicable to cases covered by section 1551.
Pursuant to the authority provided in section 269(b) the district
director may allow to the transferee any part of a surtax exemption or
accumulated earnings credit for a taxable year for which such exemption
or credit would otherwise be disallowed under section 1551(a); or he may
apportion such exemption or credit among the corporations involved. For
example, corporation A transfers on January 1, 1955, all of its property
to corporations B and C in exchange for all of the stock of such
corporations. Immediately thereafter, corporation A is dissolved and its
stockholders become the sole stockholders of corporations B and C.
Assuming that corporations B and C are unable to establish by the clear
preponderance of the evidence that the securing of the surtax exemption
defined in section 11(d) or the accumulated earnings credit provided in
section 535, or both, was not a major purpose of the transfer, the
district director is authorized under sections 1551(c) and 269(b) to
allow one such exemption and credit and to apportion such exemption and
credit between corporations B and C.
(d) Actively engaged in business. For purposes of this section, a
corporation maintaining an office for the purpose of preserving its
corporate existence is not considered to be ``actively engaged
[[Page 606]]
in business'' even though such corporation may be deemed to be ``doing
business'' for other purposes. Similarly, for purposes of this section,
a corporation engaged in winding up its affairs, prior to an acquisition
to which section 1551 is applicable, is not considered to be ``actively
engaged in business.''
(e) Meaning and application of the term ``control''--(1) In general.
For purposes of this section, the term ``control'' means:
(i) With respect to a transferee corporation described in paragraph
(a) (1) or (2) of this section, the ownership by the transferor
corporation, its shareholders, or both, of stock possessing either (a)
at least 80 percent of the total combined voting power of all classes of
stock entitled to vote, or (b) at least 80 percent of the total value of
shares of all classes of stock.
(ii) With respect to each corporation described in paragraph (a)(3)
of this section, the ownership by five or fewer individuals of stock
possessing (a) at least 80 percent of the total combined voting power of
all classes of stock entitled to vote or at least 80 percent of the
total value of shares of all classes of the stock of each corporation,
and (b) more than 50 percent of the total combined voting power of all
classes of stock entitled to vote or more than 50 percent of the total
value of shares of all classes of stock of each corporation, taking into
account the stock ownership of each such individual only to the extent
such stock ownership is identical with respect to each such corporation.
(2) Special rules. In determining for purposes of this section
whether stock possessing at least 80 percent (or more than 50 percent in
the case of subparagraph (1)(ii)(b) of this paragraph) of the total
combined voting power of all classes of stock entitled to vote is owned,
all classes of such stock shall be considered together; it is not
necessary that at least 80 percent (or more than 50 percent) of each
class of voting stock be owned. Likewise, in determining for purposes of
this section whether stock possessing at least 80 percent (or more than
50 percent) of the total value of shares of all classes of stock is
owned, all classes of stock of the corporation shall be considered
together; it is not necessary that at least 80 percent (or more than 50
percent) of the value of shares of each class be owned. The fair market
value of a share shall be considered as the value to be used for
purposes of this computation. With respect to transfers described in
paragraph (a) (2) or (3) of this section, the ownership of stock shall
be determined in accordance with the provisions of section 1563(e) and
the regulations thereunder. With respect to transfers described in
paragraph (a)(1) of this section, the ownership of stock shall be
determined in accordance with the provisions of section 544 and the
regulations thereunder, except that constructive ownership under section
544(a)(2) shall be determined only with respect to the individual's
spouse and minor children. In determining control, no stock shall be
excluded because such stock was acquired before January 1, 1951 (the
effective date of section 1551(a)(1)), or June 13, 1963 (the effective
date of section 1551(a) (2) and (3)).
(3) Example. This paragraph may be illustrated by the following
example:
Example. On January 1, 1964, individual A, who owns 50 percent of
the voting stock of corporation X, and individual B, who owns 30 percent
of such voting stock, transfer property (other than money) to
corporation Y (newly created for the purpose of acquiring such property)
in exchange for all of Y's voting stock. After the transfer, A and B own
the voting stock of corporations X and Y in the following proportions:
------------------------------------------------------------------------
Identical
Individual Corp. X Corp. Y ownership
------------------------------------------------------------------------
A................................... 50 30 30
B................................... 30 50 30
-----------------------------------
Total............................. 80 80 60
------------------------------------------------------------------------
The transfer of property by A and B to corporation Y is a transfer
described in paragraph (a)(3) of this section since (i) A and B own at
least 80 percent of the voting stock of corporations X and Y, and (ii)
taking into account each such individual's stock ownership only to the
extent such ownership is identical with respect to each such
corporation, A and B own more than 50 percent of the voting stock of
corporations X and Y.
(f) Taxable year of allowance or disallowance--(1) In general. The
district director's authority with respect to cases covered by section
1551 is not limited to the taxable year of the
[[Page 607]]
transferee corporation in which the transfer of property occurs. Such
authority extends to the taxable year in which the transfer occurs or
any subsequent taxable year of the transferee corporation if, during any
part of such year, the transferor or transferors are in control of the
transferee.
(2) Examples. This paragraph may be illustrated by the following
examples:
Example (1). On January 1, 1955, corporation D transfers property
(other than money) to corporation E, a corporation not actively engaged
in business at the time of the acquisition of such property, in exchange
for 60 percent of the voting stock of E. During a later taxable year of
E, corporation D acquires an additional 20 percent of such voting stock.
As a result of such additional acquisition, D owns 80 percent of the
voting stock of E. Accordingly, section 1551(a)(1) is applicable for the
taxable year in which the later acquisition of stock occurred and for
each taxable year thereafter in which the requisite control continues.
Example (2). On June 20, 1963, individual A, who owns all of the
stock of corporation X, transfers property (other than money) to
corporation Y, a corporation not actively engaged in business at the
time of the acquision of such property, in exchange for 60 percent of
the voting stock of Y. During a later taxable year of Y, A acquires an
additional 20 percent of such voting stock. After such acquisition A
owns at least 80 percent of the voting stock of corporations X and Y.
Accordingly, section 1551(a)(3) is applicable for the taxable year in
which the later acquisition of stock occurred and for each taxable year
thereafter in which the requisite control continues.
Example (3). Individuals A and B each owns 50 percent of the stock
of corporation X. On January 15, 1964, A transfers property (other than
money) to corporation Y (newly created by A for the purpose of acquiring
such property) in exchange for all the stock of Y. In a subsequent
taxable year of Y, individual B buys 50 percent of the stock which A
owns in Y (or he transfers money to Y in exchange for its stock, as a
result of which he owns 50 percent of Y's stock). Immediately thereafter
the stock ownership of A and B in corporation Y is identical to their
stock ownership in corporation X. Accordingly, section 1551(a)(3) is
applicable for the taxable year in which B acquires stock in corporation
Y (see paragraph (g)(3) of this section) and for each taxable year
thereafter in which the requisite control continues. Moreover, if B's
acquisition of stock in Y is pursuant to a preexisting agreement with A,
A's transfer to Y and B's acquisition of Y's stock are considered a
single transaction and section 1551(a)(3) also would be applicable for
the taxable year in which A's transfer to Y took place and for each
taxable year thereafter in which the requisite control continues.
(g) Nature of transfer--(1) Corporate transfers before June 13,
1963. A transfer made before June 13, 1963, by any corporation of all or
part of its assets, whether or not such transfer qualifies as a
reorganization under section 368, is within the scope of section
1551(a)(1), except that section 1551(a)(1) does not apply to a transfer
of money only. For example, the transfer of cash for the purpose of
expanding the business of the transferor corporation through the
formation of a new corporation is not a transfer within the scope of
section 1551(a)(1), irrespective of whether the new corporation uses the
cash to purchase from the transferor corporation stock in trade or
similar property.
(2) Corporate transfers after June 12, 1963. A direct or indirect
transfer made after June 12, 1963, by any corporation of all or part of
its assets to a transferee corporation, whether or not such transfer
qualifies as a reorganization under section 368, is within the scope of
section 1551(a)(2) except that section 1551(a)(2) does not apply to a
transfer of money only. For example, if a transferor corporation
transfers property to its shareholders or to a subsidiary, the transfer
of that property by the shareholders or the subsidiary to a transferee
corporation as part of the same transaction is a transfer of property by
the transferor corporation to which section 1551(a)(2) applies. A
transfer of property pursuant to a purchase by a transferee corporation
from a transferor corporation controlling the transferee is within the
scope of section 1551(a)(2), whether or not the purchase follows a
transfer of cash from the controlling corporation.
(3) Other transfers after June 12, 1963. A direct or indirect
transfer made after June 12, 1963, by five or fewer individuals to a
transferee corporation, whether or not such transfer qualifies under one
or more other provisions of the Code (for example, section 351), is
within the scope of section 1551(a)(3) except that section 1551(a)(3)
does not apply to a transfer of money only. Thus, if one of five or
fewer individuals who are in control of a corporation transfers property
(other than money)
[[Page 608]]
to a controlled transferee corporation, the transfer is within the scope
of section 1551(a)(3) notwithstanding that the other individuals
transfer nothing or transfer only money.
(4) Examples. This paragraph may be illustrated by the following
examples:
Example (1). Individuals A and B each owns 50 percent of the voting
stock of corporation X. On January 15, 1964, A and B each acquires
property (other than money) from X and, as part of the same transaction,
each transfers such property to his wholly owned corporation (newly
created for the purpose of acquiring such property). A and B retain
substantial continuing interests in corporation X. The transfers to the
two newly created corporations are within the scope of section
1551(a)(2).
Example (2). Corporation W organizes corporation X, a wholly owned
subsidiary, for the purpose of acquiring the properties of corporation
Y. Pursuant to a reorganization qualifying under section 368(a)(1)(C),
substantially all of the properties of corporation Y are transferred on
June 15, 1963, to corporation X solely in exchange for voting stock of
corporation W. There is a transfer of property from W to X within the
meaning of section 1551(a)(2).
Example (3). Individuals A and B, each owning 50 percent of the
voting stock of corporation X, organize corporation Y to which each
transfers money only in exchange for 50 percent of the stock of Y.
Subsequently, Y uses such money to acquire other property from A and B
after June 12, 1963. Such acquisition is within the scope of section
1551(a)(3).
Example (4). Individual A owns 55 percent of the stock of
corporation X. Another 25 percent of corporation X's stock is owned in
the aggregate by individuals B, C, D, and E. On June 15, 1963,
individual A transfers property to corporation Y (newly created for the
purpose of acquiring such property) in exchange for 60 percent of the
stock of Y, and B, C, and D acquire all of the remaining stock of Y. The
transfer is within the scope of section 1551(a)(3).
(h) Purpose of transfer. In determining, for purposes of this
section, whether the securing of the surtax exemption or accumulated
earnings credit constituted ``a major purpose'' of the transfer, all
circumstances relevant to the transfer shall be considered. ``A major
purpose'' will not be inferred from the mere purchase of inventory by a
subsidiary from a centralized warehouse maintained by its parent
corporation or by another subsidiary of the parent corporation. For
disallowance of the surtax exemption and accumulated earnings credit
under section 1551, it is not necessary that the obtaining of either
such credit or exemption, or both, have been the sole or principal
purpose of the transfer of the property. It is sufficient if it appears,
in the light of all the facts and circumstances, that the obtaining of
such exemption or credit, or both, was one of the major considerations
that prompted the transfer. Thus, the securing of the surtax exemption
or the accumulated earnings credit may constitute ``a major purpose'' of
the transfer, notwithstanding that such transfer was effected for a
valid business purpose and qualified as a reorganization within the
meaning of section 368. The taxpayer's burden of establishing by the
clear preponderance of the evidence that the securing of either such
exemption or credit or both was not ``a major purpose'' of the transfer
may be met, for example, by showing that the obtaining of such
exemption, or credit, or both, was not a major factor in relationship to
the other consideration or considerations which prompted the transfer.
[T.D. 6911, 32 FR 3214, Feb. 24, 1967, as amended by T.D. 7376, 40 FR
42745, Sept. 16, 1975]
Sec. 1.1552-1 Earnings and profits.
(a) General rule. For the purpose of determining the earnings and
profits of each member of an affiliated group which is required to be
included in a consolidated return for such group filed for a taxable
year beginning after December 31, 1953, and ending after August 16,
1954, the tax liability of the group shall be allocated among the
members of the group in accordance with one of the following methods,
pursuant to an election under paragraph (c) of this section:
(1)(i) The tax liability of the group shall be apportioned among the
members of the group in accordance with the ratio which that portion of
the consolidated taxable income attributable to each member of the group
having taxable income bears to the consolidated taxable income.
(ii) For consolidated return years beginning after December 31,
1965, a member's portion of the tax liability of the group under the
method of allocation provided by subdivision (i) of this
[[Page 609]]
subparagraph is an amount equal to the tax liability of the group
multiplied by a fraction, the numerator of which is the taxable income
of such member, and the denominator of which is the sum of the taxable
incomes of all the members. For purposes of this subdivision the taxable
income of a member shall be the separate taxable income determined under
Sec. 1.1502-12, adjusted for the following items taken into account in
the computation of consolidated taxable income:
(a) The portion of the consolidated net operating loss deduction,
the consolidated charitable contributions deduction, the consolidated
dividends received deduction, the consolidated section 247 deduction,
the consolidated section 582(c) net loss, and the consolidated section
922 deduction, attributable to such member;
(b) Such member's capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) (determined without
regard to any net capital loss carryover attributable to such member);
(c) Such member's net capital loss and section 1231 net loss,
reduced by the portion of the consolidated net capital loss attributable
to such member; and
(d) The portion of any consolidated net capital loss carryover
attributable to such member which is absorbed in the taxable year.
If the computation of the taxable income of a member under this
subdivision results in an excess of deductions over gross income, then
for purposes of this subdivision such member's taxable income shall be
zero.
(2)(i) The tax liability of the group shall be allocated to the
several members of the group on the basis of the percentage of the total
tax which the tax of such member if computed on a separate return would
bear to the total amount of the taxes for all members of the group so
computed.
(ii) For consolidated return years beginning after December 31,
1965, a member's portion of the tax liability of the group under the
method of allocation provided by subdivision (i) of this subparagraph is
an amount equal to the tax liability of the group multiplied by a
fraction, the numerator of which is the separate return tax liability of
such member, and the denominator of which is the sum of the separate
return tax liabilities of all the members. For purposes of this
subdivision the separate return tax liability of a member is its tax
liability computed as if it has filed a separate return for the year
except that:
(a) Gains and losses on intercompany transactions shall be taken
into account as provided in Sec. 1.1502-13 as if a consolidated return
had been filed for the year;
(b) Gains and losses relating to inventory adjustments shall be
taken into account as provided in Sec. 1.1502-18 as if a consolidated
return had been filed for the year;
(c) Transactions with respect to stock, bonds, or other obligations
of members shall be reflected as provided in Sec. 1.1502-13 (f) and (g)
as if a consolidated return had been filed for the year;
(d) Excess losses shall be included in income as provided in
Sec. 1.1502-19 as if a consolidated return had been filed for the year;
(e) In the computation of the deduction under section 167, property
shall not lose its character as new property as a result of a transfer
from one member to another member during the year;
(f) A dividend distributed by one member to another member during
the year shall not be taken into account in computing the deductions
under section 243(a)(1), 244(a), 245, or 247 (relating to deductions
with respect to dividends received and dividends paid);
(g) Basis shall be determined under Secs. 1.1502-31 and 1.1502-32,
and earnings and profits shall be determined under Sec. 1.1502-33, as if
a consolidated return had been filed for the year;
(h) Subparagraph (2) of Sec. 1.1502-3(f) shall apply as if a
consolidated return had been filed for the year; and
(i) For purposes of Subtitle A of the Code, the surtax exemption of
the member shall be an amount equal to $25,000 ($50,000 in the case of a
taxable year ending in 1975), divided by the number of members (or such
portion of $25,000 or $50,000 which is apportioned to the member
pursuant to a schedule attached to the consolidated return for
[[Page 610]]
the taxable year). (However, if for the taxable year some or all of the
members are component members of a controlled group of corporations
(within the meaning of section 1563) and if there are other such
component members which do not join in filing the consolidated return
for such year, the amount to be divided among the members filing the
consolidated return shall be (in lieu of $25,000 or $50,000) the sum of
the amounts apportioned to the component members which join in filing
the consolidated return (as determined for taxable years beginning after
December 31, 1974 under Sec. 1.1561-2(a)(2) or Sec. 1.1561-3, whichever
is applicable, and for taxable years beginning before January 1, 1975,
under Sec. 1.561-2A(a)(2) or Sec. 1.1561-3A whichever is applicable).)
If the computation of the separate return tax liability of a member
under this subdivision does not result in a positive tax liability, then
for purposes of this subdivision such member's separate return tax
liability shall be zero.
(3)(i) The tax liability of the group (excluding the tax increases
arising from the consolidation) shall be allocated on the basis of the
contribution of each member of the group to the consolidated taxable
income of the group. Any tax increases arising from the consolidation
shall be distributed to the several members in direct proportion to the
reduction in tax liability resulting to such members from the filing of
the consolidated return as measured by the difference between their tax
liabilities determined on a separate return basis and their tax
liabilities (determined without regard to the 2-percent increase
provided by section 1503(a) and paragraph (a) of Sec. 1.1502-30A (as
contained in the 26 CFR edition revised as of April 1, 1996) for taxable
years beginning before January 1, 1964) based on their contributions to
the consolidated taxable income.
(ii) For consolidated return years beginning after December 31,
1965, a member's portion of the tax liability of the group under the
method of allocation provided by subdivision (i) of this subparagraph
shall be determined by:
(a) Allocating the tax liability of the group in accordance with
subparagraph (1)(ii) of this paragraph, but
(b) The amount of tax liability allocated to any member shall not
exceed the separate return tax liability of such member, determined in
accordance with subparagraph (2)(ii) of this paragraph, and
(c) The sum of the amounts which would be allocated to the members
but for (b) of this subdivision (ii) shall be apportioned among the
other members in direct proportion to, but limited to, the reduction in
tax liability resulting to such other members. Such reduction for any
member shall be the excess, if any, of (1) its separate this paragraph.
(4) The tax liability of the group shall be allocated in accordance
with any other method selected by the group with the approval of the
Commissioner. No method of allocation may be approved under this
subparagraph which may result in the allocation of a positive tax
liability for a taxable year, among the members who are allocated a
positive tax liability for such year, in a total amount which is more or
less than the tax liability of the group for such year. (However, see
paragraph (d) of Sec. 1.1502-33.)
(b) Application of rules--(1) Tax liability of the group. For
purposes of section 1552 and this section, the tax liability of the
group for a taxable year shall consist of the Federal income tax
liability of the group for such year determined in accordance with
Sec. 1.1502-2 or Sec. 1.1502-30A (as contained in the 26 CFR edition
revised as of April 1, 1996), which-ever is applicable. Thus, in the
case of a carryback of a loss or credit to such year, although the
earnings and profits of the members of the group may not be adjusted
until the subsequent taxable year from which the loss or credit was
carried back, the effect of the carryback, for purposes of this section,
shall be determined by allocating the amount of the adjustment as a part
of the tax liability of the group for the taxable year to which the loss
or credit is carried. For example, if a consolidated net operating loss
is carried back from 1969 to 1967, the allocation of the tax liability
of the group for 1967 shall be recomputed in accordance with the method
of allocation used for 1967, and the changes resulting from such
recomputation shall, for accrual method taxpayers, be reflected in the
earnings
[[Page 611]]
and profits of the appropriate members in 1969.
(2) Effect of allocation. The amount of tax liability allocated to a
corporation as its share of the tax liability of the group, pursuant to
this section, shall (i) result in a decrease in the earnings and profits
of such corporation in such amount, and (ii) be treated as a liability
of such corporation for such amount. If the full amount of such
liability is not paid by such corporation, pursuant to an agreement
among the members of the group or otherwise, the amount which is not
paid will generally be treated as a distribution with respect to stock,
a contribution to capital, or a combination thereof, as the case may be.
(c) Method of election. (1) The election under paragraph (a) (1),
(2), or (3) of this section shall be made not later than the time
prescribed by law for filing the first consolidated return of the group
for a taxable year beginning after December 31, 1953, and ending after
August 16, 1954 (including extensions thereof). If the group elects to
allocate its tax liability in accordance with the method prescribed in
paragraph (a) (1), (2), or (3) of this section, a statement shall be
attached to the return stating which method is elected. Such statement
shall be made by the common parent corporation and shall be binding upon
all members of the group. In the event that the group desires to
allocate its tax liability in accordance with any other method pursuant
to paragraph (a)(4) of this section, approval of such method by the
Commissioner must be obtained within the time prescribed above. If such
approval is not obtained in such time, the group shall allocate in
accordance with the method prescribed in paragraph (a)(1) of this
section. The request shall state fully the method which the group wishes
to apply in apportioning the tax liability. Except as provided in
subparagraph (2) of this paragraph, an election once made shall be
irrevocable and shall be binding upon the group with respect to the year
for which made and for all future years for which a consolidated return
is filed or required to be filed unless the Commissioner authorizes a
change to another method prior to the time prescribed by law for filing
the return for the year in which such change is to be effective.
(2) Each group may make a new election to use any one of the methods
prescribed in paragraph (a) (1), (2), or (3) of this section for its
first consolidated return year beginning after December 31, 1965, or in
conjunction with an election under paragraph (d) of Sec. 1.1502-33, or
may request the Commissioner's approval of a method under paragraph
(a)(4) of this section for its first consolidated return year beginning
after December 31, 1965, irrespective of its previous method of
allocation under this section. If such new election is not made in
conjunction with an election under paragraph (d) of Sec. 1.1502-33, it
shall be effective for the first consolidated return year beginning
after December 31, 1965, and all succeeding years. (See Sec. 1.1502-33
for the method of making such new election in conjunction with an
election under paragraph (d) of Sec. 1.1502-33.) Any other such new
election (or request for the Commissioner's approval of a method under
paragraph (a)(4) of this section) shall be made within the time
prescribed by law for filing the consolidated return for the first
taxable year beginning after December 31, 1965 (including extensions
thereof), or within 60 days after July 3, 1968, whichever is later. Such
new election shall be made by attaching a statement to the consolidated
return for the first taxable year beginning after December 31, 1965, or
if such election is made within the time prescribed above but after such
return is filed, by filing a statement with the internal revenue officer
with whom such return was filed.
(d) Failure to elect. If a group fails to make an election in its
first consolidated return, or any other election, in accordance with
paragraph (c) of this section, the method prescribed under paragraph
(a)(1) of this section shall be applicable and shall be binding upon the
group in the same manner as if an election had been made to so allocate.
(e) Definitions. Except as otherwise provided in this section, the
terms used in this section shall have the same meaning as provided in
the regulations under section 1502.
[[Page 612]]
(f) Example. The provisions of this section may be illustrated by
the following example:
Example. Corporation P is the common parent owning all of the stock
of corporations S1 and S2, members of an affiliated group. A
consolidated return is filed for the taxable year ending December 31,
1966, by P, S1, and S2. For 1966 such corporations had the following
taxable incomes or losses computed in accordance with paragraph
(a)(1)(ii) of this section:
P......................................................................0
S1................................................................$2,000
S2...............................................................(1,000)
The group has not made an election under paragraph (c) of this section
or paragraph (d) of Sec. 1.1502-33. Accordingly, the method of
allocation provided by paragraph (a)(1) of this section is in effect for
the group. Assuming that the consolidated taxable income is equal to the
sum of the members taxable income and losses, or $1,000, the tax
liability of the group for the year (assuming a 22-percent rate) is
$220, all of which is allocated to S1. S1 accordingly reduces its
earnings and profits in the amount of $220, irrespective of who actually
pays the tax liability. If S1 pays the $220 tax liability there will be
no further effect upon the income, earnings and profits, or the basis of
stock of any member. If, however, P pays the $220 tax liability (and
such payment is not in fact a loan from P to S1), then P shall be
treated as having made a contribution to the capital of S1 in the amount
of $220. On the other hand, if S2 pays the $220 tax liability (and such
payment is not in fact a loan from S2), then S2 shall be treated as
having made a distribution with respect to its stock to P in the amount
of $220, and P shall be treated as having made a contribution to the
capital of S1 in the amount of $220.
[T.D. 6962, 33 FR 9655, July 3, 1968, as amended by T.D. 7825, 42 FR
64694, Dec. 28, 1977; T.D. 7728, 45 FR 72650, Nov. 3, 1980; T.D. 8560,
59 FR 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36680, July 18, 1995; T.D.
8677, 61 FR 33325, June 27, 1996]
Certain Controlled Corporations
Sec. 1.1561-0 Effective date.
(a) Taxable years beginning after December 31, 1974. The provisions
of Secs. 1.1561-1 through 1.1561-3 apply only to taxable years beginning
after December 31, 1974.
(b) Taxable years beginning before January 1, 1975. The provisions
of Secs. 1.1561-1A through 1.1561-3A apply only to taxable years
beginning before January 1, 1975.
[T.D. 7528, 42 FR 64694, Dec. 28, 1977]
Sec. 1.1561-1 Limitations on certain multiple tax benefits in the case of certain controlled corporations.
(a) In general. Part II (section 1561 and following), subchapter B,
chapter 6 of the Code, provides rules relating to certain controlled
corporations. In general, section 1561 provides that the component
members of a controled group of corporations on a December 31, for their
taxable years which include such December 31, shall be limited for
purposes of subtitle A to:
(1) One surtax exemption under section 11(d),
(2) One $150,000 amount for purposes of computing the accumlated
earnings credit under section 535(c) (2) and (3), and
(3) One $25,000 amount for purposes of computing the limitation on
the small business deduction of life insurance companies under sections
804(a)(4) and 809 (d)(10).
For certain definitions (including the definition of a ``controlled
group of corporations'' and a ``component member'') and special rules
for purposes of part II of subchapter B, see section 1563 and the
regulations thereunder.
(b) Tax avoidance. The provisions of part II, subchapter B, chapter
6 do not delimit or abrogate any principle of law established by
judicial decision, or any existing provisions of the code, such as
sections 269, 482, and 1551, which have the effect of preventing the
avoidance or evasion of income taxes.
(c) Special rules. (1) For purposes of sections 1561 and 1563 and
the regulations thereunder, the term ``corporation'' includes an
electing small business corporation (as defined in section 1371 (b)).
However, for the treatment of an electing small business corporation as
an excluded member of a controlled group of corporations, see paragraph
(b)(2)(ii) of Sec. 1.1563-1.
(2) In the case of corporations electing a 52-53-week taxable year
under section 441(f)(1), the provisions of sections 1561 and 1563 and
the regulations thereunder shall be applied in accordance with the
special rule section
[[Page 613]]
441(f)(2)(A). See paragraph (b)(1) of Sec. 1.441-2.
[T.D. 7528, 42 FR 64694, Dec. 28, 1977]
Sec. 1.1561-2 Determination of amount of tax benefits.
(a) Surtax exemption. (1) If a corporation is a component member of
a controlled group of corporations on December 31, the surtax exemption
under section 11(d) of such corporation for the taxable year which
includes such December 31 shall be an amount equal to:
(i) $50,000 divided by the number of corporations which are
component members of such group on such December 31, or
(ii) If an apportionment plan is adopted under Sec. 1.1561-3 which
is effective with respect to such taxable year such portion of $50,000
as is apportioned to such member in accordance with such plan.
(2) In the case of a controlled group of corporations which includes
component members which join in the filing of a consolidated return and
other component members which do not join in the filing of such a
return, and where there is no apportionment plan effective under
Sec. 1.1561-3 apportioning the $50,000 amount among the component
members filing the consolidated return and the other component members
of the controlled group, each component member of the controlled group,
(including each component member which joins in filing the consolidated
return) shall be treated as a separate corporation for purposes of
equally apportioning the $50,000 amount under subparagraph (1)(i) of
this paragraph. In such case, the surtax exemption of the corporations
filing the consolidated return shall be the sum of the amounts
apportioned to each component member which joins in filing the
consolidated return.
(3) The provisions of section 1561 may reduce the surtax exemption
of any corporation which is a component member of a controlled group or
corporations and which is subject to the tax imposed by section 11, or
by any other provision of subtitle A of the Code if the tax under such
other provisions is computed by reference to the amount of the surtax
exemption provided by section 11. Such other provisions include, for
example, sections 511(a)(1), 594, 802, 831, 852, 857, 882, 1201, and
1378.
(4) This paragraph (a) shall not apply with respect to any component
member of a controlled group of corporations on a December 31 if one or
more component members of such controlled group has a taxable year
including such December 31 which ends after December 31, 1978. Rules
pertaining to the apportionment of the surtax exemption with respect to
component members of controlled groups of corporations to which this
paragraph does not apply are reserved.
(5) The application of this paragraph may be illustrated by the
following examples:
Example (1). Corporations W, X, Y, and Z are component members of a
controlled group of corporations on December 31, 1975, and each
corporation files its income tax return on the basis of a calendar year.
For their taxable years ending on December 31, 1975, W and X each incurs
a net operating loss; Y has $5,250 of taxable income; and Z has $30,000
of taxable income. If an apportionment plan is not effective for such
taxable years, the surtax exemption under section 11(d) of each
corporation determined under subparagraph (1)(i) of this paragraph is
$12,500 ($50,0004). However, the four corporations may avoid a
pro rata division of the $50,000 amount by filing an apportionment plan
in accordance with the provisions of Sec. 1.1561-3 allocating the
$50,000 amount in any manner they deem proper.
Example (2). Corporation A files its income tax return on the basis
of a calendar year; corporation B files its income tax return on the
basis of a fiscal year ending March 31. On December 31, 1975, A and B
are the only component members of a controlled group of corporations.
Under subparagraph (1)(i) of this paragraph, the surtax exemption of A
for 1975, and the surtax exemption of B for its fiscal year ending March
31, 1976, is $25,000 ($50,0002). However, if an apportionment
plan is filed in accordance with the provisions of Sec. 1.1561-3, the
surtax exemption of each such corporation will be the amount apportioned
to the corporation pursuant to the plan.
Example (3). Corporations R, P, and S are component members of a
controlled group of corporations on December 31, 1975. P and S file a
consolidated return for their fiscal years ending June 30, 1976. R files
a separate return for its taxable year ending on December 31, 1975. No
apportionment plan is effective with respect to R's, P's, and S's
taxable years which include December 31, 1975.
[[Page 614]]
Therefore R, P, and S are each apportioned $16,666.67 ($50,0003)
as their surtax exemption under section 11(d) for their taxable years
including such date. The surtax exemption of the affiliated group filing
a consolidated return (P and S) for the year ending June 30, 1976, is
$33,333.34 (i.e., the sum of the $16,666.67 amounts apportioned to P and
S). However, if an apportionment plan is filed in accordance with the
provisions of Sec. 1.1561-3, the surtax exemption of the corporations
which are members of the affiliated group filing a consolidated return
and of each other corporation which is a component member of the
controlled group of corporations will be the amount apportioned to such
affiliated group and to each such other corporations pursuant to the
plan.
(b) Allocation of amounts of taxable income subject to normal tax.
(1) In the case of a taxable year of a corporation, if:
(i) The amount of normal tax under section 11(b) is equal to the sum
of 20 percent of so much of the taxable income as does not exceed
$25,000, plus 22 percent of so much of the taxable income as exceeds
$25,000 for a taxable year, and
(ii) The amount of surtax exemption of the corporation is less than
$50,000 under paragraph (a)(1) (i) or (ii) of this section,
then for purposes of applying section 11(b), the taxable income subject
to taxation at the rate of 20 percent shall be (in lieu of the first
$25,000 of taxable income) one-half of the amount of the surtax
exemption allocated to such corporation under paragraph (a)(1) (i) or
(ii) of this section. In addition, the amount of taxable income subject
to taxation at the rate of 22 percent shall be (in lieu of the amount of
taxable income in excess of $25,000) the taxable income that exceeds
one-half of the amount of the surtax exemption allocated to such
corporation under paragraph (a)(1) (i) or (ii) of this section for such
year. In the case of an affiliated group of corporations filing a
consolidated return for a taxable year, the preceding sentence shall be
applied by substituting the term ``affiliated group'' for the term
``corporation'' each time it appears.
(2) The provisions of this paragraph may be illustrated by the
following example:
Example. Corporations P and S are component members of a controlled
group of corporations on December 31, 1975, and each corporation files a
separate income tax return on the basis of a calendar year. For the
taxable year ending on December 31, 1975, P incurs a net operating loss
and S has $25,000 of taxable income. If an apportionment plan is not
effective for that taxable year, the surtax exemption under section
11(d) of each corporation (determined under paragraph (a)(1)(i) of this
section) is $25,000 ($50,0002). For purposes of applying section
11(b) to determine S's liability for tax for 1975, the amount of taxable
income subject to taxation at the rate of 20 percent is limited to
$12,500 (i.e., one-half of the amount of the surtax exemption allocated
to S under paragraph (a)(1)(i) of this section), and the amount of
taxable income subject to taxation at the rate of 22 percent is $12,500
(i.e., the amount of taxable income in excess of one-half of the amount
of the surtax exemption). If, on the other hand, an apportionment plan
is adopted by P and S effective for such taxable years apportioning the
entire $50,000 surtax exemption to S, then, for purposes of applying
section 11(b) to determine S's liability for tax for 1975, the amount of
taxable income subject to taxation at the rate of 20 percent is $25,000.
(3) If an apportionment plan is adopted under Sec. 1.1561-3 for a
December 31, and if paragraph (b)(1) of this section applies to any
component member whose taxable year includes such December 31, then the
plan shall specify:
(i) The amount subject to taxation at the rate of 20 percent, and
(ii) The amount subject to taxation at the rate of 22 percent,
as determined under paragraph (b)(1) of this section for each component
member. The information required to be included in a plan by this
subparagraph is in addition to the information required under
Sec. 1.1561-3(a). Where an existing apportionment plan is effective
under Sec. 1.1561-3(a)(3) for such December 31, the additional
information required under this subparagraph may be provided in an
amendment of the existing plan as provided in Sec. 1.1561-3(c).
(c) Accumulated earnings credit. (1) Except as provided in
subparagraph (2) of this paragraph, if a corporation is a component
member of a controlled group on a December 31, the amount for purposes
of computing the accumlated earnings credit under section 535(c) (2) and
(3) of such corporation shall be an amount equal to
[[Page 615]]
$150,000 divided by the number of corporations which are component
members of such group on such December 31. In the case of a controlled
group of corporations which includes component members which join in the
filing of a consolidated return and other component members which do not
join in the filing of such a return, each component member of the
controlled group (including each component member which joins in filing
the consolidated return) shall be treated as a separate corporation for
purposes of equally apportioning the $150,000 amount under this
subparagraph. In such case, the amount for purposes of computing the
accumulated earnings credit for the component members filing the
consolidated return shall be the sum of the amounts apportioned to each
component member which joins in filing the consolidated return.
(2) If, with respect to any component member of the controlled
group, the amount determined under subparagraph (1) of this paragraph
exceeds the sum of (i) such member's accumlated earnings and profits as
of the close of the preceding taxable year, plus (ii) such member's
earnings and profits for the taxable year which are retained (within the
meaning of section 535(c)(1)), then any such excess shall be subtracted
from the amount determined under subparagraph (1) of this paragraph with
respect to such member and shall be divided equally among those
remaining component members of the controlled group that do not have
such an excess (until no such excess remains to be divided among those
remaining members that have not had such an excess). The excess so
divided among such remaining members shall be added to the amount
determined under subparagraph (1) with respect to such members. If a
controlled group of corporations includes component members which join
in the filing of a consolidated return and other component members which
do not join in filing such return, the component members filing the
consolidated return shall be treated as a single corporation for
purposes of this subparagraph.
(3) A controlled group may not adopt an apportionment plan, as
provided in Sec. 1.1561-3, with respect to the amounts computed under
the provisions of this paragraph.
(4) The provisions of this paragraph may be illustrated by the
following example:
Example. A controlled group is composed of four component member
corporations, W, X, Y, and Z. Each corporation files a separate income
tax return on the basis of a calendar year. The sum of the earnings and
profits for the taxable year ending December 31, 1975, which are
retained plus the sum of the accumulated earnings and profits (as of the
close of the preceding taxable year) is $15,000, $75,000, $37,500, and
$300,000 for W, X, Y, and Z, respectively. The amounts determined under
this paragraph for W, X, Y, and Z for 1975 are $15,000, $48,750,
$37,500, and $48,750, respectively, computed as follows:
----------------------------------------------------------------------------------------------------------------
Component members
---------------------------------------------------------------
W X Y Z
----------------------------------------------------------------------------------------------------------------
Earnings and profits............................ $15,000 $75,000 $37,500 $300,000
Amount computed under subparagraph (1).......... 37,500 37,500 37,500 37,500
Excess.......................................... 22,500 0 0 0
Allocation of excess............................ .............. 7,500 7,500 7,500
New excess...................................... .............. .............. 7,500 ..............
Reallocation of new excess...................... .............. 3,750 .............. 3,750
---------------------------------------------------------------
Amount to be used for purposes of section 15,000 48,750 37,500 48,750
535(c) (2) and (3).........................
----------------------------------------------------------------------------------------------------------------
(d) Small business deduction of life insurance companies. (1) Except
as provided in subparagraph (2) of this paragraph, if two or more life
insurance companies which are taxable under section 802 are component
members of a controlled group of corporations on a December 31, the
amount for purposes of computing the limitation on the small business
deduction under sections 804(a)(4) and 809(d)(10) of such corporations
for their taxable years which include such December 31 shall be an
amount equal to $25,000 divided by the
[[Page 616]]
number of life insurance companies taxable under section 802 which are
component members of such group on such December 31.
(2) If, with respect to any of the component members of the
controlled group which are described in subparagraph (1) of this
paragraph, the amount determined under such subparagraph exceeds 10
percent of such member's investment yield (as defined in section
304(c)), then any such excess shall be subtracted from the amount
determined under subparagraph (1) of this paragraph with respect to such
member and shall be divided equally among those remaining life insurance
company members of the controlled group that do not have such an excess
(until no such excess remains to be divided among those remaining
members that have not had such an excess). The excess so divided among
such remaining members shall be added to the amount determined under
subparagraph (1) with respect to such members.
(3) A controlled group may not adopt an apportionment plan, as
provided in Sec. 1.1561-3, with respect to the amounts computed under
the provisions of this paragraph.
(e) Certain short taxable years. (1) If the return of a corporation
is for a short period which does not include a December 31, and such
corporation is a component member of a controlled group of corporations
with respect to such short period, then for purposes of subtitle A of
the Code:
(i) The surtax exemption under section 11(d) of such corporation for
such short period shall be an amount equal to $25,000 ($50,000 in the
case of a taxable year ending in 1975), divided by the number of
corporations which are component members of such controlled group on the
last day of such short period;
(ii) The amount to be used in computing the accumulated earnings
credit under section 535(c) (2) and (3) of such corporation for such
short period shall be an amount equal to $150,000 divided by the number
of corporations which are members of such controlled group on the last
day of such short period; and
(iii) The amount to be used in computing the limitation on the small
business deduction of life insurance companies under sections 804(a)(4)
and 809(d)(10) of such corporation for such short period shall not
exceed an amount equal to $25,000 divided by the number of life
insurance companies taxable under section 802 which are component
members of the controlled group on the last day of such short period.
For purposes of the preceding sentence, the term ``short period'' does
not include any period if the income for such period is required to be
included in a consolidated return under Sec. 1.1502-76. The
determination of whether a corporation is a component member of a
controlled group of corporations on the last day of a short period is
made by applying the definition of ``component member'' contained in
section 1563(b) and Sec. 1.1563-1 as if the last day of such short
period were a December 31 occurring after December 31, 1974.
(2) The provisions of this paragraph may be illustrated by the
following examples:
Example (1). On January 2, 1975, 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 1974 and 1975. X uses the calendar year
as its taxable year and Z uses a fiscal year ending on March 31. Y
adopts a fiscal year ending on June 30 as its annual accounting period,
and, therefore, files a return for the short taxable year beginning on
January 2, 1975, and ending on June 30, 1975. On June 30, 1975, Y is a
component member of a parent-subsidiary controlled group of corporations
of which X, Y, and Z are component members. Accordingly, the surtax
exemption of Y for the short taxable year ending on June 30, 1975, is
$16,666.67 ($50,0003). On December 31, 1975, X, Y, and Z are
component members of a parent-subsidiary controlled group of
corporations. Accordingly, the surtax exemption of each such corporation
for its taxable year including December 31, 1975 (i.e., X's calendar
year ending December 31, 1975, Z's fiscal year ending March 31, 1976,
and Y's fiscal year ending June 30, 1976) is $16,666.67
($50,0003), or, if an apportionment plan is filed under
Sec. 1.1561-3, the amount apportioned pursuant to such plan.
Example (2). On January 1, 1975, corporation P owns all of the stock
of corporations S-1, S-2, and S-3. P, S-1, S-2, and S-3 file separate
returns on a calendar year basis. On July 31, 1975, S-1 is liquidated
and therefore
[[Page 617]]
files a return for the short taxable year beginning on January 1, 1975,
and ending on July 31, 1975. On August 31, 1975, S-2 is liquidated and
therefore files a return for the short taxable year beginning on January
1, 1975, and ending on August 31, 1975. On July 31, 1975, S-1 is a
component member of a parent-subsidiary controlled group of corporations
of which P, S-1, S-2, and S-3 are component members. Accordingly, the
surtax exemption under section 11(d) of S-1 for the short taxable year
ending on July 31, 1975, is $12,500 ($50,0004). On August 31,
1975, S-2 is a component member of a parent-subsidiary controlled group
of corporations of which P, S-2, and S-3 are component members.
Accordingly, the surtax exemption of S-2 for the short taxable year
ending on August 31, 1975, is $16,666.67 ($50,0003). On December
31, 1975, P and S-3 are component members of a parent-subsidiary
controlled group of corporations. Accordingly, the surtax exemption of
each such corporation for the calendar year 1975 is $25,000
($50,0002), or, if an apportionment plan is filed under
Sec. 1.1561-3, the amount apportioned pursuant to such plan.
[T.D. 7528, 42 FR 64695, Dec. 28, 1977]
Sec. 1.1561-3 Apportionment of surtax exemption.
(a) In general. (1) In the case of corporations which are component
members of a controlled group of corporations on a December 31, the
single $50,000 surtax exemption under section 11(d) may be apportioned
among such members (for the taxable year of each such member which
includes such December 31) if all such members consent, in the manner
provided in paragraph (b) of this section, to an apportionment plan with
respect to such December 31. Such plan shall provide for the
apportionment of a fixed dollar amount to one or more of such members,
but in no event shall the sum of the amounts so apportioned exceed
$50,000. An apportionment plan shall not be considered as adopted with
respect to a particular December 31 until each component member which is
required to consent to the plan under paragraph (b)(1) of this section
filed the original of a statement described in such paragraph (or, the
original of a statement incorporating its consent is filed on its
behalf). In the case of a return filed before a plan is adopted, the
surtax exemption for purposes of such return shall be equally
apportioned in accordance with the rules provided in Sec. 1.1561-
2(a)(1)(i). (If a valid apportionment plan is adopted after the return
is filed and within the time prescribed by subparagraph (2) of this
paragraph, such return should be amended (or a claim for refund should
be made) to reflect the change from equal apportionment.)
(2) A controlled group may adopt an apportionment plan with respect
to a particular December 31 only if, at the time such plan is sought to
be adopted, there is at least one year remaining in the statutory period
(including any extensions thereof) for the assessment of a deficiency
against any corporation the tax liability of which would be increased by
the adoption of such plan. If there is less than one year remaining with
respect to any such corporation, the director of the service center with
which such corporation files its income tax return will ordinarily, upon
request, enter into an agreement to extend such statutory period for the
limited purpose of assessing any deficiency against such corporation
attributable to the adoption of such apportionment plan.
(3)(i) The amount apportioned to a component member of a controlled
group of corporations in an apportionment plan adopted with respect to a
particular December 31 shall constitute such member's surtax exemption
for its taxable year including the particular December 31, and for all
taxable years of such members including succeeding December 31's, unless
the apportionment plan is amended in accordance with paragraph (c) of
this section or is terminated under subdivision (ii) of this
subparagraph. Thus, the apportionment plan (including any amendments
thereof) has a continuing effect and need not be renewed annually.
(ii) If an apportionment plan is adopted with respect to a
particular December 31, such plan shall terminate with respect to a
succeeding December 31, if:
(a) The controlled group ceases to remain in existence during the
calendar year ending on such succeeding December 31,
(b) Any corporation which was a component member of such group on
the particular December 31 is not a component member of such group on
such succeeding December 31, or
[[Page 618]]
(c) Any corporation which was not a component member of such group
on the particular December 31 is a component member of such group on
such succeeding December 31.
An apportionment plan, once terminated with respect to a December 31, is
no longer effective. Accordingly, unless a new apportionment plan is
adopted, the surtax exemption of the component members of the controlled
group for their taxable years which include such December 31 and all
December 31's thereafter will be determined in accordance with the rules
provided in paragraph (a)(1)(i) of Sec. 1.1561-2.
(iii) For purposes of subdivision (ii) (a)--(a) A parent-subsidiary
controlled group of corporations shall be considered as remaining in
existence as long as its common parent corporation remains as a common
parent.
(b) A brother-sister controlled group of corporations shall be
considered as remaining in existence as long as the requirements of
paragraph (a)(3)(i) of Sec. 1.1563-1 continue to be satisfied with
respect to at least two corporations, taking into account the stock
ownership of only those five or fewer persons whose stock ownership was
taken into account at the time the apportionment plan adopted by the
component members of such group first became effective.
(c) A combined group of corporations shall be considered as
remaining in existence as long as the brother-sister controlled group of
corporations referred to in paragraph (a)(4)(i) of Sec. 1.1563-1 in
respect of such combined group remains in existence (within the meaning
of (b) of this subdivision), and at least one such corporation is a
common parent of a parent-subsidiary controlled group of corporations
referred to in such paragraph (a)(4)(i).
(d) If, by reason of paragraph (a)(5)(i) of Sec. 1.1563-1, two or
more insurance companies subject to taxation under section 802 are
treated as an insurance group separate from any corporations which are
members of a controlled group described in paragraph (a) (2), (3), or
(4) of Sec. 1.1563-1, such insurance group shall be considered as
remaining in existence as long as the controlled group described in
paragraph (a) (2), (3), or (4) of such section, as the case may be,
remains in existence (within the meaning of (a), (b), or (c) of this
subdivision), and there are at least two insurance companies which
satisfy the requirements of paragraph (a)(5)(i) of such section.
(iv) If an apportionment plan is terminated with respect to a
particular December 31 by reason of an occurrence described in
subdivision (ii) (b) or (c) of this subparagraph, each corporation which
is a component member of the controlled group on such particular
December 31 should, on or before the date it files its income tax return
for the taxable year which includes such particular December 31, notify
the service center with which it files such return of such termination.
If an apportionment plan is terminated with respect to a particular
December 31 by reason of an occurrence described in subdivision (ii)(a)
of this subparagraph, each corporation which was a component member of
the controlled group on the preceding December 31 should, on or before
the date it files its income tax return for the taxable year which
includes such particular December 31, notify the service center with
which it files such return of such termination.
(b) Consents to plan. (1)(i) The consent of a component member
(other than a wholly-owned subsidiary) to an apportionment plan with
respect to a particular December 31 shall be made by means of a
statement, signed by any person who is duly authorized to act on behalf
of the consenting member, stating that such member consents to the
apportionment plan with respect to such December 31. The statement shall
set forth in the name, address, taxpayer account number, and taxable
year of the consenting component member, the amount apportioned to such
member under the plan, and the service center where the original of the
statement is to be filed. The consent of more than one component member
may be incorporated in a single statement. The original of a statement
of consent shall be filed with the service center with which the
component member of the group on such December 31 which has the taxable
year ending first on or after such date filed its return for such
[[Page 619]]
taxable year. (If two or more component members have the same such
taxable year, a statement of consent may be filed with the service
center with which the return for any such taxable year is filed.) The
original of a statement of consent shall have attached thereto
information (referred to in this paragraph as ``group identification'')
setting forth the name, address, taxpayer account number, and taxable
year of each component member of the controlled group on such December
31 (including wholly-owned subsidiaries) and the amount apportioned to
each such member under the plan. If more than one original statement is
filed, a statement may incorporate the group identification by reference
to the name, address, taxpayer account number, and taxable year of a
component member of the group which has attached such group
identification to the original of its statement.
(ii) Each component member of the group on such December 31 (other
than wholly-owned subsidiaries) should attach a copy of its consent (or
a copy of the statement incorporating its consent) to the income tax
return, amended return, or claim for refund filed with its service
center for the taxable year including such date. Such copy shall either
have attached thereto information on group identification or shall
incorporate such information by reference to the name, address, taxpayer
account number, and taxable year of a component member of the group
which has attached such information to its income tax return, amended
return, or claim for refund filed with the same service center for the
taxable year including such date.
(2)(i) Each component member of a controlled group which is a
wholly-owned subsidiary of such group with respect to a December 31
shall be deemed to consent to an apportionment plan with respect to such
December 31, provided each component member of the group which is not a
wholly-owned subsidiary consents to the plan. For purposes of this
section, a component member of a controlled group shall be considered to
be a wholly-owned subsidiary of the group with respect to a December 31
if, on each day preceding such date during its taxable year which
includes such date, all of its stock is owned directly by one or more
corporations which are component members of the group on such December
31.
(ii) Each wholly-owned subsidiary of a controlled group with respect
to a December 31 should attach a statement containing the information
which is required to be set forth in a statement of consent to an
apportionment plan with respect to such December 31 to the income tax
return, amended return, or claim for refund filed with its service
center for the taxable year which includes such date. Such statement
should either have attached thereto information on group identification
or incorporate such information by reference to the name, address,
taxpayer account number, and taxable year of a component member of the
group which has attached such information to its income tax return,
amended return, or claim for refund filed with the same service center
for the taxable year including such date.
(c) Amendment of plan. An apportionment plan adopted with respect to
a December 31 by a controlled group of corporations may be amended with
respect to such December 31, or with respect to any succeeding December
31 for which the plan is effective under paragraph (a)(3) of this
section. An apportionment plan must be amended with respect to a
particular December 31 and the amendments to the plan shall be effective
only if adopted in accordance with the rules prescribed in this section
for the adoption of an original plan with respect to such December 31.
(d) Component members filing consolidated returns. If the component
members of a controlled group of corporations on a December 31 include
corporations which join in the filing of a consolidated return, the
corporations filing the consolidated return shall be treated as a single
component member for purposes of this section. Thus, for example, only
one consent, executed by
[[Page 620]]
the common parent, to an apportionment plan filed pursuant to this
section is required on behalf of the component members filing the
consolidated return.
[T.D. 7528, 42 FR 64697, Dec. 28, 1977; 43 FR 4603, Feb. 3, 1978]
Sec. 1.1562-0 Effective date.
The provisions of Secs. 1.1562-1 through 1.1562-7 apply only to
taxable years beginning before January 1, 1975.
(Secs. 1561(a), (83 Stat. 599; 26 U.S.C. 1561 (a)) and 7805 (68A Stat.
917; 26 U.S.C. 7805, of the Internal Revenue Code))
[T.D. 7528, 42 FR 64702, Dec. 28, 1977]
Sec. 1.1562-1 Privilege of controlled group to elect multiple surtax exemptions.
(a) Election--(1) In general. (i) Under section 1562(a)(1) a
controlled group of corporations has the privilege of electing to have
each of its component members make its returns without regard to section
1561 (relating to single surtax exemption in the case of a controlled
group of corporations). The election shall be made with respect to a
particular December 31 and shall be valid only if each corporation which
is required to consent to the election under the provisions of paragraph
(a)(1) of Sec. 1.1562-3 gives its consent in the manner and within the
time prescribed in such section. An election shall not be considered as
made with respect to a particular December 31 until each corporation
which is required to consent to the election under paragraph (c)(1) of
Sec. 1.1562-3 files the original of a statement described in such
paragraph (or, the original of a statement incorporating its consent is
filed on its behalf). Accordingly, for purposes of returns filed before
an election is made, the surtax exemption of component members of a
controlled group of corporations shall be determined in accordance with
section 1561 and the regulations thereunder. (If a valid election is
made after the return is filed and within the time prescribed in
Sec. 1.1562-3, such return should be amended (or a claim for refund
should be made) to reflect the change in the amount of the surtax
exemption (and the imposition of the additional tax) resulting from the
election.)
(ii) An election once made with respect to a particular December 31
may not thereafter be withdrawn unless such election is terminated with
respect to such December 31 in accordance with the provisions of section
1562(c) and Sec. 1.1562-2.
(iii) An election under section 1562(a)(1) may be made by a
controlled group of corporations with respect to any December 31 (after
December 31, 1962), unless:
(a) A component member of such group on such December 31 joins, or
is required to join, in the filing of a consolidated return for its
taxable year which includes such date, or
(b) Such controlled group is not eligible to make an election with
respect to such December 31 by reason of section 1562(d).
See also section 243(b)(3)(A), relating to effect of election of 100-
percent dividends received deduction, which may prevent a controlled
group from making an election under section 1562(a)(1) with respect to a
particular December 31.
(2) Years for which effective. (i) A valid election under section
1562(a)(1) by a controlled group of corporations with respect to a
particular December 31 is effective with respect to:
(a) The taxable year of each component member of such group on such
December 31 which includes such December 31, and
(b) Any succeeding taxable year of any corporation which is a
component member of such group (or a successor group) on a succeeding
December 31 included within any such succeeding taxable year.
Under section 1562(c) and Sec. 1.1562-2, an election under section
1562(a)(1) may be terminated with respect to a December 31 referred to
in either (a) or (b) of this subdivision. For years affected by
termination, see paragraph (c) of Sec. 1.1562-2.
(ii) For the application of an election under section 1562(a)(1) to
certain short taxable years not including a December 31, see section
1562(f)(2) and Sec. 1.1562-6.
(iii) The provisions of this subparagraph may be illustrated by the
following example:
[[Page 621]]
Example. Corporation P is the common parent of a parent-subsidiary
controlled group of corporations of which corporations P, S-1, and S-2
are component members on December 31, 1964. On December 31, 1965, the
controlled group of corporations consists of the same component members
as on December 31, 1964, except that corporation S-3 is also a component
member on December 31, 1965. On December 31, 1966, the controlled group
of corporations consists of the same component members as on December
31, 1965, except that S-1 is no longer a component member on December
31, 1966. In January 1965, the controlled group makes a valid election
under section 1562(a)(1) with respect to December 31, 1964. Under
subdivision (i)(a) of this subparagraph, the election (unless
terminated) is effective with respect to the taxable years of P, S-1,
and S-2 which include December 31, 1964. Under subdivision (i)(b) of
this subparagraph, the election (unless terminated) is also effective
with respect to the taxable years of P, S-1, S-2, and S-3 which include
December 31, 1965, and with respect to the taxable years of P, S-2, and
S-3 which include December 31, 1966.
(b) Effect of election--(1) General. If an election under section
1562(a)(1) is effective with respect to a taxable year of a corporation,
then:
(i) Section 1561 shall not apply to such corporation for such
taxable year, but
(ii) The additional tax imposed by section 1562(b) shall apply to
such corporation for such taxable year (except as otherwise provided in
subparagraph (3) of this paragraph).
(2) Additional tax. The additional tax imposed by section 1562(b) is
an amount equal to 6 percent of so much of a corporation's taxable
income for the taxable year as does not exceed the amount of such
corporation's surtax exemption for such taxable year. However, if a
corporation computes its tax under section 1201 (relating to alternative
tax) and is subject to the additional tax imposed by section 1562(b) for
such taxable year, the additional tax applies only to an amount equal to
the taxable income reduced by the excess of the net long-term capital
gain over the net short-term capital loss for such taxable year (to the
extent such amount does not exceed the amount of such corporation's
surtax exemption for such taxable year).
(3) Exceptions. The additional tax imposed by section 1562(b) shall
not apply to a corporation for any taxable year if:
(i) Such corporation is the only component member of a controlled
group on the December 31 included within such taxable year which has
taxable income for the taxable years including such date, or
(ii) Such corporation's surtax exemption is disallowed for such year
under any provision of the Code. For purposes of this subdivision, if
the component members of a controlled group of corporations on a
December 31 are limited in the aggregate to a single $25,000 surtax
exemption for their taxable years which include such date, then the
surtax exemption of each such component member shall be considered to be
disallowed for such taxable year regardless of how the $25,000 is
allocated among such members. For example, if pursuant to the authority
provided in section 269(b), the Commissioner allocates a single $25,000
surtax exemption equally between two corporations which are the only
component members of an electing controlled group of corporations, the
surtax exemption of each such corporation shall be considered to be
disallowed.
The application of this subparagraph in respect of a taxable year of a
component member of a controlled group of corporations does not
constitute the termination of an election made under section 1562(a)(1).
Accordingly, such election continues in effect for the subsequent
taxable years of such corporation and the other corporations which are
component members of the controlled group, unless the election is
terminated under section 1562(c).
(4) Taxable income defined. For purposes of this paragraph, the term
``taxable income'' means:
(i) In the case of a corporation subject to tax under section 511(a)
(relating to tax on unrelated business income of charitable, etc.,
organizations at corporation rates), its ``unrelated business taxable
income'' (as defined in section 512),
(ii) In the case of a life insurance company, its ``life insurance
company taxable income'' (as defined in section 802(b)),
[[Page 622]]
(iii) In the case of a regulated investment company, its
``investment company taxable income'' (as defined in section 852(b)(2)),
(iv) In the case of a real estate investment trust, its ``real
estate investment trust taxable income'' (as defined in section
857(b)(2)), and
(v) In the case of an electing small business corporation, its
``taxable income'' (as defined in section 1373(d)).
(5) Tax treated as imposed by section 11, etc. For purposes of
applying other sections of the Code, if for a taxable year a corporation
is subject to both the tax imposed by section 11 and to the additional
tax imposed by section 1562(b), then the additional tax is treated as if
it were imposed by section 11. If a corporation is subject to a tax
imposed by any section of chapter 1 of the Code other than section 11
but such tax is computed by reference to section 11, the additional tax
is treated for purposes of the Code as imposed by such other section.
(For example, the tax imposed by section 831(a) is ``computed as
provided in section 11''; therefore if a corporation is subject to both
the tax imposed by section 831(a) and the additional tax imposed by
section 1562(b) for any taxable year, the additional tax is treated as
imposed by section 831(a) for such taxable year.) Accordingly, the
credits against the tax imposed by chapter 1 of the Code allowable, for
example, under sections 38 (relating to credit against tax for
investment in certain depreciable property) and 33 (relating to credit
for taxes of foreign countries and possessions of the United States) may
be applied against the additional tax.
(6) Special rules. For purposes of sections 244 (relating to
dividends received on certain preferred stock), 247 (relating to
dividends paid on certain preferred stock of public utilities), 804
(a)(3) (relating to deduction for partially tax-exempt interest in the
case of a life insurance company), and 922 (relating to special
deduction for Western Hemisphere trade corporations), the normal tax
rate referred to in such sections shall be determined without regard to
the additional tax imposed by section 1562(b). For example, in the case
of a corporation subject to the additional tax imposed by section
1562(b) for its taxable year ending December 31, 1965, the percentage
computed under section 244(a)(2)(B) for such taxable year would be 48
percent.
[T.D. 6845, 30 FR 9744, Aug. 5, 1965, as amended by T.D. 6960, 33 FR
9302, June 25, 1968; T.D. 7181, 37 FR 8067, Apr. 25, 1972]
Sec. 1.1562-2 Termination of election.
(a) In general. An election under section 1562(a)(1) is terminated
by any one of the occurrences described in paragraph (b) of this
section. For years affected by termination, see paragraph (c) of this
section.
(b) Methods of termination--(1) Consent of the members. An election
may be terminated with respect to a particular December 31 by consent of
the component members of a controlled group of corporations. A
termination by consent shall be made with respect to a particular
December 31 and shall be valid only if each corporation which is
required to consent to the termination under paragraph (a)(1) of
Sec. 1.1562-3 gives its consent in the manner and within the time
prescribed in such section. A termination by consent shall not be
considered as made with respect to a particular December 31 until each
corporation which is required to consent to the termination under
paragraph (c)(1) of Sec. 1.1562-3 files the original of a statement
described in such paragraph (or, the original of a statement
incorporating its consent is filed on its behalf).
(2) Refusal by new member to consent. (i) If on a December 31 a
controlled group of corporations which has made an election under
section 1562(a)(1) includes a new member which files a statement that it
does not consent to the election with respect to such December 31, then
such election shall terminate with respect to such date. Such statement
shall be signed by any person who is duly authorized to act on behalf of
the new member, and shall be attached to the income tax return of such
new member for its taxable year which includes such December 31, filed
on or before the date prescribed by law (including extensions of time)
for the filing of such return. The statement shall set forth the name,
address, taxpayer account number, and taxable year of each corporation
which was a
[[Page 623]]
component member of the controlled group on such December 31. In the
event of a termination under this subparagraph, each component member of
the controlled group on such December 31 (other than such new member)
should, within 30 days after such new member files the statement of
refusal to consent, file notification of the termination with the
district director with whom it filed (or will file) an income tax return
for its taxable year which includes such December 31.
(ii) For purposes of subdivision (i) of this subparagraph, a
corporation shall be considered to be a new member of a controlled group
of corporations on a December 31 if such corporation:
(a) Is a component member of such group on such December 31, and
(b) Was not a member of such group on the January 1 immediately
preceding such December 31.
(3) Consolidated returns. (i) If any corporation which is a
component member of a controlled group of corporations on a December 31
joins, or is required to join, in the filing of a consolidated return
for its taxable year which includes such date, then an election under
section 1562(a)(1) which is effective with respect to preceding taxable
years of component members of the group shall terminate with respect to
such December 31. In the event of a termination under this subparagraph,
each component member of the controlled group on such December 31 which
does not join in the filing of a consolidated return for the taxable
year which includes such date, should, within 30 days after such
consolidated return is filed, file notification of the termination with
the district director with whom it filed (or will file) an income tax
return for its taxable year which includes such December 31.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. On each day of 1964 and 1965, Brown, an individual, owns
all the stock of corporations M and P. Corporation P, in turn, owns all
the stock of corporation S. Each corporation files a separate return for
its taxable year ending on December 31, 1964. On April 30, 1965, the
controlled group of corporations consisting of M, P, and S makes an
election under section 1562(a)(1) with respect to December 31, 1964. On
March 15, 1966, P and S join in the filing of a consolidated return for
their taxable years ending December 31, 1965, and M files a separate
return for its taxable year ending on such date. Under this
subparagraph, the election by the controlled group with respect to
December 31, 1964, is terminated with respect to December 31, 1965. On
or before April 14, 1966, M should file notification of the termination
with the district director with whom it filed its income tax return for
1965.
(4) Controlled group no longer in existence. If a controlled group
of corporations is considered as going out of existence with respect to
a particular December 31 under paragraph (b) of Sec. 1.1562-5, and if
there is no successor group in respect of such controlled group under
the rules provided in paragraph (c) of such section, then an election
under section 1562(a)(1) with respect to such controlled group shall
terminate with respect to such December 31.
(c) Effect of termination. A termination under subparagraph (1),
(2), (3), or (4) of paragraph (b) of this section is effective with
respect to the December 31 referred to in such subparagraph. An
election, once terminated, is no longer effective. Thus, a termination
is effective with respect to the taxable year of each component member
of a controlled group of corporations which includes such December 31
and with respect to all succeeding taxable years of each corporation
which is a component member of such group (or a successor group).
Moreover, after a termination, the controlled group (and any successor
group) may not make a new election except as provided in section 1562(d)
and Sec. 1.1562-4.
[T.D. 6845, 30 FR 9745, Aug. 5, 1965]
Sec. 1.1562-3 Consents to election and termination.
(a) Consents required--(1) General. An election under paragraph
(a)(1) of Sec. 1.1562-1, or a termination by consent under paragraph
(b)(1) of Sec. 1.1562-2, may be made by a controlled group of
corporations with respect to a particular December 31 only if each
corporation, which was a component member of such group (or a successor
group) on any December 31 falling within the period beginning on the
particular December 31 and ending on the most recently past December 31,
consents to
[[Page 624]]
the election or termination within the time prescribed in paragraph (b)
of this section and in the manner prescribed in paragraph (c) of this
section. Such election or termination may be made with respect to a
particular December 31 whether or not the electing or terminating group
ceases to remain in existence under the principles of paragraph (a) of
Sec. 1.1562-5 before such election or termination is made. In the case
of an election with respect to December 31, 1963, if each corporation
which is required to consent to the election under the rules provided in
Treasury Decision 6733, approved May 11, 1964 (29 FR 6320, C.B. 1964-1
(Part 1), 635) gives its consent in the manner provided in such Treasury
Decision before December 31, 1964, then a valid election under section
1562(a)(1) shall be considered to have been made with respect to
December 31, 1963.
(2) Examples. The provisions of subparagraph (1) of this paragraph
may be illustrated by the following examples:
Example (1). P Corporation is the common parent of a parent-
subsidiary controlled group of which corporations P, S-1, and S-2 are
component members on December 31, 1965. On December 31, 1966, the
controlled group consists of the same component members as on December
31, 1965, except that S-1 is no longer a component member on December
31, 1966. On December 31, 1967, the controlled group of corporations
consists of the same component members as on December 31, 1966, except
that corporation S-3 is also a component member on December 31, 1967. In
January 1968, the controlled group desires to make an election under
section 1562(a)(1) with respect to December 31, 1965. Such election may
be made only if P, S-1 (even though S-1 was not a component member of
the group on December 31, 1966, or December 31, 1967), S-2, and S-3
(even though S-3 was not a component member of the group on December 31,
1965, or December 31, 1966) consent to the election.
Example (2). Assume the same facts as in example (1) and further
assume that in January 1968, the controlled group makes a valid election
with respect to December 31, 1965. If, in July 1968, the controlled
group desires to terminate the election with respect to December 31,
1966, P, S-2, and S-3 must consent to the termination.
(b) Time for consents--(1) Consents to election. The consent of each
component member of a controlled group of corporations which is required
with respect to an election for a particular December 31, shall be made
at any time after such December 31 and before the expiration of 3 years
after the date on which the income tax return, for the taxable year of
the component member of the group on such December 31 which has the
taxable year ending first on or after such date, is required to be filed
(determined without regard to any extensions of time for the filing of
such return). See section 1562(e)(1).
(2) Consents to termination. The consent of each component member of
a controlled group of corporations which is required with respect to a
termination for a particular December 31, shall be made at any time
after such December 31 and before the expiration of 3 years after such
date. See section 1562(e)(2).
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). The component members of a controlled group of
corporations on December 31, 1965, consist of 2 calendar-year
corporations, X and Y. The group desires to make an election under
section 1562(a)(1) with respect to December 31, 1965. Under subparagraph
(1) of this paragraph, the required consents to the election must be
made after December 31, 1965, and on or before March 15, 1969. The
result is the same whether or not X or Y (or both) ceases to be a
component member of the group after December 31, 1965, and whether or
not X or Y (or both) is granted an extension of time for the filing of
its income tax return for 1965.
Example (2). Assume the same facts as in example (1) except that X
files its income tax return on the basis of a fiscal year ending January
31, and Y files its income tax return on the basis of a fiscal year
ending on June 30. Under subparagraph (1) of this paragraph, the last
day on which the required consents may be made with respect to an
election for December 31, 1965, is April 15, 1969.
Example (3). Assume the same facts as in example (1) or (2) except
that an election under section 1562(a)(1) is effective for X's and Y's
taxable years including December 31, 1965. Assume further that the group
desires to terminate the election with respect to December 31, 1965.
Under subparagraph (2) of this paragraph, the required consents to the
termination must be made after December 31, 1965, and on or before
December 31, 1968.
(c) Manner of consenting--(1) General rule. (i) The consent of a
corporation to an election or termination with respect to a particular
December 31 (other than
[[Page 625]]
a corporation which is a wholly-owned subsidiary in respect of such
election or termination) shall be made by means of a statement, signed
by any person who is duly authorized to act on behalf of the consenting
corporation, stating that such corporation consents to an election or
termination (as the case may be) with respect to such December 31. Such
statement shall set forth the name, address, and taxpayer account number
of the consenting member and the internal revenue district where the
original of the statement is to be filed. The consent of more than one
component member may be incorporated in a single statement. The original
of a statement of consent shall be filed with the district director with
whom the component member of the group on the particular December 31
which has the taxable year ending first on or after such date filed its
return for such taxable year. (If two or more component members have the
same such taxable year, a statement of consent may be filed with the
district director with whom the return for any such taxable year is
filed.) The original of a statement shall have attached thereto
information (referred to in this paragraph as ``group identification'')
setting forth the name, address, taxpayer account number, and taxable
year of each component member of the controlled group on such December
31 (including wholly-owned subsidiaries). If the particular December 31
is a December 31 other than the December 31 immediately preceding the
date on which such statement is filed then, as part of the ``group
identification'', the original of the statement shall also set forth the
information required in the preceding sentence with respect to each
other corporation which was a component member of the group (or a
successor group) on any December 31 occurring after the particular
December 31 on which the consenting corporation was a component member
of such group. If more than one original statement is filed, a statement
may incorporate the group identification by reference to the name,
address, taxpayer account number, and taxable year of a component member
of the group which has attached such group identification to the
original of its statement.
(ii) Each corporation which was a component member of the electing
(or terminating) controlled group (or a successor group) on a December
31 falling within the period beginning on the particular December 31 and
ending on the most recently past December 31 (other than a wholly-owned
subsidiary in respect of such election or termination) should attach a
copy of its consent (or a copy of the statement incorporating its
consent) to each income tax return, amended return, or claim for refund
filed with its district director for a taxable year which includes any
such December 31. Such copy should either have attached thereto
information on group identification or incorporate such information by
reference to the name, address, taxpayer account number, and taxable
year of a component member of the group which has attached such
information to its income tax return, amended return, or claim for
refund filed with the same district director for a taxable year which
includes any such December 31.
(2) Wholly-owned subsidiaries. (i) Each corporation which is a
wholly-owned subsidiary of a controlled group of corporations in respect
of an election or termination with respect to a particular December 31
shall be deemed to consent to such election or termination (as the case
may be). For purposes of this section, a corporation shall be considered
to be a wholly-owned subsidiary of a controlled group in respect of an
election or termination with respect to a particular December 31 if, on
each day falling within the period beginning on the first day of such
corporation's taxable year which included such December 31 and ending on
the day on which such election or termination is made (or, if such
corporation was not in existence on each day of such period, on each day
falling within such period during which the corporation was in
existence), all the stock of such corporation is owned directly by one
or more corporations which are component members of such group (or a
successor group) on any December 31 falling within such period.
(ii) Each wholly-owned subsidiary should attach a statement to an
income tax return, amended return, or claim for refund filed with its
district
[[Page 626]]
director for each taxable year which contains a December 31 falling
within the period described in the last sentence of subdivision (i) of
this subparagraph, stating that an election or termination (as the case
may be) is effective for such taxable year and containing the
information which would be required to be set forth in a statement of
consent to the election or termination filed pursuant to subparagraph
(1)(i) of this paragraph. Information on group identification may either
be attached to the statement or incorporated by reference to the name,
address, taxpayer account number, and taxable year of a component member
of the group which has attached such group identification to an income
tax return, amended return, or claim for refund filed with the same
district director for the taxable year including such date.
(d) Effect of consent. Under section 1562(e), any consent to an
election under section 1562(a)(1) or a termination under section
1562(c)(1) is deemed to be a consent to the application of section
1562(g)(1) (relating to tolling of statute of limitations on assessment
of deficiencies). See Sec. 1.1562-7.
[T.D. 6845, 30 FR 9746, Aug. 5, 1965]
Sec. 1.1562-4 Election after termination.
(a) In general. Under section 1562(d), if a controlled group of
corporations has made a valid election under section 1562(a)(1), and
such election is terminated by any one of the occurrences described in
paragraph (b) of Sec. 1.1562-2, then such group (or any controlled group
which is a successor to such group within the meaning of paragraph (c)
of Sec. 1.1562-5) is not eligible to make an election under section
1562(a)(1) with respect to any December 31 before the sixth December 31
after the particular December 31 with respect to which such termination
was effective. For the particular December 31 with respect to which a
termination is effective, see paragraph (c) of Sec. 1.1562-2.
(b) Example. The provisions of this section may be illustrated by
the following example:
Example. In 1965, a controlled group of corporations makes a valid
election under section 1562(a)(1) with respect to December 31, 1964. In
1967, the election is terminated with respect to December 31, 1964, by
consent pursuant to paragraph (b)(1) of Sec. 1.1562-2. The group (or any
successor group) is not eligible to make another election with respect
to any December 31 before December 31, 1970 (i.e., the sixth December 31
after December 31, 1964, the particular December 31 with respect to
which such termination was effective). If in this example the election
had been terminated with respect to December 31, 1965, instead of
December 31, 1964, the group (or any successor group) would not be
eligible to make another election with respect to any December 31 before
December 31, 1971.
[T.D. 6845, 30 FR 9747, Aug. 5, 1965]
Sec. 1.1562-5 Continuing and successor controlled groups.
(a) Controlled group continuing in existence. For purposes of
Secs. 1.1561-3 and 1.1562-1 through 1.1562-4:
(1) Parent-subsidiary group. A parent-subsidiary controlled group of
corporations shall be considered as remaining in existence as long as
(i) such group is not considered, under paragraph (c)(3) of this
section, to be a successor controlled group in respect of another
controlled group, and (ii) its common parent corporation remains as a
common parent and satisfies the requirements of paragraph (a)(2)(i)(b)
of Sec. 1.1563-1 with respect to the ownership of stock of at least one
corporation.
(2) Brother-sister group. A brother-sister controlled group of
corporations shall be considered as remaining in existence as long as
the requirements of paragraph (a)(3)(i) of Sec. 1.1563-1 continue to be
satisfied with respect to at least two corporations, taking into account
the stock ownership of only those five or fewer persons whose stock
ownership was taken into account with respect to the election under
section 1562(a)(1).
(3) Combined group. A combined group of corporations shall be
considered as remaining in existence as long as (i) the brother-sister
controlled group of corporations referred to in paragraph (a)(4)(i) of
Sec. 1.1563-1 in respect of such combined group remains in existence
(within the meaning of subparagraph (2) of this paragraph), and (ii) at
least one such corporation is a common parent of a parent-subsidiary
controlled group of corporations referred to in such paragraph
(a)(4)(i).
[[Page 627]]
(4) Insurance group. If, by reason of paragraph (a)(5)(i) of
Sec. 1.1563-1, two or more insurance companies subject to taxation under
section 802 are treated as an insurance group separate from any
corporations which are members of a controlled group described in
paragraph (a) (2), (3), or (4) of Sec. 1.1563-1, such insurance group
shall be considered as remaining in existence as long as (i) the
controlled group described in paragraph (a) (2), (3), or (4) of such
section, as the case may be, remains in existence (within the meaning of
subparagraph (1), (2), or (3) of this paragraph), and (ii) there are at
least two insurance companies which satisfy the requirements of
paragraph (a)(5)(i) of such section.
(b) Controlled group no longer in existence--(1) General. Except as
provided in subparagraph (3) of this paragraph, a controlled group of
corporations is considered as going out of existence with respect to a
December 31 if such group ceases to remain in existence under the
principles of paragraph (a) of this section during the calendar year
ending on such date.
(2) Examples. The provisions of subparagraph (1) of this paragraph
may be illustrated by the following examples, in which each corporation
referred to uses the calendar year as its taxable year:
Example (1). Corporation P was organized on January 1, 1964, and
acquired all the stock of corporation S-1 on February 1, 1964, and all
the stock of corporation S-2 on March 1, 1965. On April 1, 1965, P sold
all its S-1 stock to the public. Beginning on February 1, 1964, P is the
common parent corporation of a parent-subsidiary controlled group of
corporations. Under paragraph (a)(1) of this section, the controlled
group remains in existence throughout the remainder of 1964 and
throughout 1965 even though after April 1, 1965, P satisfies the stock
ownership requirements of paragraph (a)(2)(i) (b) of Sec. 1.1563-1 only
with respect to the stock of S-2, a corporation which was not a member
of the group at the time the group was formed, and even though S-1
ceased to be a member of the group after the group was formed.
Accordingly, if the controlled group makes a valid election under
section 1562(a)(1) with respect to December 31, 1964, such election will
remain in effect with respect to December 31, 1965, unless terminated
under section 1562(c) (1), (2), or (3). Moreover, if such election were
made and subsequently terminated with respect to December 31, 1964, the
group would not be eligible (by reason of section 1562(d)) to make an
election under section 1562(a)(1) with respect to December 31, 1965.
Example (2). Assume the same facts as in example (1) except that
corporation S-2 is a franchised corporation as defined in section
1563(f)(4) for its 1965 taxable year. On December 31, 1965, S-2 is
treated as an excluded member of the parent-subsidiary controlled group
of which P is the common parent. See section 1563(b)(2)(E).
Nevertheless, such controlled group is considered as remaining in
existence throughout 1965.
Example (3). Assume the same facts as in example (1) except that P
sold its S-1 stock on February 28, 1965, instead of April 1, 1965. Under
the principles of paragraph (a)(1) of this section, the parent-
subsidiary controlled group ceases to remain in existence on February
28, 1965. Accordingly, under subparagraph (1) of this paragraph, such
group is considered as going out of existence with respect to December
31, 1965. Thus, if the group makes a valid election under section
1562(a)(1) with respect to December 31, 1964, such election terminates
with respect to December 31, 1965. Moreover, the new controlled group of
corporations consisting of P and S-2 is not precluded (by reason of
section 1562(d)) from making an election under section 1562(a)(1) with
respect to December 31, 1965.
Example (4). Smith, an individual, owns 80 percent of the only class
of stock of corporations W and X on each day of 1966 and 1967. W, in
turn, owns 80 percent of the only class of stock of corporation Y on
each day of 1966. On April 15, 1967, X purchases 80 percent of the only
class of corporation Z and on April 30, 1967, W sells all its stock in
Y. Under paragraph (a)(3) of this section, the combined group remains in
existence throughout 1966 and 1967 since (i) the brother-sister
controlled group of corporations referred to in paragraph (a)(4)(i) of
Sec. 1.1563-1 in respect of such combined group remains in existence,
and (ii) at least one corporation is a common parent of a parent-
subsidiary controlled group referred to in such paragraph.
Example (5). Assume the same facts as in example (4) except that Y
and Z are life insurance companies subject to taxation under section 802
of the Code. Further assume that throughout 1966 and 1967 Y owns all the
stock of corporation S, and Z owns all the stock of corporation T. S and
T are life insurance companies subject to taxation under section 802.
Before April 15, 1967, under paragraph (a)(5)(i) of Sec. 1.1563-1, Y and
S are treated as an insurance group of corporations. After April 30,
1967, under paragraph (a)(4) of this section, Z and T are treated as an
insurance group which remains in existence throughout 1966 and 1967,
since the combined group remains in existence within the meaning of
paragraph (a)(3) of this section throughout 1966 and 1967, and there are
at all
[[Page 628]]
times at least two insurance companies which satisfy the requirements of
paragraph (a)(5)(i) of Sec. 1.1563-1. (However, after April 30, 1967, Y
and S cease to be members of the combined group and are considered to be
a new controlled group of corporations.)
Example (6). Jones, an individual, owns all the stock of
corporations M and N on each day of 1966. On February 1, 1967, he gives
all the stock of M to his 18-year-old son who continues to hold the M
stock throughout the remainder of 1967. Since Jones (or his son) owns,
or is considered as owning under paragraph (b)(6)(i) of Sec. 1.1563-3,
all the stock of M and N on each day of 1967, under paragraph (a)(2) of
this section the brother-sister controlled group consisting of M and N
remains in existence throughout 1967.
(3) Special rule. If:
(i) Under subparagraph (1) of this paragraph, a controlled group of
corporations would (without regard to this subparagraph) be considered
as going out of existence with respect to a December 31 because two or
more corporations cease to be members of such group during the calendar
year ending on such date,
(ii) Under paragraph (c) of this section, there is no successor
group in respect of such group, and
(iii) At least two of such corporations are considered to be
component members of such group on such December 31 by reason of the
additional member rule of paragraph (b)(3) of Sec. 1.1563-1,
then such group shall be considered as going out of existence with
respect to the December 31 immediately succeeding such December 31. For
example, assume that corporations P and S file their returns on the
basis of the calendar year. P owns all the stock of S from January 1,
1965, through December 1, 1965. On December 2, 1965, P sells the stock
of S to the public. Under subparagraph (1) of this paragraph the
controlled group consisting of P and S would (without regard to this
subparagraph) be considered as going out of existence with respect to
December 31, 1965, because P and S ceased to be members of the group on
December 2, 1965. However, since there is no successor group in respect
of the controlled group, and P and S are considered to be component
members of such group on December 31, 1965, by reason of the additional
member rule of paragraph (b)(3) of Sec. 1.1563-1, under this
subparagraph the group is considered as going out of existence with
respect to December 31, 1966, and not December 31, 1965.
(c) Successor groups--(1) Transactions involving a former owner or
owners. If, as a result of the transfer of stock of a corporation or
corporations (whether by sale, exchange, distribution, contribution to
capital, or otherwise), a controlled group (``old group'') goes out of
existence, and a new controlled group (``new group'') comes into
existence, then the new group shall be considered to be a successor to
the old group, provided one of the following applies:
(i) A person or persons who own stock of the new group that meets
the more-than-50-percent stock ownership requirement of section
1563(a)(2)(B) owned stock which met such stock ownership requirement
with respect to the old group;
(ii) A person or persons who owned more than 50 percent of the fair
market value of the stock of the common parent of the old group owns,
with respect to the new group, stock that meets the more-than-50-percent
stock ownership requirement of section 1563(a)(2)(B); or
(iii) A person or persons who owned stock that met the more-than-50-
percent stock ownership requirement of section 1563(a)(2)(B) with
respect to the old group owns more than 50 percent of the fair market
value of the stock of the common parent of the new group.
For purposes of this paragraph, the term ``owns'' includes direct
ownership and ownership with the application of the rules contained in
paragraph (b) of Sec. 1.1563-3. For purposes of this subparagraph, if as
a result of the transfer of stock, a parent-subsidiary controlled group
or a brother-sister controlled group becomes a part of a combined group,
then such parent-subsidiary or brother-sister group shall be considered
as going out of existence as a result of such transfer. Also for
purposes of this subparagraph, if as a result of the transfer of stock,
a combined group goes out of existence and a parent-subsidiary or
brother-sister group which was part of such combined group remains, then
such parent-subsidiary or brother-sister group shall be considered to be
a new controlled group which
[[Page 629]]
came into existence as a result of such transfer.
(2) Examples. The principles of subparagraph (1) of this paragraph
may be illustrated by the following examples:
Example (1). On each day of 1971, unrelated individuals Grey, Black,
and Green own the following amounts of the only class of outstanding
stock of each of corporations R and T: Grey owns 40 percent, Black owns
40 percent, and Green owns 20 percent. On March 1, 1972, Grey sells all
his stock in both corporations to unrelated individual Clay. As a result
of the transfer, the brother-sister controlled group consisting of R and
T goes out of existence. Since Black and Green, who owned stock which
met the more-than-50-percent stock ownership requirement of section
1563(a)(2)(B) with respect to the old group, owns stock of the new group
(consisting of R and T) that meets the more-than-50-percent stock
ownership requirement of section 1563(a)(2)(B), the new group is
considered to be the successor to the old group. If Green also sold all
his stock in both corporations to unrelated individual Barnes, Black
would be the only stockholder of the new group whose stock ownership was
taken into account in meeting the more-than-50-percent stock ownership
requirement of section 1563(a)(2)(B) with respect to the old group.
Since Black would not own stock of the new group that meets the more-
than-50-percent stock ownership requirement of section 1563(a)(2)(B),
the new group would not be considered a successor to the controlled
group which went out of existence.
Example (2). On each day of 1971, all the outstanding stock of
corporation P is owned in the following manner: Smith owns 30 percent,
Jones owns 30 percent, and White owns 40 percent. P owns all the stock
of corporation S1, S2, W1 and
W2. On December 31, 1971, P, S1, S2,
W1, and W2 are component members of the same
controlled group. If on March 1, 1972, P distributes all the stock of
S1 and S2 equally to Smith and Jones and all the
stock of W1 and W2 to White, the controlled group
consisting of P, S1, S2, W1, and
W2 goes out of existence. Since Smith and Jones, who together
owned stock which met the more-than-50-percent stock ownership
requirement of section 1563 (a)(2)(B) with respect to the old group, now
together own stock of the new group (consisting of S1 and
S2) that meets the more-than-50-percent stock ownership
requirement of section 1563(a)(2)(B), such new group is considered the
successor to the old group. On the other hand, since White, the sole
shareholder of W1 and W2, did not own stock which
met such stock ownership requirement with respect to the old group, the
new group consisting of W1 and W2 is not
considered a successor of the old group.
(3) Transactions involving two common parents. If, as a result of
the transfer of stock of a corporation or corporations (whether by sale,
exchange, distribution, contribution to capital, or otherwise):
(i) A parent-subsidiary controlled group of corporations goes out of
existence because its common parent corporation ceases to be a common
parent, and
(ii) The stockholders (immediately before the transfer) of such
common parent corporation, as a result of owning stock in such common
parent, own (immediately after the transfer) more than 50 percent of the
fair market value of the stock of a corporation which is the common
parent corporation of a controlled group of corporations immediately
after the transfer,
the resulting controlled group shall be considered to be a successor
group in respect of the controlled group which went out of existence as
a result of the transfer.
(4) Example. The provisions of subparagraph (3) of this paragraph
may be illustrated by the following example:
Example. Corporation Y, the common parent of a parent-subsidiary
controlled group, acquires the assets of corporation X, the common
parent of another controlled group, in a statutory merger. The
stockholders of X exchange their X stock for 60 percent of the fair
market value of all of the outstanding shares of Y. Since, as a result
of the exchange, (i) the parent-subsidiary controlled group of which X
was the common parent goes out of existence because X ceases to be a
common parent, and (ii) the stockholders of X, as a result of owning
stock in X, own immediately after the exchange more than 50 percent of
the fair market value of the stock of Y (the common parent of a
controlled group of corporations immediately after the exchange), the
controlled group of which Y is the common parent after the merger is
considered to be a successor group in respect of the controlled group of
which X was the common parent, and the group of which Y was the common
parent before the merger is considered, under paragraph (a)(1) of this
section, as no longer in existence. Thus, for example, if before the
merger the controlled group of which X was the common parent was not
eligible, by reason of the application of section 1562(d), to make an
election under section 1562(a)(1) with respect to a December 31
occurring before December 31, 1970, then the successor controlled group
would also be ineligible to make an election with respect
[[Page 630]]
to a December 31 occurring before December 31, 1970, whether or not the
controlled group of which Y was the common parent before the merger had
an election in effect pursuant to section 1562(a)(1).
[T.D. 6845, 30 FR 9747, Aug. 5, 1965, as amended by T.D. 7181, 37 FR
8067, Apr. 25, 1972]
Sec. 1.1562-6 Election for short taxable years.
(a) Application of election to short taxable years--(1) General. If
the return of a corporation is for a short period which does not include
a December 31, and if such corporation is a component member of a
controlled group of corporations with respect to such short period, then
an election under section 1562(a)(1) by such group shall apply with
respect to such short period if:
(i) Such election is in effect with respect to both the December 31,
immediately preceding such short period (hereinafter in this section
referred to as the ``preceding December 31'') and the December 31
immediately succeeding such short period (hereinafter in this section
referred to as the ``succeeding December 31''), or
(ii) Such election is in effect with respect to either the preceding
December 31 or the succeeding December 31, and each corporation which is
a component member of such group with respect to a short period falling
between such dates consents to the application of such election to such
short period. See subparagraph (4) of this paragraph for rules relating
to an election with respect to certain short taxable years ending during
1964.
(2) Component members. For purposes of this section, the
determination of whether a corporation is a component member of a
controlled group of corporations with respect to a short period shall be
made by applying the definition of component member contained in section
1563(b) and paragraph (b) of Sec. 1.1563-1 as if the last day of such
short period were a December 31 occurring after December 31, 1963.
(3) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. On December 31, 1964, corporations P, S-1, and S-2 are
component members of a parent-subsidiary controlled group of
corporations. P, S-1, and S-2 each uses the calendar year as its taxable
year. On February 1, 1965, S-1 transfers property to newly formed
corporation S-3 (which begins business on that date) and receives all
the stock of S-3 in return. S-3 adopts a fiscal year ending on November
30 as its taxable year and, therefore, files a return for the short
taxable year beginning on February 1, 1965, and ending on November 30,
1965. On December 5, 1965, S-2 is liquidated, and therefore files a
return for the short taxable year beginning on January 1, 1965, and
ending on December 5, 1965. S-2 and S-3 are component members of the
controlled group of corporations with respect to their short taxable
years falling between December 31, 1964, and December 31, 1965, within
the meaning of subparagraph (2) of this paragraph. Assume that the
controlled group has an election under section 1562(a)(1) in effect with
respect to either December 31, 1964, or December 31, 1965, but not both
such dates. Under subparagraph (1)(ii) of this paragraph, S-2 and S-3
must both file consents to the application of the section 1562(a)(1)
election with respect to their short periods in order for the election
to be effective with respect to either such short period.
(4) Election for certain short taxable years ending during 1964. If:
(i) A corporation is a component member of a controlled group of
corporations with respect to a short taxable year beginning and ending
in 1964,
(ii) Each corporation which was a component member of such group on
December 31, 1963 (determined without regard to paragraph (b)(2)(iii) of
Sec. 1.1563-1, relating to the treatment of a corporation which has a
taxable year ending on December 31, 1963, as an excluded member of a
controlled group on such date) filed its income tax return on the basis
of the calendar year ending on such date, and
(iii) Such controlled group of corporations is considered as going
out of existence with respect to December 31, 1964, pursuant to
paragraph (b)(4) of Sec. 1.1562-2,
then, for purposes of paragraph (a)(1) (ii) of this section, an election
by such controlled group under section 1562(a) (1) shall be deemed to
have been in effect for the preceding December 31. Each corporation
which is a component member of such group with respect to a short period
falling between such preceding and succeeding December 31's must, on or
before November 3, 1965, consent to the application of such election to
its short period falling between such December 31's.
[[Page 631]]
(b) Status at time of filing return. If, on the date a corporation
files its income tax return for a short period falling between a
preceding and succeeding December 31 (with respect to which period it is
a component member of a controlled group of corporations):
(1) Election not effective. An election under section 1562(a)(1) is
not effective with respect to either such preceding or succeeding
December 31, then such member shall determine its surtax exemption for
purposes of such return in accordance with section 1561(b).
(2) Election effective for preceding December 31. An election under
section 1562(a)(1) is effective with respect to such preceding December
31, and if on the date the return is filed the election has not been
terminated with respect to such succeeding December 31, then such member
may compute its tax for purposes of such return on the assumption that
the conditions of paragraph (a)(1)(i) of this section are satisfied with
respect to such short period.
(3) Election effective for preceding or succeeding December 31. An
election under section 1562(a)(1) is effective with respect to either
(but not both) such preceding or succeeding December 31, and the return
is filed after such succeeding December 31, then the member's surtax
exemption for purposes of such return shall be determined in accordance
with section 1561(b) unless:
(i) It attaches to such return its consent to the application of
such election to such short period, and
(ii) Each other corporation which is a component member of the group
with respect to a short period falling between such December 31's files,
within 30 days after such return is filed, a consent to the application
of such election to its short period falling between such December 31's.
(c) Election or termination after returns filed--(1) Election. If,
after each component member of a controlled group with respect to a
short period falling between a preceding and succeeding December 31
files its return for such short period, the group makes an election
under section 1562(a)(1) with respect to such succeeding December 31,
then the election shall apply with respect to each such short period
only if each such member files, within 30 days after such election is
made, a consent to the application of such election to its short period.
(2) Termination. If, after each component member of a controlled
group with respect to a short period falling between a preceding and
succeeding December 31 files its return for such short period, an
election under section 1562(a)(1) which is effective with respect to
such group with respect to such preceding December 31 is terminated with
respect to such succeeding December 31, then such election shall apply
with respect to each such short period only if each such member files,
within 30 days after the termination occurs, a consent to the
application of such election to its short period. For purposes of the
preceding sentence, (i) the termination of an election by consent under
section 1562(c)(1) shall be considered to occur on the date the
termination is made, and (ii) the termination of an election under
section 1562(c) (2), (3), or (4) shall be considered to occur on the
date the event causing termination occurs (for example, on the date a
new member files a refusal to consent, or on the date a consolidated
return is filed) unless the election is made after such date, in which
case the termination shall be considered to occur on the date the
election is made.
(d) Manner of consenting. A consent referred to in paragraph (b)(3)
or (c) of this section shall be made by means of a statement, signed by
any person who is duly authorized to act on behalf of the consenting
corporation, stating that such corporation consents to the application
of an election under section 1562(a)(1) with respect to its short
period. Each such statement shall set forth the name, address, taxpayer
account number, and taxable year of (1) each corporation which is a
component member of the electing controlled group with respect to a
short period falling between the preceding December 31 and the
succeeding December 31, and (2) each corporation which is a component
member of such group on either the preceding or succeeding December 31.
Each consenting corporation shall file such statement with the district
director with whom it files (or
[[Page 632]]
filed) its income tax return for the short period.
[T.D. 6845, 30 FR 9749, Aug. 5, 1965]
Sec. 1.1562-7 Extension of statutory periods of limitation.
(a)(1) Under section 1562(g)(1), the statutory period for assessment
of any deficiency against a corporation which is a component member of a
controlled group of corporations with respect to any taxable year, to
the extent such deficiency is attributable to an election under section
1562(a)(1) or a termination by consent under section 1562(c)(1), shall
not expire before the expiration of one year after the date such
election or termination is made.
(2) Under section 1562(g)(2), the statutory period for allowing or
making credit or refund of any overpayment of tax by a corporation which
is a component member of a controlled group of corporations with respect
to any taxable year, to the extent such overpayment is attributable to
an election under section 1562(a)(1) or a termination by consent under
section 1562(c)(1), shall not expire before the expiration of one year
after the date such election or termination is made.
(b) For purposes of this section, the deficiency or overpayment in
tax attributable to an election under section 1562(a)(1) or a
termination by consent under section 1562(c)(1) shall be that amount of
the increase or decrease in tax over the amount previously determined
(as defined in section 1314(a)) for any taxable year which results from
the application or nonapplication of section 1562, as the case may be.
In determining the amount of such increase or decrease, due regard shall
be given to the effect of any change in the amount of the surtax
exemption (or the application or nonapplication of the additional tax
under section 1562(b)) on credits allowable for any taxable year. Thus,
for example, as a result of such change it may be necessary to recompute
the amount of the investment credit allowable under section 38 for a
taxable year for which the election or termination is effective and for
other taxable years affected, or treated as affected, by an investment
credit carryback or carryover (as defined in section 46(b)) determined
with reference to the taxable years with respect to which such election
or termination is effective.
(c) The provisions of this section shall not be construed to:
(1) Shorten the period within which an assessment of a deficiency
may otherwise be made or the credit or refund of an overpayment may
otherwise be allowed or made, or
(2) Apply to a deficiency or overpayment for a taxable year if the
tax liability for such taxable year has been compromised under section
7122, or is the subject of a closing agreement under section 7121.
[T.D. 6845, 30 FR 9750, Aug. 5, 1965]
Sec. 1.1563-1 Definition of controlled group of corporations and component members.
(a) Controlled group of corporations--(1) In general. For purposes
of sections 1561 through 1563 and the regulations thereunder, the term
``controlled group of corporations'' means any group of corporations
which is either a ``parent-subsidiary controlled group'' (as defined in
subparagraph (2) of this paragraph), a ``brother-sister controlled
group'' (as defined in subparagraph (3) of this paragraph), a ``combined
group'' (as defined in subparagraph (4) of this paragraph), or an
``insurance group'' (as defined in subparagraph (5) of this paragraph).
For the exclusion of certain stock for purposes of applying the
definitions contained in this paragraph, see section 1563(c) and
Sec. 1.1563-2.
(2) Parent-subsidiary controlled group. (i) The term ``parent-
subsidiary controlled group'' means one or more chains of corporations
connected through stock ownership with a common parent corporation if:
(a) Stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote or at least 80
percent of the total value of shares of all classes of stock of each of
the corporations, except the common parent corporation, is owned
(directly and with the application of paragraph (b)(1) of Sec. 1.1563-3,
relating to options) by one or more of the other corporations; and
(b) The common parent corporation owns (directly and with the
application of paragraph (b)(1) of Sec. 1.1563-3, relating
[[Page 633]]
to options) stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote or at least 80
percent of the total value of shares of all classes of stock of at least
one of the other corporations, excluding, in computing such voting power
or value, stock owned directly by such other corporations.
(ii) The definition of a parent-subsidiary controlled group of
corporations may be illustrated by the following examples:
Example (1). P Corporation owns stock possessing 80 percent of the
total combined voting power of all classes of stock entitled to vote of
S Corporation. P is the common parent of a parent-subsidiary controlled
group consisting of member corporations P and S.
Example (2). Assume the same facts as in example (1). Assume further
that S owns stock possessing 80 percent of the total value of shares of
all classes of stock of T Corporation. P is the common parent of a
parent-subsidiary controlled group consisting of member corporations P,
S, and T. The result would be the same if P, rather than S, owned the T
stock.
Example (3). L Corporation owns 80 percent of the only class of
stock of M Corporation and M, in turn, owns 40 percent of the only class
of stock of O Corporation. L also owns 80 percent of the only class of
stock of N Corporation and N, in turn, owns 40 percent of the only class
of stock of O. L is the common parent of a parent-subsidiary controlled
group consisting of member corporations L, M, N, and O.
Example (4). X Corporation owns 75 percent of the only class of
stock of Y and Z Corporations; Y owns all the remaining stock of Z; and
Z owns all the remaining stock of Y. Since intercompany stockholdings
are excluded (that is, are not treated as outstanding) for purposes of
determining whether X owns stock possessing at least 80 percent of the
voting power or value of at least one of the other corporations, X is
treated as the owner of stock possessing 100 percent of the voting power
and value of Y and of Z for purposes of subdivision (i)(b) of this
subparagraph. Also, stock possessing 100 percent of the voting power and
value of Y and Z is owned by the other corporations in the group within
the meaning of subdivision (i)(a) of this subparagraph. (X and Y
together own stock possessing 100 percent of the voting power and value
of Z, and X and Z together own stock possessing 100 percent of the
voting power and value of Y.) Therefore, X is the common parent of a
parent-subsidiary controlled group of corporations consisting of member
corporations X, Y, and Z.
(3) Brother-sister controlled group. (i) The term ``brother-sister
controlled group'' means two or more corporations if the same five or
fewer persons who are individuals, estates, or trusts own (directly and
with the application of the rules contained in paragraph (b) of
Sec. 1.1563-3) stock possessing:
(a) At least 80 percent of the total combined voting power of all
classes of stock entitled to vote or at least 80 percent of the total
value of shares of all classes of the stock of each corporation; and
(b) More than 50 percent of the total combined voting power of all
classes of stock entitled to vote or more than 50 percent of the total
value of shares of all classes of stock of each corporation, taking into
account the stock ownership of each such person only to the extent such
stock ownership is identical with respect to each such corporation.
The five or fewer persons whose stock ownership is considered for
purposes of the 80 percent requirement must be the same persons whose
stock ownership is considered for purposes of the more-than-50 percent
requirement.
(ii) The principles of this subparagraph may be illustrated by the
following examples:
Example (1). The outstanding stock of corporations P, Q, R, S, and
T, which have only one class of stock outstanding is owned by the
following unrelated individuals:
Corporations
----------------------------------------------------------------------------------------------------------------
Individuals P Q R S T Identical ownership
----------------------------------------------------------------------------------------------------------------
A......................................... 55% 51% 55% 55% 55% 51%.
B......................................... 45% 49% ...... ...... ...... (45% in P & Q).
C......................................... ...... ...... 45% ...... ...... ............................
D......................................... ...... ...... ...... 45% ...... ............................
E......................................... ...... ...... ...... ...... 45% ............................
-------------------------------------------------------------
Total................................... 100% 100% 100% 100% 100% ............................
----------------------------------------------------------------------------------------------------------------
Corporations P and Q are members of a brother-sister controlled group of
corporations. Although the more-than-50 percent identical ownership
requirement is met for all 5 corporations, corporations R, S, and T are
not members becasue at least 80 percent of the stock of each of those
corporations is not owned by the same 5 or fewer persons
[[Page 634]]
whose stock ownership is considered for purposes of the more-than-50
percent identical ownership requirement.
Example (2). The outstanding stock of corporations U and V, which
have only one class of stock outstanding, is owned by the following
unrelated individuals:
------------------------------------------------------------------------
Corporations
---------------------
Individuals U V
(percent) (percent)
------------------------------------------------------------------------
A................................................. 12 12
B................................................. 12 12
C................................................. 12 12
D................................................. 12 12
E................................................. 13 13
F................................................. 13 13
G................................................. 13 13
H................................................. 13 13
----------
Total........................................... 100 100
------------------------------------------------------------------------
Any group of five of the shareholders will own more than 50 percent of
the stock in each corporation, in identical holdings. However, U and V
are not members of brother-sister controlled group because at least 80
percent of the stock of each corporation is not owned by the same five
or fewer persons.
Example (3). Corporation X and Y each have two classes of stock
outstanding, voting common and non-voting common. (None of this stock is
excluded from the definition of stock under section 1563(c).) Unrelated
individuals A and B owns the following percentages of the class of stock
entitled to vote (voting) and of the total value of shares of all
classes of stock (value) in each of corporations X and Y:
------------------------------------------------------------------------
Corporations
Individuals ---------------------------------------
X Y
------------------------------------------------------------------------
A............................... 100% voting, 60% 75% voting, 60%
value. value.
B............................... 0% voting, 10% 25% voting, 10%
value. value.
------------------------------------------------------------------------
No other shareholder of X owns (or is considered to own) any stock in Y.
X and Y are a brother-sister controlled group of corporations. The group
meets the more-than-50 percent ownership requirements because A and B
own more than 50 percent of the total value of shares of all classes of
stock of X and Y in identical holdings. (The group also meets the more-
than-50 percent ownership requirement because of A's voting stock
ownership.) The group meets the 80 percent requirement because A and B
own at least 80 percent of the total combined voting power of all
classes of stock entitled to vote.
Example (4). Assume the same facts as in example (3) except that the
value of the stock owned by A and B is not more than 50 percent of the
total value of shares of all classes of stock of each corporation in
identical holdings. X and Y are not a brother-sister controlled group of
corporations. The group meets the more-than-50 percent ownership
requirement because A owns more than 50 percent of the total combined
voting power of the voting stock of each corporation. For purposes of
the 80 percent requirement, B's voting stock in Y cannot be combined
with A's voting stock in Y since B, who does not own any voting stock in
X, is not a person whose ownership is considered for purposes of the
more-than-50 percent requirement. Because no other shareholder owns
stock in both X and Y, these other shareholders' stock ownership is not
counted towards meeting either the more-than-50 percent ownership
requirement or the 80-percent ownership requirement.
(iii) Paragraph (a)(3) of this section, as amended, by T.D. 8179
applies to taxable years ending on or after December 31, 1970. See,
however, the transitional rule in paragraph (d) of this section.
(4) Combined group. (i) The term ``combined group'' means any group
of three or more corporations, if:
(a) Each such corporation is a member of either a parent-subsidiary
controlled group of corporations or a brother-sister controlled group of
corporations, and
(b) At least one of such corporations is the common parent of a
parent-subsidiary controlled group and also is a member of a brother-
sister controlled group.
(ii) The definition of a combined group of corporations may be
illustrated by the following examples:
Example (1). Smith, an individual, owns stock possessing 80 percent
of the total combined voting power of all classes of the stock of
corporations X and Y. Y, in turn, owns stock possessing 80 percent of
the total combined voting power of all classes of the stock of
corporation Z. Since:
(a) X, Y, and Z are each members of either a parent-subsidiary or
brother-sister controlled group of corporations, and
(b) Y is the common parent of a parent-subsidiary controlled group
of corporations consisting of Y and Z, and also is a member of a
brother-sister controlled group of corporations consisting of X and Y,
X, Y, and Z are members of the same combined group.
Example (2). Assume the same facts as in example (1), and further
assume that corporation X owns 80 percent of the total value of shares
of all classes of stock of corporation T, X, Y, Z, and T are members of
the same combined group.
[[Page 635]]
(5) Insurance group. (i) The term ``insurance group'' means two or
more insurance companies subject to taxation under section 802 each of
which is a member of a controlled group of corporations described in
subparagraph (2), (3), or (4) of this paragraph. Such insurance
companies shall be treated as a controlled group of corporations
separate from any other corporations which are members of the controlled
group described in such subparagraph (2), (3), or (4). For purposes of
this section and Sec. 1.1562-5, the common parent of the controlled
group described in subparagraph (2) of this paragraph shall be referred
to as the common parent of the insurance group.
(ii) The definition of an insurance group may be illustrated by the
following example:
Example. Corporation P owns all the stock of corporation I which, in
turn, owns all the stock of corporation X. P also owns all the stock of
corporation Y which, in turn, owns all the stock of corporation J. I and
J are life insurance companies subject to taxation under section 802 of
the Code. Since I and J are members of a parent-subsidiary controlled
group of corporations, such companies are treated as members of an
insurance group separate from the parent-subsidiary controlled group
consisting of P, X, and Y. For purposes of this section and Sec. 1.1562-
5, P is referred to as the common parent of the insurance group even
though P is not a member of such group.
(6) Voting power of stock. For purposes of Sec. 1.1562-5, this
section, and Secs. 1.1563-2 and 1.1563-3, in determining whether the
stock owned by a person (or persons) possesses a certain percentage of
the total combined voting power of all classes of stock entitled to vote
of a corporation, consideration will be given to all the facts and
circumstances of each case. A share of stock will generally be
considered as possessing the voting power accorded to such share by the
corporate charter, by-laws, or share certificate. On the other hand, if
there is any agreement, whether express or implied, that a shareholder
will not vote his stock in a corporation, the formal voting rights
possessed by his stock may be disregarded in determining the percentage
of the total combined voting power possessed by the stock owned by other
shareholders in the corporation, if the result is that the corporation
becomes a component member of a controlled group of corporations.
Moreover, if a shareholder agrees to vote his stock in a corporation in
the manner specified by another shareholder in the corporation, the
voting rights possessed by the stock owned by the first shareholder may
be considered to be possessed by the stock owned by such other
shareholder if the result is that the corporation becomes a component
member of a controlled group of corporations.
(b) Component members--(1) In general. For purposes of sections 1561
through 1563 and the regulations thereunder, a corporation is a
component member of a controlled group of corporations on a December 31
(and with respect to the taxable year which includes such December 31)
if such corporation:
(i) Is a member of such controlled group on such December 31 and is
not treated as an excluded member under subparagraph (2) of this
paragraph, or
(ii) Is not a member of such controlled group on such December 31
but is treated as an additional member under subparagraph (3) of this
paragraph.
(2) Excluded members. (i) A corporation, which is a member of a
controlled group of corporations on the December 31 included within its
taxable year, but was a member of such group for less than one-half of
the number of days in such taxable year which precede such December 31,
shall be treated as an excluded member of such group on such December
31.
(ii) A corporation which is a member of a controlled group of
corporations on any December 31 shall be treated as an excluded member
of such group on such date if, for its taxable year including such date,
such corporation is:
(a) Exempt from taxation under section 501(a) (except a corporation
which has unrelated business taxable income for such taxable year which
is subject to tax under section 511) or 521,
(b) A foreign corporation not subject to taxation under section
882(a) for the taxable year,
(c) An electing small business corporation (as defined in section
1371(b)) not subject to the tax imposed by section 1378,
[[Page 636]]
(d) A franchised corporation (as defined in section 1563(f)(4) and
Sec. 1.1563- 4), or
(e) An insurance company subject to taxation under section 802 or
821, except that an insurance company taxable under section 802 which
(without regard to this subdivision) is a component member of an
insurance group described in paragraph (a)(5) of this section shall not
be treated as an excluded member of such insurance group.
(iii) A corporation which has a taxable year ending on December 31,
1963, shall be treated as an excluded member of a controlled group on
such date.
(3) Additional members. A corporation which:
(i) Is not a member of a controlled group of corporations on the
December 31 included within its taxable year, and
(ii) Is not described, with respect to such taxable year, in
subparagraph (2)(ii) (a), (b), (c), (d), or (e), or (2)(iii) of this
paragraph,
shall be treated as an additional member of such group on such December
31 if it was a member of such group for one-half (or more) of the number
of days in such taxable year which precede such December 31.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). Brown, an individual, owns all of the stock of
corporations W and X on each day of 1964. W and X each uses the calendar
year as its taxable year. On January 1, 1964, Brown also owns all the
stock of corporation Y (a fiscal year corporation with a taxable year
beginning on July 1, 1964, and ending on June 30, 1965), which stock he
sells on October 15, 1964. On December 31, 1964, Brown purchases all the
stock of corporation Z (a fiscal year corporation with a taxable year
beginning on September 1, 1964, and ending on August 31, 1965). On
December 31, 1964, W, X, and Z are members of the same controlled group.
However, the component members of the group on such December 31 are W,
X, and Y. Under subparagraph (2)(i) of this paragraph, Z is treated as
an excluded member of the group on December 31, 1964, since Z was a
member of the group for less than one-half of the number of days (29 out
of 121 days) during the period beginning on September 1, 1964 (the first
day of its taxable year) and ending on December 30, 1964. Under
subparagraph (3) of this paragraph, Y is treated as an additional member
of the group on December 31, 1964, since Y was a member of the group for
at least one-half of the number of days (107 out of 183 days) during the
period beginning on July 1, 1964 (the first day of its taxable year) and
ending on December 30, 1964.
Example (2). On January 1, 1964, corporation P owns all the stock of
corporation S, which in turn owns all the stock of corporation S-1. On
November 1, 1964, P purchases all of the stock of corporation X from the
public and sells all of the stock of S to the public. Corporation X owns
all the stock of corporation Y during 1964. P, S, S-1, X, and Y file
their returns on the basis of the calendar year. On December 31, 1964,
P, X, and Y are members of a parent-subsidiary controlled group of
corporations; also, corporations S and S-1 are members of a different
parent-subsidiary controlled group on such date. However, since X and Y
have been members of the parent-subsidiary controlled group of which P
is the common parent for less than one-half the number of days during
the period January 1 through December 30, 1964, they are not component
members of such group on such date. On the other hand, X and Y have been
members of a parent-subsidiary controlled group of which X is the common
parent for at least one-half the number of days during the period
January 1 through December 30, 1964, and therefore they are component
members of such group on December 31, 1964. Also since S and S-1 were
members of the parent-subsidiary controlled group of which P is the
common parent for at least one-half the number of days in the taxable
years of each such corporation during the period January 1 through
December 30, 1964, P, S, and S-1 are component members of such group on
December 31, 1964.
Example (3). Throughout 1964, corporation M owns all the stock of
corporation F which, in turn, owns all the stock of corporations L-1, L-
2, X, and Y. M is a domestic mutual insurance company subject to
taxation under section 821, F is a foreign corporation not engaged in
trade or business within the United States, L-1 and L-2 are domestic
life insurance companies subject to taxation under section 802, and X
and Y are domestic corporations subject to tax under section 11 of the
Code. Each corporation uses the calendar year as its taxable year. On
December 31, 1964, M, F, L-1, L-2, X, and Y are members of a parent-
subsidiary controlled group of corporations. However, under subparagraph
(2)(ii) of this paragraph, M, F, L-1, and L-2 are treated as excluded
members of the group on December 31, 1964. Thus, on December 31, 1964,
the component members of the parent-subsidiary controlled group of which
M is the common parent include only X and Y. Furthermore, since
subparagraph (2)(ii)(e) of this paragraph does not result in L-1 and L-2
being treated as excluded members of an insurance group, L-1 and L-2 are
component members of an insurance group on December 31, 1964.
[[Page 637]]
(5) Application of constructive ownership rules. For purposes of
subparagraphs (2)(i) and (3) of this paragraph, it is necessary to
determine whether a corporation was a member of a controlled group of
corporations for one-half (or more) of the number of days in its taxable
year which precede the December 31 falling within such taxable year.
Therefore, the constructive ownership rules contained in paragraph (b)
of Sec. 1.1563-3 (to the extent applicable in making such determination)
must be applied on a day-by-day basis. For example, if P Corporation
owns all the stock of X Corporation on each day of 1964, and on December
30, 1964, acquires an option to purchase all the stock of Y Corporation
(a calendar-year taxpayer which has been in existence on each day of
1964), the application of paragraph (b)(1) of Sec. 1.1563-3 on a day-by-
day basis results in Y being a member of the brother-sister controlled
group on only one day of Y's 1964 year which precedes December 31, 1964.
Accordingly, since Y is not a member of such group for one-half or more
of the number of days in its 1964 year preceding December 31, 1964, Y is
treated as an excluded member of such group on December 31, 1964.
(c) Overlapping groups--(1) In general. If on a December 31 a
corporation is a component member of a controlled group of corporations
by reason of ownership of stock possessing at least 80 percent of the
total value of shares of all classes of stock of the corporation, and if
on such December 31 such corporation is also a component member of
another controlled group of corporations by reason of ownership of other
stock (that is, stock not used to satisfy the at-least-80-percent total
value test) possessing at least 80 percent of the total combined voting
power of all classes of stock of the corporation entitled to vote, then
such corporation shall be treated as a component member only of the
controlled group of which it is a component member by reason of the
ownership of at least 80 percent of the total value of its shares.
(2) Brother-sister controlled groups. (i) If on a December 31, a
corporation would, without application of this subparagraph, be a
component member of more than one brother-sister controlled group on
such date, such corporation shall be treated as a component member of
only one such group on such date. Such a corporation may select which
group in which it is to be included by filing an election as provided in
this subparagraph. The election shall be in the form of a statement
designating the group in which the corporation is to be included. The
statement shall provide all the information with respect to stock
ownership which is reasonably necessary to satisfy the Internal Revenue
officer with whom it is filed that the corporation would, but for the
election, be a component member of more than one controlled group. Once
filed, the election is irrevocable and effective until such time that a
change in the stock ownership of the corporation results in termination
of membership in the controlled group in which such corporation has been
included.
(ii) Except as provided in subdivision (iii) of this subparagraph,
the statement shall be signed by a person duly authorized to act on
behalf of such corporation and shall be filed on or before the due date
(including extension of time) for the filing of the income tax return of
such corporation for the taxable year. However, in the case of an
election with respect to December 31, 1970, the statement shall be
considered as timely filed if filed on or before December 15, 1971. In
the event no election is filed in accordance with the provisions of this
subdivision, then the district director with audit jurisdiction of such
corporation's return for the taxable year which includes such December
31 shall determine the group in which such corporation is to be
included, and such determination shall be binding for all subsequent
years unless the corporation files a valid election with respect to any
such subsequent year.
(iii) If more than one corporation would, without application of
this subparagraph, be a component member of more than one controlled
group, a single statement shall be signed by persons duly authorized to
act on behalf of each such corporation. Such statement shall designate
the group in which each corporation is to be included. The
[[Page 638]]
statement shall be attached to the income tax return of the corporation
that, among those corporations which would (without the application of
this subparagraph) belong to more than one group, has the taxable year
including such December 31 which ends on the earliest date. However, in
the case of an election with respect to December 31, 1970, the statement
may be filed by December 15, 1971, with the service center director with
whom such corporation's return is filed for the taxable year which
includes such December 31. In the event no election is filed in
accordance with the provisions of this subdivision, then the district
director with audit jurisdiction of such corporation's return for the
taxable year that includes such December 31 shall determine the group in
which each corporation is to be included, and such determination shall
be binding for all subsequent years unless the corporations file a valid
election with respect to any such subsequent year.
(iv) The provisions of this subparagraph may be illustrated by the
following examples (in which it is assumed that all the individuals are
unrelated):
Example (1). On each day of 1970 all the outstanding stock of
corporations M, N, and P is held in the following manner:
------------------------------------------------------------------------
Corporations
Individuals -----------------------
M N P
------------------------------------------------------------------------
A............................................... 55% 40% 5%
B............................................... 40% 20% 40%
C............................................... 5% 40% 55%
------------------------------------------------------------------------
Since the more-than-50-percent stock ownership requirement of section
1563(a)(2)(B) is met with respect to corporations M and N and with
respect to corporations N and P, but not with respect to corporations M,
N, and P, corporation N would, without the application of this
subparagraph, be a component member on December 31, 1970, of overlapping
groups consisting of M and N and of N and P. If N does not file an
election in accordance with subdivision (ii) of this subparagraph, the
district director with audit jurisdiction of N's return will determine
the group in which N is to be included.
Example (2). On each day of 1970, all the outstanding stock of
corporations S, T, W, X, and Z is held in the following manner:
------------------------------------------------------------------------
Corporations
Individuals ----------------------------------
S T W X Z
------------------------------------------------------------------------
D.................................... 52% 52% 52% 52% 52%
E.................................... 40% 2% 2% 2% 2%
F.................................... 2% 40% 2% 2% 2%
G.................................... 2% 2% 40% 2% 2%
H.................................... 2% 2% 2% 40% 2%
I.................................... 2% 2% 2% 2% 40%
------------------------------------------------------------------------
On December 31, 1970, the more-than-50-percent stock ownership
requirement of section 1563(a)(2)(B) may be met with regard to any
combination of the corporations but all five corporations cannot be
included as component members of a single controlled group because the
inclusion of all the corporations in a single group would be dependent
upon taking into account the stock ownership of more than five persons.
Therefore, if the corporations do not file a statement in accordance
with subdivision (iii) of this subparagraph, the district director with
audit jurisdiction of the return of the corporation whose taxable year
ends on the earliest date will determine the group in which each
corporation is to be included. The corporations or the district
director, as the case may be, may designate that three corporations be
included in one group and two corporations in another, or that any four
corporations be included in one group and that the remaining corporation
not be included in any group.
(d) Transitional rules--(1) In general. Treasury decision 8179
amended paragraph (a)(3) of this section to revise the definition of a
brother-sister controlled group of corporations. In general, those
amendments are effective for taxable years ending on or after December
31, 1970.
(2) Limited nonretroactivity. (i) Under the authority of section
7805(b), the Internal Revenue Service will treat an old group as a
brother-sister controlled group corporations for purposes of applying
sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of
the Code and sections 202, 203, 204, and 302 of the Employment
Retirement Income Security Act of 1974 (ERISA) in a plan year or taxable
year beginning before March 2, 1988. To the extent necessary to prevent
an adverse effect on any old member (or any other corporation), or on
any plan or other entity described in such sections (including plans,
etc., of corporations not part of such old group), that would result
solely from the retroactive effect of the amendment to this section by
T.D. 8179. An
[[Page 639]]
adverse effect includes the disqualification of a plan or the
disallowance of a deduction or credit for a contribution to a plan. The
Internal Revenue Service, however, will not treat an old member as a
member of an old group to the extent that such treatment will have an
adverse effect on that old member.
(ii) Section 7805(b) will not be applied pursuant to paragraph
(d)(2)(i) of this section to treat an old member of an old group as a
member of a brother-sister controlled group to prevent an adverse effect
for a taxable year if, for that taxable year, that old member treats or
has treated itself as not being a member of that old group for purposes
of section 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971
of the Code and sections 202, 203, 204, and 302 and title IV of ERISA
for such taxable year (such as by filing, with respect to such taxable
year, a return, amended return, or claim for credit or refund in which
the amount of any deduction, credit, limitation, or tax due is
determined by treating itself as not being a member of the old group for
purposes of those sections). However, the fact that one or more (but not
all) of the old members do not qualify for section 7805(b) treatment
because of the preceding sentence will not preclude that old member (or
members) from being treated as a member of the old group under paragraph
(d)(2)(i) of this section in order to prevent the disallowance of a
deduction or credit of another old member (or other corporation) or to
prevent the disqualification of, or other adverse effect on, another old
member's plan (or other entity) described in the sections of the Code
and ERISA enumerated in such paragraph.
(3) Election of general nonretroactivity. In the case of a taxable
year ending on or after December 31, 1970, and before March 2, 1988. An
old group will be treated as a brother-sister controlled group of
corporations for all purposes of the Code for such taxable year if--
(i) Each old member files a statement consenting to such treatment
for such taxable year with the District Director having audit
jurisdiction over its return within six months after March 2, 1988, and
(ii) No old member (A) files or has filed, with respect to such
taxable year, a return, amended return, or claim for credit or refund in
which the amount of any deduction, credit, limitation, or tax due is
determined by treating any old member as not a member of the old group
or (B) treats the employees of all members of the old group as not being
employed by a single employer for purposes of sections 401, 404(a),
408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and sections
202, 203, 204, and 302 of ERISA for such taxable year.
(4) Definitions. For purposes of this paragraph (d) of this
section--
(i) An ``old group'' is a brother-sister controlled group of
corporations, determined by applying paragraph (a)(3) of this section as
in effect before the amendments made by Treasury decision 8179, that is
not a brother-sister controlled group of corporations, determined by
applying paragraph (a)(3) of this section as amended by such Treasury
decision, and
(ii) An ``old member'' is any corporation that is a member of an old
group.
(5) Election to choose between membership in more than one
controlled group. If--
(i) An old member has filed an election under paragraph (c)(2) of
this section to be treated as a component member of an old group for a
December 31 before March 2, 1988, and
(ii) That corporation would (without regard to such paragraph) be a
component member of more than one brother-sister controlled group (not
including an old group) on the December 31, that corporation may make an
election under that paragraph by filing an amended return on or before
September 2, 1988. This paragraph (d)(5) does not apply to a corporation
that is treated as a member of an old group under paragraph (d)(3) of
this section.
(6) Refunds. See section 6511(a) for period of limitation on filing
claims for credit or refund.
[T.D. 6845, 30 FR 9751, Aug. 5, 1965, as amended by T.D. 6960, 33 FR
9302, June 25, 1968; T.D. 7181, 37 FR 8068, Apr. 25, 1972; T.D. 7293, 38
FR 32803, Nov. 28, 1973; T.D. 8179, 53 FR 6612, Mar. 2, 1988; 53 FR
8302, Mar. 14, 1988]
[[Page 640]]
Sec. 1.1563-2 Excluded stock.
(a) Certain stock excluded. For purposes of sections 1561 through
1563 and the regulations thereunder, the term ``stock'' does not
include:
(1) Nonvoting stock which is limited and preferred as to dividends,
and
(2) Treasury stock.
(b) Stock treated as excluded stock--(1) Parent-subsidiary
controlled group. If a corporation (hereinafter in this paragraph
referred to as ``parent corporation'') owns 50 percent or more of the
total combined voting power of all classes of stock entitled to vote or
50 percent or more of the total value of shares of all classes of stock
in another corporation (hereinafter in this paragraph referred to as
``subsidiary corporation''), the provisions of subparagraph (2) of this
paragraph shall apply. For purposes of this subparagraph, stock owned by
a corporation means stock owned directly plus stock owned with the
application of the constructive ownership rules of paragraph (b) (1) and
(4) of Sec. 1.1563-3, relating to options and attribution from
corporations. In determining whether the stock owned by a corporation
possesses the requisite percentage of the total combined voting power of
all classes of stock entitled to vote of another corporation, see
paragraph (a)(6) of Sec. 1.1563-1.
(2) Stock treated as not outstanding. If the provisions of this
subparagraph apply, then for purposes of determining whether the parent
corporation or the subsidiary corporation is a member of a parent-
subsidiary controlled group of corporations within the meaning of
paragraph (a)(2) of Sec. 1.1563-1, the following stock of the subsidiary
corporation shall, except as otherwise provided in paragraph (c) of this
section, be treated as if it were not outstanding:
(i) Plan of deferred compensation. Stock in the subsidiary
corporation held by a trust which is part of a plan of deferred
compensation for the benefit of the employees of the parent corporation
or the subsidiary corporation. The term ``plan of deferred
compensation'' shall have the same meaning such term has in section
406(a)(3) and the regulations thereunder.
(ii) Principal stockholders and officers. Stock in the subsidiary
corporation owned (directly and with the application of the rules
contained in paragraph (b) of Sec. 1.1563-3) by an individual who is a
principal stockholder or officer of the parent corporation. A principal
stockholder of the parent corporation is an individual who owns
(directly and with the application of the rules contained in paragraph
(b) of Sec. 1.1563-3) 5 percent or more of the total combined voting
power of all classes of stock entitled to vote or 5 percent or more of
the total value of shares of all classes of stock of the parent
corporation. An officer of the parent corporation includes the
president, vice-presidents, general manager, treasurer, secretary, and
comptroller of such corporation, and any other person who performs
duties corresponding to those normally performed by persons occupying
such positions.
(iii) Employees. Stock in the subsidiary corporation owned (directly
and with the application of the rules contained in paragraph (b) of
Sec. 1.1563-3) by an employee of the subsidiary corporation if such
stock is subject to conditions which substantially restrict or limit the
employee's right (or if the employee constructively owns such stock, the
direct owner's right) to dispose of such stock and which run in favor of
the parent or subsidiary corporation. In general, any condition which
extends, directly or indirectly, to the parent corporation or the
subsidiary corporation preferential rights with respect to the
acquisition of the employee's (or direct owner's) stock will be
considered to be a condition described in the preceding sentence. It is
not necessary, in order for a condition to be considered to be in favor
of the parent corporation or the subsidiary corporation, that the parent
or subsidiary be extended a discriminatory concession with respect to
the price of the stock. For example, a condition whereby the parent
corporation is given a right of first refusal with respect to any stock
of the subsidiary corporation offered by an employee for sale is a
condition which substantially restricts or limits the employee's right
to dispose of such stock and runs in favor of the parent corporation.
Moreover, any legally enforceable condition
[[Page 641]]
which prohibits the employee from disposing of his stock without the
consent of the parent (or a subsidiary of the parent) will be considered
to be a substantial limitation running in favor of the parent
corporation.
(iv) Controlled exempt organization. Stock in the subsidiary
corporation owned (directly and with the application of the rules
contained in paragraph (b) of Sec. 1.1563-3) by an organization (other
than the parent corporation):
(a) To which section 501 (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(b) Which is controlled directly or indirectly by the parent
corporation or subsidiary corporation, by an individual, estate, or
trust that is a principal stockholder of the parent corporation, by an
officer of the parent corporation, or by any combination thereof.
The terms ``principal stockholder of the parent corporation'' and
``officer of the parent corporation'' shall have the same meanings in
this subdivision as in subdivision (ii) of this subparagraph. The term
``control'' as used in this subdivision means control in fact and the
determination of whether the control requirement of (b) of this
subdivision is met will depend upon all the facts and circumstances of
each case, without regard to whether such control is legally enforceable
and irrespective of the method by which such control is exercised or
exercisable.
(3) Brother-sister controlled group. If five or fewer persons
(hereinafter referred to as common owners) who are individuals, estates,
or trusts own (directly and with the application of the rules contained
in paragraph (b) of Sec. 1.1563-3) stock possessing 50 percent or more
of the total combined voting power of all classes of stock entitled to
vote or 50 percent or more of the total value of shares of all classes
of stock in a corporation, the provisions of subparagraph (4) of this
paragraph shall apply. In determining whether the stock owned by such
person or persons possesses the requisite percentage of the total
combined voting power of all classes of stock entitled to vote of a
corporation, see paragraph (a)(6) of Sec. 1.1563-1.
(4) Stock treated as not outstanding. If the provisions of this
subparagraph apply, then for purposes of determining whether a
corporation is a member of a brother-sister controlled group of
corporations within the meaning of paragraph (a)(3) of Sec. 1.1563-1,
the following stock of such corporation shall, except as otherwise
provided in paragraph (c) of this section, be treated as if it were not
outstanding:
(i) Exempt employees' trust. Stock in such corporation held by an
employees' trust described in section 401(a) which is exempt from tax
under section 501(a), if such trust is for the benefit of the employees
of such corporation.
(ii) Employees. Stock in such corporation owned (directly and with
the application of the rules contained in paragraph (b) of Sec. 1.1563-
3) by an employee of such corporation if such stock is subject to
conditions which run in favor of a common owner of such corporation (or
in favor of such corporation) and which substantially restrict or limit
the employee's right (or if the employee constructively owns such stock,
the record owner's right) to dispose of such stock. The principles of
subparagraph (2)(iii) of this paragraph shall apply in determining
whether a condition satisfies the requirements of the preceding
sentence. Thus, in general, a condition which extends, directly or
indirectly, to a common owner or such corporation preferential rights
with respect to the acquisition of the employee's (or record owner's)
stock will be considered to be a condition which satisfies such
requirements. For purposes of this subdivision, if a condition which
restricts or limits an employee's right (or record owner's right) to
dispose of his stock also applies to the stock in such corporation held
by such common owner pursuant to a bona fide reciprocal stock purchase
arrangement, such condition shall not be treated as one which restricts
or limits the employee's (or record owner's) right to dispose of such
stock. An example of a reciprocal stock purchase arrangement is an
agreement whereby a common owner and the employee are given a right of
first refusal with respect to stock of the employer
[[Page 642]]
corporation owned by the other party. If, however, the agreement also
provides that the common owner has the right to purchase the stock of
the employer corporation owned by the employee in the event that the
corporation should discharge the employee for reasonable cause, the
purchase arrangement would not be reciprocal within the meaning of this
subdivision.
(iii) Controlled exempt organization. Stock in such corporation
owned (directly and with the application of the rules contained in
paragraph (b) of Sec. 1.1563-3) by an organization:
(a) To which section 501(c)(3) (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(b) Which is controlled directly or indirectly by such corporation,
by an individual, estate, or trust that is a principal stockholder of
such corporation, by an officer of such corporation, or by any
combination thereof.
The terms ``principal stockholder'' and ``officer'' shall have the same
meanings in this subdivision as in subparagraph (2)(ii) of this
paragraph. The term ``control'' as used in this subdivision means
control in fact and the determination of whether the control requirement
of (b) of this subdivision is met will depend upon all the facts and
circumstances of each case, without regard to whether such control is
legally enforceable and irrespective of the method by which such control
is exercised or exercisable.
(5) Other controlled groups. The provisions of subparagraphs (1),
(2), (3), and (4) of this paragraph shall apply in determining whether a
corporation is a member of a combined group (within the meaning of
paragraph (a)(4) of Sec. 1.1563-1) or an insurance group (within the
meaning of paragraph (a)(5) of Sec. 1.1563-1). For example, under
paragraph (a)(4) of Sec. 1.1563-1, in order for a corporation to be a
member of a combined group such corporation must be a member of a
parent-subsidiary group or a brother-sister group. Accordingly, the
excluded stock rules provided by this paragraph are applicable in
determining whether the corporation is a member of such group.
(6) Meaning of employee. For purposes of this section Secs. 1.1563-3
and 1.1563-4, the term ``employee'' has the same meaning such term is
given in section 3306(i) of the Code (relating to definitions for
purposes of the Federal Unemployment Tax Act). Accordingly, the term
employee as used in such sections includes an officer of a corporation.
(7) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). Corporation P owns 70 of the 100 shares of the only
class of stock of corporation S. The remaining shares of S are owned as
follows: 4 shares by Jones (the general manager of P), and 26 shares by
Smith (who also owns 5 percent of the total combined voting power of the
stock of P). P satisfies the 50 percent stock ownership requirement of
subparagraph (1) of this paragraph with respect to S. Since Jones is an
officer of P and Smith is a principal stockholder of P, under
subparagraph (2)(ii) of this paragraph the S stock owned by Jones and
Smith is treated as not outstanding for purposes of determining whether
P and S are members of a parent-subsidiary controlled group of
corporations within the meaning of paragraph (a)(2) of Sec. 1.1563-1.
Thus, P is considered to own stock possessing 100 percent (7070)
of the total voting power and value of all the S stock. Accordingly, P
and S are members of a parent-subsidiary controlled group of
corporations.
Example (2). Assume the same facts as in example (1) and further
assume that Jones owns 15 shares of the 100 shares of the only class of
stock of corporation S-1, and corporation S owns 75 shares of such
stock. P satisfies the 50 percent stock ownership requirement of
subparagraph (1) of this paragraph with respect to S-1 since P is
considered as owning 52.5 percent (70 percent x 75 percent) of the S-1
stock with the application of paragraph (b)(4) of Sec. 1.1563-3. Since
Jones is an officer of P, under subparagraph (2)(ii) of this paragraph,
the S-1 stock owned by Jones is treated as not outstanding for purposes
of determining whether S-1 is a member of the parent-subsidiary
controlled group of corporations. Thus, S is considered to own stock
possessing 88.2 percent (7585) of the voting power and value of
the S-1 stock. Accordingly, P, S, and S-1 are members of a parent-
subsidiary controlled group of corporations.
Example (3). Corporation X owns 60 percent of the only class of
stock of corporation Y. Davis, the president of Y, owns the remaining 40
percent of the stock of Y. Davis has agreed that if he offers his stock
in Y for sale he will first offer the stock to X at a price equal to the
fair market value of the stock on the first date the stock is offered
for sale. Since Davis is an employee of Y within the meaning of section
3306(i) of the Code, and
[[Page 643]]
his stock in Y is subject to a condition which substantially restricts
or limits his right to dispose of such stock and runs in favor of X,
under subparagraph (2)(iii) of this paragraph such stock is treated as
if it were not outstanding for purposes of determining whether X and Y
are members of a parent-subsidiary controlled group of corporations.
Thus, X is considered to own stock possessing 100 percent of the voting
power and value of the stock of Y. Accordingly, X and Y are members of a
parent-subsidiary controlled group of corporations. The result would be
the same if Davis's wife, instead of Davis, owned directly the 40
percent stock interest in Y and such stock was subject to a right of
first refusal running in favor of X.
(c) Exception--(1) General. If stock of a corporation is owned by a
person directly or with the application of the rules contained in
paragraph (b) of Sec. 1.1563-3 and such ownership results in the
corporation being a component member of a controlled group of
corporations on a December 31, then the stock shall not be treated as
excluded stock under the provisions of paragraph (b) of this section if
the result of applying such provisions is that such corporation is not a
component member of a controlled group of corporations on such December
31.
(2) Illustration. The provisions of this paragraph may be
illustrated by the following example:
Example. On each day of 1965, corporation P owns directly 50 of the
100 shares of the only class of stock of corporation S. Jones, an
officer of P, owns directly 30 shares of S stock and P has an option to
acquire such 30 shares from Jones. The remaining shares of S are owned
by unrelated persons. If, pursuant to the provisions of paragraph
(b)(2)(ii) of this section, the 30 shares of S stock owned directly by
Jones is treated as not outstanding, the result is that P would be
treated as owning stock possessing only 71 percent (5070) of the
total voting power and value of S stock, and S would not be a component
member of a controlled group of corporations on December 31, 1965.
However, since P is considered as owning the 30 shares of S stock with
the application of paragraph (b)(1) of this section, and such ownership
plus the S stock directly owned by P (50 shares) results in S being a
component member of a controlled group of corporations on December 31,
1965, the provisions of this paragraph apply. Therefore, the provisions
of paragraph (b)(2)(ii) of this section do not apply with respect to the
30 shares of S stock, and on December 31, 1965, S is a component member
of a controlled group of corporations consisting of P and S.
[T.D. 6845, 30 FR 9753, Aug. 5, 1965, as amended by T.D. 7181, 37 FR
8070, Apr. 4, 1972]
Sec. 1.1563-3 Rules for determining stock ownership.
(a) In general. In determining stock ownership for purposes of
Secs. 1.1562-5, 1.1563-1, 1.1563-2, and this section, the constructive
ownership rules of paragraph (b) of this section apply to the extent
such rules are referred to in such sections. The application of such
rules shall be subject to the operating rules and special rules
contained in paragraphs (c) and (d) of this section.
(b) Constructive ownership--(1) Options. If a person has an option
to acquire any outstanding stock of a corporation, such stock shall be
considered as owned by such person. For purposes of this subparagraph,
an option to acquire such an option, and each one of a series of such
options, shall be considered as an option to acquire such stock. For
example, assume Smith owns an option to purchase 100 shares of the
outstanding stock of M Corporation. Under this subparagraph, Smith is
considered to own such 100 shares. The result would be the same if Smith
owned an option to acquire the option (or one of a series of options) to
purchase 100 shares of M stock.
(2) Attribution from partnerships. (i) Stock owned, directly or
indirectly, by or for a partnership shall be considered as owned by any
partner having an interest of 5 percent or more in either the capital or
profits of the partnership in proportion to his interest in capital or
profits, whichever such proportion is the greater.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. Green, Jones, and White, unrelated individuals, are
partners in the GJW partnership. The partners' interests in the capital
and profits of the partnership are as follows:
------------------------------------------------------------------------
Capital Profits
Partner -----------------------
Percent Percent
------------------------------------------------------------------------
Green........................................... 36 25
Jones........................................... 60 71
White........................................... 4 4
------------------------------------------------------------------------
[[Page 644]]
The GJW partnership owns the entire outstanding stock (100 shares) of X
Corporation. Under this subparagraph, Green is considered to own the X
stock owned by the partnership in proportion to his interest in capital
(36 percent) or profits (25 percent), whichever such proportion is the
greater. Therefore, Green is considered to own 36 shares of the X stock.
However, since Jones has a greater interest in the profits of the
partnership, he is considered to own the X stock in proportion to his
interest in such profits. Therefore, Jones is considered to own 71
shares of the X stock. Since White does not have an interest of 5
percent or more in either the capital or profits of the partnership, he
is not considered to own any shares of the X stock.
(3) Attribution from estates or trusts. (i) Stock owned, directly or
indirectly, by or for an estate or trust shall be considered as owned by
any beneficiary who has an actuarial interest of 5 percent or more in
such stock, to the extent of such actuarial interest. For purposes of
this subparagraph, the actuarial interest of each beneficiary shall be
determined by assuming the maximum exercise of discretion by the
fiduciary in favor of such beneficiary and the maximum use of such stock
to satisfy his rights as a beneficiary. A beneficiary of an estate or
trust who cannot under any circumstances receive any interest in stock
held by the estate or trust, including the proceeds from the disposition
thereof, or the income therefrom, does not have an actuarial interest in
such stock. Thus, where stock owned by a decedent's estate has been
specifically bequeathed to certain beneficiaries and the remainder of
the estate is bequeathed to other beneficiaries, the stock is
attributable only to the beneficiaries to whom it is specifically
bequeathed. Similarly, a remainderman of a trust who cannot under any
circumstances receive any interest in the stock of a corporation which
is a part of the corpus of the trust (including any accumulated income
therefrom or the proceeds from a disposition thereof) does not have an
actuarial interest in such stock. However, an income beneficiary of a
trust does have an actuarial interest in stock if he has any right to
the income from such stock even though under the terms of the trust
instrument such stock can never be distributed to him. The factors and
methods prescribed in Sec. 20.2031-7 of this chapter (Estate Tax
Regulations) for use in ascertaining the value of an interest in
property for estate tax purposes shall be used for purposes of this
subdivision in determining a beneficiary's actuarial interest in stock
owned directly or indirectly by or for a trust.
(ii) For the purposes of this subparagraph, property of a decedent
shall be considered as owned by his estate if such property is subject
to administration by the executor or administrator for the purposes of
paying claims against the estate and expenses of administration
notwithstanding that, under local law, legal title to such property
vests in the decedent's heirs, legatees or devisees immediately upon
death. With respect to an estate, the term ``beneficiary'' includes any
person entitled to receive property of the decedent pursuant to a will
or pursuant to laws of descent and distribution. A person shall no
longer be considered a beneficiary of an estate when all the property to
which he is entitled has been received by him, when he no longer has a
claim against the estate arising out of having been a beneficiary, and
when there is only a remote possibility that it will be necessary for
the estate to seek the return of property or to seek payment from him by
contribution or otherwise to satisfy claims against the estate or
expenses of administration. When pursuant to the preceding sentence, a
person ceases to be a beneficiary, stock owned by the estate shall not
thereafter be considered owned by him.
(iii) Stock owned, directly or indirectly, by or for any portion of
a trust of which a person is considered the owner under Subpart E, Part
I, Subchapter J of the Code (relating to grantors and others treated as
substantial owners) is considered as owned by such person.
(iv) This subparagraph does not apply to stock owned by any
employees' trust described in section 401(a) which is exempt from tax
under section 501(a).
(4) Attribution from corporations. (i) Stock owned, directly or
indirectly, by or for a corporation shall be considered as owned by any
person who owns (within the meaning of section 1563(d)) 5 percent or
more in value or its stock
[[Page 645]]
in that proportion which the value of the stock which such person so
owns bears to the value of all the stock in such corporation.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. Brown, an individual, owns 60 shares of the 100 shares of
the only class of outstanding stock of corporation P. Smith, an
individual, owns 4 shares of the P stock, and corporation X owns 36
shares of the P stock. Corporation P owns, directly and indirectly, 50
shares of the stock of corporation S. Under this subparagraph, Brown is
considered to own 30 shares of the S stock (\60/100\ x 50), and X is
considered to own 18 shares of the S stock (\36/100\ x 50). Since Smith
does not own 5 percent or more in value of the P stock, he is not
considered as owning any of the S stock owned by P. If, in this example,
Smith's wife had owned directly 1 share of the P stock, Smith (and his
wife) would each own 5 shares of the P stock, and therefore Smith (and
his wife) would be considered as owning 2.5 shares of the S stock (\5/
100\ x 50).
(5) Spouse. (i) Except as provided in subdivision (ii) of this
subparagraph, an individual shall be considered to own the stock owned,
directly or indirectly, by or for his spouse, other than a spouse who is
legally separated from the individual under a decree of divorce, whether
interlocutory or final, or a decree of separate maintenance.
(ii) An individual shall not be considered to own stock in a
corporation owned, directly or indirectly, by or for his spouse on any
day of a taxable year of such corporation, provided that each of the
following conditions are satisfied with respect to such taxable year:
(a) Such individual does not, at any time during such taxable year,
own directly any stock in such corporation.
(b) Such individual is not a member of the board of directors or an
employee of such corporation and does not participate in the management
of such corporation at any time during such taxable year.
(c) Not more than 50 percent of such corporation's gross income for
such taxable year was derived from royalties, rents, dividends,
interest, and annuities.
(d) Such stock in such corporation is not, at any time during such
taxable year, subject to conditions which substantially restrict or
limit the spouse's right to dispose of such stock and which run in favor
of the individual or his children who have not attained the age of 21
years. The principles of paragraph (b)(2)(iii) of Sec. 1.1563-2 shall
apply in determining whether a condition is a condition described in the
preceding sentence.
(iii) For purposes of subdivision (ii) (c) of this subparagraph, the
gross income of a corporation for a taxable year shall be determined
under section 61 and the regulations thereunder. The terms
``royalties'', ``rents'', ``dividends'', ``interest'', and ``annuities''
shall have the same meanings such terms are given for purposes of
section 1244(c). See paragraph (e)(1)(ii), (iii), (iv), (v), and (vi) of
Sec. 1.1244(c)-1.
(6) Children, grandchildren, parents, and grandparents. (i) An
individual shall be considered to own the stock owned, directly or
indirectly, by or for his children who have not attained the age of 21
years, and, if the individual has not attained the age of 21 years, the
stock owned, directly or indirectly, by or for his parents.
(ii) If an individual owns (directly, and with the application of
the rules of this paragraph but without regard to this subdivision)
stock possessing more than 50 percent of the total combined voting power
of all classes of stock entitled to vote or more than 50 percent of the
total value of shares of all classes of stock in a corporation, then
such individual shall be considered to own the stock in such corporation
owned, directly or indirectly, by or for his parents, grandparents,
grandchildren, and children who have attained the age of 21 years. In
determining whether the stock owned by an individual possesses the
requisite percentage of the total combined voting power of all classes
of stock entitled to vote of a corporation, see paragraph (a)(6) of
Sec. 1.1563-1.
(iii) For purposes of section 1563, and Secs. 1.1563-1 through
1.1563-4, a legally adopted child of an individual shall be treated as a
child of such individual by blood.
(iv) The provisions of this subparagraph may be illustrated by the
following example:
Example (a) Facts. Individual F owns directly 40 shares of the 100
shares of the only class of stock of Z Corporation. His son, M
[[Page 646]]
(20 years of age), owns directly 30 shares of such stock, and his son, A
(30 years of age), owns directly 20 shares of such stock. The remaining
10 shares of the Z stock are owned by an unrelated person.
(b) F's ownership. Individual F owns 40 shares of the Z stock
directly and is considered to own the 30 shares of Z stock owned
directly by M. Since, for purposes of the more-than-50-percent stock
ownership test contained in subdivision (ii) of this subparagraph, F is
treated as owning 70 shares or 70 percent of the total voting power and
value of the Z stock, he is also considered as owning the 20 shares
owned by his adult son, A. Accordingly, F is considered as owning a
total of 90 shares of the Z stock.
(c) M's ownership. Minor son, M, owns 30 shares of the Z stock
directly, and is considered to own the 40 shares of Z stock owned
directly by his father, F. However, M is not considered to own the 20
shares of Z stock owned directly by his brother, A, and constructively
by F, because stock constructively owned by F by reason of family
attribution is not considered as owned by him for purposes of making
another member of his family the constructive owner of such stock. See
paragraph (c)(2) of this section. Accordingly, M owns and is considered
as owning a total of 70 shares of the Z stock.
(d) A's ownership. Adult son, A, owns 20 shares of the Z stock
directly. Since, for purposes of the more-than-50-percent stock
ownership test contained in subdivision (ii) of this subparagraph, A is
treated as owning only the Z stock which he owns directly, he does not
satisfy the condition precedent for the attribution of Z stock from his
father. Accordingly, A is treated as owning only the 20 shares of Z
stock which he owns directly.
(c) Operating rules and special rules--(1) In general. Except as
provided in subparagraph (2) of this paragraph, stock constructively
owned by a person by reason of the application of subparagraph (1), (2),
(3), (4), (5), or (6) of paragraph (b) of this section shall, for
purposes of applying such subparagraphs, be treated as actually owned by
such person.
(2) Members of family. Stock constructively owned by an individual
by reason of the application of subparagraph (5) or (6) of paragraph (b)
of this section shall not be treated as owned by him for purposes of
again applying such subparagraphs in order to make another the
constructive owner of such stock.
(3) Precedence of option attribution. For purposes of this section,
if stock may be considered as owned by a person under subparagraph (1)
of paragraph (b) of this section (relating to option attribution) and
under any other subparagraph of such paragraph, such stock shall be
considered as owned by such person under subparagraph (1) of such
paragraph.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). A, 30 years of age, has a 90 percent interest in the
capital and profits of a partnership. The partnership owns all the
outstanding stock of corporation X and X owns 60 shares of the 100
outstanding shares of corporation Y. Under subparagraph (1) of this
paragraph, the 60 shares of Y constructively owned by the partnership by
reason of subparagraph (4) of paragraph (b) of this section is treated
as actually owned by the partnership for purposes of applying
subparagraph (2) of paragraph (b) of this section. Therefore, A is
considered as owning 54 shares of the Y stock (90 percent of 60 shares).
Example (2). Assume the same facts as in example (1). Assume further
that B, who is 20 years of age and the brother of A, directly owns 40
shares of Y stock. Although the stock of Y owned by B is considered as
owned by C (the father of A and B) under paragraph (b)(6)(i) of this
section, under subparagraph (2) of this paragraph such stock may not be
treated as owned by C for purposes of applying paragraph (b)(6)(ii) of
this section in order to make A the constructive owner of such stock.
Example (3). Assume the same facts assumed for purposes of example
(2), and further assume that C has an option to acquire the 40 shares of
Y stock owned by his son, B. The rule contained in subparagraph (2) of
this paragraph does not prevent the reattribution of such 40 shares to A
because, under subparagraph (3) of this paragraph, C is considered as
owning the 40 shares by reason of option attribution and not by reason
of family attribution. Therefore, since A satisfies the more-than-50-
percent stock ownership test contained in paragraph (b)(6)(ii) of this
section with respect to Y, the 40 shares of Y stock constructively owned
by C are reattributed to A, and A is considered as owning a total of 94
shares of Y stock.
(d) Special rule of section 1563 (f)(3)(B)--(1) In general. If the
same stock of a corporation is owned (within the meaning of section
1563(d)) by two or more persons, then such stock shall be treated as
owned by the person whose ownership of such stock results in the
corporation being a component
[[Page 647]]
member of a controlled group on a December 31 which has at least one
other component member on such date.
(2) Component member of more than one group. (i) If, by reason of
subparagraph (1) of this paragraph, a corporation would (but for this
subparagraph) become a component member of more than one controlled
group on a December 31, such corporation shall be treated as a component
member of only one such controlled group on such date. The determination
as to which group such corporation is treated as a component member of
shall be made in accordance with the rules contained in subdivisions
(ii), (iii), and (iv) of this subparagraph.
(ii) In any case in which a corporation is a component member of a
controlled group of corporations on a December 31 as a result of
treating each share of its stock as owned only by the person who owns
such share directly, then each such share shall be treated as owned by
the person who owns such share directly.
(iii) If the application of subdivision (ii) of this subparagraph
does not result in a corporation being treated as a component member of
only one controlled group on a December 31, then the stock of such
corporation described in subparagraph (1) of this paragraph shall be
treated as owned by the one person described in such subparagraph who
owns, directly and with the application of the rules contained in
paragraph (b) (1), (2), (3), and (4) of this section, the stock
possessing the greatest percentage of the total value of shares of all
classes of stock of the corporation.
(iv) If the application of subdivision (ii) or (iii) of this
subparagraph does not result in a corporation being treated as a
component member of only one controlled group of corporations on a
December 31, then the determination of that group of which such
corporation is to be treated as a component member shall be made by the
district director with audit jurisdiction of such corporation's return
for the taxable year that includes such December 31 unless such
corporation files an election as provided in this subdivision. The
election shall be in the form of a statement, signed by a person
authorized to act on behalf of such corporation, designating the group
in which the corporation has elected to be included. The statement shall
provide all the information with respect to stock ownership which is
reasonably necessary to satisfy the district director that the
corporation would, but for the election, be a component member of more
than one controlled group. The statement shall be filed on or before the
due date (including extensions of time) for the filing of the income tax
return of such corporation for the taxable year. However, in the case of
an election with respect to December 31, 1970, the statement shall be
considered as timely filed if filed on or before December 15, 1971. Once
filed, the election is irrevocable and effective until subdivision (ii)
or (iii) of this subparagraph applies or until there is a substantial
change in the stock ownership of such corporation.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples, in which each corporation referred to uses the
calendar year as its taxable year and the stated facts are assumed to
exist on each day of 1970 (unless otherwise provided in the example):
Example (1). Jones owns all the stock of corporation X and has an
option to purchase from Smith all the outstanding stock of corporation
Y. Smith owns all the outstanding stock of corporation Z. Since the Y
stock is considered as owned by two or more persons, under subparagraph
(2)(ii) of this paragraph the Y stock is treated as owned only by Smith
since he has direct ownership of such stock. Therefore, on December 31,
1970, Y and Z are component members of the same brother-sister
controlled group. If, however, Smith had owned his stock in corporation
Z for less than one-half of the number of days of Z's 1970 taxable year,
then under subparagraph (1) of this paragraph the Y stock would be
treated as owned only by Jones since his ownership results in Y being a
component member of a controlled group on December 31, 1970.
Example (2). Individual H owns directly all the outstanding stock of
corporation M. W (the wife of H) owns directly all the outstanding stock
of corporation N. Neither spouse is considered as owning the stock
directly owned by the other because each of the conditions prescribed in
paragraph (b) (5)(ii) of this section is satisfied with respect to each
corporation's 1970 taxable year. H owns directly 60 percent of the only
class of
[[Page 648]]
stock of corporation P and W owns the remaining 40 percent of the P
stock. Under subparagraph (2)(iii) of this paragraph, the stock of P is
treated as owned only by H since H owns (directly and with the
application of the rules contained in paragraph (b) (1), (2), (3), and
(4) of this section) the stock possessing the greatest percentage of the
total value of shares of all classes of stock of P. Accordingly, on
December 31, 1970, P is treated as a component member of a brother-
sister group consisting of M and P.
Example (3). Unrelated individuals A and B each own 49 percent of
all the outstanding stock of corporation R, which in turn owns 70
percent of the only class of outstanding stock of corporation S. The
remaining 30 percent of the stock of corporation S is owned by unrelated
individual C. C also owns the remaining 2 percent of the stock of
corporation R. Under the attribution rule of paragraph (b)(4) of this
section A and B are each considered to own 34.3 percent of the stock of
corporation S. Accordingly, since five or fewer persons own at least 80
percent of the stock of corporations R and S and also own more than 50
percent identically (A's and B's identical ownership each is 34.3
percent, C's identical ownership is 2 percent), on December 31, 1970,
corporations R and S are treated as component members of the same
brother-sister controlled group.
[T.D. 6845, 30 FR 9755, Aug. 5, 1965, as amended by T.D. 7181, 37 FR
8070, Apr. 25, 1972; T.D. 7779, 46 FR 29474, June 2, 1981; T.D. 8179, 53
FR 6613, Mar. 2, 1988]
Sec. 1.1563-4 Franchised corporations.
(a) In general. For purposes of paragraph (b)(2)(ii)(d) of
Sec. 1.1563-1, a member of a controlled group of corporations shall be
considered to be a franchised corporation for a taxable year if each of
the following conditions is satisfied for one-half (or more) of the
number of days preceding the December 31 included within such taxable
year (or, if such taxable year does not include a December 31, for one-
half or more of the number of days in such taxable year preceding the
last day of such year):
(1) Such member is franchised to sell the products of another
member, or the common owner, of such controlled group.
(2) More than 50 percent (determined on the basis of cost) of all
the goods held by such member primarily for sale to its customers are
acquired from members or the common owner of the controlled group, or
both.
(3) The stock of such member is to be sold to an employee (or
employees) of such member pursuant to a bona fide plan designed to
eliminate the stock ownership of the parent corporation (as defined in
paragraph (b)(1) of Sec. 1.1563-2) or of the common owner (as defined in
paragraph (b)(3) of Sec. 1.1563-2) in such member.
(4) Such employee owns (or such employees in the aggregate own)
directly more than 20 percent of the total value of shares of all
classes of stock of such member. For purposes of this subparagraph, the
determination of whether an employee (or employees) owns the requisite
percentage of the total value of the stock of the member shall be made
without regard to paragraph (b) of Sec. 1.1563-2, relating to certain
stock treated as excluded stock. Furthermore, if the corporation has
more than one class of stock outstanding, the relative voting rights as
between each such class of stock shall be disregarded in making such
determination.
(b) Plan for elimination of stock ownership. (1) A plan referred to
in paragraph (a)(3) of this section must:
(i) Provide a reasonable selling price for the stock of the member,
and
(ii) Require that a portion of the employee's compensation or
dividends, or both, from such member be applied to the purchase of such
stock (or to the purchase of notes, bonds, debentures, or similar
evidences of indebtedness of such member held by the parent corporation
or the common owner).
It is not necessary, in order to satisfy the requirements of subdivision
(ii) of this subparagraph, that the plan require that a percentage of
every dollar of the compensation and dividends be applied to the
purchase of the stock (or the indebtedness). The requirements of such
subdivision are satisfied if an otherwise qualified plan provides that
under certain specified conditions (such as a requirement that the
member earn a specified profit) no portion of the compensation and/or
dividends need be applied to the purchase of the stock (or
indebtedness), provided such conditions are reasonable.
(2) A plan for the elimination of the stock ownership of the parent
corporation or of the common owner will satisfy the requirements of
paragraph
[[Page 649]]
(a)(3) of this section and subparagraph (1) of this paragraph even
though it does not require that the stock of the member be sold to an
employee (or employees) if it provides for the redemption of the stock
of the member held by the parent or common owner and under the plan the
amount of such stock to be redeemed during any period is calculated by
reference to the profits of such member during such period.
[T.D. 6845, 30 FR 9757, Aug. 5, 1965]
Sec. 1.1564-1 Limitations on additional benefits for members of controlled groups.
(a) In general. Section 1564(a)(1) provides that, with respect to
any December 31 after 1969 and before 1975, only one component member of
a controlled group of corporations (as defined in section 1563(a)) shall
be allowed the full amount of:
(1) The $25,000 surtax exemption under section 1562 (relating to
election of multiple surtax exemptions),
(2) The $100,000 amount under section 535(c) (2) and (3) (relating
to the accumulated earnings credit), and
(3) The $25,000 limitation on the small business deduction of life
insurance companies under sections 804(a)(4) and 809(d)(10).
The amounts otherwise allowed to the other component members of such
controlled group for their taxable years which include such December 31
shall be reduced to the amounts set forth in the following schedule:
------------------------------------------------------------------------
Amount Small
Surtax under sec. business
Taxable years including-- exemption 535(c) (2) deduction
and (3) limitation
------------------------------------------------------------------------
Dec. 31, 1970....................... $20,833 $83,333 $20,833
Dec. 31, 1971....................... 16,667 66,667 16,667
Dec. 31, 1972....................... 12,500 50,000 12,500
Dec. 31, 1973....................... 8,333 33,333 8,333
Dec. 31, 1974....................... 4,167 16,667 4,167
------------------------------------------------------------------------
(b) Election. (1) Section 1564(a)(2) provides that, with respect to
any December 31 after 1969 and before 1975, the component members of a
controlled group of corporations shall elect which component member or
members of such group shall be allowed for their taxable years which
includes such December 31 the full amounts described in paragraph (a)
(1), (2), and (3) of this section. In making such election, the members
may allocate such full amounts among themselves in any manner they
choose. For example, the group may select one of its members to receive
the full amount of the $25,000 surtax exemption under section 1562 and
another of its members to receive the full $100,000 amount under section
535(c)(2), or it may select one of its members to claim both, such full
amounts.
(2) The election shall be made with respect to a particular December
31 and shall be valid only if each corporation which is a component
member of the controlled group on such December 31 gives its consent.
The consents shall be made by means of a statement, signed by persons
duly authorized to act on behalf of each of the component members (other
than wholly owned subsidiaries), stating which member has been selected
to receive the amount which is not reduced under paragraph (a) of this
section. The member so selected shall attach the statement to its income
tax return for the taxable year including such December 31. The
statement shall set forth the name, address, employer identification
number, and taxable years of each of the other component members
(including wholly owned subsidiaries) of the controlled group. Such
other members shall attach a copy of the statement to their income tax
returns for their taxable years including such December 31. An election
plan adopted by a controlled group with respect to a particular December
31 shall be valid only for the taxable year of each member of the group
which includes such December 31.
(3) Each component member of a controlled group which is a wholly
owned subsidiary of such group with respect to a December 31 shall be
deemed to consent to an election with respect to such December 31,
provided each component member of the group which is not a wholly owned
subsidiary consents to the election plan. A component member of a
controlled group shall be considered to be a wholly owned subsidiary of
the group with respect to a December 31 if, on each day preceding such
date during its taxable year which includes such date, all of its stock
is
[[Page 650]]
owned directly by one or more corporations which are component members
of the group on such December 31.
[T.D. 7181, 37 FR 8071, Apr. 25, 1972]
Procedure and Administration--Table of Contents
INFORMATION AND RETURNS
returns and records
Source: Sections 1.6001-1 to 1.6091-4 contained in T.D. 6500, 25 FR
12108, Nov. 26, 1960, unless otherwise noted.
Records, Statements, and Special Returns
Sec. 1.6001-1 Records.
(a) In general. Except as provided in paragraph (b) of this section,
any person subject to tax under subtitle A of the Code (including a
qualified State individual income tax which is treated pursuant to
section 6361(a) as if it were imposed by chapter 1 of subtitle A), or
any person required to file a return of information with respect to
income, shall keep such permanent books of account or records, including
inventories, as are sufficient to establish the amount of gross income,
deductions, credits, or other matters required to be shown by such
person in any return of such tax or information.
(b) Farmers and wage-earners. Individuals deriving gross income from
the business of farming, and individuals whose gross income includes
salaries, wages, or similar compensation for personal services rendered,
are required with respect to such income to keep such records as will
enable the district director to determine the correct amount of income
subject to the tax. It is not necessary, however, that with respect to
such income individuals keep the books of account or records required by
paragraph (a) of this section. For rules with respect to the records to
be kept in substantiation of traveling and other business expenses of
employees, see Sec. 1.162-17.
(c) Exempt organizations. In addition to such permanent books and
records as are required by paragraph (a) of this section with respect to
the tax imposed by section 511 on unrelated business income of certain
exempt organizations, every organization exempt from tax under section
501(a) shall keep such permanent books of account or records, including
inventories, as are sufficient to show specifically the items of gross
income, receipts and disbursements. Such organizations shall also keep
such books and records as are required to substantiate the information
required by section 6033. See section 6033 and Secs. 1.6033-1 through
1.6033-3.
(d) Notice by district director requiring returns statements, or the
keeping of records. The district director may require any person, by
notice served upon him, to make such returns, render such statements, or
keep such specific records as will enable the district director to
determine whether or not such person is liable for tax under subtitle A
of the Code, including qualified State individual income taxes, which
are treated pursuant to section 6361(a) as if they were imposed by
chapter 1 of subtitle A.
(e) Retention of records. The books or records required by this
section shall be kept at all times available for inspection by
authorized internal revenue officers or employees, and shall be retained
so long as the contents thereof may become material in the
administration of any internal revenue law.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7122, 36 FR
11025, June 8, 1971; T.D. 7577, 43 FR 59357, Dec. 20, 1978; T.D. 8308,
55 FR 35593, Aug. 31, 1990]
Sec. 1.6001-2 Returns.
For rules relating to returns required to be made by every
individual, estate, or trust which is liable for one or more qualified
State individual income taxes, as defined in section 6362, for a taxable
year, see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations
on procedure and Administration).
[T.D. 7577, 43 FR 59357, Dec. 20, 1978]
tax returns or statements
Sec. 1.6011-1 General requirement of return, statement, or list.
(a) General rule. Every person subject to any tax, or required to
collect any tax, under Subtitle A of the Code, shall make such returns
or statements as are required by the regulations in this chapter. The
return or statement shall
[[Page 651]]
include therein the information required by the applicable regulations
or forms.
(b) Use of prescribed forms. Copies of the prescribed return forms
will so far as possible be furnished taxpayers by district directors. A
taxpayer will not be excused from making a return, however, by the fact
that no return form has been furnished to him. Taxpayers not supplied
with the proper forms should make application therefor to the district
director in ample time to have their returns prepared, verified, and
filed on or before the due date with the internal revenue office where
such returns are required to be filed. Each taxpayer should carefully
prepare his return and set forth fully and clearly the information
required to be included therein. Returns which have not been so prepared
will not be accepted as meeting the requirements of the Code. In the
absence of a prescribed form, a statement made by a taxpayer disclosing
his gross income and the deductions therefrom may be accepted as a
tentative return, and, if filed within the prescribed time, the
statement so made will relieve the taxpayer from liability for the
addition to tax imposed for the delinquent filing of the return,
provided that without unnecessary delay such a tentative return is
supplemented by a return made on the proper form.
(c) Tax withheld on nonresident aliens and foreign corporations. For
requirements respecting the return of the tax required to be withheld
under chapter 3 of the Code on nonresident aliens and foreign
corporations and tax-free covenant bonds, see Sec. 1.1461-2.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6922, 32 FR
8713, June 17, 1967]
Sec. 1.6011-2 Returns, etc., of DISC's and former DISC's.
(a) Records and information. Every DISC and former DISC (as defined
in section 992(a)) must comply with section 6001 and the regulations
thereunder, relating to required records, statements, and special
returns. Thus, for example, a DISC is required to maintain the books of
account or records described in Sec. 1.6001-1(a). In addition, every
DISC must furnish to each of its shareholders on or before the last day
of the second month following the close of the taxable year of the DISC
a copy of Schedule K (Form 1120-DISC) disclosing the amounts of actual
distributions and deemed distributions from the DISC to such shareholder
for the taxable year of the DISC. In the case of a deficiency
distribution to meet qualification requirements, see Sec. 1.992-3(a)(4)
for requirements that distribution be designated in the form of a
communication sent to a shareholder and service center at the time of
distribution.
(b) Returns--(1) Requirement of return. Every DISC (as defined in
section 992(a)(1)) shall make a return of income. A former DISC (as
defined in section 992(a)(3)) shall also make a return of income in
addition to any other return required. The return required of a DISC or
former DISC under this section shall be made on Form 1120-DISC. The
provisions of Sec. 1.6011-1 shall apply with respect to a DISC and
former DISC. A former DISC should indicate clearly on Form 1120-DISC
that it is making a return of income as a former DISC (for example, by
labeling at the top of the Form 1120-DISC ``Former DISC''). In the case
of a former DISC, those items on the form which pertain to the
computation of taxable income shall not be completed, but Schedules J,
K, L, and M must be completed. Except as otherwise specifically provided
in the Code or regulations, the return of a DISC or former DISC is
considered to be an income tax return.
(2) Existence of DISC. A corporation which is a DISC and which is in
existence during any portion of a taxable year is required to make a
return for that fractional part of its taxable year during which it was
in existence.
[T.D. 7533, 43 FR 6603, Feb. 15, 1978]
Sec. 1.6011-3 Requirement of statement from payees of certain gambling winnings.
(a) General rule. Except as provided in paragraph (c) of this
section, any person receiving a payment with respect to a wager in a
sweepstakes, wagering pool, lottery, or other wagering transaction
(including a parimutuel pool with respect to horse races, dog races, or
jai alai) shall make a statement to
[[Page 652]]
the payer of such winnings upon the payer's demand. Such statements
shall accompany the payer's return made with respect to the payment as
required pursuant to section 3402(q) or 6041, as the case may be.
(b) Contents of statement. The statement referred to in paragraph
(a) shall contain information (in addition to that required under
section 6041(c)) as to the amount, if any, of winnings from identical
wagers to which the recipient is entitled. If any person other than the
recipient is entitled to all or a portion of the payment, the statement
shall also include information as to the amount, if any, of winnings
from identical wagers to which each such person is entitled. The
statement shall be provided on Form W-2G or, if persons other than the
recipient are entitled to all or a portion of such payment, on Form
5754.
(c) Exception. The requirement of paragraph (a) of this section does
not apply with respect to any payment of winnings--
(1) From a slot machine play, or a bingo or keno game,
(2) Which is subject to withholding under section 3402(q) without
regard to the existence of winnings from identical wagers, or
(3) For which no return of information under section 6041 is
required of the payer.
(d) Meaning of terms, For purposes of this section, the terms
``sweepstakes'', ``wagering pool'', ``lottery'', ``other wagering
transaction'' and ``identical wagers'' shall have the same meanings as
ascribed to them under Sec. 31.3402(q)-1.
[T.D. 7919, 48 FR 46297, Oct. 12, 1983]
Sec. 1.6011-4T Requirement of statement disclosing participation in certain transactions by corporate taxpayers (Temporary).
(a) In general. Every taxpayer that is required to file a return for
a taxable year with respect to a tax imposed under section 11 and that
has participated, directly or indirectly, in a reportable transaction
within the meaning of paragraph (b) of this section must attach to its
return for the taxable year described in paragraph (d) of this section a
disclosure statement in the form prescribed by paragraph (c) of this
section. For this purpose, a taxpayer will have indirectly participated
in a transaction if its Federal income tax liability is affected by the
transaction even if it is not a direct party to the transaction (e.g.,
it participates through a partnership or through a controlled entity). A
separate disclosure statement is required for each reportable
transaction. The fact that a taxpayer files a disclosure statement for a
reportable transaction shall not affect the legal determination whether
the tax benefits claimed with respect to the transaction are allowable.
(b) Definition of reportable transaction--(1) In general. A
reportable transaction is a transaction that is described in either
paragraph (b)(2) or (3) of this section and that meets the projected tax
effect test in paragraph (b)(4) of this section. The term transaction
includes all of the factual elements necessary to support the tax
benefits that are expected to be claimed with respect to any entity,
plan, or arrangement, and includes any series of related steps carried
out as part of a prearranged plan and any series of substantially
similar transactions entered into in the same taxable year.
(2) Listed transactions. A transaction is described in this
paragraph (b)(2) if the transaction is the same as or substantially
similar to one of the types of transactions that the Internal Revenue
Service (IRS) has determined to be a tax avoidance transaction and
identified by notice, regulation, or other form of published guidance as
a listed transaction for purposes of section 6011. However, a listed
transaction is not treated as a reportable transaction if it has
affected the taxpayer's Federal income tax liability as reported on any
tax return filed on or before February 28, 2000. The fact that a
transaction becomes a listed transaction does not imply that the
transaction was not otherwise a reportable transaction prior thereto.
(3) Other reportable transactions--(i) In general. Except as
provided in paragraph (b)(3)(ii) of this section, a transaction is
described in this paragraph (b)(3) if it is entered into after February
28, 2000 and has at least two of the following characteristics:
[[Page 653]]
(A) The taxpayer has participated in the transaction under
conditions of confidentiality (as defined in Sec. 301.6111-2T(c)).
(B) The taxpayer has obtained or been provided with contractual
protection against the possibility that part or all of the intended tax
benefits from the transaction will not be sustained, including, but not
limited to, recission rights, the right to a full or partial refund of
fees paid to any person, fees that are contingent on the taxpayer's
realization of tax benefits from the transaction, insurance protection
with respect to the tax treatment of the transaction, or a tax indemnity
or similar agreement (other than a customary indemnity provided by a
principal to the transaction that did not participate in the promotion
of the transaction to the taxpayer).
(C) The taxpayer's participation in the transaction was promoted,
solicited, or recommended by one or more persons who have received or
are expected to receive fees or other consideration with an aggregate
value in excess of $100,000, and such person or persons' entitlement to
such fees or other consideration was contingent on the taxpayer's
participation in the transaction.
(D) The expected treatment of the transaction for Federal income tax
purposes in any taxable year differs or is expected to differ by more
than $5 million from the treatment of the transaction for purposes of
determining book income as taken into account on the schedule M-1 (or
comparable schedule) on the taxpayer's Federal corporate income tax
return for the same period.
(E) The transaction involves the participation of a person that the
taxpayer knows or has reason to know is in a Federal income tax position
that differs from that of the taxpayer (such as a tax exempt entity or a
foreign person), and the taxpayer knows or has reason to know that such
difference in tax position has permitted the transaction to be
structured on terms that are intended to provide the taxpayer with more
favorable Federal income tax treatment than it could have obtained
without the participation of such person (or another person in a similar
tax position).
(F) The expected characterization of any significant aspect of the
transaction for Federal income tax purposes differs from the expected
characterization of such aspect of the transaction for purposes of
taxation of any party to the transaction in another country.
(ii) Exceptions. A transaction is not a reportable transaction under
paragraph (b)(3) of this section if paragraph (b)(3)(ii)(A), (B), (C),
or (D) of this section is satisfied.
(A) The taxpayer has participated in the transaction in the ordinary
course of its business in a form consistent with customary commercial
practice, and the taxpayer reasonably determines that it would have
participated in the same transaction on substantially the same terms
irrespective of the expected Federal income tax benefits.
(B) The taxpayer has participated in the transaction in the ordinary
course of its business in a form consistent with customary commercial
practice, and the taxpayer reasonably determines that there is a long-
standing and generally accepted understanding that the expected Federal
income tax benefits from the transaction (taking into account any
combination of intended tax consequences) are allowable under the
Internal Revenue Code (Code) for substantially similar transactions.
(C) The taxpayer reasonably determines that there is no reasonable
basis under Federal tax law for denial of any significant portion of the
expected Federal income tax benefits from the transaction. Such a
determination must take into account the entirety of the transaction and
any combination of tax consequences that are expected to result from any
component steps of the transaction, must not be based on any
unreasonable or unrealistic factual assumptions, and must take into
account all relevant aspects of Federal tax law, including the statute
and legislative history, treaties, authoritative administrative
guidance, and judicial decisions that establish principles of general
application in the tax law (e.g., Gregory v. Helvering, 293 U.S. 465
(1935)).
[[Page 654]]
(D) The transaction is identified in published guidance as being
excepted from disclosure under this section.
(iii) Ordinary course of business. For purposes of paragraphs
(b)(3)(ii)(A) and (B) of this section, a transaction involving the
acquisition, disposition, or restructuring of a business, including the
acquisition, disposition, or other change in the ownership or control of
an entity that is engaged in a business, or a transaction involving a
recapitalization or an acquisition of capital for use in the taxpayer's
business, shall be considered a transaction carried out in the ordinary
course of a taxpayer's business.
(4) Projected tax effect--(i) In general. A transaction described in
paragraph (b)(2) of this section meets the projected tax effect test if,
at the time the taxpayer enters into the transaction or at any time
thereafter, the taxpayer reasonably estimates that the transaction will
reduce the taxpayer's Federal income tax liability by more than $1
million in any single taxable year or by a total of more than $2 million
for any combination of taxable years in which the transaction is
expected to have the effect of reducing the taxpayer's Federal income
tax liability. A transaction described in paragraph (b)(3) of this
section meets the projected tax effect test if, at the time the taxpayer
enters into the transaction or at any time thereafter, the taxpayer
reasonably estimates that the transaction will reduce the taxpayer's
Federal income tax liability by more than $5 million in any single
taxable year or by a total of more than $10 million for any combination
of taxable years in which the transaction is expected to have the effect
of reducing the taxpayer's Federal income tax liability. For purposes of
this paragraph (b)(4), a transaction will be treated as reducing a
taxpayer's Federal income tax liability for a taxable year if, and to
the extent that, disallowance of the tax treatment claimed or expected
to be claimed would result in an increase in the taxpayer's Federal
income tax liability for that year. These dollar thresholds may be
adjusted pursuant to forms prescribed for reporting under this section
and the instructions to such forms.
(ii) Estimation of projected tax effect. A taxpayer's estimate of
the effect of a transaction on its Federal income tax liability shall
take into account all projected Federal income tax consequences of the
transaction, including all deductions, exclusions from gross income,
nonrecognition of gain, tax credits, adjustments (or the absence of
adjustments) to the basis of property, and any other tax consequences
that may reduce the taxpayer's Federal income tax liability by affecting
the timing, character, or source of any item of income, gain, deduction,
loss, or credit. The estimate shall not take into account the potential
Federal income tax effect of any other transaction or transactions that
the taxpayer might have entered into if the taxpayer had not entered
into the transaction in question. Gross income may not be taken into
account if the elements of the transaction that result in the creation
of the gross income are not necessary to achieve the intended tax
results of the transaction, whether or not these elements are an
integral part of the transaction. For example, gross income may not be
taken into account to the extent that it would have been reasonably
possible for the taxpayer to have participated in the transaction in a
manner that would have been expected to produce less gross income
without a commensurate effect on the other tax consequences of the
transaction. In addition, gain on property that the taxpayer acquired
independent of its participation in the transaction may not be taken
into account.
(5) Examples. The following examples illustrate the application of
paragraph (b) of this section. Assume, for purposes of these examples,
that the transactions are not the same as or substantially similar to
any of the types of transactions that the IRS has identified as listed
transactions under section 6011 and, thus, are not described in
paragraph (b)(2) of this section. The examples are as follows:
Example 1. In March of 2000, C, a domestic corporation, invests $100
million to purchase certain financial instruments the terms of which
have been structured to enable the holder to claim a deductible tax loss
upon the disposition of one or more of the instruments a short time
after acquisition while deferring gain on the retained instruments.
[[Page 655]]
C purchased the instruments on the recommendation of X, which is
expected to receive direct or indirect compensation in excess of
$100,000 contingent on C's purchase. C disposes of certain of the
financial instruments in November of 2000, and reports a loss from the
disposition of those financial instruments on its 2000 Federal corporate
income tax return which reduces its reported Federal income tax
liability by more than $5 million. That loss is not reflected on C's
income statement for purposes of determining book income as taken into
account on the schedule M-1 on C's Federal corporate income tax return.
Further, C is unable to reasonably determine that it would have entered
into the transaction irrespective of the Federal income tax benefits, or
that the transaction is a customary form of transaction giving rise to
tax consequences for which there is a long-standing and generally
accepted understanding that such tax consequences are allowable under
the Code for similar transactions, or that the Commissioner would have
no reasonable basis to deny the claimed loss. The transaction involving
C's purchase and disposition of the financial instruments has the
characteristics described in paragraphs (b)(3)(i)(C) and (D) of this
section. None of the exceptions in paragraph (b)(3)(ii) of this section
applies. Therefore, the transaction involving C's purchase and
disposition of the financial instruments is a reportable transaction
because it is described in paragraph (b)(3) of this section.
Example 2. In the year 2001, D, a domestic corporation, completes
construction of an office building to be used in its business. After
completion of the building but before D files its tax return for the
year 2001, it is approached by Y, a professional services organization,
which advises D that Y has developed a set of programs that will enable
D to maximize its depreciation deductions with respect to the building
and the related furniture and fixtures. Y allows D to review Y's
programs subject to D's agreement that it will not use any portion of
the programs in establishing its depreciation accounts for Federal tax
purposes unless it pays Y a fee of $150,000. In addition, D makes a
commitment to Y that it will not divulge any information relating to the
programs to any person, whether or not D decides to use the programs. D
agrees to use Y's programs for purposes of computing its depreciation
allowances for 2001 and later taxable years. D expects its use of the
programs to reduce its Federal income tax liability by more than $10
million over the life of the building. However, D reasonably determines
that it would have constructed and owned the office building in the same
manner irrespective of the enhanced depreciation that it expects to
derive from the use of Y's programs. Therefore, regardless of whether
D's depreciation deductions on the building may be subject to
disallowance, the transaction encompassing the construction of the
building and the use of Y's programs is not a reportable transaction by
reason of the exception under paragraph (b)(3)(ii)(A) of this section.
Example 3. E is a domestic corporation, which is a calendar year
taxpayer. E is engaged in the leasing business. In 2001, E enters into a
large number of substantially similar arrangements described in
paragraph (b)(3)(i) of this section under which it acquires and leases
tangible personal property to U.S. persons who use such property in
their businesses. E treats the leases as leases for Federal income tax
purposes and as loans for financial accounting purposes. During the
first three taxable years in which the leases are in effect, E
reasonably expects that its reported taxable income will be more than
$30 million lower than it would be if the leases were treated as loans
for Federal income tax purposes, giving rise to a total expected
reduction of E's Federal income tax liability for those years in excess
of $10 million. E cannot conclude that it would have entered into the
leases on substantially the same terms irrespective of the expected
Federal income tax benefits, nor can it conclude that the Commissioner
would have no reasonable basis to deny its tax treatment of the leases.
However, E does reasonably determine that the terms of the leases are
consistent with customary commercial form in the leasing industry, and
that there is a long-standing and generally accepted understanding that
the combination of Federal income tax consequences it is claiming with
respect to the leases are allowable under the Code for similar
transactions. The substantially similar leases would be treated for
purposes of this section as a single transaction that would satisfy the
projected tax effect test described in paragraph (b)(4) of this section.
However, the leases would not be a reportable transaction by reason of
the exception under paragraph (b)(3)(ii)(B) of this section.
(c) Form and content of disclosure statement. (1) The disclosure
statement for each reportable transaction must include the information
required by paragraph (c)(1)(i) through (c)(1)(vi) of this section and
shall be presented in a format (preferably no longer than one page)
similar to that shown in the Example in paragraph (c)(2) of this section
or on such form as may be prescribed for use under this section.
(i) The name, if any, by which the transaction is known or commonly
referred to by the taxpayer; if no name exists, provide a short-hand
designation of this transaction to distinguish it from other reportable
transactions
[[Page 656]]
in which the taxpayer may have participated (or may participate in the
future).
(ii) A statement indicating whether, to the best knowledge of the
taxpayer, the transaction has been registered as a tax shelter under
section 6111. If the transaction has been registered as a tax shelter
under section 6111, indicate whether Form 8271, ``Investor Reporting of
Tax Shelter Registration Number'', has been filed with the taxpayer's
return and provide the registration number, if any, that has been
assigned to the tax shelter.
(iii) A brief description of the principal elements of the
transaction that give rise to the expected tax benefits.
(iv) A brief description of the expected tax benefits of the
transaction (e.g., loss deductions, interest deductions, rental
deductions, foreign tax credits, etc.).
(v) An identification of each taxable year (including prior taxable
years) for which the transaction is expected to have the effect of
reducing the taxpayer's Federal income tax liability and an estimate
(which may be rounded to the nearest $1 million) of the amount by which
the transaction is expected to reduce the taxpayer's Federal income tax
liability for each such taxable year.
(vi) The names and addresses of any parties who promoted, solicited,
or recommended the taxpayer's participation in the transaction and who
had a financial interest, including the receipt of fees, in the
taxpayer's decision to participate.
(2) Example. The following example illustrates the application of
paragraph (c) of this section: In January of 1999, X, a domestic
corporation which is a calendar year taxpayer, entered into an
arrangement under which it purported to lease a building owned and
occupied by the government of a municipality located in foreign country
W and lease the building back to the municipal government. X determines
that the transaction is a reportable transaction described in paragraph
(b)(1) of this section because it is described in paragraph (b)(2) of
this section and satisfies the projected tax effect test in paragraph
(b)(4) of this section. As of February 28, 2000, X had not filed its
1999 Federal corporate income tax return. The following form of
disclosure statement would satisfy the requirements described in
paragraph (c)(1) of this section.
Disclosure Statement for Reportable Transaction
----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Corporation X (EIN)
(address)
----------------------------------------------------------------------------------------------------------------
1. Identification of transaction: LILO--Country W.
----------------------------------------------------------------------------------------------------------------
2. Registration status under section 6111: Not registered.
----------------------------------------------------------------------------------------------------------------
3. Description of transaction: We leased a building from a municipality in W. We made an advance payment of rent
of $89 million. The lease term is 34 years. The foreign municipality subleased the asset back from us for a
term of 20 years. The foreign municipality has the option, at the end of the sublease term, to buy out our
interest for $50 million. Our advance lease payment has been financed with a bank loan of $60 million. The
foreign municipality placed $75 million of the advance rental payment in special accounts to satisfy the
sublease and buyout obligations.
----------------------------------------------------------------------------------------------------------------
4. Principal tax benefits: Deductions for rental and interest payments in excess of income from leaseback rental
payments.
----------------------------------------------------------------------------------------------------------------
[[Page 657]]
5. Estimates of expected reduction of Federal income tax liability for affected taxable years: 1999-2002, $5
million per year; 2003-2013, $4 million per year; and 2014-2017, $3 million per year.
----------------------------------------------------------------------------------------------------------------
6. Promoters:
Financial Institution Y
(address)
(telephone number)
Professional Service Firm Z
(address)
(telephone number)
----------------------------------------------------------------------------------------------------------------
(d) Time of providing disclosure--(1) In general. The disclosure
statement for a reportable transaction shall be attached to the
taxpayer's Federal corporate income tax return for each taxable year for
which the taxpayer's Federal income tax liability is affected by its
participation in the transaction. In addition, at the same time that the
disclosure statement is first attached to the taxpayer's Federal income
tax return, a copy of that disclosure statement must be sent to:
Internal Revenue Service LM:PF, Large & Mid-Size Business Division, 1111
Constitution Ave., N.W., Washington, DC 20224. If a transaction becomes
a reportable transaction on or after the date the taxpayer has filed its
return for the first taxable year for which the transaction affected the
taxpayer's Federal income tax liability (e.g., there is a change in
facts affecting the expected Federal income tax effect of the
transaction, or the transaction subsequently becomes one identified in
published guidance as a listed transaction described in (b)(2) of this
section), the disclosure statement shall be filed as an attachment to
the taxpayer's Federal corporate income tax return next filed after the
date the transaction becomes a reportable transaction. If a disclosure
statement is required as an attachment to a Federal corporate income tax
return that is filed earlier than 180 days after February 28, 2000, the
taxpayer may either attach the disclosure statement to the return, or
file the disclosure statement as an amendment to the return no later
than 180 days after February 28, 2000.
(2) Example. The following example illustrates the application of
this paragraph (d): In December of 2000, F, a domestic corporation which
is a calendar year taxpayer, enters into a transaction described in
paragraph (b)(3) of this section but not described in paragraph (b)(2)
of this section. At the time F enters into the transaction and
thereafter, F reasonably estimates that the transaction will reduce F's
Federal income tax liability by $2 million in any single taxable year
and by a total of $8 million for any combination of taxable years in
which the transaction is expected to have the effect of reducing F's
Federal income tax liability. Consequently, the transaction does not
meet the projected tax effect test described in paragraph (b)(4) of this
section for transactions described in paragraph (b)(3) of this section.
On March 1, 2002, the IRS publishes a notice identifying the transaction
as a listed transaction described in paragraph (b)(2) of this section.
Thus, upon issuance of the notice, the transaction becomes a transaction
described in paragraph (b)(2) of this section. As a result of the lower
dollar thresholds of the projected tax effect test with respect to
transactions described in (b)(2) of this section, the transaction meets
the projected tax effect test in paragraph (b)(4) of this section.
Consequently, the transaction becomes a reportable transaction described
in paragraph (b)(1) of this section, and F is required to file a
disclosure statement meeting the requirements of paragraph (c)(1) of
this section for the transaction as an attachment to F's next filed
Federal corporate income tax return. If F's 2001 return has not been
filed on or before the date the Service identifies the transaction as a
listed transaction, the disclosure statement must be attached to F's
2001 return.
[[Page 658]]
(e) Retention of documents. The taxpayer must retain all documents
related to a transaction subject to disclosure under this section until
the expiration of the statute of limitations applicable to the first
taxable year for which disclosure of the transaction was made in
accordance with the requirements of this section. (This document
retention requirement is in addition to any document retention
requirements that section 6001 generally imposes on the taxpayer.) Such
documents include, but are not limited to, the following: all marketing
materials related to the transaction; all written analyses used in
decision-making related to the transaction; all correspondence and
agreements related to the transaction between the taxpayer and any
promoter, advisor, lender, or other party to the reportable transaction;
all documents discussing, referring to, or demonstrating the tax
benefits arising from the reportable transaction; and all documents, if
any, referring to the business purposes for the reportable transaction.
(f) Affiliated groups. For purposes of this section, an affiliated
group of corporations that joins in the filing of a consolidated return
under section 1501 shall be considered a single taxpayer.
(g) Effective date. This section applies to Federal corporate income
tax returns filed after February 28, 2000. However, paragraph (e) of
this section applies to documents and other records that the taxpayer
acquires, prepares, or has in its possession on or after February 28,
2000.
[T.D. 8877, 65 FR 11207, Mar. 2, 2000]
Sec. 1.6012-1 Individuals required to make returns of income.
(a) Individual citizen or resident--(1) In general. Except as
provided in subparagraph (2) of this paragraph, an income tax return
must be filed by every individual for each taxable year beginning before
January 1, 1973, during which he receives $600 or more of gross income,
and for each taxable year beginning after December 31, 1972, during
which he receives $750 or more of gross income, if such individual is:
(i) A citizen of the United States, whether residing at home or
abroad,
(ii) A resident of the United States even though not a citizen
thereof, or
(iii) An alien bona fide resident of Puerto Rico during the entire
taxable year.
(2) Special rules. (i) For taxable years beginning before January 1,
1970, an individual who is described in subparagraph (1) of this
paragraph and who has attained the age of 65 before the close of his
taxable year must file an income tax return only if he receives $1,200
or more of gross income during his taxable year.
(ii) For taxable years beginning after December 31, 1969, and before
January 1, 1973, an individual described in subparagraph (1) of this
paragraph (other than an individual referred to in section 142(b)):
(a) Who is not married (as determined by applying section 143(a) and
the regulations thereunder) must file an income tax return only if he
receives $1,700 or more of gross income during his taxable year, except
that if such an individual has attained the age of 65 before the close
of his taxable year an income tax return must be filed by such
individual only if he receives $2,300 or more of gross income during his
taxable year.
(b) Who is entitled to make a joint return under section 6013 and
the regulations thereunder must file an income tax return only if his
gross income received during his taxable year, when combined with the
gross income of his spouse received during his taxable year, is $2,300
or more. However, if such individual or his spouse has attained the age
of 65 before the close of the taxable year an income tax return must be
filed by such individual only if their combined gross income is $2,900
or more. If both the individual and his spouse have attained the age of
65 before the close of the taxable year such return must be filed only
if their combined gross income is $3,500 or more. However, this
subdivision (ii)(b) shall not apply if the individual and his spouse did
not have the same household as their home at the close of their taxable
year, if such spouse files a separate return for a taxable year which
includes any part of such individual's taxable year, or if any other
taxpayer
[[Page 659]]
is entitled to an exemption for such individual or his spouse under
section 151(e) for such other taxpayer's taxable year beginning in the
calendar year in which such individual's taxable year begins. For
example, a married student more than half of whose support is furnished
by his father must file an income tax return if he receives $600 or more
of gross income during his taxable year.
(iii) For taxable years beginning after December 31, 1972, an
individual described in subparagraph (1) of this paragraph (other than
an individual referred to in section 142(b)):
(a) Who is not married (as determined by applying section 143(a) and
the regulations thereunder) must file an income tax return only if he
receives $1,750 or more of gross income during his taxable year, except
that if such an individual has attained the age of 65 before the close
of his taxable year an income tax return must be filed by such
individual only if he receives $2,500 or more of gross income during his
taxable year.
(b) Who is entitled to make a joint return under section 6013 and
the regulations thereunder must file an income tax return only if his
gross income received during his taxable year, when combined with the
gross income of his spouse received during his taxable year, is $2,500
or more. However, if such individual or his spouse has attained the age
of 65 before the close of the taxable year an income tax return must be
filed by such individual only if their combined gross income is $3,250
or more. If both the individual and his spouse attain the age of 65
before the close of the taxable year such return must be filed only if
their combined gross income is $4,000 or more. However, this subdivision
(iii)(b) shall not apply if the individual and his spouse did not have
the same household as their home at the close of their taxable year, if
such spouse files a separate return for a taxable year which includes
any part of such individual's taxable year, or if any other taxpayer is
entitled to an exemption for the taxpayer or his spouse under section
151(e) for such other taxpayer's taxable year beginning in the calendar
year in which such individual's taxable year begins. For example, a
married student more than half of whose support is furnished by his
father must file an income tax return if he receives $750 or more of
gross income during the taxable year.
(iv) For purposes of section 6012(a) (1)(A)(ii) and subdivisions
(ii)(b) and (iii)(b) of this subparagraph, an individual and his spouse
are considered to have the same household as their home at the close of
a taxable year if the same household constituted the principal place of
abode of both the individual and his spouse at the close of such taxable
year (or on the date of death, if the individual or his spouse died
within the taxable year). The individual and his spouse will be
considered to have the same household as their home at the close of the
taxable year notwithstanding a temporary absence from the household due
to special circumstances, as, for example, in the case of a nonpermanent
failure on the part of the individual and his spouse to have a common
abode by reason of illness, education, business, vacation, or military
service. For example, A, a calendar-year individual under 65 years of
age, is married to B, also under 65 years of age, and is a member of the
Armed Forces of the United States. During 1970 A is transferred to an
overseas base. A and B give up their home, which they had jointly
occupied until that time; B moves to the home of her parents for the
duration of A's absence. They fully intend to set up a new joint
household upon A's return. Neither A nor B must file a return for 1970
if their combined gross income for the year is less than $2,300 and if
no other taxpayer is entitled to a dependency exemption for A or B under
section 151(e).
(v) In the case of a short taxable year referred to in section
443(a)(1), an individual described in subparagraph (1) of this paragraph
shall file an income tax return if his gross income received during such
short taxable year equals or exceeds his own personal exemption allowed
by section 151(b) (prorated as provided in section 443(c)) and, when
applicable, his additional exemption for age 65 or more allowed by
section 151(c)(1) (prorated as provided in section 443(c)).
(vi) For rules relating to returns required to be made by every
individual
[[Page 660]]
who is liable for one or more qualified State individual income taxes,
as defined in section 6362, for a taxable year, see paragraph (b) of
Sec. 301.6361-1 of this chapter (Regulations on Procedure and
Administration).
(vii) For taxable years beginning after December 31, 1978, an
individual who receives payments during the calendar year in which the
taxable year begins under section 3507 (relating to advance payment of
earned income credit) must file an income tax return.
(3) Earned income from without the United States and gain from sale
of residence. For the purpose of determining whether an income tax
return must be filed for any taxable year beginning after December 31,
1957, gross income shall be computed without regard to the exclusion
provided for in section 911 (relating to earned income from sources
without the United States). For the purpose of determining whether an
income tax return must be filed for any taxable year ending after
December 31, 1963, gross income shall be computed without regard to the
exclusion provided for in section 121 (relating to sale of residence by
individual who has attained age 65). In the case of an individual
claiming an exclusion under section 121, he shall attach Form 2119 to
the return required under this paragraph and in the case of an
individual claiming an exclusion under section 911, he shall attach Form
2555 to the return required under this paragraph.
(4) Return of income of minor. A minor is subject to the same
requirements and elections for making returns of income as are other
individuals. Thus, for example, for a taxable year beginning after
December 31, 1972, a return must be made by or for a minor who has an
aggregate of $1,750 of gross income from funds held in trust for him and
from his personal services, regardless of the amount of his taxable
income. The return of a minor must be made by the minor himself or must
be made for him by his guardian or other person charged with the care of
the minor's person or property. See paragraph (b)(3) of Sec. 1.6012-3.
See Sec. 1.73-1 for inclusion in the minor's gross income of amounts
received for his personal services. For the amount of tax which is
considered to have been properly assessed against the parent, if not
paid by the child, see section 6201(c) and paragraph (c) of
Sec. 301.6201-1 of this chapter (Regulations on Procedure and
Administration).
(5) Returns made by agents. The return of income may be made by an
agent if, by reason of disease or injury, the person liable for the
making of the return is unable to make it. The return may also be made
by an agent if the taxpayer is unable to make the return by reason of
continuous absence from the United States (including Puerto Rico as if a
part of the United States) for a period of at least 60 days prior to the
date prescribed by law for making the return. In addition, a return may
be made by an agent if the taxpayer requests permission, in writing, of
the district director for the internal revenue district in which is
located the legal residence or principal place of business of the person
liable for the making of the return, and such district director
determines that good cause exists for permitting the return to be so
made. However, assistance in the preparation of the return may be
rendered under any circumstances. Whenever a return is made by an agent
it must be accompanied by a power of attorney (or copy thereof)
authorizing him to represent his principal in making, executing, or
filing the return. A form 2848, when properly completed, is sufficient.
In addition, where one spouse is physically unable by reason of disease
or injury to sign a joint return, the other spouse may, with the oral
consent of the one who is incapacitated, sign the incapacitated spouse's
name in the proper place on the return followed by the words ``By
____________________ Husband (or Wife),'' and by the signature of the
signing spouse in his own right, provided that a dated statement signed
by the spouse who is signing the return is attached to and made a part
of the return stating:
(i) The name of the return being filed,
(ii) The taxable year,
(iii) The reason for the inability of the spouse who is
incapacitated to sign the return, and
[[Page 661]]
(iv) That the spouse who is incapacitated consented to the signing
of the return.
The taxpayer and his agent, if any, are responsible for the return as
made and incur liability for the penalties provided for erroneous,
false, or fraudulent returns.
(6) Form of return. Form 1040 is prescribed for general use in
making the return required under this paragraph. Form 1040A is an
optional short form which, in accordance with paragraph (a)(7) of this
section, may be used by certain taxpayers. A taxpayer otherwise entitled
to use Form 1040A as his return for any taxable year may not make his
return on such form if he elects not to take the standard deduction
provided in section 141, and in such case he must make his return on
Form 1040. For taxable years beginning before January 1, 1970, a
taxpayer entitled under section 6014 and Sec. 1.6014-1 to elect not to
show his tax on his return must, if he desires to exercise such
election, make his return on Form 1040A. Form 1040W is an optional short
form which, in accordance with paragraph (a)(8) of this section, may be
used only with respect to taxable years beginning after December 31,
1958, and ending before December 31, 1961.
(7)(i) Use of Form 1040A. Form 1040A may be filed only by those
individuals entitled to use such form as provided by and in accordance
with the instructions for such form.
(ii) Computation and payment of tax. Unless a taxpayer is entitled
to elect under section 6014 and Sec. 1.6014-1 not to show the tax on
Form 1040A and does so elect, he shall compute and show on his return on
Form 1040A the amount of the tax imposed by subtitle A of the Code and
shall, without notice and demand therefor, pay any unpaid balance of
such tax not later than the date fixed for filing the return.
(iii) Change of election to use Form 1040A. A taxpayer who has
elected to make his return on Form 1040A may change such election. Such
change of election shall be within the time and subject to the
conditions prescribed in section 144(b) and Sec. 1.144-2 relating to
change of election to take, or not to take the standard deduction.
(8) Use of Form 1040W for certain taxable years--(i) In general. An
individual may use Form 1040W as his return for any taxable year
beginning after December 31, 1958, and ending before December 31, 1961,
in which the gross income of the individual, regardless of the amount
thereof:
(a) Consists entirely of remuneration for personal services
performed as an employee (whether or not such remuneration constitutes
wages as defined in section 3401(a)), dividends, or interest, and
(b) Does not include more than $200 from dividends and interest.
For purposes of determining whether gross income from dividends and
interest exceeds $200, dividends from domestic corporations are taken
into account to the extent that they are includible in gross income. For
purposes of this subparagraph, any reference to Form 1040 in Secs. 1.4-
2, 1.142-1, and 1.144-1 and this section shall also be deemed a
reference to Form 1040W.
(ii) Change of election to use Form 1040W. A taxpayer who has
elected to make his return on Form 1040W may change such election. Such
change of election shall be within the time and subject to the
conditions prescribed in section 144(b) and Sec. 1.144-2, relating to
change of election to take, or not to take, the standard deduction.
(iii) Joint return of husband and wife on Form 1040W. A husband and
wife, eligible under section 6013 and the regulations thereunder to file
a joint return for the taxable year, may, subject to the provisions of
this subparagraph, make a joint return on Form 1040W for any taxable
year beginning after December 31, 1958, and ending before December 31,
1961, in which the aggregate gross income of the spouses (regardless of
amount) consists entirely of remuneration for personal services
performed as an employee (whether or not such remuneration constitutes
wages as defined in section 3401(a)), dividends, or interest, and does
not include more than $200 from dividends and interest. For purposes of
determining whether gross income from sources to which the $200
limitation applies exceeds such
[[Page 662]]
amount in cases where both spouses receive dividends from domestic
corporations, the amount of such dividends received by each spouse is
taken into account to the extent that such dividends are includible in
gross income. See section 116 and Secs. 1.116-1 and 1.116-2. If a joint
return is made by husband and wife on Form 1040W, the liability for the
tax shall be joint and several.
(9) Items of tax preference. For a taxable year ending after
December 31, 1969, an individual shall attach Form 4625 to the return
required by this paragraph if during the year the individual:
(i) Has items of tax preference (described in section 57) in excess
of its minimum tax exemption (determined under Sec. 1.58-1) or
(ii) Uses a net operating loss carryover from a prior taxable year
in which it deferred minimum tax under section 56(b).
(b) Return of nonresident alien individual--(1) Requirement of
return--(i) In general. Except as otherwise provided in subparagraph (2)
of this paragraph, every nonresident alien individual (other than one
treated as a resident under section 6013 (g) or (h)) who is engaged in
trade or business in the United States at any time during the taxable
year or who has income which is subject to taxation under subtitle A of
the Code shall make a return on Form 1040NR. For this purpose it is
immaterial that the gross income for the taxable year is less than the
minimum amount specified in section 6012(a) for making a return. Thus, a
nonresident alien individual who is engaged in a trade or business in
the United States at any time during the taxable year is required to
file a return on Form 1040 NR even though (a) he has no income which is
effectively connected with the conduct of a trade or business in the
United States, (b) he has no income from sources within the United
States, or (c) his income is exempt from income tax by reason of an
income tax convention or any section of the Code. However, if the
nonresident alien individual has no gross income for the taxable year,
he is not required to complete the return schedules but must attach a
statement to the return indicating the nature of any exclusions claimed
and the amount of such exclusions to the extent such amounts are readily
determinable.
(ii) Treaty income. If the gross income of a nonresident alien
individual includes treaty income, as defined in paragraph (b)(1) of
Sec. 1.871-12, a statement shall be attached to the return on Form
1040NR showing with respect to that income:
(a) The amounts of tax withheld,
(b) The names and post office addresses of withholding agents, and
(c) Such other information as may be required by the return form, or
by the instructions issued with respect to the form, to show the
taxpayer's entitlement to the reduced rate of tax under the tax
convention.
(2) Exceptions--(i) Return not required when tax is fully paid at
source. A nonresident alien individual (other than one treated as a
resident under section 6013 (g) or (h)) who at no time during the
taxable year is engaged in a trade or business in the United States is
not required to make a return for the taxable year if his tax liability
for the taxable year is fully satisfied by the withholding of tax at
source under chapter 3 of the Code. This subdivision does not apply to a
nonresident alien individual who has income for the taxable year which
is treated under section 871 (c) or (d) and Sec. 1.871-9 (relating to
students or trainees) or Sec. 1.871-10 (relating to real property
income) as income which is effectively connected for the taxable year
with the conduct of a trade or business in the United States by that
individual, or to a nonresident alien individual making a claim under
Sec. 301.6402-3 of this chapter (Procedure and Administration
Regulations) for the refund of an overpayment of tax for the taxable
year. In addition, this subdivision does not apply to a nonresident
alien individual who has income for the taxable year that is treated
under section 871(b)(1) as effectively connected with the conduct of a
trade or business within the United States by reason of the operation of
section 897. For purposes of this subdivision, some of the items of
income from sources within the United States upon which the tax
liability will not have been fully satisfied by the withholding of
[[Page 663]]
tax at source under chapter 3 of the Code are:
(a) Interest upon so-called tax-free covenant bonds upon which, in
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent
is required to be withheld at the source,
(b) In the case of bonds or other evidences of indebtedness issued
after September 28, 1965, amounts described in section 871(a)(1)(C),
(c) Capital gains described in section 871(a)(2) and paragraph (d)
of Sec. 1.871- 7, and
(d) Accrued interest received in connection with the sale of bonds
between interest dates, which, in accordance with paragraph (h) of
Sec. 1.1441-4, is not subject to withholding of tax at the source.
(ii) Return of individual for taxable year of change of U.S.
citizenship or residence. (a) If an alien individual becomes a citizen
or resident of the United States during the taxable year and is a
citizen or resident of the United States on the last day of such year,
he must make a return on Form 1040 for the taxable year. However, a
separate schedule is required to be attached to this return to show the
income tax computation for the part of the taxable year during which the
alien was neither a citizen nor resident of the United States, unless an
election under section 6013 (g) or (h) is in effect for the alien. A
Form 1040NR, clearly marked ``Statement'' across the top, may be used as
such a separate schedule.
(b) If an individual abandons his U.S. citizenship or residence
during the taxable year and is not a citizen or resident of the United
States on the last day of such year, he must make a return on Form
1040NR for the taxable year, even if an election under section 6013(g)
was in effect for the taxable year preceding the year of abandonment.
However, a separate schedule is required to be attached to this return
to show the income tax computation for the part of the taxable year
during which the individual was a citizen or resident of the United
States. A Form 1040, clearly marked ``Statement'' across the top, may be
used as such a separate schedule.
(c) A return is required under this subdivision (ii) only if the
individual is otherwise required to make a return for the taxable year.
(iii) Beneficiaries of estates or trusts. A nonresident alien
individual who is a beneficiary of an estate or trust which is engaged
in trade or business in the United States is not required to make a
return for the taxable year merely because he is deemed to be engaged in
trade or business within the United States under section 875(2).
However, such nonresident alien beneficiary will be required to make a
return if he otherwise satisfies the conditions of subparagraph (1)(i)
of this paragraph for making a return.
(iv) Certain alien residents of Puerto Rico. This paragraph does not
apply to a nonresident alien individual who is a bona fide resident of
Puerto Rico during the taxable year. See section 876 and paragraph
(a)(1)(iii) of this section.
(3) Representative or agent for nonresident alien individual--(i)
Cases where power of attorney is not required. The responsible
representative or agent within the United States of a nonresident alien
individual shall make on behalf of his nonresident alien principal a
return of, and shall pay the tax on, all income coming within his
control as representative or agent which is subject to the income tax
under subtitle A of the Code. The agency appointment will determine how
completely the agent is substituted for the principal for tax purposes.
Any person who collects interest or dividends on deposited securities of
a nonresident alien individual, executes ownership certificates in
connection therewith, or sells such securities under special
instructions shall not be deemed merely by reason of such acts to be the
responsible representative or agent of the nonresident alien individual.
If the responsible representative or agent does not have a specific
power of attorney from the nonresident alien individual to file a return
in his behalf, the return shall be accompanied by a statement to the
effect that the representative or agent does not possess specific power
of attorney to file a return for such individual but that the return is
being filed in accordance with the provisions of this subdivision.
[[Page 664]]
(ii) Cases where power of attorney is required. Whenever a return of
income of a nonresident alien individual is made by an agent acting
under a duly authorized power of attorney for that purpose, the return
shall be accompanied by the power of attorney in proper form, or a copy
thereof, specifically authorizing him to represent his principal in
making, executing, and filing the income tax return. Form 2848 may be
used for this purpose. The agent, as well as the taxpayer, may incur
liability for the penalties provided for erroneous, false, or fraudulent
returns. For the requirements regarding signing of returns, see
Sec. 1.6061-1. The rules of paragraph (e) of Sec. 601.504 of this
chapter (Statement of Procedural Rules) shall apply under this
subparagraph in determining whether a copy of a power of attorney must
be certified.
(iii) Limitation. A return of income shall be required under this
subparagraph only if the nonresident alien individual is otherwise
required to make a return in accordance with this paragraph.
(4) Disallowance of deductions and credits. For provisions
disallowing deductions and credits when a return of income has not been
filed by or on behalf of a nonresident alien individual, see section
874(a) and the regulations thereunder.
(5) Effective date. This paragraph shall apply for taxable years
beginning after December 31, 1966, except that it shall not be applied
to require (i) the filing of a return for any taxable year ending before
January 1, 1974, which, pursuant to instructions applicable to the
return, is not required to be filed or (ii) the amendment of a return
for such a taxable year which, pursuant to such instructions, is
required to be filed. For corresponding rules applicable to taxable
years beginning before January 1, 1967, see 26 CFR 1.6012-1(b) (Revised
as of January 1, 1967).
(c) Cross reference. For returns by fiduciaries for individuals,
estates, and trusts, see Sec. 1.6012-3.
(Sec. 1445 (98 Stat. 655; 26 U.S.C. 1445), sec. 6012 (68A Stat. 732; 26
U.S.C. 6012), and 7805 (68A Stat. 917; 26 U.S.C. 7805) of the Internal
Revenue Code of 1954)
[T.D. 6500, 25 FR 12108, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting
Sec. 1.6012-1, see the List of CFR Sections Affected in the Finding Aids
section of this volume.
Sec. 1.6012-2 Corporations required to make returns of income.
(a) In general--(1) Requirement of return. Except as provided in
paragraphs (e) and (g)(1) of this section with respect to charitable and
other organizations having unrelated business income and to certain
foreign corporations, respectively, every corporation, as defined in
section 7701(a)(3), subject to taxation under subtitle A of the Code
shall make a return of income regardless of whether it has taxable
income or regardless of the amount of its gross income.
(2) Existence of corporation. A corporation in existence during any
portion of a taxable year is required to make a return. If a corporation
was not in existence throughout an annual accounting period (either
calendar year or fiscal year), the corporation is required to make a
return for that fractional part of a year during which it was in
existence. A corporation is not in existence after it ceases business
and dissolves, retaining no assets, whether or not under State law it
may thereafter be treated as continuing as a corporation for certain
limited purposes connected with winding up its affairs, such as for the
purpose of suing and being sued. If the corporation has valuable claims
for which it will bring suit during this period, it has retained assets
and therefore continues in existence. A corporation does not go out of
existence if it is turned over to receivers or trustees who continue to
operate it. If a corporation has received a charter but has never
perfected its organization and has transacted no business and has no
income from any source, it may upon presentation of the facts to the
district director be relieved from the necessity of making a return. In
the absence of a proper showing of such facts to the district director,
a corporation will be required to make a return.
(3) Form of return. The return required of a corporation under this
section shall be made on Form 1120 unless the corporation is a type for
which a special form is prescribed. The special forms of returns and
schedules required
[[Page 665]]
of particular types of corporations are set forth in paragraphs (b) to
(g), inclusive, of this section.
(b) Personal holding companies. A personal holding company, as
defined in section 542, including a foreign corporation within the
definition of such section, shall attach Schedule PH, Computation of
U.S. Personal Holding Company Tax, to the return required by paragraph
(a) or (g), as the case may be, of this section.
(c) Insurance companies--(1) Life insurance companies. A life
insurance company subject to tax under section 802 or 811 shall make a
return on Form 1120L. There shall be filed with the return (i) a copy of
the annual statement, the form of which has been approved by the
National Association of Insurance Commissioners, which is filed by the
company for the year covered by such return with the insurance
departments of States, Territories, and the District of Columbia, and
which shows the reserves used by the company in computing the taxable
income reported on its return, and (ii) copies of Schedule A (real
estate) and Schedule D (bonds and stocks) of such annual statement.
(2) Mutual insurance companies. A mutual insurance company (other
than a life or marine insurance company and other than a fire insurance
company subject to the tax imposed by section 831) or an interinsurer or
reciprocal underwriter subject to tax under section 821 shall make a
return on Form 1120M. See paragraph (a)(3) of Sec. 1.821-1. There shall
be filed with the return (i) a copy of the annual statement, the form of
which has been approved by the National Association of Insurance
Commissioners, which is filed by the company for the year covered by
such return with the insurance departments of States, Territories, and
the District of Columbia, and (ii) copies of Schedule A (real estate)
and Schedule D (bonds and stocks) of such annual statement.
(3) Other insurance companies. Every insurance company (other than a
life or mutual insurance company), every mutual marine insurance
company, and every mutual fire insurance company, subject to tax under
section 831, and every mutual savings bank conducting a life insurance
business and subject to tax under section 594, shall make a return on
Form 1120. See paragraph (c) of Sec. 1.831-1. There shall be filed with
the return a copy of the annual statement, the form of which has been
approved by the National Association of Insurance Commissioners, which
contains the underwriting and investment exhibit for the year covered by
such return.
(4) Foreign insurance companies. The provisions of subparagraphs
(1), (2), and (3) of this paragraph concerning the returns and
statements of insurance companies subject to tax under section 802 or
811, section 821, and section 831, respectively, are applicable to
foreign insurance companies subject to tax under such sections, except
that the copy of the annual statement, the form of which has been
approved by the National Association of Insurance Commissioners,
required to be submitted with the return shall, in the case of a foreign
insurance company, be a copy of the statement relating to the United
States business of such company.
(d) Affiliated groups. For the forms to be used by affiliated
corporations filing a consolidated return, see Sec. 1.1502-75.
(e) Charitable and other organizations with unrelated business
income. Every organization described in section 511(a)(2) which is
subject to the tax imposed by section 511(a)(1) on its unrelated
business taxable income shall make a return on Form 990-T for each
taxable year if it has gross income, included in computing unrelated
business taxable income for such taxable year, of $1,000 or more. The
filing of a return of unrelated business income does not relieve the
organization of the duty of filing other required returns.
(f) Farmers' cooperatives. Farmers' cooperative organizations
described in section 521 are required to make a return of income whether
or not such organizations are subject to the taxes imposed by sections
11 and 1201 as prescribed in section 522 or 1381. The return shall be
made on Form 990-C.
(g) Returns by foreign corporations. (1) Requirement of return--(i)
In general. Except as otherwise provided in subparagraph (2) of this
paragraph, every foreign corporation which is engaged in trade or
business in the United States at any time during the taxable year or
which has income which is subject to
[[Page 666]]
taxation under subtitle A of the Code (relating to income taxes) shall
make a return on Form 1120-F. Thus, for example, a foreign corporation
which is engaged in trade or business in the United States at any time
during the taxable year is required to file a return on Form 1120-F even
though (a) it has no income which is effectively connected with the
conduct of a trade or business in the United States, (b) it has no
income from sources within the United States, or (c) its income is
exempt from income tax by reason of an income tax convention or any
section of the Code. However, if the foreign corporation has no gross
income for the taxable year, it is not required to complete the return
schedules but must attach a statement to the return indicating the
nature of any exclusions claimed and the amount of such exclusions to
the extent such amounts are readily determinable.
(ii) Treaty income. If the gross income of a foreign corporation
includes treaty income, as defined in paragraph (b)(1) of Sec. 1.871-12,
a statement shall be attached to the return on Form 1120-F showing with
respect to that income:
(a) The amounts of tax withheld,
(b) The names and post office addresses of withholding agents, and
(c) Such other information as may be required by the return form or
by the instructions issued with respect to the form, to show the
taxpayer's entitlement to the reduced rate of tax under the tax
convention.
(iii) Balance sheet and reconciliation of income. At the election of
the taxpayer, the balance sheets and reconciliation of income, as shown
on Form 1120-F, may be limited to:
(a) The assets of the corporation located in the United States and
to its other assets used in the trade or business conducted in the
United States, and
(b) Its income effectively connected with the conduct of a trade or
business in the United States and its other income from sources within
the United States.
(2) Exceptions--(i) Return not required when tax is fully paid at
source--(a) In general. A foreign corporation which at no time during
the taxable year is engaged in a trade or business in the United States
is not required to make a return for the taxable year if its tax
liability for the taxable year is fully satisfied by the withholding of
tax at source under chapter 3 of the Code. For purposes of this
subdivision, some of the items of income from sources within the United
States upon which the tax liability will not have been fully satisfied
by the withholding of tax at source under chapter 3 of the Code are:
(1) Interest upon so-called tax-free covenant bonds upon which, in
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent
is required to be withheld at source,
(2) In the case of bonds or other evidence of indebtedness issued
after September 25, 1965, amounts described in section 881(a)(3),
(3) Accrued interest received in connection with the sale of bonds
between interest dates, which, in accordance with paragraph (h) of
Sec. 1.1441-4, is not subject to withholding of tax at source.
(b) Corporations not included. This subdivision (i) shall not apply:
(1) To a foreign corporation which has income for the taxable year
which is treated under section 882(d) or (e) and Sec. 1.882-2 as income
which is effectively connected for the taxable year with the conduct of
a trade or business in the United States by that corporation,
(2) To a foreign corporation making a claim under Sec. 301.6402-3 of
this chapter (Procedure and Administration Regulations) for the refund
of an overpayment of tax for the taxable year, or
(3) To a foreign corporation described in paragraph (c)(2)(i) of
Sec. 1.532-1 whose accumulated taxable income for the taxable year is
determined under paragraph (b)(2) of Sec. 1.535-1.
(ii) Beneficiaries of estates or trusts. A foreign corporation which
is a beneficiary of an estate or trust which is engaged in trade or
business in the United States is not required to make a return for the
taxable year merely because it is deemed to be engaged in trade or
business within the United States under section 875(2). However, such
foreign corporation will be required to make a return if it otherwise
satisfies the conditions of subparagraph (1)(i) of this paragraph for
making a return.
[[Page 667]]
(iii) Special returns and schedules. The provisions of paragraphs
(b) through (f) of this section shall apply to a foreign corporation
except that a foreign corporation which is an insurance company to which
paragraph (c)(3) of this section applies shall make a return on Form
1120-F and not on Form 1120. If a foreign corporation which is an
insurance company to which paragraph (c) (1) or (2) of this section
applies has income for the taxable year from sources within the United
States which is not effectively connected for that year with the conduct
of a trade or business in the United States by that corporation, the
corporation shall attach to its return on Form 1120L or 1120M, as the
case may be, a separate schedule showing the nature and amount of the
items of such income, the rate of tax applicable thereto, and the amount
of tax withheld therefrom under chapter 3 of the Code.
(3) Representative or agent for foreign corporation--(i) Cases where
power of attorney is not required. The responsible representative or
agent within the United States of a foreign corporation shall make on
behalf of his principal a return of, and shall pay the tax on, all
income coming within his control as representative or agent which is
subject to the income tax under subtitle A of the Code. The agency
appointment will determine how completely the agent is substituted for
the principal for tax purposes. Any person who collects interest or
dividends on deposited securities of a foreign corporation, executes
ownership certificates in connection therewith, or sells such securities
under special instructions shall not be deemed merely by reason of such
acts to be the responsible representative or agent of the foreign
corporation. If the responsible representative or agent does not have a
specific power of attorney from the foreign corporation to file a return
in its behalf, the return shall be accompanied by a statement to the
effect that the representative or agent does not possess specific power
of attorney to file a return for such corporation but that the return is
being filed in accordance with the provisions of this subdivision.
(ii) Cases where power of attorney is required. Whenever a return of
income of a foreign corporation is made by an agent acting under a duly
authorized power of attorney for that purpose, the return shall be
accompanied by the power of attorney in proper form, or a copy thereof
specifically authorizing him to represent his principal in making,
executing, and filing the income tax return. Form 2848 may be used for
this purpose. The agent, as well as the taxpayer, may incur liability
for the penalties provided for erroneous, false, or fraudulent returns.
For the requirements regarding signing of returns, see Sec. 1.6062-1.
The rules of paragraph (e) of Sec. 601.504 of this chapter (Statement of
Procedural Rules) shall apply under this subparagraph in determining
whether a copy of a power of attorney must be certified.
(iii) Limitation. A return of income shall be required under this
subparagraph only if the foreign corporation is otherwise required to
make a return in accordance with this paragraph.
(4) Disallowance of deductions and credits. For provisions
disallowing deductions and credits when a return of income has not been
filed by or on behalf of a foreign corporation, see section 882(c)(2)
and the regulations thereunder, and paragraph (b) (2) and (3) of
Sec. 1.535-1.
(5) Effective date. This paragraph shall apply for taxable years
beginning after December 31, 1966, except that it shall not be applied
to require (i) the filing of a return for any taxable year ending before
January 1, 1974, which, pursuant to instructions applicable to the
return, is not required to be filed or (ii) the amendment of a return
for such a taxable year which, pursuant to such instructions, is
required to be filed. For corresponding rules applicable to taxable
years beginning before January 1, 1967, see 26 CFR 1.6012-2(g) (Revised
as of January 1, 1967).
(h) Electing small business corporations. An electing small business
corporation, whether or not subject to the tax imposed by section 1378,
shall make a return on Form 1120-S. See also section 6037 and the
regulations thereunder.
(i) Items of tax preference--(1) In general. Every corporation
required to make a return under this section, and having items of tax
preference (described in section 57 and the regulation
[[Page 668]]
thereunder) in an amount specified by Form 4626, shall file such form as
part of its return.
(2) Organizations with unrelated business income and foreign
corporations. Regardless of the provisions of paragraphs (e) and (g) of
this section, any organization described in either such paragraph having
items of tax preference (described in section 57 and the regulations
thereunder) in any amount entering into the computation or unrelated
business income is required to make a return on form 990-T or form 120F,
respectively, and to attach the required form as part of such return.
(j) Other provisions. For returns by fiduciaries for corporations,
see Sec. 1.6012-3. For information returns by corporations regarding
payments of dividends, see Secs. 1.6042-1 to 1.6042-3, inclusive;
regarding corporate dissolutions or liquidations, see Sec. 1.6043-1;
regarding distributions in liquidation, see Sec. 1.6043-2; regarding
payments of patronage dividends, see Secs. 1.6044-1 to 1.6044-4,
inclusive; and regarding certain payments of interest, see Secs. 1.6049-
1 and 1.6049-2. For information returns of officers, directors, and
shareholders of foreign personal holding companies, as defined in
section 552, see Secs. 1.6035-1 and 1.6035-2. For returns as to
formation or reorganization of foreign corporations, see Secs. 1.6046-1
to 1.6046-3, inclusive.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting
Sec. 1.6012-2, see the List of CFR Sections Affecting in the Finding
Aids section of this volume.
Sec. 1.6012-3 Returns by fiduciaries.
(a) For estates and trusts--(1) In general. Every fiduciary, or at
least one of joint fiduciaries, must make a return of income on form
1041 (or by use of a composite return pursuant to Sec. 1.6012-5) and
attach the required form if the estate or trust has items of tax
preference (as defined in section 57 and the regulations thereunder) in
any amount:
(i) For each estate for which he acts if the gross income of such
estate for the taxable year is $600 or more;
(ii) For each trust for which he acts, except a trust exempt under
section 501(a), if such trust has for the taxable year any taxable
income, or has for the taxable year gross income of $600 or more
regardless of the amount of taxable income; and
(iii) For each estate and each trust for which he acts, except a
trust exempt under section 501(a), regardless of the amount of income
for the taxable year, if any beneficiary of such estate or trust is a
nonresident alien.
(2) Wills and trust instruments. At the request of the Internal
Revenue Service, a copy of the will or trust instrument (including any
amendments), accompanied by a written declaration of the fiduciary under
the penalties of perjury that it is a true and complete copy, shall be
filed together with a statement by the fiduciary indicating the
provisions of the will or trust instrument (including any amendments)
which, in the fiduciary's opinion, determine the extent to which the
income of the estate or trust is taxable to the estate or trust, the
beneficiaries, or the grantor, respectively.
(3) Domiciliary and ancillary representatives. In the case of an
estate required to file a return under subparagraph (1) of this
paragraph, having both domiciliary and ancillary representatives, the
domiciliary and ancillary representatives must each file a return on
Form 1041. The domiciliary representative is required to include in the
return rendered by him as such domiciliary representative the entire
income of the estate. The return of the ancillary representative shall
be filed with the district director for his internal revenue district
and shall show the name and address of the domiciliary representative,
the amount of gross income received by the ancillary representative, and
the deductions to be claimed against such income, including any amount
of income properly paid or credited by the ancillary representative to
any legatee, heir, or other beneficiary. If the ancillary representative
for the estate of a nonresident alien is a citizen or resident of the
United States, and the domiciliary representative is a nonresident
alien, such ancillary representative is required to render the return
otherwise required of the domiciliary representative.
(4) Two or more trusts. A trustee of two or more trusts must make a
separate return for each trust, even though such trusts were created by
the same
[[Page 669]]
grantor for the same beneficiary or beneficiaries.
(5) Trusts with unrelated business income. Every fiduciary for a
trust described in section 511(b)(2) which is subject to the tax imposed
on its unrelated business taxable income by section 511(b)(1) shall make
a return on Form 990-T for each taxable year if the trust has gross
income, included in computing unrelated business taxable income for such
taxable year, of $1,000 or more. The filing of a return of unrelated
business income does not relieve the fiduciary of such trust from the
duty of filing other required returns.
(6) Charitable remainder trusts. Every fiduciary for a charitable
remainder annuity trust (as defined in Sec. 1.664-2) or a charitable
remainder unitrust (as defined in Sec. 1.664-3) shall make a return on
Form 1041-B for each taxable year of the trust even though it is
nonexempt because it has unrelated business taxable income. The return
on Form 1041-B shall be made in accordance with the instructions for the
form and shall be filed with the designated Internal Revenue office on
or before the 15th day of the fourth month following the close of the
taxable year of the trust. A copy of the instrument governing the trust,
accompanied by a written declaration of the fiduciary under the
penalties of perjury that it is a true and complete copy, shall be
attached to the return for the first taxable year of the trust.
(7) Certain trusts described in section 4947(a)(1). For taxable
years beginning after December 31, 1980, in the case of a trust
described in section 4947(a)(1) which has no taxable income for a
taxable year, the filing requirements of section 6012 and this section
shall be satisfied by the filing, pursuant to Sec. 53.6011-1 of this
chapter (Foundation Excise Tax Regulations) and Sec. 1.6033-2(a), by the
fiduciary of such trust of--
(i) Form 990-PF if such trust is treated as a private foundation, or
(ii) Form 990 if such trust is not treated as a private foundation.
When the provisions of this paragraph (a)(7) are met, the fiduciary
shall not be required to file Form 1041.
(8) Estate and trusts liable for qualified tax. In the case of an
estate or trust which is liable for one or more qualified State
individual income taxes, as defined in section 6362, for a taxable year,
see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on
Procedure and Administration) for rules relating to returns required to
be made.
(9) A trust any portion of which is treated as owned by the grantor
or another person pursuant to sections 671 through 678. In the case of a
trust any portion of which is treated as owned by the grantor or another
person under the provisions of subpart E (section 671 and following)
part I, subchapter J, chapter 1 of the Internal Revenue Code see
Sec. 1.671-4.
(b) For other persons--(1) Decedents. The executor or administrator
of the estate of a decedent, or other person charged with the property
of a decedent, shall make the return of income required in respect of
such decedent. For the decedent's taxable year which ends with the date
of his death, the return shall cover the period during which he was
alive. For the filing of returns of income for citizens and alien
residents of the United States, and alien residents of Puerto Rico, see
paragraph (a) of Sec. 1.6012-1. For the filing of a joint return after
death of spouse, see paragraph (d) of Sec. 1.6013-1.
(2) Nonresident alien individuals--(i) In general. A resident or
domestic fiduciary or other person charged with the care of the person
or property of a nonresident alien individual shall make a return for
that individual and pay the tax unless:
(a) The nonresident alien individual makes a return of, and pays the
tax on, his income for the taxable year,
(b) A responsible representative or agent in the United States of
the nonresident alien individual makes a return of, and pays the tax on,
the income of such alien individual for the taxable year, or
(c) The nonresident alien individual has appointed a person in the
United States to act as his agent for the purpose of making a return of
income and, if such fiduciary is required to file a Form 1041 for an
estate or trust of which such alien individual is a beneficiary, such
fiduciary attaches a copy of the agency appointment to his return on
Form 1041.
(ii) Income to be returned. A return of income shall be required
under this
[[Page 670]]
subparagraph only if the nonresident alien individual is otherwise
required to make a return in accordance with paragraph (b) of
Sec. 1.6012-1. The provisions of that paragraph shall apply in
determining the form of return to be used and the income to be returned.
(iii) Disallowance of deductions and credits. For provisions
disallowing deductions and credits when a return of income has not been
filed by or on behalf of a nonresident alien individual, see section 874
and the regulations thereunder.
(iv) Alien resident of Puerto Rico. This subparagraph shall not
apply to the return of a nonresident alien individual who is a bona fide
resident of Puerto Rico during the entire taxable year. See Sec. 1.876-
1.
(v) Cross reference. For requirements of withholding tax at source
on nonresident alien individuals and of returns with respect to such
withheld taxes, see Secs. 1.1441-1 to 1.1465-1, inclusive.
(3) Persons under a disability. A fiduciary acting as the guardian
of a minor, or as the guardian or committee of an insane person, must
make the return of income required in respect of such person unless, in
the case of a minor, the minor himself makes the return or causes it to
be made.
(4) Corporations. A receiver, trustee in dissolution, trustee in
bankruptcy, or assignee, who, by order of a court of competent
jurisdiction, by operation of law or otherwise, has possession of or
holds title to all or substantially all the property or business of a
corporation, shall make the return of income for such corporation in the
same manner and form as corporations are required to make such returns.
Such return shall be filed whether or not the receiver, trustee, or
assignee is operating the property or business of the corporation. A
receiver in charge of only a small part of the property of a
corporation, such as a receiver in mortgage foreclosure proceedings
involving merely a small portion of its property, need not make the
return of income. See also Sec. 1.6041-1, relating to returns regarding
information at source; Secs. 1.6042-1 to 1.6042-3, inclusive, relating
to returns regarding payments of dividends; Secs. 1.6044-1 to 1.6044-4,
inclusive, relating to returns regarding payments of patronage
dividends; and Secs. 1.6049-1 and 1.6049-2, relating to returns
regarding certain payments of interest.
(5) Individuals in receivership. A receiver who stands in the place
of an individual must make the return of income required in respect of
such individual. A receiver of only part of the property of an
individual need not file a return, and the individual must make his own
return.
(c) Joint fiduciaries. In the case of joint fiduciaries, a return is
required to be made by only one of such fiduciaries. A return made by
one of joint fiduciaries shall contain a statement that the fiduciary
has sufficient knowledge of the affairs of the person for whom the
return is made to enable him to make the return, and that the return is,
to the best of his knowledge and belief, true and correct.
(d) Other provisions. For the definition of the term ``fiduciary'',
see section 7701(a)(6) and the regulations thereunder. For information
returns required to be made by fiduciaries under section 6041, see
Sec. 1.6041-1. As to further duties and liabilities of fiduciaries, see
section 6903 and Sec. 301.6903-1 of this chapter (Regulations on
Procedure and Administration).
[T.D. 6500, 25 FR 12108, Nov. 26, 1960]
Editorial Note: For Federal Register citations affecting
Sec. 1.6012-3, see the List of CFR Sections Affecting in the Finding
Aids section of this volume.
Sec. 1.6012-4 Miscellaneous returns.
For returns by regulated investment companies of tax on
undistributed capital gain designated for special treatment under
section 852(b)(3)(D), see Sec. 1.852-9. For returns with respect to tax
withheld on nonresident aliens and foreign corporations and on tax-free
covenant bonds, see Secs. 1.1461-1 to 1.1465-1, inclusive. For returns
of tax on transfers to avoid income tax, see Sec. 1.1494-1. For the
requirement of an annual report by persons completing a Government
contract, see 26 CFR (1939) 17.16 (Treasury Decision 4906, approved June
23, 1939), and 26 CFR (1939) 16.15 (Treasury Decision 4909, approved
June 28, 1939) , as made applicable to section 1471 of the 1954 Code by
Treasury Decision 6091, approved August 16, 1954 (19
[[Page 671]]
FR 5167, C.B. 1954-2, 47). See also Sec. 1.1471-1.
[T.D. 7332, 39 FR 44231, Dec. 23, 1974]
Editorial Note: For the convenience of the user Secs. 16.15 and
17.16 of 26 CFR (1939) are set forth below:
Sec. 16.15 Annual reports for income taxable years--(a) General
requirements. Every contracting party completing a contract or
subcontract within the contracting party's income-taxable year ending
after April 3, 1939 shall file with the district director of internal
revenue for the internal revenue district in which the contracting
party's Federal income tax returns are required to be filed an annual
report on the prescribed form of the profit and excess profit on all
contracts and subcontracts coming within the scope of the act and the
regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a
statement, preferably in columnar form, showing separately for each such
contract or subcontract completed by the contracting party within the
income-taxable year the total contract price, the cost of performing the
contract or subcontract and the resulting profit or loss on each
contract or subcontract together with a summary statement showing in
detail the computation of the net profit or net loss upon all contracts
and subcontracts completed within the income-taxable year and the amount
of the excess profit, if any, for the income-taxable year covered by the
report. A copy of the report made to the Secretary of the Army (see
Sec. 16.14) with respect to each contract or subcontract covered in the
annual report, shall be filed as a part of such annual report. In case
the income-taxable year of the contracting party is a period of less
than twelve months (see Sec. 16.1), the report required by this section
shall be made for such period and not for a full year.
(b) Time for filing annual reports. Annual reports of contracts and
subcontracts coming within the scope of the act and the regulations in
this part completed by a contracting party within an income-taxable year
must be filed on or before the 15th day of the ninth month following the
close of the contracting party's income-taxable year. It is important
that the contracting party render on or before the due date an annual
report as nearly complete and final as it is possible for the
contracting party to prepare. An extension of time granted the
contracting party for filing its Federal income tax return does not
serve to extend the time for filing the annual report required by this
section. Authority consistent with authorizations for granting
extensions of time for filing Federal income tax returns is hereby
delegated to the various collectors of internal revenue for granting
extensions of time for filing the reports required by this section.
Application for extensions of time for filing such reports should be
addressed to the district director of internal revenue for the district
in which the contracting party files its Federal income tax returns and
must contain a full recital of the causes for the delay.
Sec. 17.16 Annual reports for income-taxable years--(a) General
requirements. Every contracting party completing a contract or
subcontract within the contracting party's income-taxable year ending
after April 3, 1939 shall file, with the district director of internal
revenue for the internal revenue district in which the contracting
party's Federal income tax return is required to be filed, annual
reports on the prescribed forms of the profit and excess profit on all
contracts and subcontracts coming within the scope of the act. If any
contracts or subcontracts so completed by the contracting party were
entered into for the construction or manufacture of any complete naval
vessel or any portion thereof, the profit and excess profit on all such
contracts and subcontracts completed within the income-taxable year
ending after April 3, 1939 shall be computed in accordance with the
provisions of Sec. 17.6. If any contracts or subcontracts so completed
by the contracting party were entered into for the construction or
manufacture of any complete naval aircraft or any portion thereof, the
profit and excess profit on all such contracts and subcontracts
completed within the income-taxable year ending after April 3, 1939
shall be computed in accordance with the provisions of Sec. 17.7. There
shall be included as a part of the annual report a statement, preferably
in columnar form, showing separately for each contract or subcontract
completed by the contracting party within the income-taxable year and
covered by the report, the total contract price, the cost of performing
the contract or subcontract and resulting profit or loss on each
contract or subcontract together with a summary statement showing in
detail the computation of the net profit or net loss upon each group of
contracts and subcontracts covered by the report and the amount of the
excess profit, if any, with respect to each group of contracts and
subcontracts covered by the report. A copy of the report made to the
Secretary of the Navy (see Sec. 17.15) with respect to each contract or
subcontract covered in the annual report, shall be filed as a part of
such annual report. In case the income-taxable year of the contracting
party is a period of less than twelve months (see Sec. 17.1), the
reports required by this section shall be made for such period and not
for a full year.
(b) Time for filing annual reports. Annual reports of contracts and
subcontracts completed by a contracting party within an income-taxable
year ending after April 3, 1939 shall be filed on or before the 15th day
of the
[[Page 672]]
ninth month following the close of the contracting party's income-
taxable year. It is important that the contracting party render on or
before the due date annual reports as nearly complete and final as it is
possible for the contracting party to prepare. An extension of time
granted the contracting party for filing its Federal income tax return
does not serve to extend the time for filing the annual reports required
by this section. Authority consistent with authorizations for granting
extensions of time for filing Federal income tax returns is hereby
delegated to the various district directors of internal revenue for
granting extensions of time for filing the reports required by this
section. Application for extension of time for filing such reports
should be addressed to the district director of internal revenue for the
district in which the contracting party files its Federal income tax
returns and must contain a full recital of the causes for the delay.
Sec. 1.6012-5 Composite return in lieu of specified form.
The Commissioner may authorize the use, at the option of a person
required to make a return, of a composite return in lieu of any form
specified in this part for use by such a person, subject to such
conditions, limitations, and special rules governing the preparation,
execution, filing, and correction thereof as the Commissioner may deem
appropriate. Such composite return shall consist of a form prescribed by
the Commissioner and an attachment or attachments of magnetic tape or
other approved media. Notwithstanding any provisions in this part to the
contrary, a single form and attachment may comprise the returns of more
than one such person. To the extent that the use of a composite return
has been authorized by the Commissioner, references in this part to a
specific form for use by such a person shall be deemed to refer also to
a composite return under this section.
[T.D. 7200, 37 FR 16544, Aug. 16, 1972]
Sec. 1.6012-6 Returns by political organizations.
(a) Requirement of return--(1) In general. For taxable years
beginning after December 31, 1974, every political organization
described in section 527(e)(1), and every fund described in section
527(f)(3) or section 527(g), and every organization described in section
501(c) and exempt from taxation under section 501(a) shall make a return
of income within the time provided in section 6072(b), if a tax is
imposed on such an organization or fund by section 527(b).
(2) Taxable years beginning after December 31, 1971, and before
January 1, 1975. For taxable years beginning after December 31, 1971,
and before January 1, 1975, any political organization which would be
described in section 527(e)(1) if such section applied to such years
shall not be required to make a return if such organization would not be
required to make a return under paragraph (a)(1) of this section.
(b) Form of return. The return required by an organization or fund
upon which a tax is imposed by section 527(b) shall be made on Form
1120-POL.
[T.D. 7516, 42 FR 57312, Nov. 2, 1977; 43 FR 2721, Jan. 19, 1978]
Sec. 1.6012-7T Telephone return filing using voice signature (temporary).
(a) In general. For all purposes of the Internal Revenue Code, a
return completed by an eligible taxpayer under the TeleFile Voice
Signature test in accordance with the instructions provided over the
telephone is an individual Federal income tax return filed at the time
the TeleFile system interactive voice computer states to the taxpayer
that the filing is completed. For provisions relating to the signing and
verification of the TeleFile Voice Signature test returns made under
this section, see Secs. 1.6061-2T and 1.6065-2T, respectively.
(b) Manner of filing return by telephone. An eligible taxpayer who
chooses to participate in the TeleFile Voice Signature test must dial
the telephone number provided by the Internal Revenue Service from a
touch-tone telephone. When an eligible taxpayer dials this telephone
number, the TeleFile system interactive voice computer will give the
taxpayer filing instructions. The taxpayer must provide all the
information and a voice signature at the time and in the manner required
by those instructions.
(c) Eligible taxpayer defined. An eligible taxpayer is a single
individual who lives in the Cincinnati District Office geographic area,
who is eligible to file Form 1040EZ, Income Tax Return for
[[Page 673]]
Single and Joint Filers With No Dependents, and whose current name and
address appear on the mailing label attached to the taxpayer's tax
package for the calendar year for which the Form 1040EZ is to be filed.
(d) Address to which refunds are sent. If a taxpayer who files a
TeleFile Voice Signature test return is entitled to a refund, the
taxpayer's refund will be sent to the address on the mailing label
attached to the taxpayer's tax package.
(e) Effective dates. (1) This section is effective for--
(i) 1992 calendar year returns filed by eligible taxpayers in the
TeleFile Voice Signature test after January 13, 1993, and before April
16, 1993; and
(ii) 1993 calendar year returns filed by eligible taxpayers in the
TeleFile Voice Signature test after January 12, 1994, and before April
16, 1994.
(2) No returns can be filed under the TeleFile Voice Signature tests
between April 16, 1993, and January 12, 1994, or after April 15, 1994.
[T.D. 8510, 58 FR 68296, Dec. 27, 1993]
Sec. 1.6013-1 Joint returns.
(a) In general. (1) A husband and wife may elect to make a joint
return under section 6013(a) even though one of the spouses has no gross
income or deductions. For rules for determining whether individuals
occupy the status of husband and wife for purposes of filing a joint
return, see paragraph (a) of Sec. 1.6013-4. For any taxable year with
respect to which a joint return has been filed, separate returns shall
not be made by the spouses after the time for filing the return of
either has expired. See, however, paragraph (d)(5) of this section for
the right of an executor to file a late separate return for a deceased
spouse and thereby disaffirm a timely joint return made by the surviving
spouse.
(2) A joint return of a husband and wife (if not made by an agent of
one or both spouses) shall be signed by both spouses. The provisions of
paragraph (a)(5) of Sec. 1.6012-1, relating to returns made by agents,
shall apply where one spouse signs a return as agent for the other, or
where a third party signs a return as agent for one or both spouses.
(b) Nonresident alien. A joint return shall not be made if either
the husband or wife at any time during the taxable year is a nonresident
alien, unless an election is in effect for the taxable year under
section 6013 (g) or (h) and the regulations thereunder.
(c) Different taxable years. Except as otherwise provided in this
section, a husband and wife shall not file a joint return if they have
different taxable years.
(d) Joint return after death. (1) Section 6013(a)(2) provides that a
joint return may be made for the survivor and the deceased spouse or for
both deceased spouses if the taxable years of such spouses begin on the
same day and end on different days only because of the death of either
or both. Thus, if a husband and wife make this return on a calendar year
basis, and the wife dies on August 1, 1956, a joint return may be made
with respect to the calendar year 1956 of the husband and the taxable
year of the wife beginning on January 1, 1956, and ending with her death
on August 1, 1956. Similarly, if husband and wife both make their
returns on the basis of a fiscal year beginning on July 1 and the wife
dies on October 1, 1956, a joint return may be made with respect to the
fiscal year of the husband beginning on July 1, 1956, and ending on June
30, 1957, and with respect to the taxable year of the wife beginning on
July 1, 1956, and ending with her death on October 1, 1956.
(2) The provision allowing a joint return to be made for the taxable
year in which the death of either or both spouses occurs is subject to
two limitations. The first limitation is that if the surviving spouse
remarries before the close of his taxable year, he shall not make a
joint return with the first spouse who died during the taxable year. In
such a case, however, the surviving spouse may make a joint return with
his new spouse provided the other requirements with respect to the
filing of a joint return are met. The second limitation is that the
surviving spouse shall not make a joint return with the deceased spouse
if the taxable year of either spouse is a fractional part of a year
under section 443(a)(1) resulting from a change of accounting period.
For example, if a husband and wife
[[Page 674]]
make their returns on the calendar year basis and the wife dies on March
1, 1956, and thereafter the husband receives permission to change his
annual accounting period to a fiscal year beginning July 1, 1956, no
joint return shall be made for the short taxable year ending June 30,
1956. Similarly, if a husband and wife who make their returns on a
calendar year basis receive permission to change to a fiscal year
beginning July 1, 1956, and the wife dies on June 1, 1956, no joint
return shall be made for the short taxable year ending June 30, 1956.
(3) Section 6013(a)(3) provides for the method of making a joint
return in the case of the death of one spouse or both spouses. The
general rule is that, in the case of the death of one spouse, or of both
spouses, the joint return with respect to the decedent may be made only
by his executor or administrator, as defined in paragraph (c) of
Sec. 1.6013-4. An exception is made to this general rule whereby, in the
case of the death of one spouse, the joint return may be made by the
surviving spouse with respect to both him and the decedent if all the
following conditions exist:
(i) No return has been made by the decedent for the taxable year in
respect of which the joint return is made;
(ii) No executor or administrator has been appointed at or before
the time of making such joint return; and
(iii) No executor or administrator is appointed before the last day
prescribed by law for filing the return of the surviving spouse.
These conditions are to be applied with respect to the return for each
of the taxable years of the decedent for which a joint return may be
made if more than one such taxable year is involved. Thus, in the case
of husband and wife on the calendar year basis, if the wife dies in
February 1957, a joint return for the husband and wife for 1956 may be
made if the conditions set forth in this subparagraph are satisfied with
respect to such return. A joint return also may be made by the survivor
for both himself and the deceased spouse for the calendar year 1957 if
it is separately determined that the conditions set forth in this
subparagraph are satisfied with respect to the return for such year. If,
however, the deceased spouse should, prior to her death, make a return
for 1956, the surviving spouse may not thereafter make a joint return
for himself and the deceased spouse for 1956.
(4) If an executor or administrator is appointed at or before the
time of making the joint return or before the last day prescribed by law
for filing the return of the surviving spouse, the surviving spouse
cannot make a joint return for himself and the deceased spouse whether
or not a separate return for the deceased spouse is made by such
executor or administrator. In such a case, any return made solely by the
surviving spouse shall be treated as his separate return. The joint
return, if one is to be made, must be made by both the surviving spouse
and the executor or administrator. In determining whether an executor or
administrator is appointed before the last day prescribed by law for
filing the return of the surviving spouse, an extension of time for
making the return is included.
(5) If the surviving spouse makes the joint return provided for in
subparagraph (3) of this paragraph and thereafter an executor or
administrator of the decedent is appointed, the executor or
administrator may disaffirm such joint return. This disaffirmance, in
order to be effective, must be made within one year after the last day
prescribed by law for filing the return of the surviving spouse
(including any extension of time for filing such return) and must be
made in the form of a separate return for the taxable year of the
decedent with respect to which the joint return was made. In the event
of such proper disaffirmance the return made by the survivor shall
constitute his separate return, that is, the joint return made by him
shall be treated as his return and the tax thereon shall be computed by
excluding all items properly includible in the return of the deceased
spouse. The separate return made by the executor or administrator shall
constitute the return of the deceased spouse for the taxable year.
(6) The time allowed the executor or administrator to disaffirm the
joint return by the making of a separate return does not establish a new
due date for the return of the deceased spouse. Accordingly, the
provisions of sections
[[Page 675]]
6651 and 6601, relating to delinquent returns and delinquency in payment
of tax, are applicable to such return made by the executor in
disaffirmance of the joint return.
(e) Return of surviving spouse treated as joint return. For
provisions relating to the treatment of the return of a surviving spouse
as a joint return for each of the next two taxable years following the
year of the death of the spouse, see section 2 and Sec. 1.2-2.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7274, 38 FR
11345, May 7, 1973; T.D. 7670, 45 FR 6929, Jan. 31, 1980]
Sec. 1.6013-2 Joint return after filing separate return.
(a) In general. (1) Where an individual has filed a separate return
for a taxable year for which a joint return could have been made by him
and his spouse under section 6013(a), and the time prescribed by law for
filing the return for such taxable year has expired, such individual and
his spouse may, under conditions hereinafter set forth, make a joint
return for such taxable year. The joint return filed pursuant to section
6013(b) shall constitute the return of the husband and wife for such
year, and all payments, credits, refunds, or other repayments, made or
allowed with respect to the separate return of either spouse are to be
taken into account in determining the extent to which the tax based on
the joint return has been paid.
(2) If a joint return is made under section 6013(b), any election,
other than the election to file a separate return, made by either spouse
in his separate return for the taxable year with respect to the
treatment of any income, deduction, or credit of such spouse shall not
be changed in the making of the joint return where such election would
have been irrevocable if the joint return had not been made. Thus, if
one spouse has made an irrevocable election to adopt and use the last-
in, first-out inventory method under section 472, this election may not
be changed upon making the joint return under section 6013(b).
(3) A joint return made under section 6013(b) after the death of
either spouse shall, with respect to the decedent, be made only by his
executor or administrator. Thus, where no executor or administrator has
been appointed, a joint return cannot be made under section 6013(b).
(4) A nonresidential alien treated as a resident under section 6013
(g) or (h) for any taxable year ending on or after December 31, 1975,
and the alien's U.S. citizen or resident spouse may file a joint return
for that taxable year, even though one or both of the spouses have
previously filed separate returns for that taxable year. In this case,
the rule in paragraph (a)(3) of this section does not apply.
(b) Limitations with respect to making of election. A joint return
shall not be made under section 6013(b)(1) with respect to a taxable
year:
(1) Beginning on or before July 30, 1996, unless there is paid in
full at or before the time of the filing of the joint return the amount
shown as tax upon such joint return; or
(2) After the expiration of three years from the last day prescribed
by law for filing the return for such taxable year determined without
regard to any extension of time granted to either spouse; or
(3) After there has been mailed to either spouse, with respect to
such taxable year, a notice of deficiency under section 6212, if the
spouse, as to such notice, files a petition with the Tax Court of the
United States within the time prescribed in section 6213; or
(4) After either spouse has commenced a suit in any court for the
recovery of any part of the tax for such taxable year; or
(5) After either spouse has entered into a closing agreement under
section 7121 with respect to such taxable year, or after any civil or
criminal case arising against either spouse with respect to such taxable
year has been compromised under section 7122.
(c) When return deemed filed; assessment and collection; credit or
refund. (1) For the purpose of section 6501, relating to the period of
limitations upon assessment and collection, and section 6651, relating
to delinquent returns, a joint return made under section 6013(b) shall
be deemed to have been filed, giving due regard to any extension of time
granted to either spouse, on the following date:
[[Page 676]]
(i) Where both spouses filed separate returns, prior to making the
joint return under section 6013(b), on the date the last separate return
of either spouse was filed for the taxable year, but not earlier than
the last date prescribed by law for the filing of the return of either
spouse;
(ii) Where only one spouse was required and did file a return prior
to the making of the joint return under section 6013(b), on the date of
the filing of the separate return, but not earlier than the last day
prescribed by law for the filing of such return; or
(iii) Where both spouses were required to file a return, but only
one spouse did so file, on the date of the filing of the joint return
under section 6013(b).
(2) For the purpose of section 6511, relating to refunds and
credits, a joint return made under section 6013(b) shall be deemed to
have been filed on the last date prescribed by law for filing the return
for such taxable year, determined without regard to any extension of
time granted to either spouse for filing the return or paying the tax.
(d) Additional time for assessment. In the case of a joint return
made under section 6013(b), the period of limitations provided in
sections 6501 and 6502 shall not be less than one year after the date of
the actual filing of such joint return. The expiration of the one year
is to be determined without regard to the rules provided in paragraph
(c)(1) of this section, relating to the application of sections 6501 and
6651 with respect to a joint return made under section 6013(b).
(e) Additions to the tax and penalties. (1) Where the amount shown
as the tax by the husband and wife on a joint return made under section
6013(b) exceeds the aggregate of the amounts shown as tax on the
separate return of each spouse, and such excess is attributable to
negligence, intentional disregard of rules and regulations, or fraud at
the time of the making of such separate return, there shall be assessed,
collected, and paid in the same manner as if it were a deficiency an
additional amount as provided by the following:
(i) If any part of such excess is attributable to negligence, or
intentional disregard of rules and regulations, at the time of the
making of such separate return, but without any intent to defraud, this
additional amount shall be 5 percent of the total amount of the excess.
(ii) If any part of such excess is attributable to fraud with intent
to evade tax at the time of the making of such separate return, this
additional amount shall be 50 percent of the total amount of the excess.
The latter addition is in lieu of the 50 percent addition to the tax
provided in section 6653(b).
(2) For purposes of section 7206 (1) and (2) and section 7207
(relating to criminal penalties in the case of fraudulent returns), the
term ``return'' includes a separate return filed by a spouse with
respect to a taxable year for which a joint return is made under section
6013(b) after the filing of a separate return.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7670, 45 FR
6929, Jan. 31, 1980; T.D. 8725, 62 FR 39117, July 22, 1997]
Sec. 1.6013-3 Treatment of joint return after death of either spouse.
For purposes of section 21 (relating to change in rates during a
taxable year), section 443 (relating to returns for a period of less
than 12 months), and section 7851(a)(1)(A) (relating to the
applicability of certain provisions of the Internal Revenue Code of 1954
and the Internal Revenue Code of 1939), where the husband and wife have
different taxable years because of death of either spouse, the joint
return shall be treated as if the taxable years of both ended on the
date of the closing of the surviving spouse's taxable year. Thus, in
cases where the Internal Revenue Code of 1939 otherwise would apply to
the taxable year of the decedent spouse and the Internal Revenue Code of
1954 would apply to the taxable year of the surviving spouse, this
provision makes the Internal Revenue Code of 1954 applicable to the
taxable years of both spouses if a joint return is filed.
Sec. 1.6013-4 Applicable rules.
(a) Status as husband and wife. For the purpose of filing a joint
return under section 6013, the status as husband and wife of two
individuals having taxable years beginning on the same day shall be
determined:
[[Page 677]]
(1) If the taxable year of each individual is the same, as of the
close of such year; and
(2) If the close of the taxable year is different by reason of the
death of one spouse, as of the time of such death.
An individual legally separated from his spouse under a decree of
divorce or of separate maintenance shall not be considered as married.
However, the mere fact that spouses have not lived together during the
course of the taxable year shall not prohibit them from making a joint
return. A husband and wife who are separated under an interlocutory
decree of divorce retain the relationship of husband and wife until the
decree becomes final. The fact that the taxpayer and his spouse are
divorced or legally separated at any time after the close of the taxable
year shall not deprive them of their right to file a joint return for
such taxable year under section 6013.
(b) Computation of income, deductions, and tax. If a joint return is
made, the gross income and adjusted gross income of husband and wife on
the joint return are computed in an aggregate amount and the deductions
allowed and the taxable income are likewise computed on an aggregate
basis. Deductions limited to a percentage of the adjusted gross income,
such as the deduction for charitable, etc., contributions and gifts,
under section 170, will be allowed with reference to such aggregate
adjusted gross income. A similar rule is applied in the case of the
limitation of section 1211(b) on the allowance of losses resulting from
the sale or exchange of capital assets (see Sec. 1.1211-1). Although
there are two taxpayers on a joint return, there is only one taxable
income. The tax on the joint return shall be computed on the aggregate
income and the liability with respect to the tax shall be joint and
several. For computation of tax in the case of a joint return, see
Sec. 1.2-1. For tax in the case of a joint return of husband and wife
electing to pay the optional tax under section 3, see Sec. 1.3-1. For
the election not to show on a joint return the amount of tax due in
connection therewith, see paragraph (c) of Sec. 1.6014-1 and paragraph
(d) of Sec. 1.6014-2. For separate computations of the self-employment
tax of each spouse on a joint return, see paragraph (b) of Sec. 1.6017-
1.
(c) Definition of executor or administrator. For purposes of section
6013 the term ``executor or administrator'' means the person who is
actually appointed to such office and not a person who is merely in
charge of the property of the decedent.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7102, 36 FR
5497, Mar. 24, 1971]
Sec. 1.6013-5 Spouse relieved of liability in certain cases.
(a) In general. A person shall be relieved from liability for any
tax, penalties, additions to tax, interest, or other amounts, to the
extent that such liability is attributable to an omission from gross
income in a taxable year, and:
(1) He filed a joint return with a spouse in such taxable year,
(2) An amount of income which exceeds 25 percent of the amount of
gross income which is stated in the return (as determined in a manner
provided by section 6501(e)(1)(A) of the Code) and which is attributable
to such person's spouse was omitted from the return, and should have
been, under chapter 1 of the Code, included in the return,
(3) He establishes that he did not know of, and had no reason to
know of such omission, and
(4) It is inequitable to hold the taxpayer liable for the deficiency
in tax for such taxable year attributable to such omission.
(b) Inequitable defined. Whether it is inequitable to hold a person
liable for the deficiency in tax, within the meaning of paragraph (a)(4)
of this section, is to be determined on the basis of all the facts and
circumstances. In making such a determination a factor to be considered
is whether the person seeking relief significantly benefited, directly
or indirectly, from the items omitted from gross income. However, normal
support is not a significant ``benefit'' for purposes of this
determination. Evidence of direct or indirect benefit may consist of
transfers of property, including transfers which may be received several
years after the year in which the omitted item of income should have
been included in
[[Page 678]]
gross income. Thus, for example, if a person seeking relief receives
from his spouse an inheritance of property or life insurance proceeds
which are traceable to items omitted from gross income by his spouse,
that person will be considered to have benefited from those items. Other
factors which may also be taken into account, if the situation warrants,
include the fact that the person seeking relief has been deserted by his
spouse or the fact that he has been divorced or separated from such
spouse.
(c) Community property laws. The determination of the spouse to whom
items of gross income (other than gross income from property) are
attributable shall be made without regard to any applicable community
property laws.
(d) Omission of income. Section 6013(e) of the Code shall apply only
to income which is properly includible as gross income under chapter 1
of the Code, which was, in fact, omitted from a joint return. Section
6013(e) shall not apply to a tax deficiency resulting from erroneous or
fraudulent deductions, claims, or other evasions or avoidances of tax.
(e) Scope of section. This section does not apply to any taxable
year for which a claim for credit or refund is barred by operation of
any law or rule of law.
[T.D. 7320, 39 FR 28279, Aug. 6, 1974]
Sec. 1.6013-6 Election to treat nonresident alien individual as resident of the United States.
(a) Election for special treatment--(1) In general. Two individuals
who are husband and wife at the close of a taxable year ending on or
after December 31, 1975, may make an election under this section for
that taxable year if, at the close of that year, one spouse is a citizen
or resident of the United States and the other spouse is a nonresident
alien. The effect of the election is that each spouse is treated as a
resident of the United States for purposes of chapters 1, 5, and 24 and
sections 6012, 6013, 6072, and 6091 of the Code for the entire taxable
year. An election made under this section is in effect for the taxable
year for which made and for all subsequent years of the husband and
wife, except:
(i) Any taxable year for which the election is suspended, as
described in paragraph (a)(3) of this section, and
(ii) Any taxable year for which the election is terminated in
accordance with paragraph (b) of this section and all subsequent taxable
years.
A husband and wife may not make an election if an election previously
made under this section by either spouse has been terminated under
paragraph (b) of this section.
(2) Particular rules. (i) As used in paragraph (a)(3) of this
section, the term ``U.S. spouse'' means any married individual who is a
citizen or resident of the United States at any time during a taxable
year.
(ii) An individual's residence is determined by application of the
principles of Secs. 301.7701(b)-1 through 301.7701(b)-9 of this chapter
relating to what constitutes residence in the United States by an alien
individual.
(iii) Whether two individuals are married at the close of a taxable
year is determined by application of the rules in Sec. 1.6013-4(a).
(iv) The provisions of section 879 and the regulations thereunder
shall not apply for any taxable year for which an election under this
section is in effect.
(v) An individual who makes an election under this section may not,
for United States income tax purposes, claim under any United States
income tax treaty not to be a U.S. resident. The relationship of U.S.
income tax treaties and the election under this section is illustrated
by the following example.
Example. H, a U.S. citizen, is married to W, a nonresident alien of
the United States and a domiciliary of country X. H and W maintain their
only permanent home in country X. W receives both U.S. source and
country X source interest during the taxable year. The interest is not
effectively connected with a permanent establishment or a fixed base in
any country. H and W make the section 6013 (g) election. Under article
ii (1) of the United States--country X Income Tax Convention interest
derived and beneficially owned by a resident of one contracting state is
exempt from tax in the other contracting state. Article 4 (1) of the
treaty provides that an individual is a resident of a contracting state
if subject to tax in that country by reason of the individual's
domicile, residence, or citizenship. Under article 4 (1) of the treaty,
W is a resident of country X by virtue of her
[[Page 679]]
domocile in country X and also of the United States by virtue of the
section 6013 (g) election. Article 4 (2) of the treaty provides that if
an individual is a resident of both the United States and country X by
reason of article 4 (1), the individual shall be deemed to be a resident
of the contracting state in which he or she has a permanent home
available. Because W's sole permanent home is in country X, under
article 4 (2) of the treaty W is treated as a resident of country X for
purposes of the treaty. Because W has elected under section 6013(g) to
be treated as a U.S. resident (and thus to be taxed on worldwide
income), W may not, for U.S. income tax purposes, claim under the treaty
not to be a U.S. resident. W, therefore, is subject to U.S. income tax
on the interest. For purposes of country X income tax, W is considered a
resident of country X under the treaty.
(3) Suspension of election. (i) An election made under this section
is suspended and is not in effect for a taxable year subsequent to the
first taxable year for which made if neither spouse is a U.S. spouse
during that subsequent taxable year. Thus, for example, the election is
in suspense if both spouses are nonresident aliens for the entire
taxable year.
(ii) If either spouse dies during any taxable year for which the
election under this section is in effect, other than the first taxable
year for which the election is to be in effect, the taxable year shall
include, solely for purposes of this paragraph (a)(3), only those days
during the taxable year on which both spouses are alive. Thus, for
example, if the U.S. spouse dies during the taxable year, the election
is not suspended for that year even if the surviving nonresident alien
spouse never acquires U.S. citizenship or residency. Similarly, if the
nonresident alien spouse dies during the taxable year, the election is
not suspended for that year even if the surviving U.S. spouse
subsequently abandons U.S. citizenship or residency. However, if neither
spouse was a U.S. spouse at any time during the period of the taxable
year when both spouses were alive, the election is suspended for that
year even if the surviving spouse subsequently acquires U.S. citizenship
or residency.
For the effect of the death of either spouse on the status of the
election in subsequent taxable years, see paragraph (b)(2) of this
section.
(4) Time and manner of making an election. (i) A husband and wife
shall make the election under this section by attaching a statement to a
joint return for the first taxable year for which the election is to be
in effect. The election must be made before the expiration of the period
prescribed by section 6511(a) (or section 6511(c) if the period is
extended by agreement) for making a claim for credit or refund. If
either or both spouses die after the close of the taxable year but
before the joint return is filed, the election may be made by the
executor, administrator, or other person charged with the property of
the deceased spouse. If the election is made with a joint amended
return, the amended return should be made on Form 1040 or 1040A, the
word ``Amended'' should be written clearly on the front of the return,
and an amended return also must be filed for each subsequent taxable
year as to which a return previously has been filed by either spouse.
(ii) The statement must contain a declaration that the election is
being made and that the requirements of paragraph (a)(1) of this section
are met for the taxable year. The statement must also contain the name,
address, and taxpayer identifying number of each spouse. If the election
is being made on behalf of a deceased spouse, the statement must contain
the name and address of the executor, administrator, or other person
making the election on behalf of the decreased spouse. The statement
must be signed by both persons making the election.
(b) Termination of election--(1) Revocation. (i) An election under
this section shall terminate if either spouse revokes the election. An
election that is revoked terminates as of the first taxable year for
which the last day prescribed by section 6072(a) and 6081(a) for filing
the return of tax has not yet occurred.
(ii) Revocation of the election is made by filing a statement of
revocation in the following manner. If the spouse revoking the election
is required to file a return under section 6012, the statement is filed
by attaching it to the return for the first taxable year to which the
revocation applies. If the spouse revoking the election is not
[[Page 680]]
required to file a return under section 6012, but files a claim for
refund under section 6511, the statement is filed by attaching it to the
claim for refund. If the spouse revoking the election is not required to
file a return and does not file a claim for refund, the statement is
filed by submitting it to the service center director with whom was
filed the most recent joint return of the spouses. The revocation may,
if the revoking spouse dies after the close of the first taxable year to
which the revocation applies but before the return, claim for refund, or
statement of revocation is filed, be made by the executor, administrator
or other person charged with the property of the deceased spouse.
(iii) A revocation of the election is effective as of a particular
taxable year if it is filed on or before the last day prescribed by
section 6072(a) and 6081(a) for filing the return of tax for that
taxable year. However, the revocation is not final until that last day.
(iv) The statement of revocation must contain a declaration that the
election under this section is being revoked. The statement must also
contain the name, address, and taxpayer identifying number of each
spouse. If the revocation is being made on behalf of a deceased spouse,
the statement must contain the name and address of the executor,
administrator, or other person revoking the election on behalf of the
deceased spouse. The statement must also include a list of the States,
foreign countries, and possessions of the United States which have
community property laws and in which:
(A) Each spouse is domiciled, or
(B) real property is located from which either of the spouses
receives income.
The statement must be signed by the person revoking the election.
(2) Death. An election under this section shall terminate if either
spouse dies. An election that terminates on account of death terminates
as of the first taxable year of the surviving spouse following the
taxable year in which the death occurred. However, if the surviving
spouse is a citizen or resident of the United States who is entitled to
the benefits of section 2, the election terminates as of the first
taxable year following the last taxable year for which the surviving
spouse is entitled to the benefits of section 2. If both spouses die
within the same taxable year, the election terminates as of the first
day after the close of the taxable year in which the deaths occurred.
(3) Legal separation. An election under this section terminates if
the spouses legally separate under a degree of divorce or of separate
maintenance. An election that terminates on account of legal separation
terminates as of the close of the taxable year preceding the taxable
year in which the separation occurs. The rules in Sec. 1.6013-4(a) are
relevant in determining whether two spouses are legally separated.
(4) Inadequate records. An election under this section may be
terminated by the Commissioner if it is determined that either spouse
has failed to keep adequate records. An election that is terminated on
account of inadequate records terminates as of the close of the taxable
year preceding the taxable year for which the Commissioner determines
that the election should be terminated. Adequate records are the books,
records, and other information resonably necessary to ascertain the
amount of liability for taxes under chapters 1, 5, and 24 of the code of
either spouse for the taxable year. Adequate records also includes the
granting of access to the books and records.
(c) Illustrations. The application of this section is illustrated by
the following examples. In each case the individual's taxable year is
the calendar year and the spouses are not legally separated.
Example (1). W, a U.S. citizen for the entire taxable year 1979, is
married to H, a nonresident alien individual. W and H may make the
section 6013(g) election for 1979 by filing the statement of election
with a joint return. If W and H make the election, income from sources
within and without the United States received by W and H in 1979 and
subsequent years must be included in gross income for each taxable year
unless the election later is terminated or suspended. While W and H must
file a joint return for 1979, joint or separate returns may be filed for
subsequent years.
Example (2). H and W are husband and wife and are both nonresident
alien individuals. In June 1980 H becomes a U.S. resident and remains a
resident for the balance of the
[[Page 681]]
year. H and W may make the section 6013(g) election for 1980. If H and W
make the election, income from sources within and without the United
States received by H and W for the entire taxable year 1980 and
subsequent years must be included in gross income for each taxable year,
unless the election later is terminated or suspended.
Example (3) . W, a U.S. resident on December 31, 1981, is married to
H, a nonresident alien. W and H make the section 6013(g) election and
file joint returns for 1981 and succeeding years. On January 10, 1987, W
becomes a nonresident alien. H has remained a nonresident alien. W and H
may file a joint return or separate returns for 1987. As neither W or H
is a U.S. resident at any time during 1988, their election is suspended
for 1988. If W and H have U.S. source or foreign source income
effectively connected with the conduct of a U.S. trade or business in
1988, they must file separate returns as nonresident aliens. W becomes a
U.S. resident again on January 5, 1990. Their election no longer is in
suspense. Income from sources within and without the United States
received by W or H in the years their election is not suspended must be
included in gross income for each taxable year.
Example (4). H, a U.S. citizen for the entire taxable year 1979, is
married to W, who is not a U.S. citizen. While W believes that she is a
U.S. resident, H and W make the section 6013(g) election for 1979 to
cover the possibility that later it would be determined that she is a
nonresident alien during 1979. The election for 1979 will not be
considered evidence that W was a nonresident alien in prior years.
Income from sources within and without the United States received by H
amd W in 1979 and subsequent years must be included in gross income for
each taxable year, unless the election later is terminated or suspended.
[T.D. 7670, 45 FR 6929, Jan. 31, 1980, as amended by T.D. 7842, 47 FR
49842, Nov. 3, 1982; T.D. 8411, 57 FR 15241, Apr. 27, 1992]
Sec. 1.6013-7 Joint return for year in which nonresident alien becomes resident of the United States.
(a) Election for special treatment--(1) In general. Two individuals
who are husband and wife at the close of a taxable year ending on or
after December 31, 1975, may make an election under this section for
that taxable year if one spouse is a citizen or resident of the United
States on the last day of that taxable year and the other spouse is a
nonresident alien at the beginning of that taxable year and a citizen or
resident of the United States at the close of that taxable year. Two
married individuals who are nonresident aliens at the beginning of a
taxable year and who are U.S. citizens or residents on the last day of
that taxable year qualify for the election. The effect of the election
is that each spouse is treated as a resident of the United States for
purposes of chapters 1, 5, and 24 and sections 6012, 6013, 6072, and
6091 of the code for all of that taxable year. A husband and wife may
not make an election if an election has previously been made under this
section by either spouse.
(2) Particular rules. The rules in subdivisions (ii) through (v) of
Sec. 1.6013-6(a)(2) are applicable to this section.
(3) Time and manner of making an election. A husband and wife shall
make the election under this section in accordance with the rules in
Sec. 1.6013-6(a)(4).
(b) Section 6013(g) election in effect. If an election under section
6013(g) is in effect for a year subsequent to the first taxable year for
which made and during that subsequent year the husband and wife meet the
requirements of section 6013(h) and paragraph (a)(1) of this section,
then the election under section 6013(g) shall apply to that subsequent
taxable year. A separate election under section 6013(h) is not required
for that subsequent taxable year.
[T.D. 7670, 45 FR 6931, Jan. 31, 1980]
Sec. 1.6014-1 Tax not computed by taxpayer for taxable years beginning before January 1, 1970.
(a) In general. If an individual is entitled under paragraph (a)(7)
of Sec. 1.6012-1 to use as his return Form 1040A, he may elect not to
show thereon the amount of the tax due in connection with such return if
his gross income is less than $5,000.
(b) Computation and payment of tax. A taxpayer who, in accordance
with paragraph (a) of this section, elects not to show the tax on Form
1040A is not required to pay the unpaid balance of such tax at the time
he files the return. In such case, the tax will be computed for the
taxpayer by the Internal Revenue Service, and a notice will be mailed to
the taxpayer stating the amount of tax due. Where it is determined that
a refund of tax is due, the Internal Revenue Service will send
[[Page 682]]
such refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of
this chapter (Regulations on Procedure and Administration).
(c) Joint return. (1) A husband and wife who, pursuant to paragraph
(a)(7) of Sec. 1.6012-1, file a joint return on Form 1040A may elect not
to show the tax on such return if their aggregate gross income for the
taxable year is less than $5,000.
(2) The tax computed for the taxpayer who files Form 1040A and
elects not to show thereon the tax due shall be the lesser of the
following amounts:
(i) A tax computed as though the return on Form 1040A constituted
the separate returns of the spouses, or
(ii) A tax computed as though the return on Form 1040A constituted a
joint return.
(d) Married individuals filing separate returns. In the case of a
married individual who files a separate return and who elects under this
section not to show his tax on Form 1040A his tax shall be computed with
reference to the 10-percent standard deduction rather than the minimum
standard deduction.
(e) This section shall apply to taxable years beginning before
January 1, 1970.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6581, 26 FR
11678, Dec. 6, 1961; T.D. 6792, 30 FR 531, Jan. 15, 1965; T.D. 7102, 36
FR 5497, Mar. 24, 1971]
Sec. 1.6014-2 Tax not computed by taxpayer for taxable years beginning after December 31, 1969.
(a) In general. An individual subject to the tax imposed by section
1 of the Code may, in accordance with the instructions applicable to the
income tax return to be filed, elect, for any taxable year beginning
after December 31, 1969, not to show on his income tax return for such
year the amount of tax due in connection with such return.
(b) Restriction on making an election. The election pursuant to this
section shall not be made by an individual who does not file his return
(or amended return) making such election on or before the date
prescribed in section 6072(a) for the filing of the original return
(determined without regard to any extension of time).
(c) Effects of election. (1) A taxpayer who, in accordance with the
provisions of this section, elects not to show the tax on his income tax
return is not required to pay the unpaid balance of such tax at the time
he files the return. In such case, the tax will be computed for the
taxpayer by the Internal Revenue Service, and a notice will be mailed to
the taxpayer stating the amount of tax due. Where it is determined that
a refund of tax is due, the Internal Revenue Service will send such
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this
chapter (Regulations on Procedure and Administration). The computation
of tax by the Internal Revenue Service shall be treated for purposes of
this chapter as if made by the taxpayer, and such computation or the
issuance of a notice or refund pursuant thereto shall not relieve the
taxpayer of liability for any deficiency (although the deficiency is
based upon an amount of tax different from that computed for the
taxpayer by the Internal Revenue Service) or affect the rights of the
Internal Revenue Service with respect to any subsequent audit or other
review of the taxpayer's return.
(2) Where the election provided for in this section is made by a
taxpayer who takes the standard deduction and who has adjusted gross
income of less than $10,000, such election constitutes an election to
pay the tax imposed by section 3.
(3) A taxpayer who makes an election under section 6014 shall not be
precluded from claiming:
(i) Status as a head of household or a surviving spouse;
(ii) The credit under section 31 (relating to tax withheld on
wages);
(iii) The credit under section 37 (relating to retirement income);
(iv) The credit under section 38 (relating to investment in certain
depreciable property);
(v) The credit under section 39 (relating to certain uses of
gasoline and lubricating oil);
(vi) The credit under section 41 (relating to contributions to
candidates for public office);
(vii) The credit under section 42 (relating to personal exemptions);
(viii) The credit under section 43 (relating to earned income);
[[Page 683]]
(ix) The credit under section 44 (relating to purchase of new
principal residence); or
(x) The credit under section 45 (relating to overpayments of tax).
(d) Joint returns. (1) A husband and wife who file a joint return
may elect not to show the tax on such return in accordance with the
rules prescribed in paragraphs (a) and (b) of this section.
(2) The tax computed for a husband and wife who elect pursuant to
this section not to show their tax on their joint income tax return
shall be the lesser of the following amounts:
(i) A tax computed as though the return of income constituted a
joint return, or
(ii) If sufficient information is provided for the taxable income of
each spouse to be determined, a tax computed as though the return of
income constituted the separate returns of the spouses.
(e) Married individuals filing separate returns. This section shall
apply to married individuals filing separate returns unless otherwise
provided in the instructions accompanying a return. The instructions may
require the taxpayer to attach to his return a statement to the effect
that his tax and the tax of his spouse were determined in accordance
with the rules of sections 141(d) and 142(a).
(f) Revocation of election. An election pursuant to this section may
be revoked on an amended return (whether such return is filed before or
after the date prescribed in section 6072(a) for filing the original
return).
[T.D. 7102, 36 FR 5497, Mar. 24, 1971, as amended by T.D. 7298, 38 FR
35234, Dec. 26, 1973; T.D. 7391, 40 FR 55856, Dec. 2, 1975]
Sec. 1.6015(a)-1 Declaration of estimated income tax by individuals.
(a) Requirement--(1) Taxable years beginning after December 31,
1971. With respect to taxable years beginning after December 31, 1971, a
declaration of estimated income tax by an individual is not required if
the estimated tax (as defined in section 6015(c)) can reasonably be
expected to be less than $100. In all other cases a declaration of
estimated income tax shall be made by every individual if the following
conditions are met and if such individual is not a nonresident alien
individual who is excepted under section 6015(i) and Sec. 1.6015(i)-1
from the requirements of making a declaration:
(i) The gross income for the taxable year can reasonably be expected
to exceed:
(a) $20,000, in the case of:
(1) A single individual including a head of a household (as defined
in section 2(b)) or a surviving spouse (as defined in section 2(a)); or
(2) A married individual entitled under section 6015(b) to file a
joint declaration with his spouse, if his spouse has not received wages
(as defined in section 3401(a)) for the taxable year; or
(b) $10,000, in the case of a married individual entitled under
section 6015(b) to file a joint declaration with his spouse, if both he
and his spouse have received wages (as defined in section 3401(a)) for
the taxable year; or
(c) $5,000, in the case of a married individual not entitled under
section 6015(b) to file a joint declaration with his spouse; or
(ii) The gross income can reasonably be expected to include more
than $500 from sources other than wages (as defined in section 3401(a)).
(2) Taxable years beginning after December 31, 1966, and before
January 1, 1972. With respect to taxable years beginning after December
31, 1966, and before January 1, 1972, a declaration of estimated income
tax by an individual is not required if the estimated tax (as defined in
section 6015(c)) can reasonably be expected to be less than $40. In all
other cases a declaration of estimated income tax shall be made by every
individual if the following conditions are met and if such individual is
not a nonresident alien individual who is excepted under section 6015(i)
and Sec. 1.6015(i)-1 from the requirement of making a declaration:
(i) The gross income for the taxable year can reasonably be expected
to exceed:
(a) $5,000, in the case of:
(1) A single individual other than a head of a household (as defined
in section 1(b)(2) for taxable years ending before January 1, 1971, or
as defined in section 2(b) of the Code as amended by the Tax Reform Act
of 1969 for taxable years beginning after December 31,
[[Page 684]]
1970) or a surviving spouse (as defined in section 2(b) for taxable
years ending before January 1, 1971, or as defined in section 2(a) of
the Code as amended by the Tax Reform Act of 1969 for taxable years
beginning after December 31, 1970);
(2) A married individual not entitled under section 6015(b) to file
a joint declaration with his spouse; or
(3) A married individual entitled under section 6015(b) to file a
joint declaration with his spouse, but only if the aggregate gross
income of such individual and his spouse for the taxable year can
reasonably be expected to exceed $10,000; or
(b) $10,000, in the case of:
(1) A head of household (as defined in section 1(b)(2) for taxable
years ending before January 1, 1971, or as defined in section 2(b) of
the Code as amended by the Tax Reform Act of 1969 for taxable years
beginning after December 31, 1970); or
(2) A surviving spouse (as defined in section 2(b) for taxable years
ending before January 1, 1971, or as defined in section 2(a) of the Code
as amended by the Tax Reform Act of 1969 for taxable years beginning
after December 31, 1970); or
(ii) The gross income can reasonably be expected to include more
than $200 from sources other than wages (as defined in section 3401(a)).
(3) Taxable years beginning before January 1, 1967. With respect to
taxable years beginning before January 1, 1967, and after December 31,
1960, a declaration of estimated income tax by an individual is not
required if the estimated tax (as defined in section 6015(c)) can
reasonably be expected to be less than $40. In all other cases a
declaration shall be made by every citizen of the United States, whether
residing at home or abroad, every individual residing in the United
States though not a citizen thereof, every nonresident alien who is a
resident of Canada, Mexico, or Puerto Rico and who has wages subject to
withholding at the source under section 3402, and every nonresident
alien who has been, or expects to be, a resident of Puerto Rico during
the entire taxable year, if:
(i) The gross income for the taxable year can reasonably be expected
to exceed:
(a) $5,000, in the case of:
(1) A single individual other than a head of a household (as defined
in section 1(b)(2)); or
(2) A married individual not entitled under section 6015(b) to file
a joint declaration with his spouse; or
(3) A married individual entitled under section 6015(b) to file a
joint declaration with his spouse, but only if the aggregate gross
income of such individual and his spouse for the taxable year can
reasonably be expected to exceed $10,000; or
(b) $10,000, in the case of:
(1) A head of a household (as defined in section 1(b)(2)); or
(2) A surviving spouse (as defined in section 2(b)); or
(ii) The gross income can reasonably be expected to include more
than $200 from sources other than wages (as defined in section 3401(a)).
(b) Income of child. In estimating his gross income for the taxable
year a parent should not take into account the income of his minor
child. Such income is not includible in the gross income of the parent.
See section 73 and Sec. 1.73-1.
(c) Exemption of spouse. For the purpose of determining whether a
declaration of estimated tax is required under the provisions of
paragraph (a)(3) of this section, a married person filing a separate
declaration may not take into account the exemption of his spouse, if
his spouse has, or is reasonably expected to have, gross income, or is
reasonably expected to be the dependent of another taxpayer for the
taxable year.
(d) Nonresident alien individuals. For the rules exempting certain
nonresident alien individuals from the requirement of making a
declaration of estimated income tax, see Sec. 1.6015(i)-1.
(e) Examples. The application of the provisions of this section may
be illustrated by the following examples:
Example (1). H maintains as his home a household which is the
principal place of abode of himself and his two dependent children. H's
wife died in 1970 and he has not remarried. H and his wife filed a joint
return for 1970. H's salary from January 1, to June
[[Page 685]]
30, 1972, is at the annual rate of $18,000. However, effective July 1,
1972, his annual salary is increased to $24,000, and under the facts
then existing it is reasonable to assume that his salary for the
remaining portion of 1972 will remain unchanged and that his total
salary for the year will, therefore, be $21,000. Since H is a surviving
spouse (as defined in section 2(a)) and his gross income can reasonably
be expected to exceed $20,000, he is required to file a declaration of
estimated tax for 1972. Since it was not reasonable to assume that H's
gross income for 1972 would exceed $20,000 until July 1972 (after June 1
and before September 2), H is not required to file a declaration until
September 15, 1972. However, if H's estimated tax (as defined in section
6015(c)) can reasonably be expected to be less than $100, he is not
required to file a declaration of estimated tax. See section 6073 and
Secs. 1.6073-1 to 1.6073-4, inclusive, for rules as to when a
declaration must be filed.
Example (2). H, a taxpayer making his return on the calendar year
basis, has an annual salary of $12,000 in 1972. W, H's wife, received
wages (as defined in section 3401(a)) in December 1972. W did not
receive wages prior to December. Assuming that H and W are entitled to
file a joint declaration of estimated tax under section 6015(b), H would
not be required to file a declaration for 1972 until January 15, 1973,
since prior to December 1972 W had not received wages. Since W received
wages after September 1, 1972, H must file a declaration on or before
January 15, 1973, because, under the rule contained in paragraph
(a)(1)(i)(b) of this section, H's gross income could reasonably be
expected to exceed $10,000 for 1972. However, no declaration would be
required if H's estimated tax (as defined in section 6015(c)) could
reasonably be expected to be less than $100. No declaration is required
prior to January 15, 1973, because, under the rule contained in
paragraph (a)(1)(i)(a)(2) of this section, H's gross income for 1972
could not reasonably be expected to exceed $20,000.
Example (3). P is a taxpayer making his return on the calendar year
basis. P is engaged in the practice of his profession on his own account
and has gross income of $2,000 from such profession for the 2 months of
January and February 1972. He reasonably expects that his gross income
from his profession will continue to average $1,000 each month
throughout the year and that he will have no income from any other
source during 1972. Since P has gross income which does not constitute
wages subject to withholding, he is required to file a declaration of
estimated tax for that year since he has income of more than $500 from
sources other than wages, unless he reasonably expects his estimated tax
to be less than $100.
Example (4). S, a married taxpayer, has been regularly employed for
many years. As of January 1, 1972, his weekly wages are $305. For many
years, S has also owned stock in a corporation which has regularly paid
him annual dividends ranging from $575 to $600. Because his gross income
can reasonably be expected to include more than $500 from sources other
than wages, S is required to make a declaration of estimated tax for
1972, unless he reasonably expects his estimated tax to be less than
$100.
(f) Declarations made by agents. The declaration of income may be
made by an agent if, by reason of disease or injury, the person liable
for the making of the declaration is unable to make it. The declaration
may also be made by an agent if the taxpayer is unable to make the
declaration by reason of continuous absence from the United States
(including Puerto Rico as if a part of the United States) for a period
of at least 60 days prior to the date prescribed by law for making the
declaration. In addition, a declaration may be made by an agent if the
taxpayer requests permission, in writing, of the district director for
the internal revenue district in which is located the legal residence or
principal place of business of the person liable for the making of the
declaration, and such district director determines that good cause
exists for permitting the declaration to be so made. However, assistance
in the preparation of the declaration may be rendered under any
circumstances. Whenever a declaration is made by an agent it must be
accompanied by a power of attorney (or copy thereof) authorizing him to
represent his principal in making, executing, or filing the declaration.
A form 2848, when properly completed, is sufficient. In addition, where
one spouse is physically unable by reason of disease or injury to sign a
joint declaration, the other spouse may, with the oral consent of the
one who is incapacitated, sign the incapacitated spouse's name in the
proper place in the declaration followed by the words ``By ____________,
Husband (or Wife)'', and by the signature of the signing spouse in his
own right, provided that a dated statement signed by the spouse who is
signing the declaration is attached to and made a part of the
declaration stating:
(1) The name of the declaration being filed,
(2) The taxable year,
[[Page 686]]
(3) The reason for the inability of the spouse who is incapacitated
to sign the declaration, and
(4) That the spouse who is incapacitated consented to the signing of
the declaration.
The taxpayer and his agent, if any, are responsible for the declaration
as made and incur liability for the penalties provided for erroneous,
false, or fraudulent declarations.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6817, 30 FR
4537, Apr. 8, 1965; T.D. 7117, 36 FR 9422, May 25, 1971; T.D. 7274, 38
FR 11345, May 7, 1973; T.D. 7282, 38 FR 19027, July 17, 1973; T.D. 7332,
39 FR 44232, Dec. 23, 1974]
Sec. 1.6015(b)-1 Joint declaration by husband and wife.
(a) In general. A husband and wife may make a joint declaration of
estimated tax even though they are not living together. However, a joint
declaration may not be made if they are separated under a decree of
divorce or of separate maintenance. A joint declaration may not be made
if the taxpayer's spouse is a nonresident alien (including a nonresident
alien who is a bona fide resident of Puerto Rico during the entire
taxable year) or if his spouse has a different taxable year. If the
gross income of each spouse meets the requirements of section 6015(a),
either a joint declaration must be made or a separate declaration must
be made by each. If a joint declaration is made, the amount estimated as
the income tax imposed by chapter 1 (other than by section 56) must be
computed on the aggregate estimated taxable income of the spouses (see
section 6013(d)(3) and Sec. 1.2-1), while (for taxable years beginning
after December 31, 1966) the amount estimated as the self-employment tax
imposed by chapter 2 must be computed on the separate estimated self-
employment income of each spouse. See sections 1401 and 1402 and
Sec. 1.6017-1(b)(1). The liability with respect to the estimated tax, in
the case of a joint declaration, shall be joint and several.
(b) Application to separate returns. The fact that a joint
declaration of estimated tax is made by them will not preclude a husband
and his wife from filing separate returns. In case a joint declaration
is made but a joint return is not made for the same taxable year, the
payments made on account of the estimated tax for such year may be
treated as payments on account of the tax liability of either the
husband or wife for the taxable year or may be divided between them in
such manner as they may agree. In the event the husband and wife fail to
agree to a division, such payments shall be allocated between them in
accordance with the following rule. The portion of such payments to be
allocated to a spouse shall be that portion of the aggregate of all such
payments as the amount of tax imposed by chapter 1 (other than by
section 56) shown on the separate return of the taxpayer (plus, for
taxable years beginning after December 31, 1966, the amount of tax
imposed by chapter 2 shown on the return of the taxpayer) bears to the
sum of the taxes imposed by chapter 1 (other than by section 56) shown
on the separate returns of the taxpayer and his spouse (plus, for
taxable years beginning after December 31, 1966, the sum of the taxes
imposed by chapter 2 shown on the returns of the taxpayer and his
spouse). For example, assume that for calendar yedar 1972 H and his
Spouse W make a joint declaration of estimated tax and, pursuant
thereto, pay a total of $19,500 of estimated tax. H and W subsequenty
file separate returns for 1972 showing tax imposed by chapter 1 (other
than by section 56) in the amount of $11,500 and $8,000, respectively.
In addition, H's return shows a tax imposed by chapter 2 in the amount
of $500. H and W fail to agree to a division of the estimated tax paid.
The amount of the aggregate estimated tax payments allocated to H is
computed as follows:
(1) Amount of tax, imposed by chapter 1 (other than by $11,500
section 56) shown on H's return.............................
(2) Plus: Amount of tax imposed by chapter 2 shown on H's 500
return......................................................
----------
(3) Total taxes imposed by chapter 1 (other than by section 12,000
56) and by chapter 2 shown on H's return....................
(4) Amount of tax imposed by chapter 1 (other than by section $8,000
56) shown on W's return.....................................
----------
(5) Total taxes imposed by chapter 1 (other than by section 20,000
56) and by chapter 2 shown on both H's and W's returns......
==========
(6) Proportion of such taxes shown on H's return to total 60%
amount of such taxes shown on both H's and W's returns
($12,00020,000).....................................
[[Page 687]]
(7) Amount of estimated tax payments allocated to H (60% of $11,700
$10,500)....................................................
Accordingly, H's return would show remaining tax liability in the amount
of $300 ($12,000 taxes shown less $11,700 estimated tax allocated).
(c) Death of spouse. (1) A joint declaration may not be made after
the death of either the husband or wife. However, if it is reasonable
for a surviving spouse to assume that there will be filed a joint return
for himself and the deceased spouse for his taxable year and the last
taxable year of the deceased spouse he may, in making a separate
declaration for his taxable year which includes the period comprising
such last taxable year of his spouse, estimate the amount of the tax
imposed by chapter 1 (other than by section 56) on his and his spouse's
taxable income on an aggregate basis and compute his estimated tax with
respect to such chapter 1 tax in the same manner as though a joint
declaration had been filed.
(2) If a joint declaration is made by husband and wife and
thereafter one spouse dies, no further payments of estimated tax on
account of such joint declaration are required from the estate of the
decedent. The surviving spouse, however, shall be liable for the payment
of any subsequent installments of the joint estimated tax unless an
amended declaration setting forth the separate estimated tax for the
taxable year is made by such spouse. Such separate estimated tax shall
be paid at the times and in the amounts determined under the rules
prescribed in section 6153. For the purpose of (i) the making of such
amended declaration by the surviving spouse, and (ii) the allocation of
payments made pursuant to a joint declaration between the surviving
spouse and the legal representative of the decedent in the event a joint
return is not filed, the payments made pursuant to the joint declaration
may be divided between the decedent and the surviving spouse in such
proportion as the surviving spouse and the legal representative of the
decedent may agree. In the event the surviving spouse and the legal
representative of the decedent fail to agree to a division, such
payments shall be allocated in accordance with the following rule. The
portion of such payments to be allocated to the surviving spouse shall
be that portion of the aggregate amount of such payments as the amount
of tax imposed by chapter 1 (other than by section 56) shown on the
separate return of the surviving spouse (plus, for taxable years
beginning after December 31, 1966, the amount of tax imposed by chapter
2 shown on the return of the surviving spouse) bears to the sum imposed
by chapter 1 (other than by section 56) shown on the separate returns of
the surviving spouse and of the decedent (plus, for taxable years
beginning after December 31, 1966, the sum of the taxes imposed by
chapter 2 shown on the returns of the surviving spouse and of the
decedent); and the balance of such payments shall be allocated to the
decedent. This rule may be illustrated by analogizing the surviving
spouse described in this rule to H in the example contained in paragraph
(b) of this section and the decedent in this rule to W in that example.
(d) Signing of declaration. A joint declaration of a husband and
wife (if not made by an agent of one or both spouses) shall be signed by
both spouses. The provisions of paragraph (f) of Sec. 1.6015(a)-1,
relating to returns made by agents, shall apply where one spouse signs a
declaration as agent for the other, or where a third party signs a
declaration as agent for one or both spouses.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T. D. 7274, 38 FR
11345, May 7, 1973; T.D. 7427, 41 FR 34027, Aug. 12, 1976]
Sec. 1.6015(c)-1 Definition of estimated tax.
(a) In general. In the case of an individual, the term ``estimated
tax'' means:
(1) The amount which the individual estimates as the amount of the
income tax imposed by chapter 1 (other than the tax imposed by section
56 or for taxable years ending before September 30, 1968, the tax
surcharge imposed by section 51) for the taxable year (and including the
amount which he estimates as the amount of any qualified State
individual income taxes which are treated pursuant to section 6361(a) as
if they were imposed by chapter 1 for the taxable year), plus
[[Page 688]]
(2) For taxable years beginning after December 31, 1966, the amount
which the individual estimates as the amount of the self-employment tax
imposed by chapter 2 for the taxable year, minus
(3) The amount which the individual estimates as the sum of any
credits against tax provided by part IV of subchapter A of chapter 1.
These credits are those provided by section 31 (relating to tax withheld
on wages), section 32 (relating to tax withheld at source on nonresident
aliens and foreign corporations and on tax-free covenant bonds), section
33 (relating to foreign taxes), section 34 (relating to the credit for
dividends received on or before December 31, 1964), section 35 (relating
to partially tax-exempt interest), section 37 (relating to the elderly),
section 38 (relating to the investment credit), section 39 (relating to
certain uses of gasoline, special fuels, and lubricating oil), section
40 (relating to expenses of work incentive programs), section 41
(relating to contributions to candidates), section 42 (relating to
general tax credit), section 43 (relating to earned income), section 44
(relating to purchase of new principal residence), section 44A (relating
to expenses for household and dependent care services necessary for
gainful employment), section 44B (relating to credit for employment of
certain new employees), and section 45 (relating to overpayments of
tax), minus,
(4) In the case of an individual who is subject to one or more
qualified State individual income taxes, the amount which he estimates
as the sum of the credits allowed against such taxes pursuant to section
6362(b)(2) (B) or (C) or section 6362(c)(4) and paragraph (c) of
Sec. 301.6362-4 of this chapter (Regulations on Procedure and
Administration) (relating to the credit for income taxes of other States
or political subdivisions thereof) and paragraph (c)(2) of
Sec. 301.6361-1 (relating to the credit for tax withheld from wages on
account of qualified State individual income taxes), and minus
(5) For taxable years ending after February 29, 1980, the amount
which the individual estimates will be the amount of such individual's
overpayment of windfall profit tax imposed by section 4986 of the Code
for the taxable year. For this purpose, the amount of such overpayment
is the amount by which such individual's aggregate windfall profit tax
liability for the taxable year as a producer of crude oil is reasonably
expected to be exceeded by withholding of windfall profit tax for the
taxable year.
(b) Example. A, a self-employed individual not subject to any
qualified State individual income tax, estimates that his liabilities
for income tax and self-employment tax for 1973 will be $1,600 and $400,
respectively. A is required to declare and pay an estimated tax of
$2,000 for that year.
(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654,
6655, and 7805))
[T.D. 7577, 43 FR 59358, Dec. 20, 1978, as amended by T.D. 8016, 50 FR
11854, Mar. 26, 1985]
Sec. 1.6015(d)-1 Contents of declaration of estimated tax.
(a) In general. (1) The declaration of estimated tax by an
individual shall be made on Form 1040-ES. For the purpose of making the
declaration, the amount of gross income which the taxpayer can
reasonably be expected to receive or accrue, depending upon the method
of accounting upon which taxable income is computed, and the amount of
the estimated allowable deductions and credits to be taken into account
in computing the amount of estimated tax shall be determined upon the
basis of the facts and circumstances existing as at the time prescribed
for the filing of the declaration as well as those reasonably to be
anticipated for the taxable year. If, therefore, the taxpayer is
employed at the date prescribed for filing his declaration at a given
wage or salary, it should, in the absence of circumstances indicating
the contrary, be presumed by him for the purpose of the declaration that
such employment will continue to the end of the taxable year at the wage
or salary received by him as of such date. In the case of income other
than wages and salary the regularity in the payment of income, such as
dividends, interest, rents, royalties, and income arising from estates
and
[[Page 689]]
trusts is a factor to be taken into consideration. Thus, if the taxpayer
owns shares of stock in a corporation and dividends have been paid
regularly for several years upon such stock, the taxpayer in the
preparation of his declaration should, in the absence of information
indicating a change in the dividend policy, include the prospective
dividends from the corporation for the taxable year as well as those
actually received in such year prior to the filing of the declaration.
In the case of a taxpayer engaged in business on his own account, there
shall be made an estimate of gross income and deductions and credits in
the light of the best available information affecting the trade,
business, or profession.
(2) In the case of any individual who can, at the time of the
preparation of his declaration, reasonably anticipate that his gross
income will be of such amount and character as to enable him to elect
upon his return for such year to compute the tax under section 3
(relating to optional tax), in lieu of the tax imposed by section 1, the
declaration of estimated tax may be made upon the basis set forth in
section 3 and Sec. 1.3-1. The filing of a declaration computed upon the
basis of section 3 shall not constitute the making of an election under
section 4 (relating to rules for optional tax) nor will it permit the
filing of a return on the basis of the optional tax under section 3
unless the taxpayer otherwise comes within the provisions of sections 3
and 4. For the purpose of computing the tax liability in the case of
married persons, if the taxable income of one spouse is determined
without regard to the standard deduction, the standard deduction is not
allowed to either. (See, however, paragraph (c) of Sec. 1.142-1 for
exceptions where spouses are legally separated under a decree of divorce
or separate maintenance.) Hence, where separate declarations are filed,
one spouse should not use section 3 in computing the estimated tax
unless the other spouse also uses section 3 or employs the standard
deduction in computing the estimated tax.
(b) Computation of estimated tax. In computing the estimated tax the
taxpayer should take into account the following:
(1) The amount estimated as the income tax imposed by chapter 1
(other than by section 56) for the taxable year after the application of
any allowable amounts estimated as the credit for foreign taxes, the
dividends received credit (for dividends received on or before December
31, 1964), the credit for partially tax-exempt interest, the retirement
income credit, the investment credit, the credit for expenses of work
incentive programs, the credit for contributions to candidates, the
credit for overpayments of tax, but without regard to the credit under
section 31 for tax withheld on wages or to the credit under section 39
for certain uses of gasoline, special fuels, and lubricating oils;
(2) For taxable years beginning after December 31, 1966 (and, if the
taxpayer so desires, for an earlier taxable year), the amount estimated
as the tax on self-employment income imposed by chapter 2;
(3) The amounts estimated by the taxpayer as the credits under
section 31 for tax withheld on wages and under section 39 for certain
uses of gasoline, special fuels, and lubricating oils;
(4) For taxable years ending after February 29, 1980, the amount
which the taxpayer estimates will be the amount of such taxpayer's
overpayment of windfall profit tax imposed by section 4986 of the Code
for the taxable year. For this purpose, the amount of such overpayment
is the amount by which such individual's aggregate windfall profit tax
liability for the taxable year as a producer of crude oil is reasonably
expected to be exceeded by withholding of windfall profit tax for the
taxable year.
(5) The excess, if any, of the sum of the amounts shown under
subparagraphs (b) (1) and (2) of this paragraph over the sum of the
amounts shown under subparagraphs (b)(3) and (4) of this paragraph shall
be the estimated tax for the taxable year.
(c) Use of prescribed form. Copies of Form 1040-ES will so far as
possible be furnished taxpayers by district directors. A taxpayer will
not be excused from making a declaration, however, by the fact that no
form has been furnished to him. Taxpayers not supplied
[[Page 690]]
with the proper form should make application therefor to the district
director in ample time to have their declarations prepared, verified,
and filed with the district director on or before the date prescribed
for filing the declaration. If the prescribed form is not available, a
statement disclosing the amount estimated as the tax, the estimated
credits, and the estimated tax after deducting such credits should be
filed as a tentative declaration within the prescribed time, accompanied
by the payment of the required installment. Such tentative declaration
should be supplemented, without unnecessary delay, by a declaration made
on the proper form.
(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654,
6655, and 7805))
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7427, 41 FR
34028, Aug. 12, 1976; T.D. 8016, 50 FR 11854, Mar. 26, 1985]
Sec. 1.6015(e)-1 Amendment of declaration.
In the making of a declaration of estimated tax, the taxpayer is
required to take into account the then existing facts and circumstances
as well as those reasonably to be anticipated relating to prospective
gross income, allowable deductions, and estimated credits for the
taxable year. Amended or revised declarations may be made in any case in
which the taxpayer estimates that his gross income, deductions, or
credits will differ from the gross income, deductions, or credits
reflected in the previous declaration. An amended declaration may also
be made based upon a change in the number of exemptions to which the
taxpayer may be entitled for the then current taxable year. However,
only one amended declaration may be filed during any interval between
installment dates. See paragraph (d) of Sec. 1.6073-1. An amended
declaration may be filed jointly by husband and wife even though
separate declarations have previously been filed. An amended declaration
may be made on either Form 1040-ES (marked ``Amended''). See, however,
paragraph (c) of Sec. 1.6015(d)-1 for procedure to be followed if the
prescribed form is not available.
[T.D. 7427, 41 FR 34028, Aug. 12, 1976]
Sec. 1.6015(f)-1 Return as declaration or amendment.
(a) Time for filing return. (1)(i) If a taxpayer pays in full the
amount computed on the return as payable, and
(a) If a taxpayer (other than a taxpayer referred to in (b) of this
subdivision):
(1) On the calendar year basis, files his return on or before
January 31 of the succeeding calendar year, or
(2) On a fiscal year basis, files his return on or before the last
day of the first month immediately succeeding the close of such fiscal
year, or
(b) If an individual referred to in section 6073(b), relating to
income from farming, or, with respect to taxable years beginning after
December 31, 1962, from fishing:
(1) On the calendar year basis, for taxable years beginning before
January 1, 1969, files his return on or before February 15, or
(2) On a fiscal year basis, for taxable years beginning before
January 1, 1969, files his return on or before the 15th day of the
second month after the close of his fiscal year, or
(3) On the calendar year basis, for taxable years beginning after
December 31, 1968, files his return on or before March 1, or
(4) On a fiscal year basis, for taxable years beginning after
December 31, 1968, files his return on or before the first day of the
third month after the close of his fiscal year, then:
(ii)(a) If the declaration is not required to be filed during the
taxable year, but is required to be filed on or before January 15 of the
succeeding year (or the date corresponding thereto in the case of a
fiscal year), such return shall be considered as such declaration; or
(b) If a declaration was filed during the taxable year, such return
shall be considered as the amendment of the declaration permitted by
section 6015(e) to be filed on or before January 15 of the succeeding
year (or the date corresponding thereto in the case of a fiscal year).
[[Page 691]]
Hence, for example, an individual taxpayer on the calendar year basis
who, subsequent to September 1, 1963, first meets the requirements of
section 6015(a) which necessitate the filing of a declaration for 1963,
may satisfy the requirements as to the filing of such declaration by
filing his return for 1963 on or before January 31, 1964 (February 15,
1964, in the case of a farmer or fisherman), and paying in full at the
time of such filing the tax shown thereon to be payable. Likewise, if a
taxpayer files on or before September 15, 1963, a timely declaration for
such year and subsequent thereto and on or before January 31, 1964,
files his return for 1963, and pays at the time of such filing the tax
shown by the return to be payable, such return shall be treated as an
amended declaration timely filed.
(2) For the purpose of section 6015(f) a taxpayer may file his
return on or before the last day of the first month following the close
of the taxable year even though he has not been furnished Form W-2 by
his employer. In such case the taxpayer shall compute, as accurately as
possible, his wages for such year and the tax withheld for which he is
entitled to a credit, reporting such wages and tax on his return,
together with all other pertinent information necessary to the
determination of his tax liability for such year.
(b) Effect on addition to the tax. Compliance with the provisions of
section 6015(f) will enable a taxpayer to avoid the addition to the tax
imposed by section 6654 with respect to an underpayment of the
installment not required to be paid until January 15 of the succeeding
calendar year (or the corresponding date in the case of a fiscal year).
With respect to an underpayment of any earlier installment, compliance
with section 6015(f) will not relieve the taxpayer from the addition to
the tax imposed by section 6654. However, the period of the underpayment
under section 6654(c), with respect to any earlier installment, will
terminate on January 15 of the succeeding calendar year (or the
corresponding date in the case of a fiscal year). For example, a
taxpayer discovers on January 14, 1956, that he has underpaid his
estimated tax for the calendar year 1955. He may, in lieu of filing an
amended declaration on January 15, 1956, and paying the balance of the
estimated tax determined thereon, file his final return on January 31,
1956, and pay in full the amount computed thereon as payable. By so
doing, he will avoid the addition to the tax with respect to the
underpayment of the installment required to be paid by January 15, 1956.
The periods of underpayment, under section 6654(c), as to the
installments required to be paid on April 15, 1955, June 15, 1955, and
September 15, 1955, also terminate on January 15, 1956.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7028, 35 FR
3806, Feb. 27, 1970; 35 FR 4293, Mar. 10, 1970]
Sec. 1.6015(g)-1 Short taxable years of individuals.
(a) Requirement of declaration. No declaration may be made for a
period of more than 12 months. For purposes of this section a taxable
year of 52 or 53 weeks, in the case of a taxpayer who computes his
taxable income in accordance with the election permitted by section
441(f) shall be deemed a period of 12 months. For special rules
affecting the time for filing declarations and paying estimated tax by
such a taxpayer, see paragraph (b) of Sec. 1.441-2. A separate
declaration for a fractional part of a year is required where, for
example, there is a change, with the approval of the Commissioner, in
the basis of computing taxable income from one taxable year to another
taxable year. The periods to be covered by such separate declarations in
the several cases are those set forth in section 443. No declaration is
required if the short taxable year is:
(1) A period of less than four months.
(2) A period of at least four months but less than six months and
the requirements of section 6015(a) are first met after the 1st day of
the fourth month.
(3) A period of at least six months but less than nine months and
the requirements of section 6015(a) are first met after the 1st day of
the sixth month, or
(4) A period of nine months or more and the requirements of section
6015(a) are first met after the 1st day of the ninth month.
[[Page 692]]
In the case of a decedent, no declaration need be filed subsequent to
the date of death. As to the requirement for an amended declaration if
death of one spouse occurs after filing a joint declaration, see
paragraph (c) of Sec. 1.6015(b)-1.
(b) Income and income tax placed on annual basis. For the purpose of
determining whether the anticipated income and tax for a short taxable
year resulting from a change of annual accounting period, necessitates
the filing of a declaration, income and income tax imposed by chapter 1
(other than by section 56) shall be placed on an annual basis in the
manner prescribed in section 443(b)(1). Thus, for example, an unmarried
taxpayer who changes from a fiscal year basis to a calendar year basis
beginning January 1, 1973, will have a short taxable year beginning July
1, 1972, and ending December 31, 1972. If his anticipated gross income
for such short taxable year consists solely of wages (as defined in
section 3401(a)) in the amount of $11,000, his total gross income and
his gross income from such wages for the purpose of determining whether
a declaration is required is $22,000, the amount obtained by placing
anticipated income of $11,000 upon an annual basis. Since the taxpayer's
anticipated gross income from wages when placed upon an annual basis is
in excess of $20,000, he is required to file a declaration of estimated
tax for the short taxable year unless the estimated tax can reasonably
be expected to be less than $100. However, for taxable years beginning
after December 31, 1966, the amount which the individual estimates as
the amount of self-employment tax imposed by chapter 2 shall be computed
on the actual self-employment income for the short period.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7427, 41 FR
34028, Aug. 12, 1976]
Sec. 1.6015(h)-1 Estates and trusts.
An estate or trust, though generally taxed as an individual, is not
required to file a declaration.
Sec. 1.6015(i)-1 Nonresident alien individuals.
(a) Exception from requirement of making a declaration. No
declaration of estimated income tax is required to be made under section
6015(a) and Sec. 1.6015(a)-1 by a nonresident alien individual unless:
(1) Such individual has wages, as defined in section 3401(a), and
the regulations thereunder, upon which tax is required to be withheld
under section 3402,
(2) Such individual has income (other than compensation for personal
services upon which tax is required to be withheld at source under
section 1441) which is effectively connected for the taxable year with
the conduct of a trade or business in the United States by such
individual, or
(3) Such individual has been, or expects to be, a resident of Puerto
Rico during the entire taxable year.
(b) Rules applicable to nonresident alien individuals required to
make a declaration--(1) Tests to be applied. A nonresident alien
individual who is not excepted by paragraph (a) of this section from the
requirement of making a declaration of income tax is required to file a
declaration if his gross income meets the requirements of section
6015(a) and Sec. 1.6015(a)-1. In making the determination under section
6015(a)(1) as to whether the amount of the gross income of a nonresident
alien individual is such as to require making a declaration of estimated
income tax, only the tests relating to a single individual (other than a
head of household) or to a married individual not entitled to file a
joint declaration with his spouse shall apply, since a nonresident alien
individual may not make a joint declaration by reason of section 6015(b)
and is not a head of household. Only in a rare case would a nonresident
alien individual be a surviving spouse.
(2) Determination of gross income. To determine the gross income of
a nonresident alien individual who is not, or does not expect to be, a
resident of Puerto Rico during the entire taxable year, see section 872
and Secs. 1.872-1 and 1.872-2. To determine the gross income of a
nonresident alien individual who
[[Page 693]]
is, or expects to be, a resident of Puerto Rico during the entire
taxable year, see section 876 and Sec. 1.876-1. For purposes of applying
paragraph (a)(2) of this section, income which is effectively connected
for the taxable year with the conduct of a trade or business in the
United States includes all income which is treated under section 871 (c)
or (d) and Sec. 1.871-9 (relating to students and trainees) or
Sec. 1.871-10 (relating to real property income) as income which is
effectively connected for such year with the conduct of a trade or
business in the United States.
(c) Effective date. This section shall apply for taxable years
beginning after December 31, 1966. For corresponding rules applicable to
taxable years beginning before January 1, 1967, see 26 CFR 1.6015(a)-
1(d) (Rev. as of Jan. 1, 1971).
[T.D. 7332, 39 FR 44232, Dec. 23, 1974]
Sec. 1.6015(j)-1 Applicability.
Section 6015 is applicable only with respect to taxable years
beginning after December 31, 1954. Sections 58, 59, and 60 of the
Internal Revenue Code of 1939 and the regulations thereunder, shall
continue in force with respect to taxable years beginning before January
1, 1955.
[T.D. 6500, 25 FR 12108, Nov. 26, 1960. Redesignated by T.D. 7332, 39 FR
44232, Dec. 23, 1974]
Sec. 1.6016-1 Declarations of estimated income tax by corporations.
(a) Requirement. For taxable years ending on or after December 31,
1955, a declaration of estimated tax shall be made by every corporation
(including unincorporated business enterprises electing to be taxed as
domestic corporations under section 1361), which is subject to taxation
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code
(relating to insurance companies), if its income tax under such sections
or such subchapter L for the taxable year can reasonably be expected to
exceed the sum of $100,000 plus the amount of any estimated credits
allowable under section 32 (relating to tax withheld at source on
nonresident aliens and foreign corporations and on tax-free covenant
bonds), section 33 (relating to taxes of foreign countries and
possessions of the United States), and section 38 (relating to
investment in certain depreciable property).
(b) Definition of estimated tax. The term ``estimated tax'', in the
case of a corporation, means the excess of the amount which such
corporation estimates as its income tax liability for the taxable year
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code,
over the sum of $100,000 and any estimated credits under sections 32,
33, and 38. However, for the rule with respect to the limitation upon
the $100,000 exemption for members of certain electing affiliated
groups, see section 243(b)(3)(C)(v) and the regulations thereunder.
(c) Examples. The application of this section may be illustrated by
the following examples:
Example (1). M, a corporation subject to tax under section 11,
reasonably anticipates that it will have taxable income of $224,000 for
the calendar year 1964. The normal tax and surtax result in an expected
liability of $105,000. M determines that it will not have any allowable
credits under sections 32, 33, and 38 for 1964. Since M's expected tax
($105,000) exceeds the exemption ($100,000), a declaration of estimated
tax is required to be filed, reporting an estimated tax of $5,000
($105,000-$100,000) for the calendar year 1964.
Example (2). Under the facts stated in example (1), except that M
estimates it will have an allowable foreign tax credit under section 33
in the amount of $4,000 and an allowable investment credit under section
38 in the amount of $3,000, no declaration is required, since M's
expected tax ($105,000) does not exceed the $100,000 plus the allowable
credits totaling $7,000.
[T.D. 6768, 29 FR 14921, Nov. 4, 1964]
Sec. 1.6016-2 Contents of declaration of estimated tax.
(a) In general. The declaration of estimated tax by a corporation
shall be made on Form 1120-ES. For the purpose of making the
declaration, the estimated tax should be based upon the amount of gross
income which the taxpayer can reasonably be expected to receive or
accrue as the case may be, depending upon the method of accounting upon
the basis of which the taxable income is computed, and the amount of the
estimated allowable deductions and credits to be taken into account.
Such amounts of gross income, deductions, and credits should be
determined upon
[[Page 694]]
the basis of facts and circumstances existing as at the time prescribed
for the filing of the declaration as well as those reasonably to be
anticipated for the taxable year.
(b) Use of prescribed form. Copies of Form 1120-ES will so far as
possible be furnished taxpayers by district directors. A taxpayer will
not be excused from making a declaration, however, by the fact that no
form has been furnished. Taxpayers not supplied with the proper form
should make application therefor to the district director in ample time
to have their declarations prepared, verified, and filed with the
district director on or before the date prescribed for filing the
declaration. If the prescribed form is not available a statement
disclosing the estimated income tax after the exemption and the credits,
if any, should be filed as a tentative declaration within the prescribed
time, accompanied by the payment of the required installment. Such
tentative declaration should be supplemented, without unnecessary delay,
by a declaration made on the proper form.