Consolidated returns 106.3 Accounting period; 52-53 week year adopted by subsidiaries. Subsidiary corporations may change to a 52–53 week taxable year ending on the Sunday closest to the date on which the fiscal year accounting period of their common parent ends and may join in filing a consolidated return with the parent, provided the conditions set forth in Rev. Rul. 72–184 are met and the Commissioner’s approval is obtained. §§1.441-2, 1.1502–76. (Secs. 441, 1502; ’86 Code.) Rev. Rul. 78-322, 1978–2 C.B. 228. 106.4 Accounting period; 52-53 week year; Commissioner’s consent. Circumstances under which consent will be given for an affiliated group to file a consolidated return when one or more members use a 52–53 week taxable year while other members use a taxable year ending on the last day of a calendar month. The treatment of deferred intercompany transactions between members of such a group is provided. §§1.441-2, 1.1502-76. (Secs. 441, 1502; ’86 Code.) Rev. Rul. 72-184, 1972-1 C.B. 289. 106.5 Accounting period; Commissioner’s consent to change. The requirement of reg. 1.442–1(c) permitting a change in a taxable year without the prior approval of the Commissioner if there had been no previous change within a tenyear period is not met by an affiliated group filing consolidated returns which includes a subsidiary that joined the group in the preceding year and changed its taxable year to that of the group as required by the consolidated return regulations. §1.442-1. (Sec. 442, ’86 Code.) Rev. Rul. 74-326, 1974-2 C.B. 142. 106.6 Accounting period of member leaving affiliated group; short-term return. A member of an affiliated group filing consolidated returns on a calendar year basis whose stock was acquired from the common parent by an unrelated individual on March 31, 1974, may change its annual accounting period from a calendar year to a fiscal year ending March 31, effective April 1, 1974, and the income for the preceding three months will be reported on the consolidated return of the former parent without being subject to the computation of tax provisions of section 443(b) of the Code. §§1.443-1, 1.1502-76. (Secs. 443, 1502; ’86 Code.) Rev. Rul. 74-585, 1974-2 C.B. 143. 106.7 Accounting period of parent changed. Where a parent corporation has been granted permission to change its accounting period from a fiscal year to a calendar year basis to conform to its subsidiaries, a consolidated return, including the income of the parent and subsidiaries, maybe filed for the short period. The consolidated taxable Consolidated returns income must be annualized. §§24.14, 24.32. (Sec. 141, ’39 Code; Sec. 1501, ’86 Code.) 106.1 Accounting method of subsidiary; conRev. Rul. 55-80, 1955-1 C.B. 387. sent to change. The Commissioner’s consent is not required where a subsidiary is required to 106.8 Affiliated corporations; additions to change its accounting method to conform to that bad debt reserves. Reg. 1.1502–14(d) prohibits of the consolidated group of which it is a member. an affiliated group filing a consolidated Federal income tax return from claiming a current deduc§1.1502-44A. (Secs. 446, 1502; ’86 Code.) tion under section 166(c) for additions to reserves Rev. Rul. 55-732, 1955-2 C.B. 379. for bad debts computed under section 585 to the 106.2 Accounting method of subsidiary; extent that such additions relate to loans from a long-term contract. A subsidiary corporation, member of the group that is a bank to another the subcontractor for various parts of a constric- member. §§1.166-1, 1.581-1, 1.1502-14, tion contract negotiated by the parent corporation 1.1504-1. (Secs. 166, 581, 585, 1502, 1504; ’86 as prime contractor, may not determine its income Code.) Rev. Rul. 76-430, 1976-2 C.B. 183. under the percentage of completion method by applying to the total price for the subcontract the 106.9 Affiliated group; aggregate stock ownsame percentage of completion figure that the par- ership rules. The aggregate stock ownership rules ent applies to the prime contract price, determined of section 1.1502–34 of the regulations apply by using the actual costs of both corporations as regardless of actual stock ownership by a member the numerator and the parent’s estimated cost of of an affiliated group. Rev. Rul. 74–598 modified. the entire contract as the denominator, even §§1.332-2, 1.351-1, 1.1502-34, 301.7805-1. though the corporations file consolidated returns. (Secs. 332, 351, 1502, 7805; ’86 Code.) §§1.446-1, 1.451-3, 1.1502-11, 1.1502-12, Rev. Rul. 89-46, 1989-1 C.B. 272. 1.1502-17, 1.1504-1. (Secs. 446, 451, 1502, 106.10 Affiliated group; bankruptcy of mem1504; ’86 Code.) ber. An affiliated group, which has filed consoliRev. Rul. 74-517, 1974-2 C.B. 150.

Consolidated returns dated returns for prior taxable years, is required to file a consolidated return for a subsequent taxable year in which none of the exceptions provided in reg. 1.1502–11 is applicable, even though a member of the group is involved in bankruptcy proceedings and the trustee in bankruptcy fails or refuses to file a Form 1122 consenting to the filing of such a return. §1.1502–11A. (Sec. 1502, ’86 Code.) Rev. Rul. 63-104, 1963-1 C.B. 172.

the parent to return all shares of stock to the original owner with each party retaining the dividends received prior to the agreement. The corporation was a member of the affiliated group required to be included in any return filed by the parent for the period prior to the settlement, and intercompany dividends paid to the parent are eliminated. §§1.1501-1, 1.1502-75, 1.1502-76, 1.1504-1. (Secs. 1501, 1502, 1504; ’86 Code.) Rev. Rul. 78–119, 1978-1 C.B. 277.

106.11 Affiliated group; basis of stock; adjustment items. Regulations will be issued relating to the basis of the stock of a subsidiary that is a member of an affiliated group of corporations filing a consolidated return, Notice 87-14, 1987-1 C.B. 445.

106.18 Affiliated group; election; dividends received; nonqualifying. The common parent corporation of an affiliated group currently filing consolidated Federal income tax returns may make an election under section 243(b)(2) in order that the group will be allowed a 100 percent dividends received deduction for State income tax purposes even though intercompany dividends paid during a consolidated return year are eliminated pursuant to reg. 1.1502-14(a) and therefore are not qualifying dividends to which such deduction applies. §§1.243-1, 1.1502-14. (Secs. 243, 1502; ’86 Code.) Rev. Rul. 73-484, 1973-2 C.B. 78.

106.12 Affiliated group; change in operations of two members. A change in the operations of two members of an affiliated group of corporations does not constitute “good cause” for granting the group permission to file separate rather than consolidated returns. §1.1502–11A. (Sec. 1502, ’86 Code.) Rev. Rul. 57-3, 1957-1 C.B. 290. 106.13 Affiliated group; change of accounting period. An affiliated group’s election to file a consolidated return in lieu of separate returns is not adversely affected by a member’s failure to obtain permission to change its accounting period to that used by the group or the member’s failure to file a timely amended separate return to exclude certain items included in the consolidated return. §§1.1501-1, 1.1502–1. (Secs. 1501, 1502; ’86 Code.) Rev. Rul. 72-258, 1972-1 C.B. 283. 106.14 Affiliated group; computation of earnings and profits; deemed dividend election. An example is provided for computing the earnings and profits available for distribution during the taxable year by a parent corporation, its wholly owned subsidiary, and the subsidiary’s wholly owned subsidiary all filing a consolidated return and electing the deemed dividend provisions of reg. 1.1502-32(f)(2). §§1.316-1, 1.1502-32. (Secs. 316, 1502; ’86 Code.) Rev. Rul. 75-212, 1975-1 C.B. 107. 106.15 Affiliated group; direct ownership of stock. The ownership of a subsidiary’s stock by a parent corporation is “direct” within the meaning of section 1504(a), where the parent transfers legal title of stock to a nominee but retains the entire beneficial interest of the shares. G.C.M. 7331 superseded. §1.1504–1. (Sec. 1504, ’86 Code.) Rev. Rul. 70-469, 1970-2 C.B. 179. 106.16 Affiliated group; discontinue filing. Consideration will be given to applications for blanket permission to discontinue filing consolidated returns submitted by particular classes of affiliated groups whose tax liability is adversely affected by the Tax Reform Act of 1969. Supplemented to provide that consideration will be given to applications for permission to discontinue filing consolidated returns submitted on behalf of individual affiliated groups and particular classes of affiliated groups whose tax liability is adversely affectedly the Revenue Act of 1971. §1.1502–75. (Sec. 601.201, S.P.R.; Sec. 1502, ’86 Code.) Rev. Proc. 70-4, C.B. 1970–1 C.B. 417; Rev. Proc. 72–23, 1972–1 C.B. 748. 106.17 Affiliated group; disputed stock ownership. A corporation’s sole shareholder traded its stock to the parent of an affiliated group in exchange for shares of the parent’s stock and later sued the parent for misrepresentation, obtaining a temporary court order requiring the parent to keep its operations and assets separate from those of the acquired corporation, refrain from voting its stock, and deposit the stock certificates with the court. Ultimately an agreement was reached with

106.19 Affiliated group; intangible development costs. Treatment of intangible development costs incurred by members of an affiliated group that files consolidated returns where only certain members have elected to deduct such expenses currently, or there arc intergroup transfers of operation properties and new acquisitions. I.T. 3763 superseded. §§1.612-4, 1.1502–17. (Secs. 612, 1502; ’86 Code.) Rev. Rul. 69-590, 1969-2 C.B. 170. 106.20 Aftlliated group; involuntary sale of subsidiary’s stock; F.C.C. policies. A parent corporation disposing of a subsidiary’s stock to comply with a change in Federal Communications Commission policies must include on the consolidated income tax return of the affiliated group the “excess loss account” on such stock even though the disposition is a nontaxable involuntary conversion. §§1.1071–1, 1.1502–19. (Secs. 1071, 1502; ’86 Code.) Rev. Rul. 73-73, 1973-1 C.B. 371. 106.21 Affiliated group; leased stock of unrelated corporation. A common parent of an affiliated group is not affiliated with an unrelated corporation whose stock was included with certain properties leased from another unrelated corporation. §1.1504-1. (Sec. 1504, ’86 Code.) Rev. Rul. 68-623, 1968-2 C.B. 404. 106.22 Affiliated group; life insurance company; dividend exclusion. The election by a common parent to exclude 100 percent of the qualifying dividends received from members of an affiliated group which includes a life insurance company will not preclude the filing of a consolidated return by the non-life insurance companies of the group. §§1.243-1, 1.1501–1. (Secs. 243, 1501; ’86 Code.) Rev. Rul. 69-469, 1969-2 C.B. 169. 106.23 Affiliated group; losses; intergroup exchange of bonds. Losses sustained on the exchange of bonds at fair market value between a life insurance subsidiary that files a separate return and two casualty insurance subsidiaries that file a consolidated return with the parent, not a personal holding company, are allowable on both returns, §§1.165-1, 1.267(b)-1, 1.482-1, 1.1504-1. (Secs. 165, 267, 482, 1504; ’86 Code.) Rev. Rul. 76-88, 1976–1 C.B. 52. 106.24 Affiliated group; member for thirty days or less. A corporation that has been a member of an affiliated group for 30 days or less and leaves the group during a consolidated return year may at its option be considered as not having been

a member of the group during such year. §1.1502-76. (Sec. 1502, ’86 Code.) Rev. Rul. 71-440, 1971-2 C.B. 326. 106.25 Affiliated group; merger of subsidiary into common parent. The merger of a second tier subsidiary into the common parent of an affiliated group does not cause the termination of the affiliated group under the circumstances described, §§1.1501-1, 1.1502-75. (Secs. 1501, 1502; ’86 Code.) Rev. Rul. 82-152, 1982-2 C.B. 205. 106.26 Affiliated group; nonvoting cumulative convertible preferred stock. Nonvoting stock that is limited and preferred as to dividends and convertible into common stock does not constitute “stock” in determining the voting power of all classes of stock owned by a parent corporation. §1.1504–1. (Sec. 1504, ’86 Code.) Rev. Rul. 71-83, 1971-1 C.B. 268. 106.27 Affiliated group; participating preferred nonvoting stock. Participating preferred nonvoting stock, which is entitled not only to receive a preferred dividend in priority to that given common stock, but also to participate with common stock in any further distributions of earnings, is not “limited and preferred as to dividends” for purposes of qualification for affiliation under section 1504(a). §1.1504–1. (Sec. 1504, ’86 Code.) Rev. Rul. 79-21, 1979-1 C.B. 290. 106.28 Affiliated group; permission to discontinue filing. A request for permission to discontinue filing consolidated returns will be denied where filing separate returns would enable a domestic subsidiary to utilize a foreign tax credit which would otherwise be lost and enable the parent to maximize the use of net operating loss carryhacks and carryovers since shifting to separate returns to achieve tax advantages does not constitute “good cause” within the meaning of section 1.1502-75(c)(1) of the regulations. §1.1502-75. (Sec. 1502, ’86 Code.) Rev. Rul. 74-91, 1974-1 C.B. 252. 106.29 Affiliated group; permission to discontinue filing. An affiliated group’s common parent, whose home State imposes a tax on a corporation’s net worth with an exclusion based on the book value of subsidiaries and whose wholly owned subsidiary in another State is subject to a capital stock tax that is declared unconstitutional and replaced with a similar tax does not, as a result of these facts, experience a change in law or cirreg. cumstances contemplated by 1.1502–75(c)(1)(iii)(a) and has not shown good cause to be granted permission to discontinue the filing of consolidated returns. §1.1502–75. (Sec. 1502, ’86 Code.) Rev. Rul. 74-378, 1974-2 C.B. 287. 106.30 Affiliated group; preferred stock; voting power. Preferred stock of a subsidiary that may be voted to elect three of eight directors is voting stock and the voting power requisites for an affiliated group are met if all the common and half of the preferred stock are owned by the parent. §§1.1502-1, 1.1504-1. (Secs. 1502, 1504; ’86 Code.) Rev. Rul. 69-126, 1969-1 C.B. 218. 106.31 Affiliated group; reincorporation followed by mergers. In the case of a reorganization involving a mere change in identity, form, or place of organization, which is accomplished by a reincorporation followed by a merger, the part of the taxable year before the reorganization and the part after are a single year of the acquiring corporation if the transferor is the parent of an affiliated group filing consolidated returns and the same group and the acquiring parent remain in existence for the year of reorganization. The transferor need not file a return for any portion of such year. §§1.368–2, 1.1502-11A. (Secs. 368, 381, 1502; ’86 Code.) Rev. Rul. 57-276, 1957-1 C.B. 126.

Consolidated returns 106.32 Affiliated group; sale of partnership interest between members. Deferred intercompany gain or loss resulting from the sale of a partnership interest between members of an affiliated group filing consolidated tax returns is restored to income by the selling member when the purchasing member claims cost recovery deductions attributable to basis adjustments under section 743(b). §§1.743-1, 1.754-1. (Secs. 743, 754, 1502, ’86 Code.) Rev. Rul. 89-85, 1989-2 C.B. 208. 106.33 Affiliated group; sale of section 38 property; investment credit recapture. An affiliated group member’s sale, during a consolidated return year, of its interest in a partnership owning section 38 property to anotber member of the group will not result in the recapture of investment tax credit by virtue of reg. 1.1502-3(f)(2)(i). §§1.46-3, 1.47-1, 1.1502-2. (Secs. 46, 47, 1502; ’86 Code.) Rev. Rul. 75–245, 1975-1 C.B. 6. 106.34 Affiliated group; tax surcharge. Affiliated corporate groups that filed consolidated returns for calendar year 1969 are subject to the tax surcharge imposed by section 51(a)(1)(B) of the Code. §1.1502-2. (Secs. 51, 1502; ’86 Code.) Rev. Rul. 70-620, 1970-2 C.B. 177.

permission to allocate their consolidated income tax liability in a manner which reflects the income of the various types of businesses in the group. Approval of a method proposed by a group of corporations must be obtained prior to the time required by law for filing the consolidated return for the taxable year for which such method is to be used. (Sec. 1552, ’86 Code.) Rev. Rul. 57-392, 1957-2 C.B. 615.

of the consolidated tax liability in accordance with section 1552(a)(2), computation of a hypothetical tax for each member on a separate return basis, and the payment, through the parent corporation, from members whose hypothetical tax was reduced to members whose losses or credits generated such reductions. §§1.316-1, 1.1552–1. (Secs. 316, 1552; ’86 Code.) Rev. Rul. 73–605, 1973-2 C.B. 109.

106.41 Allocation of tax liability. An affiliated group’s allocation of consolidated tax liability among its members for other than Federal income tax purposes, under an intercompany agreement using a method that differs from the method provided in the group’s election under reg. 1.1502-33(d)(3), will not invalidate the group’s election. However, the adjustment to the earnings and profits of the members of the group for tax purposes must be determined in accordance with the election. §§1.1502–33, 1.1552–1. (Secs. 1502, 1552; ’86 Code.) Rev. Rul. 76-302, 1976-2 C.B. 257.

106.47 Application of section 1504(a)(3). Section 1504(a)(3) does not prevent members of a consolidated group that terminated under reg. 1.1502–75(d)(1) or 1.1502(d)(3) from being included in the acquiring or continuing group’s consolidated return, if they are acquired as a result of the acquisition of the assets of the common parent of the terminating group by a nonmember corporation in certain reorganizations. Members of the terminating group must be included in the consolidated return filed by the acquiring or continuing group. §§1.1502–75, 1.1504–1. (Secs. 1502, 1504; ’86 Code.) Rev. Rul. 91-70, 1991-2 C.B. 361.

106.42 Allocation of tax liability; change in method. An affiliated group that includes an insurance company will be denied permission to change its method of allocating consolidated tax liability to either the method in reg. 1.1552–1(a)(2) or the combined method in section 106.35 Affiliated group; terminated before 1.1502–33(d)(2)(ii), determined for each taxable end of taxable year. The liquidation of a member year depending on the insurance company’s tax of an affiliated group prior to the end of the consol- liability on a separate return basis, to comply with idated return year does not prevent the filing of a a directive of the insurance commissioner of the consolidated return which would properly include company’s home state. §§1.1502–33, 1.1552–1. the income of the parent corporation for the entire (Secs. 1502, 1552; ’86 Code.) taxable year and income of the subsidiary for the Rev. Rul. 75-80, 1975-1 C.B. 292. portion of the taxable year during which it was a member of the group. §§1.1501–1, 1.1502–1, 106.43 Allocation of tax liability; change in method. Automatic approval procedures are pro1.1502-76. (Secs. 1501, 1502; ’86 Code.) vided for an affiliated group filing a consolidated Rev. Rul. 74-483, 1974-2 C.B. 285. return to elector to change its method of allocating 106.36 Affiliated group; termination of mem- the consolidated federal income tax liability to bership and formation of new group. Filing members of the group. §§1.1502–33, 1.1552–1. requirements are set forth for a member of a con- (Sec. 601.201, S.P.R.; Secs. 1502, 1552, ’86 solidated return group that becomes an insurance Code.) company and leaves the group during the taxable Rev. Proc. 90-39, 1990-2 C.B. 365. year, elects to form a new group with its life insur106.44 Allocation of tax liability; change in ance subsidiary, and subsequently liquidates the subsidiary in the same year. §§1.1501–1, methods. This revenue procedure clarifies Rev. 1.1502-76, 1.1504-1. (Secs. 1501, 1502, 1504; Proc. 90-39 concerning automatic approval procedures for an affiliated group filing a consoli’86 Code.) dated return to elect or to change its metbod of Rev. Rul. 77-210, 1977-1 C.B. 267. allocating the consolidated federal income tax 106.37 Affiliated group within a group. Two liability to members of the group. §1.1552-1. includible corporations, one owning all the stock (Sec. 601.201, S.P.R.; Sec. 1552, ’86 Code.) Rev. Proc. 90-39A, 1990-2 C.B. 367. of the other, both of which are members of an affiliated group of which another includable corporation is the common parent, do not constitute a sep- 106.45 Allocation of tax liability; net operatarate affiliated group privileged to file ing loss. In computing the earnings and profits of consolidated returns. §§1.1501–1, 1.1502–2A, each member, an affiliated group filing a consolidated return may elect to allocate the consolidated 1.1504-1. (Secs. 1501, 1502, 1504; ’86 Code.) tax liability to its members on the basis of the perRev. Rul. 56-559, 1956-2 C.B. 595. centage of the total tax which the “hypothetical” 106.38 Affiliation; direct ownership of stock; tax of each member, if computed on a separate revocable trust. A parent corporation that is the return, would bear to the total amount of the hypograntor and sole beneficiary of a revocable voting thetical taxes for all members of the group so comtrust “directly” owns stock that it transfers to that puted. In such a computation, the amount of net voting trust under section 1504(a). §1.1504–1. operating loss deduction for each member shall equal the amount of net operating loss deductible (Sec. 1504, ’86 Code.) had such member actually filed a separate return Rev. Rul. 84-79, 1984-1 C.B. 190. forthe taxable year. therefore, a net operating loss 106.39 Alaska Native Corporations; affili- deduction of a member used in computing its ated group; equity ownership test. Guidance is hypothetical tax on a separate return basis shall not provided concerning the position of the Service include the portion of such member’s loss susregarding section 1804(e)(4) of the Tax Reform tained in a prior year which had been absorbed by Act of 1986 as it relates to Alaska Native Corpora- the group or the member in computing actual tax tions established under the Alaska Native Claims liabilities for prior years. §§1.312-6, 1.1552–1. Settlement Act. (Secs. 312, 1552; ’86 Code.) Notice 87-75, 1987-2 C.B. 384. Rev. Rul. 66-374, 1966-2 C.B. 427. 106.40 Allocation of tax liability. The Commissioner has granted the members of an affiliated group of corporations, which are variously engaged in distinctly different types of operations,

106.46 Allocation of tax liability; payments to members generating tax reductions. Tax consequences of an agreement entered into by members of an affiliated group that provided for allocation

106.48 Bond transactions; affiliated banks. Transactions in bonds held for investment by banks which are members of an affiliated group filing a consolidated return should be computed by each member bank on a separate basis. To the extent that the transactions of the affiliated banks result in net capital gains, the gains and losses shall be aggregated in determining the consolidated net income. If a member bank sustains an excess of losses over gains from its bond transactions, such gain and loss shall be treated as an ordinary gain and loss in determining that member’s net income. §§1.582-1, 1.1502-31. (Secs. 582, 1502; ’86 Code.) Rev. Rul. 57–167, 1957-1 C.B. 294. 106.49 Canadian subsidiary; formed to obtain government (PAIT) grant. A wholly owned Canadian subsidiary formed by a domestic corporation to obtain a grant from the Canadian government under the Program for Advancement of Industrial Technology (PAIT) may not file a consolidated return with its domestic parent. §1.1504-1. (Sec. 1504, ’86 Code.) Rev. Rul. 71-523, 1971-2 C.B. 326. 106.50 Cancellation of debt of parent to subsidiary. The gain accruing to a parent corporation from cancellation of its indebtedness to a subsidiary is recognized in computing consolidated taxable income. To the extent that the advances from the subsidiary, which are cancelled, exceed the basis of the subsidiary’s stock in the hands of the parent, such excess is taxable as a gain from the sale or exchange of property. §1.1502–37A. (Sec. 1502, ’86 Code.) Rev. Rul. 57-201, 1957-1 C.B. 295. 106.51 Carryback of consolidated net operating losses following the consolidation of two unrelated common parent corporations. Pursuant to the reverse acquisition rules of section 1.1502–75(d)(3), the portion of a consolidated net operating loss attributable to a newly formed common parent, following the consolidation of two unrelated common parents under section 368(a)(1)(A), may be carried back to prior years of the affiliated group that is treated as continuing in existence. No portion of the consolidated net operating loss attributable to the newly formed common parent may be carried back to the prior years of the affiliated group that is treated as terminating. §§1.381(c)(1)–1, 1.1502–75. (Secs. 381, 1502, ’86 Code.) Rev. Rul. 89-80, 1989–1 C.B. 273. 106.52 Common parent of new affiliated group. Procedures are set forth for the filing of a consolidated return when a new common parent who is not a member of any affiliated group acquires the existing common parent’s stock and

I

Consolidated returns a new affiliated group comes into existence during the year. §§1.1502–75, 1.1502–76. (Sec. 1502, ’86 Code.) Rev. Rul. 69-163, 1969-1 C.B. 217. 106.53 Dividend exclusion; corporation formed to acquire operating company. Taxpayer corporation, formed to purchase the stock of a corporation with wholly owned subsidiary, obtained a bank loan to finance part of the purchase price. The acquired corporation borrowed the same amount and paid it all as a dividend to the taxpayer which used it to repay the loan. The dividend was eliminated in the corporation consolidated return. Held, the incorporators did not secure an otherwise unavailable tax benefit, therefore, the corporations were entitled to file a consolidated return. (Sec. 269, ’86 Code.) Cromwell Corp., 43 T.C. 313, Acq., 1965-2 C.B. 4. 106.54 Dividends paid; income source. The source of dividends paid by a domestic corporation (within or without the U.S.) is determined on the basis of the corporation’s own gross income, even though the corporation joins in filing a consolidated return with its domestic affiliates. §§1.861-3, 1.1502-11, 1.1502-12, 1.1502-13, 1.1502-14, 1.1502-80. (Secs. 861, 1502; ’86 Code.) Rev. Rul. 72-230, 1972-1 C.B. 209. 106.55 Election; controlling U.S. shareholder of foreign corporation. A domestic corporation that is a member of an affiliated group filing consolidated returns may elect or take action under reg. 1.964-1(c)(3) with respect to a foreign corporation which it controls. §§1.963–1, 1.964–1, 1.1502-77. (Secs. 963, 964, 1502; ’86 Code.) Rev. Rul. 68-641, 1968-2 C.B. 325. 106.56 Election; date of subsidiary’s incorporation. When a common parent elects to file a consolidated return with a domestic subsidiary that it organized, incorporated, manages, and controls, an affiliation occurs at the date of subsidiary’s incorporation notwithstanding the subsidiary’s failure to issue stock certificates to the parent. G.C.M. 2019 superseded. §1.1504-1. (Sec. 1504, ’86 Code.) Rev. Rul. 69–591, 1969-2 C.B. 171. 106.57 Election; deferred intercompany transaction. A checklist questionnaire of the information needed and the guidelines used by the Commissioner in considering requests for consent to elect not to defer gain or loss on deferred intercompany transactions under reg. 1.1502–13(c)(3) are provided as well as the time for filing these requests. Rev. Proc. 74–35 modified and superseded and Rev. Proc. 76–14 superseded. §1.1502-13. (Sec. 601.201, S.P.R.; Sec. 1502, ’86 Code.) Rev. Proc. 82-36, 1982-1 C.B. 490. 106.58 Election; deferred intercompany transactions. The listing of interest under the heading “deferred intercompany interest” on a schedule of a subsidiary that was attached to the consolidated return of an affiliated group of corporations is a proper election to capitalize interest on an intercompany loan. Rev. Rul. 70–539 distinguished. §§1.266-1, 1.1502-13. (Secs. 266, 1502; ’86 Code.) Rev. Rul. 76-325, 1976-2 C.B. 88. 106.59 Election; foreign tax credit. An election by some members of an affiliated group of corporations filing a consolidated return to take a credit, rather than a deduction, for foreign taxes paid is binding on all the members of the group. §1.1502-43A. (Secs. 164, 901, 1502; ’86 Code.) Rev. Rul. 57-601, 1957-2 C.B. 614.

106.60 Election; foreign tax credit; overall to per-country limitation. A change in election from the overall limitation to the per-country limitation on foreign tax credit may be made by the common parent of an affiliated group filing consolidated returns where it acquires control of another affiliated group with income from another country. §§1.904-1, 1.1502-4, 1.1504-1. (Secs. 904, 1502, 1504; ’86 Code.) Rev. Rul. 69-518, 1969–2 C.B. 154. 106.61 Election; parent corporation’s scope of agency. In computing consolidated taxable income, any election which must be made to determine a subsidiary’s separate taxable income, and which would be available to a corporation filing a separate return, may be made by the common parent on behalf of such subsidiary. §1.1502–16A. (Sec. 1502, ’86 Code.) Rev. Rul. 57-20, 1957-1 C.B. 293. 106.62 Election; separate returns; change in affiliated group. An affiliated group which filed a consolidated return may elect to file separate returns for a subsequent year in which an affiliate acquired and completely liquidated another corporation, provided the acquisition was for a business purpose. Distinguished to provide that the acquisition and liquidation of another corporation for the purpose of acquiring its assets does not give rise to a new election to file separate returns for that year. §1.1502-11A. (Sec. 1502, ’86 Code.) Rev. Rul. 56–271, 1956-1 C.B. 440; Rev. Rul. 57-73, 1957-1 C.B. 291. 106.63 Election; separate returns; effect of Pub. L. 125. Pub. L. 125, 1953-2 C.B. 473, amends chapter 1 of the 1939 Code so as to make less advantageous to affiliated groups as a class the continued filing of consolidated returns, within the meaning of section 24.11(a) of Regulations 129. Accordingly, affiliated groups which filed consolidated returns in prior years may elect to file separate returns with respect to the first return due to be filed after July 16, 1953, the date of enactment of Pub. L. 125. Rev. Rul. 17, relating to the filing of consolidated returns for the calendar year 1952 and for fiscal years ending in 1953, is modified to the extent that it is inconsistent with the foregoing. §24.11. (Sec. 141, ’39 Code; Sec. 1501, ’86 Code.) Rev. Rul. 17, 1953-1 C.B. 227; Rev. Rul. 152, 1953-2 C.B. 184.

106.67 Election; separate returns; indirectly organized. Where the parent of an affiliated group, which has been filing consolidated returns, purchases all the stock of another corporation, created one month prior to the purchase by the wives of two of the three controlling shareholders of the parent, the acquired corporation is considered to have been indirectly organized by the acquiring corporation. Therefore, the affiliated group does not acquire the right to file separate returns for the taxable year of acquisition. §1.1502-11A. (Sec. 1502, ’86 Code.) Rev. Rul. 59–326, 1959–2 C.B. 197. 106.68 Election; separate returns; Tax Rate Extension Act. An affiliated group which tiled a consolidated return for the calendar year 1954, or for the first taxable year ending after August 16, 1954, is not entitled, solely by reason of the extension of the corporate normal tax rate of 30 percent, to make a new election to file separate returns. §1.1502-11A. (Sec. 1502, ’86 Code.) Rev. Rul. 56-681, 1956-2 C.B. 597. 106.69 Elimination of intercompany profit. A general contractor filing consolidated returns with two wholly owned subsidiaries reported income on the completed contract method, accumulating revenue and costs attributable to a contract, and deducting currently all general expenses not considered attributable to any contract. The Commissioner contended that for consolidation purposes, general expenses should be allocated, deducting only the amounts allocated to the subsidiary contracts. Held, the contractor properly eliminated as “unrealized profit” the gross profits on the subsidiary contracts. (Sec. 141(a), ’39 Code; Sec. 1501, ’86 Code.) Algernon Blair, Inc., 29 T.C. 1205, Acq., 1958-2 C.B. 4. 106.70 Estimated tax; additions for underpayment; separate return year. A corporation that filed a consolidated return for the preceding taxable year but is unable to file a consolidated return for the current taxable year because of the sale of its interest in its subsidiary may rely on the exception under section 6655(d)(2) as provided by reg. 1.1502-5(b)(2) to determine the addition to the tax for underpayment of estimated tax. §§1.1502-5, 1.6655-2. (Secs. 1502, 6655; ’86 Code.) Rev. Rul. 73-512, 1973-2 C.B. 413.

106.64 Election; separate returns; effect of Pub.L. 399. Pub. L. 399, which amended the provisions of the 1939 Code relating to the computation of alternative tax on corporations, did not give rise to a right to make a new election under the 1954 Code to file separate rather than consolidated returns. §1.1502-11A. (Sec. 1502, ’86 Code.) Rev. Rul. 56-680, 1956-2 C.B. 597.

106.71 Estimated tax; first two consecutive consolidated return years.Members of an affiliated group may file either separate or consolidated declaration of estimated tax for the first two consecutive consolidated return years; thereafter, a consolidated declaration must be filed. However, in applying these provisions to taxable years ending on or before June 30, 1968, the term “declaration of estimated tax” should be “payments of estimated tax.” §1.1502–5. (Sec. 1502, ’86 Code.) Rev. Rul. 69-622, 1969-2 C.B. 169.

106.65 Election; separate returns; filed after election. An affiliated group, having properly elected to file a consolidated return for a taxable year, may, prior to the due date of such return, file their returns for such taxable year on a separate basis. Distinguished by Rev. Rul. 76-393. §1.1501-1. (Sec. 1501, ’86 Code.) Rev. Rul. 56-67, 1956–1 C.B. 437.

106.72 Extension; qualified restructuring. The deadline for completing a qualified restructuring, as set forth in reg. section 1.1503–2T(c)(4)(ii), is extended until December 31, 1990. Notice 90-5, 1990-1 C.B. 303.

106.66 Election; separate returns; tiled by parent. An affiliated group, whose parent inadvertently filed a separate return for its taxable year, is prevented from filing a consolidated return for the same year after the due date of the parent’s return. The relief provisions of reg. 1.1502–75(b)(3) are inapplicable. Rev. Rul. 56-67 distinguished. §§1.1502-75, 1.1504-1, 1.6072-2, 1.6081-1, 301.6081-1. (Secs. 1502, 1504, 6072, 6081; ’86 Code.) Rev. Rul. 76–393, 1976-2 C.B. 255.

106.73 Extension of time; Form 7004. The filing of Form 7004, Application for Automatic Extension of Time to File U.S. Corporation Income Tax Return, by a parent corporation is not an exercise of the privilege of making a consolidated return. §§24.10, 1.1502-1A. (Sec. 141, ’39 Code; Secs. 1502, 6081, ’86 Code.) Rev. Rul. 55-560, 1955-2 C.B. 379. 106.74 52-53 week tax year. Procedure for an affiliated group of corporations to obtain the Commissioner’s advance consent under section 1.1502–76(a)(1) to file a consolidated income tax

I

Consolidated returns return in which one or more members use a 52–53 week tax year and the tax years of all members end within the same 7-day period. Rev. Ruls. 72–184 and 78–322 modified. §1.1502–76. (Sec. 601.201, S.P.R.; Sec. 1502, ’86 Code.) Rev. Proc. 89-56, 1989-2 C.B. 643. 106.75 Foreign tax credit. The fraction limiting a foreign tax credit on a consolidated return is applicable to the total U.S. income tax of the affiliated group for the taxable year, whether computed bv the regular or alternative method. (Secs. 63, 964; ’86 Code.) Rev. Rul. 57-116, 1957-1 C.B. 245. 106.76 Foreign tax credit. In computing its foreign tax credit, a domestic calendar-year corporation all of whose income was from foreign sources, that was acquired on July 1 by the domestic calendar-year parent of an affiliated group and that maintained sufficient permanent records, must allocate its foreign income tax liability accrued for its short period return based on its income for the period ended July 1. In computing the consolidated return foreign tax credit, the foreign income tax liability allocable to the income from July 1 to December 31 must be used. §§1.901-1, 1.1502-76. (Secs. 901, 1502; ’86 Code.) Rev. Rul. 75-532, 1975-2 C.B. 295. 106.77 Foreign tax credit; consolidated limitation. For purposes of computing the consolidated limitation on the foreign tax credit of an affiliated group of corporations, expenses of each member of the group which cannot be allocated to a specific item or class of domestic or foreign income should be allocated in the ratio of foreign gross income to total gross income of each member. Thus, gross income and expenses of members of the group that do not have income from foreign sources are not included in this computation. §§1.861-8, 1.862-1, 1.904-1, 1.1502-4. (Secs. 861, 862, 904, 1502; ’86 Code.) Rev. Rul. 72-281, 1972-1 C.B. 285. 106.78 Foreign tax credit; domestic affiliated group. An affiliated group of five domestic corporations filing a consolidated return is not entitled to a foreign tax credit under section 902 when each corporation in the group owns 2.5 percent of the voting stock of a foreign corporation. §§1.902–1, 1.1501–1, 1.1502-4, 1.1502-34. (Secs. 902, 1501, 1502; ’86 Code.) Rev. Rul. 85-3, 1985-1 C.B. 222. 106.79 Includible corporation; qualification; stock ownership. Unexercised warrants to purchase stock should not be taken into account in determining “stock ownership” for qualification as an affiliated group. §1.1504-1. (Sec. 1504, ’86 Code.) Rev. Rul. 64-251, 1964-2 C.B. 338. 106.80 Initial inventory amount. There is no “initial inventory amount” to be taken into account where the affiliated group that filed separate returns joins in filing of a consolidated return with a new common parent. §1.1502-18. (Sec. 1502, ’86 Code.) Rev. Rul. 70-416, 1970-2 C.B. 177. 106.81 Intercompany deferred gain; sale of inventory; acquired by new parent. The deferred intercompany gain realized by a subsidiary upon the sale of inventory items to members of its first consolidated return group upon its acquisition by a new parent, with which it filed a consolidated return, shall be recovered in the final consolidated return filed with the first group. In addition, the taxpayer is not required by reg. 1.1502–18(b) to include an adjustment for initial inventory amount in taxable income in its consolidated return with its new parent. §§1.1502–13. (Sec. 1502, ’86 Code.) Rev. Rul. 72-321, 1972-1 C.B. 285.

106.82 Intercompany sale of subsidiary’s stock; excess loss account. A member of an affiliated group sold all the stock of its wholly owned subsidiary in which it had an excess loss account to its parent in a consolidated return year. The excess loss account is not included in the seller’s income at the time of the sale, but is treated as deferred gain to be included in income under reg. 1.1502-13(d), (e) and (f). §§1.1502-13, 1.1502-19, 1.1502-32. (Sec. 1502, ’86 Code.) Rev. Rul. 81-84, 1981-1 C.B. 451. 106.83 Intercompany stock redemption; computation of taxable income. The receipt of cash by a common parent corporation from its subsidiary during a consolidated return period, in redemption by the subsidiary of all its preferred stock all of which is held by the parent corporation, constitutes an intercompany dividend to be eliminated in computing the consolidated taxable income. The parent’s adjusted basis for the subsidiary’s preferred stock will be transferred to and allocated ratably among the shares of the subsidiary’s common stock owned by the parent at the time of the redemption. §§1.301–1, 1.302–2, 1.316-1, 1.317-1, 1.1502-31A. (Secs. 301.302, 316, 317, 1502; ’86 Code.) Rev. Rul. 66-37, 1966-1 C.B. 209. 106.84 Intercompany transactions. An affiliated group filing a consolidated return may take into account, in determining its consolidated taxable income, unrealized profits and losses occurring in the regular course of trade or business from intercompany transactions, provided such treatment is adopted for bona fide business reasons and not for tax avoidance purposes. Such practice, if adopted, must be consistently followed in all subsequent years for which a consolidated return is filed, or required to be filed, and requires the prior approval of the Commissioner. §§1.922-1, 1.1502-31A. (Secs. 922, 1502; ’86 Code.) Rev. Rul. 60-289, 1960-2 C.B. 268. 106.85 Intercompany transactions; coal lease agreement. An arms-length coal lease agreement in 1972 between members of an affiliated group filing consolidated returns, in which the ownerlessor retained an economic interest and the lessee obtained the right to mine and dispose of the coal, does not constitute a deferred intercompany transreg. meaning of within the action 1.1502–13(a)(2)(i) or (iii). Section 631(c) applies to the royalty payments received by the owner-lessor. §§1.611–1, 1.631–3, 1.1502–13. (Secs. 611, 631, 1502; ’86 Code.) Rev. Rul. 74-10, 1974-1 C.B. 251. 106.86 Intercompany transactions; installment sales. A parent corporation that is a dealer in personal property may not treat the extension of credit by its subsidiary, a national bank, to the parent corporation’s customers as equivalent to the parent corporation selling on the installment basis to its customers and then selling the installment obligations in a deferred intercompany transaction to its subsidiary. §§1.453–1, 1.1502–13. (Secs. 453A, 1001, 1502; ’86 Code.) Rev. Rul. 85-133, 1985-2 C.B. 192. 106.87 Intercompany transactions; per centage depletion. If the payer-lessee of a mineral property pays a royalty and uses all of the mined mineral in the manufacture of depreciable property, and the payer-lessee and the payee-lessor of the royalty file a consolidated income tax return, the payee-lessor’s depletion deduction is taken when the royalty income is reportable in its separate taxable income. Rev. Rul. 74–10 clarified and distinguished. §§1.613-4, 1.1502-13. (Secs. 613, 1502; ’86 Code.) Rev. Rul. 87-60, 1987-2 C.B. 154. 106.88 Investment credit; carryback; new subsidiaries. The portion of consolidated unused investment credit of an affiliated group filing a

consolidated return, attributable to the common parent’s two new wholly owned subsidiaries, may be carried back to the parent’s separate return for a year in which the subsidiaries were not in existence but may not be carried back to any other member of the group. §1.1502–79. (Sec. 1502, ’86 Code.) Rev. Rul. 75-54, 1975–1 C.B. 293. 106.89 Investment credit carryover. Consolidated unused credits arising in 1965 and prior years may be carried over to a subsequent consoli dated return year under described circumstances even though, in an intervening year, separate returns were filed by all members of the affiliated group. §1.1502-3. (Sec. 1502, ’86 Code.) Rev. Rul. 68-555, 1968-2 C.B. 393. 106.90 Investment credit; recapture; section 936 election by member. A member of an affiliated group, that filed consolidated income tax returns in prior years and properly claimed an in vestment credit in one such year, files a separate return claiming the Puerto Rico and Possessions tax credit. The member is liable, in the year the section 936 election is made, for increased income tax resulting from the recapture of that portion of investment credit, taken in the prior year, that is attributable to new section 38 property placed in service by the member. Rev. Rul. 73–76 distinguished. §§1.47–1, 1.48–1, 1.1502–3, 1.1504-1. (Secs. 47, 48, 936, 1502, 1504; ’86 Code.) Rev. Rul. 79–97, 1979–1 C.B. 39. 106.91 Investment credit; recapture; transferor property in reorganization. The transfer of section 38 property between members of a consolidated group in a consolidated return year constitutes a disposition of section 38 property under section 47(a)(1) when the transfer is part of a plan to transfer the section 38 property outside the consolidated group in a transaction qualifying as a reorganization under sections 355(a)(1) and 1.355-1, 1.47-3, 368(a)(1)(D). §§1.47-1, 1.368-1, 1.1502-3. (Secs. 47, 355, 368, 1502; ’86 Code.) Rev. Rul. 82–20, 1982–1 C.B. 6. 106.92 Limitation on assessment. A subsidiary corporation joined with its calendar year parent using the subsidiary’s fiscal year to file a consolidated return which was invalid because the subsidiary did not file a timely consent to the filing of the consolidated return and its parent did not obtain permission to change its accounting period. Held, the consolidated return constituted the subsidiary’s return for purposes of the three year period for assessment. (Secs. 1502, 6501; ’86 Code.) General Manufacturing Corp., 44 T.C. 513, Acq., 1966-1 C.B. 2. 106.93 Limitation on built-in deduction. A cash method subsidiary incurred normal operating expenses that were economically accrued during the portion of a taxable year for which the subsidiary filed a separate short period return and were recognized during the portion of the year for which the subsidiary was part of an affiliated group filing a consolidated return. The expenses constitute a built-in deduction within the meaning of reg. 1.1502–15(a)(2)(i) and arc subject to the limitations of reg 1.1502-21(c). §1.1502-15. (Sec. 1502, ’86 Code.) Rev. Rul. 79-279, 1979-2 C.B. 316. 106.94 Limitation on built-in deductions; excess loss account. In determining whether a built-in deduction realized by a corporation is subject to limitation under section 1.1502-15(a)(1), the corporation’s excess loss account with respect to the subsidiary’s stock reduces the aggregate adjusted basis of the corporation’s assets for purposes of computing its aggregate adjusted basis to ratio section under fair market value 1.1502-15(a)(4)(1)(b). §1.1502-15. (Sec. 1502, ’86 Code.) Rev. Rul. 83-14, 1983-1 C.B. 199.

Consolidated returns 106.95 Liquidation; excess loss accounts; section 338(h)(10) election. When a parent corporation has an excess loss account in its subsidiary’s stock and such stock is acquired by a third corporation in a qualified stock purchase for which a valid section 338(h)(10) election is made, the excess loss account is eliminated on the deemed section 332 liquidation resulting from the election. §§1.338(h)(10)-1T, 1.1502-19. (Secs. 338, 1502, ’86 Code.) Rev. Rul. 89-98, 1989-2 C.B. 219. 106.96 Liquidation of foreign corporation; stock ownership rules. Two situations illustrate the effect of special aggregate stock ownership rules of reg. 1.1502–34 in determining whether section 332(b) applies to the liquidation of a foreign subsidiary corporation and section 351(a) applies to a transfer of property to a foreign corporation by members of an affiliated group. §§1.332-2, 1.351-1, 1.367-1, 1.1502-34. (Secs. 332, 351, 367, 1502; ’86 Code.) Rev. Rul. 70-141, 1970-1 C.B. 76. 106.97 Liquidation of foreign corporation; stock ownership rules. The aggregate stock ownership rules of reg. 1.1502–34 do not apply to prevent recognition of gain or loss under section 332 on a wholly owned foreign subsidiary’s transfer of all of its assets, subject to liabilities, to its domestic parent’s wholly owned domestic subsidiary which owns no stock of the foreign subsidiary and files a consolidated return with the parent. Amplified by Rev. Rul. 75-383. §§1.332-2, 1.1502-34. (Secs. 332, 1502; ’86 Code.) Rev. Rul. 74–598, 1974-2 C.B. 287. 106.98 Losses and deductions; transition rules. This notice clarifies the proposed rules under reg. sections 1.1502–21, and 1.1502–90 through -99 concerning the use of losses and deductions by consolidated groups between January 1, 1987 and January 29, 1991. Notice 91-27, 1991-2 C.B. 629. 106.99 Mexican corporations; controlled by domestic parent. Two corporations organized under the laws of Mexico by a domestic parent corporation that controls 100 percent of their capital stock, are treated as domestic corporations and may file a consolidated return with their domestic parent. §1.1504-1. (Sec. 1504, ’86 Code.) Rev. Rul. 69-182, 1969-1 C.B. 218. 106.100 Mexican corporations; controlled by domestic parent. A domestic parent may elect to treat its wholly owned Mexican subsidiary as a domestic corporation for the purpose of filing consolidated returns where the subsidiary was organized solely to comply with Mexican law as to title and operation of property in Mexico. §1.1504–1. (Sec. 1504, ’86 Code.) Rev. Rul. 70-379, 1970-2 C.B. 179. 106.101 Net operating loss; carryback; common parent not financial institution. The consolidated net operating loss of a group, which is entirely attributable to the common parent corporation, not a financial institution as defined in section 585, 586, or 593, may not be carried back 10 years under section 172(b)(1)(F), despite the fact that another member of the group is such a financial institution. §§1.172-4, 1.1502–21. (Secs. 172, 1502; ’86 Code.) Rev. Rul. 84-136, 1984-2 C.B. 193. 106.102 Net operating loss; carryback; new subsidiary. A consolidated net operating loss of an affiliated group filing a consolidated return, attributable to a new subsidiary wholly owned by another subsidiary which formerly owned the assets and operations that generated the loss, may be carried back to the other subsidiary’s separate return for a year in which the new wholly owned subsidiary was not in existence but may not be car-

ried back to the common parent’s separate return for that year. §1.1502-79. (Sec. 1502, ’86 Code.) Rev. Rul. 74-610, 1974-2. C.B. 288. 106.103 Net operating loss; carryback; subsidiary organized in loss year. An affiliated group that filed consolidated returns for the years 1970–73 and elected to allocate its consolidated tax liability sustained a net operating loss in 1973 attributable in part to a subsidiary that was organized and joined the group in 1973. That portion of the loss attributable to the newly organized subsidiary may be included in the 1973 consolidated net operating loss carryback and the tax refunds thus generated may be allocated, for purposes of determining earnings and profits available for payment of dividends, to the members who generated the tax liability in the respective carryback years. §§1.1502-79, 1.1552-1. (Secs. 1502, 1552; ’86 Code.) Rev. Rul. 74-423, 1974-2 C.B. 289.

there was a consolidated return change of ownership as defined in section 1.1502–1(g) of the regulations. §§1.1502–1, 1.1502–21. (Sec. 1502, ’86 Code.) Rev. Rul. 84-33, 1984-1 C.B. 502. 106.110 Net operating loss; carryover; affiliation terminated. Where an affiliated group of corporations filing consolidated returns is terminated prior to the close of a taxable year, a consolidated net operating loss carryover attributable to all the members of the group shall be applied in full against the consolidated income reported on the group’s final consolidated income tax return, even though the reported income is attributable entirely to-operations of the parent corporation. §§1.172-1, 1.1502-13A, 1.1502-31A. (Secs. 172, 1502; ’86 Code.) Rev. Rul. 61–224, 1961-2 C.B. 145.

106.111 Net operating loss; carryover; separation of member. Where a member of an affili106.104 Net operating loss; carryback ated group which files a consolidated return on the adjustment. The carryback of a consolidated net calendar year basis was sold during the taxable operating loss from a taxable year in which a par- year and filed a separate return for the balance of ent corporation merged with a subsidiary, the for- the taxable year, a consolidated net operating loss mer subsidiary becoming the parent of a new affil- carryover attributable to the subsidiary shall be iated group, depends on whether the former carried over to the consolidated return of the affilisubsidiary files a consolidated or separate return ated group for the taxable year in which the subsidand the period for which the return is filed. iary was sold. The carryover, not absorbed, is §§39.122-4, 24.13, 24.31. (Secs. 122, 141, ’39 available to the subsidiary for the short period. §§1.172-4, 1.1502-31A. (Secs. 172, 1502; ’86 Code; Secs. 172, 1501, ’86 Code.) Code.) Rev. Rul. 55-724, 1955-2 C.B. 581. Rev. Rul. 58–329, 1958–1 C.B. 337. 106.105 Net operating loss; carryback 106.112 Net operating loss and unused investadjustment; affiliation terminated. Where a member of an affiliated group severed its connec- ment credit; carryback; newly formed parent. tion with its parent corporation, and filed separate A consolidated net operating loss and a consolitax returns for the three succeeding taxable years dated unused investment credit that are attributand in the third year sustained a net operating loss, able to a newly organized corporation, which the net operating loss is not reduced by the taxable became the parent of an affiliated group by acquirincome of a prior period which was included in a ing the stock of two unrelated corporations, may consolidated return reflecting a consolidated net not be carried back to the separate return years of operating loss. §§1.172–1, 1.1502–31A. (Secs. the subsidiary member corporations. §1.1502–79. (Sec. 1502, ’86 Code.) 172, 1502; ’86 Code.) Rev. Rul. 80-79, 1980-1 C.B. 191. Rev. Rul. 66-91, 1966-1 C.B. 54. 106.113 Net operating loss; carryover; sub106.106 Net operating loss; carryback sidiary liquidated into parent. The concurrent adjustment; depletion. The consolidated net application of section 381(c)(1) and reg. operating loss carryback of an affiliated group 1.1502–21(c) to compute a consolidated net opermust be adjusted for the excess of percentage ating loss deduction is illustrated in a situation in depletion over cost depletion allowed on a consol- which a group of corporations, previously filing idated return for a prior year with respect to a sub- separate returns and electing to claim multiple sursidiary which was not an affiliate in the year of tax exemptions, elected to file a consolidated loss. §§24.11, 24.31. (Sec. 141, ’39 Code; Secs. return, and the subsidiary whose loss from the pre172, 1503, ’86 Code.) ceding year was carried over to the consolidated Rev. Rul. 55-499, 1955-2 C.B. 379. return was liquidated into the parent during that 106.107 Net operating loss; carryback year. §§1.381(c)(l)–1, 1.1502–21. (Secs. 381, 1502; ’86 Code.) adjustment; new subsidiary. The portion of a Rev. Rul. 75-378, 1975-2 C.B. 355. consolidated net operating loss of an affiliated group attributable to a member which was not in 106.114 Permission to discontinue. This proexistence in the year preceding the loss year may cedure sets forth the requirements for consolibe used in computing the consolidated net operat- dated groups requesting permission to discontinue ing loss deduction of the group for the preceding filing consolidated returns for the taxable year that years. §1.1502-31A. (Sec. 1502, ’86 Code.) includes Nov. 19, 1990. §§1.337(d)-1, Rev. Rul. 64-93, 1964-1 (Part 1) C.B. 325. 1.337(d)-2T, 1.1502-20, 1.1502-75. (Sec. 601.201, S.P.R.; Secs. 337, 1502, 1504; ’86 Code.) 106.108 Net operating loss; carryback to sepRev. Proc. 91-11, 1991–1 C.B. 470. arate return of parent. A consolidated net operating loss in a year governed by consolidated 106.115 Permission to discontinue filing conreturn regulations applicable to taxable years solidated returns. This procedure provides addibeginning after December 31, 1965, entirely tional time for consolidated groups to apply for attributable to a subsidiary not in existence prior permission to discontinue filing consolidated to the loss year, may be carried back to the parent’s returns. It also states that until a consolidated return year for 1965. §§1.172–1, 1.1502–79. group has received permission, it must continue (Secs. 172, 1502; ’86 Code.) filing consolidated returns. Rev. Proc. 91-11 Rev. Rul. 69-623, 1969-2 C.B. 171. modified and clarified. §§1.337(d)-1, 1.337(d)-2T, 1.1502-20, 1.1502-75. (Sec. 106.109 Net operating loss; carryover; affili- 601.201, S.P.R.; Secs. 337, 1502, 1504, ’86 Code.) ated group; change of ownership. Two newly Rev. Proc. 91-39, 1991-2 C.B. 694. formed subsidiaries of parent affiliated group, to which all of the assets of two former divisions of 106.116 Personal holding company income; parent were contributed as a part of a plan of bank- dividend distribution. Dividends received by a ruptcy reorganization, are treated as “old mem- common parent company of an affiliated group bers” of the parent affiliated group for the year from a bank member of the group during aconsoli-

Consolidated returns dated return year are eliminated in computing the parent’s separate personal holding company income. §§1.543–1, 1.1502–14. (Secs. 543, 1502; ’86 Code.) Rev. Rul. 71-531, 1971-2 C.B. 242. 106.117 Personal holding company income; dividend distribution. The corporation parent of an affiliated group that includes a bank subsidiary and files a consolidated return, whose income consists of dividends from the bank subsidiary and dividends and interest from other investments, determines whether and to what extent it is liable for the personal holding company tax based on its separate personal holding company income excluding the subsidiary’s dividends. §1.542–1. (Sec. 542, ’86 Code.) Rev. Rul. 74-131, 1974-1 C.B. 145. 106.118 Personal holding company income; dividend distribution. To determine its separate personal holding company income and its separate undistributed personal holding company income for a consolidated return year, a common parent would eliminate dividends it receives from a 90-percent owned holding company which wholly owns a bank and has only bank dividend income. §§1.543-1, 1.1502-14. (Secs. 543, 1502; ’86 Code.) Rev. Rul. 74-432, 1974-2 C.B. 175. 106.119 Personal holding company income; dividend distribution. A personal holding company, a member of an affiliated group treated as an ineligible group by reason of section 542(b)(2), paid dividends to its parent, which was not a personal holding company, during a taxable year for which the group filed a consolidated return, and took dividends paid deduction for the dividends in order to avoid the personal holding company tax. The dividends are included in computing the recipient corporation’s separate personal holding company income and separate undistributed personal holding company income. Dividends the recipient corporation subsequently paid to its personal holding company parent in the same year are excluded from the common parent’s computation of separate personal holding company income and separate undistributed personal holding company income. §§1.5424, 1.543–1, 1.545–1, 1.1502–2, 1.1502-14. (Secs. 542, 543, 545, 1502; ’86 Code.) Rev. Rul. 79-60, 1979-1 C.B. 211.

public utilities for purposes of computing tax on a consolidated return. §1.1503–1. (Sec. 1503, ’86 Code.) Rev. Rul. 56-128, 1956-1 C.B. 442. 106.123 Public utilities; repayments under FPC order. In determining whether 80 percent or more of a regulated public utility company’s gross income (computed without regard to dividends and capital gains and losses) for the taxable year is derived from sources described in section 1503(c), any refunds or repayments made pursuant to an order promulgated by the F.P.C., or other governmental body, instrumentality or agency as defined in such section, shall not be taken into account in determining gross income. §1.1503-1. (Sec. 1503, ’86 Code.) Rev. Rul. 59-122, 1959-1 C.B. 230. 106.124 Railroads; intercompany transportation costs. A group of affiliated railroad corporation filed consolidated returns in the taxable years of 1924 through 1930 but did not eliminate from their operating expense deductions the cost of intercompany transpiration of materialused in capital construction by one of the affiliated corporations. The Tax Court held that this intercompany transpiration cost must be eliminated and used the 7-mill per ton mile rate established by the I.C.C. as the fair evaluation of the expense of transporting a railroad’s own construction material as a fair cost valuation of the intercompany transportation. (Secs. 215, 234, 240, Rev. Acts of ’24 and ’26; Secs. 23(a), 24(a), 141, Rev. Act of ’28; Secs. 162; 261, 1501, ’86 Code.) Union Pacific Railroad Co., 32 B.T.A, 383, Acq., 1961-1 C.B. 4. rule 106.125 Reconsolidation; general waiver. This procedure provides that section 1504(a)(3) does not prevent members of a consolidated group that terminated under reg. 1.1502–75(d)(1) or (d)(3) from being included in the acquiring or continuing group’s consolidated return, if they are acquired as a result of the acquisition of the assets of the common parent of the terminating group by a nonmember corporation in certain reorganizations. Members of the terminating group must be included in the consolidated return filed by the acquiring or continuing group. Rev. Proc. 90-53 clarified and superseded. §§1.1502-75, 1.1504-1. (Sec. 601.201, S.P.R.; Secs. 1502, 1504, ’86 Code.) Rev. Proc. 91-71, 1991-2 C.B. 900.

106.120 Portfolio securities distributed by subsidiary to parent. The distribution portfolio securities as a dividend by a wholly owned subsidiary to its parent during a consolidated return 106.126 Regulations consent. Each member of period is an intercompany transaction. The an affiliated group which filed (or was required to amount of the dividend to the parent and the basis file) a consolidated return for a taxable year beginof the securities in the hands of the parent is the ning in 1965 may, without filing the Form 1122 adjusted basis of the securities in the hands of the required by the regulations, consent to the consoli subsidiary immediately before the distribution. dated return regulations by joining in the making Adjustment of earnings and profits is made of a consolidated return for the first taxable year of between the subsidiary and the parent. §§1.301-1, the group beginning after December 31, 1965 1.312-7, 1.312-11, 1.316-1, 1.1502-31A, where (1) the income and deductions of such 1.1502-38A. (Secs. 301, 312, 316, 1502; ’86 member are included in the consolidated return, Code.) (2) the member does not file a separate return for Rev. Rul. 65-110, 1965-1 C.B. 438. such taxable year, and (3) the member is included 106.121 Prepaid rent; when includable and in the affiliations schedule, Form 851. §1.1502-75. (Sec. 1502, ’86 Code.) deductible. Rent prepaid by a cash-method corpoRev. Rul. 67-146, 1967-1 C.B. 254. ration to its wholly owned accrual-method subsidiary, both members of an affiliated group filing a consolidated return, is a deferred intercompany 106.127 Reorganization exchange; merger of transaction and not deductible by the parent or affiliated subsidiary with nonmember corporaincludible in income by the subsidiary until the tion. When an independent corporation merged, taxable year to which the rent applies. §§1.61–8, but remained independent after the merger, with a member of an affiliated group filing consolidated 1.1502-13. (Secs. 61, 1502; ’86 Code.) returns, the parent corporation’s gain resulting Rev. Rul. 74–589, 1974–2 C.B. 286. from section 356 “boot” representing gains and 106.122 Public utilities; freight forwarders. profits accumulated by the subsidiary in years Subsidiary corporations engaged in the freight for- before 1966 need not be recognized as it will have warding business which derive at least 80 percent been previously taken into account. Gain arising of their gross income (computed without regard to from the exchange of property with the independividends and capital gains and losses) from the dent corporation would not be deferred as it furnishing of such services, qualify as regulated constitutes gain from the disposition of parent’s

assets outside the affiliated group. §§1.3561, 1.1502-14. (Secs. 356, 1502; ’86 Code.) Rev. Rul. 72–498, 1972-2 C.B. 516. 106.128 Reverse acquisitions. Application of the reverse acquisition rules of reg. 1.1502–75(d)(3) where, in a series of transactions, the common parent of one affiliated group acquires more than 80 percent of the stock of the common parent of a second affiliated group. The effect of such acquisition on the respective affiliated groups to which the parent corporations belong is set forth. §1.1502-75. (Sec. 1502, ’86 Code.) Rev. Rul. 72-30, 1972-1 C.B. 286. 106.129 Reverse acquisitions; reorganization. Stock ownership in an acquiring corporation obtained in an unrelated transaction prior to a reorganization is not included in the more than 50 percent of the fair market value test of reg. 1.1502–75(d)(3)(i) in determining whether the reorganization results in a reverse acquisition. §1.1502-75. (Sec. 1502, ’86 Code.) Rev. Rul. 76-164, 1976-1 C.B. 270. 106.130 Reverse acquisitions; reorganization; member not affiliated. The reverse acquisitions rule of reg. 1.1502–75(d)(3) maybe applicable even though one of the corporations in a reorganization was not a member of an affiliated group prior to its acquisition by another corporation pursuant to the reorganization plan. §§1.1502-75, 1.1502-76. (Sec. 1502, ’86 Code.) Rev. Rul. 72-322, 1972-1 C.B. 287. 106.131 Reverse acquisitions; tax-exempt parent. A corporation exempt under section 501 formed a new, nonexempt corporation to which it transferred all of the stock of two other corporations, each of which had been a member of a different affiliated group, in exchange for the stock of the new corporation. On that date, two-thirds of the excess of the total fair market value of assets over liabilities of the two corporations owned by the exempt parent was attributable to the first of the two. The exchange involving the first corporation qualified as a reverse acquisition with the affiliated group continuing in existence, but the other exchange did not qualify as a reverse acquisition and that group’s existence terminated on the acquisition date. §§1.351–1, 1.1502–75, 1.1504-1. (Secs. 351, 1502, 1504; ’86 Code.) Rev. Rul. 73-303, 1973-2 C.B. 315. 106.132 Short period; dissolved subsidiary. The district director may prescribe a date for filing the short taxable year return of a dissolved subsidiary corporation to correspond with the due date of the return of the parent where the short period return of the subsidiary is not delinquent and where the subsidiary may elect to or is required to be included in a consolidated return. The amount of tax paid upon the basis of the return of the subsidiary will be considered as having been paid by the parent. §39.53–1. (Sec. 53, ’33 Code; Secs. 1501, 6072, ’86 Code.) Rev. Rul. 55-108, 1955-1 C.B. 140. 106.133 Short period; LIFO election; financial conformity. Disclosure in a calendar year consolidated financial statement of the effect on income of an acquired member’s change to the LIFO inventory method in a short taxable period, which falls within the calendar year of the financial statement, is permitted under Rev. Proc. 75–10 and will not terminate the LIFO election. §§1.472-1, 1.1502-76. (Secs. 472, 1502; ’86 Code.) Rev. Rul. 79-58, 1979-1 C.B. 187. 106.134 Short period; return of subsidiary. A subsidiary corporation which becomes an affiliate of a group for which a consolidated return is filed must adopt an annual accounting period to conform to that of the parent corporation. A short period return is acceptable to accomplish the

Consolidated returns change. However, if the consolidated return is not with respect to plans of liquidation adopted on or before the date proposed regulations are published filed, the short period return will be inoperative. in the Federal Register; for purposes of old section §§1.1501-1, 1.1504-1. (Secs. 1501, 1504, 6012; 337, such regulations will not be effective with ’86 Code.) Rev. Rul. 56-360, 1956-2 C.B. 595. respect to a plan of liquidation adopted by the selling corporation on or before the date proposed 106.135 Short period; return of subsidiary. A regulations are published; and for purposes of seccorporation that becomes a member of an affili- tion 338(d)(3), such regulations will not be effecated group of corporations and joins the group in tive for purchases made during any 12-month filing a consolidated return under section 1501 is acquisition period beginning on or before the date not required under section 443(b) to annualize its proposed regulations are published. pre-affiliation period income required to be Notice 87–63, 1987-2 C.B. 375. reported on a separate short-period return. Rev. 106.142 Stock transaction; basis. In determinRul. 57-602 revoked. §§1.443-1, 1.1502-76. ing gain or loss from the sale by a member of an (Secs. 443, 1502; ’86 Code.) Rev. Rul. 67–189, 1967–1 C.B. 255; Erwin affiliated group of stock it owns in another memProperties, Inc., 43 T.C. 888, Acq., 1967-1 C.B. 2. ber, the basis of the stock is required to be reduced by all operating losses of the issuing corporation 106.136 Short period; return of subsidiary. A during consolidated return years to the extent that fiscal year subsidiary that joins in the filing of a such losses could not have been availed of if sepacalendar year consolidated return is not required to rate returns had been filed. The basis must be furannualize its taxable income in filing an amended ther reduced by the proportionate share of any return for the portion of its taxable year not includ- consolidated losses for those years which could able in the consolidated return of the group. not be used by the affiliated group. §1.1502–34A. §§1.443-1, 1.1502-76. (Secs. 443, 1502; ’86 (Sec. 1502, ’86 Code.) Code.) Rev. Rul. 57-455, 1957-2 C.B. 613. Rev. Rul. 70-378, 1970-2 C.B. 178. 106.143 Stock transaction; basis; deposits

106.137 Short period constituting taxable under Merchant Marine Act. A wholly owned year; adjustment. An adjustment under section subsidiary’s earnings and profits deposited, pur481(a) required to be taken ratably over a period suant to section 607 of the Merchant Marine Act of 10 taxable years by a calendar-year corporation of 1936, into statutory reserve funds that were in that had been granted permission to change to the existence on or before the effective date of the full absorption method of inventory costing must Merchant Marine Act of 1970 may not be used, be included in each of the corporation’s two sepa- under reg. 1.1502–32, to increase the parent’s rate short period consolidated returns filed during basis for determining gain or loss in the stock of one calendar year due to a reorganization. The the subsidiary with which it has always filed conshort periods for which the returns were filed, solidated tax returns. §§1.312–6, 1.1502–32. although totaling 12 calendar months, each consti- (Secs. 312, 1502; ’86 Code.) tute a separate taxable year. §§1.441–1, 1.471–11, Rev. Rul. 77-284, 1977-2 C.B. 97. 1.481-1, 1.1502-76. (Secs. 441, 471, 481, 1502; 106.144 Subsidiary’s separate return year; ’86 Code.) inventory adjustment. In computing the upward Rev. Rul. 78-165, 1978-1 C.B. 276. inventory adjustments for the first separate return 106.138 Small business corporation; stock period of a subsidiary after its disaffiliation from acquired in reorganization. All of the stock of an its parent under reg. 1.1502–39A(c) (pre-1966), electing small business corporation was acquired the amount of profits reflected in the subsidiary’s by a corporation before the start of business on closing inventory for the first separate return year October 16, 1978, in a B reorganization, They should include all inventory transactions during filed a consolidated return for the acquiring corpo- such period between the companies which were ration’s taxable year ended December 31, 1978. members of the group. In no event should the subThe small business corporation’s election is not sidiary’s upward inventory adjustment in the first terminated for the separate taxable year ending separate return year exceed the amount of its October 15, 1978, but is terminated for taxable downward inventory adjustment initially made years beginning after the date. Rev. Rul. 72-201 upon consolidation as required by reg. revoked. §§1.1372-4, 1.1502–76. (Secs. 1372, 1.1502-39A(b). §1.1502-39A. (Sec. 1502, ’86 1502; ’86 Code.) Code.) Rev. Rul. 80-169, 1980-1 C.B. 188. Rev. Rul. 71-570, 1971-2 C.B. 325. 106.139 Stock buy-back subsequent to section 355 transaction. This procedure provides a safe harbor under which the Service will rule that a purchase by the distributing corporation or the controlled corporation of its stock subsequent to a section 355 transactions will not violate the device test of section 355(a)(1)(B). §1.355–2. (Sec. 601.201, S.P.R.; Sec. 355, ’86 Code.) Rev. Proc. 91-63, 1991–2 C.B. 865.

106.145 30-day rules eliminated; corporation becoming or ceasing to be members on or after February 15, 1993. This notice modifies pro-

posed regulation section 1.1502-76(b)(4)(ii) to provide that the 30-day roles would be eliminated with respect to corporations becoming or ceasing to be members of a consolidated group on or after February 15, 1993. Notice 92-59, 1992-2 C.B. 386.

106.140 Stock of subsidiary held in escrow. Where a parent corporation purchased all the outstanding shares of stock of another corporation, all the stock being held in escrow by a trust company as security for the purchase price, the fact that all the shares of stock are held in escrow during a taxable year will not deprive the parent company of the right to include the subsidiary whose stock has been acquired in the consolidated income tax returns to be filed by the affiliated group. §39.141-1. (Sec. 141, ’39 Code; Sec. 1501, ’86 Code.) Rev. Rul. 55-458, 1955-2 C.B. 579.

106.146 Western Hemisphere and possessions corporation. A U.S. corporation that is both

106.141 Stock ownership requirements. For

106.147 Western Hemisphere trade corporations. In computing the foreign tax credit of an affiliated group of corporations, where the subsid-

purposes of section 332(b)(1), regulations under section 1504(a)(5)(A) and (B) will not be effective

a Western Hemisphere trade corporation and a possession corporation but fails to derive benefit from section 931 due to a net operating loss for the year is an “includible corporation” within the meaning of section 1504(b)(4), and may be included in a consolidated return for that year, Rev. Rul. 65-293 revoked. §§1.921-1, 1.931-1, 1.1504-1. (Secs. 921, 931, 1504; ’86 Code.) Rev. Rul. 73-498, 1973–2 C.B. 316; Burke Concrete Accessories, Inc., 56 T.C. 588, Acq., 1973–2 C.B. 1.

iaries include Western Hemisphere trade corporations some of which have operating losses, the consolidated section 922 deduction is computed on the consolidated income attributable to all Western Hemisphere trade corporations in the group. Further, the consolidated section 922 deduction is allocated only to the profit corporations. §§1.904-1, 1.922-1, 1.1502-31A, 1.1502-43A. (Secs. 904, 922, 1502; ’86 Code.) Rev. Rul. 58–618, 1958–2 C.B. 430. 106.148 Western Hemisphere trade corporations; foreign tax credit; carrybacks and carryovers. The amount of the foreign tax reduction required by reason of the inclusion of Western Hemisphere trade corporations in an affiliated group filing consolidated returns and using the overall limitation in determining the foreign tax credit qualifies for the foreign tax credit carryback and carryover provisions of former section 904(d), Rev. Rul. 74-72 revoked. §§1.904–2, 1.1503-1. (Secs. 904, 1503; ’86 Code.) Rev. Rul. 85-55, 1985-1 C.B. 323. 106.149 Western Hemisphere trade corporations; section 922 deduction; foreign tax credit reduction. Under certain circumstances the Service will no longer require application of the fractional method without losses set forth in reg. 1.1502–25(c) for purposes of determining the “portion of the consolidated taxable income” attributable to those members of an affiliated group that are Western Hemisphere trade corporations (WHTCs). §§1.1502–25, 1.1503–1. (Secs. 1502, 1503; ’86 Code.) Rev. Rul. 85-136, 1985-2 C.B. 194. 106.150 Western Hemisphere trade corporations; special deduction. Members of an affiliated group operating in the Western Hemisphere outside the U.S. but having no gross income are excluded in determining the consolidated taxable income attributable to members of the group which are Western Hemisphere trade corporations. Amplified to provide that such members whose only income is from dividends, interest, and capital gains are also excluded. In computing the limitation on foreign tax credit, the deduction provided in section 922 should be allocated between income from sources within and without the U.S. §1.1502–31A. (Secs. 863, 904, 921, 922, 1502; ’86 Code.) Rev. Rul. 56-316, 1956-2 C.B. 597; Rev. Rul. 58-56, 1958-1 C.B. 335.

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