[Federal Register Volume 64, Number 217 (Wednesday, November 10, 1999)]
[Rules and Regulations]
[Pages 61205-61206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29085]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8842]
RIN 1545-AW32
Acquisition of an S Corporation by a Member of a Consolidated
Group
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section 1502 of
the Internal Revenue Code. These final regulations provide specific
rules that apply to the acquisition of the stock of an S corporation by
a member of a consolidated group. These rules eliminate the compliance
burdens associated with filing a separate return for the day that an S
corporation is acquired by a consolidated group. Additionally, the
regulations clarify the rule for the filing of the separate return for
a corporation's items for the period not included in the consolidated
return.
DATES: Effective Date: These regulations are effective November 10,
1999.
Applicability Date: For dates of applicability, see Sec. 1.1502-
76(b)(6)(i).
FOR FURTHER INFORMATION CONTACT: Vincent Daly, (202) 622-7770 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
On December 17, 1998, the IRS published in the Federal Register a
notice of proposed rulemaking (REG-106219-98, 63 FR 69581), concerning
acquisitions by a consolidated group of at least eighty percent of the
stock of an S corporation. Although a comment was received questioning
the advisability of a special rule for the acquisition of an S
corporation, the IRS and Treasury have determined the rules are
necessary to eliminate the administrative burden of filing a separate
tax return for the day the S corporation is acquired. The proposed
regulations are adopted by this Treasury decision.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that these regulations will not have a significant economic
impact on a substantial number of small entities. This certification is
based on the fact that the regulations will provide administrative
relief to small entities by removing the administrative burden of
filing a separate one-day return currently required for certain
acquisitions. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Jeffrey L. Vogel of
the Office of the Assistant Chief Counsel (Corporate), IRS. However,
other personnel from the IRS and Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1362-3 is amended by adding a sentence to the end
of paragraph (a) to read as follows:
Sec. 1.1362-3 Treatment of S termination year.
(a) In general. * * * See, however, Sec. 1.1502-76(b)(1)(ii)(A)(2)
for special rules for an S election that terminates under section
1362(d) immediately before the S corporation becomes a member of a
consolidated group (within the meaning of Sec. 1.1502-1(h)).
* * * * *
Par. 3. Section 1.1502-76 is amended as follows:
1. The text of paragraph (b)(1)(ii)(A) following the paragraph
heading is redesignated as paragraph (b)(1)(ii)(A)(1).
2. A paragraph heading for newly designated paragraph
(b)(1)(ii)(A)(1) is added.
3. The first sentence of newly designated paragraph
(b)(1)(ii)(A)(1) is revised.
4. Paragraph (b)(1)(ii)(A)(2) is added.
5. Paragraph (b)(2)(v) is redesignated as paragraph (b)(2)(vi).
[[Page 61206]]
6. New paragraph (b)(2)(v) is added.
7. Paragraphs (b)(4) and (b)(5) are redesignated as paragraphs
(b)(5) and (b)(6), respectively.
8. New paragraph (b)(4) is added.
9. Newly designated paragraph (b)(5) is amended as follows:
a. Example 6 (b), first sentence is revised.
b. Example 6 (c), second sentence is revised.
c. Example 7 is added.
10. Newly designated paragraph (b)(6)(i) is revised.
The revisions and additions read as follows:
Sec. 1.1502-76 Taxable year of members of group.
* * * * *
(b) * * * (1) * * *
(ii) * * *(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. * * *
(2) Special rule for former S corporations. If S becomes a member
in a 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.
* * * * *
(2) * * *
(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.
* * * * *
(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) * * *
Example 6. Allocation of partnership items. * * *
(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. * *
*
(c) Controlled 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. * * *
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.
* * * * *
Bob Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: October 29, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-29085 Filed 11-9-99; 8:45 am]
BILLING CODE 4830-01-U
