[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