[Federal Register Volume 65, Number 187 (Tuesday, September 26, 2000)]
[Proposed Rules]
[Pages 57755-57763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24039]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-103805-99]
RIN 1545-AX56


Agent for Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of previous proposed regulations; notice of proposed 
rulemaking; and notice of public hearing.

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SUMMARY: This document contains proposed regulations regarding the 
agent for an affiliated group that files a consolidated return 
(consolidated group). The proposed regulations address certain issues 
raised by the current regulations concerning the agent for the group 
when the common parent ceases to be the common parent, as well as 
questions concerning the scope of the common parent's authority. These 
proposed regulations affect all consolidated groups. This document also 
provides notice of a public hearing on these proposed regulations. In 
addition, this document withdraws a portion of the proposed rulemaking 
(LR-97-79) published in the Federal Register, July 31, 1984.

DATES: Written and electronic comments must be received by December 26, 
2000. Outlines of topics to be discussed at the public hearing 
scheduled for 10 a.m. on January 22, 2001, must be received by December 
26, 2000.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-103805-99), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may also be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to CC:M&SP:RU (REG-103805-99), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
internet site at http://www.irs.ustreas.gov/tax_regs/regslist.html. The 
public hearing will be held in room 4718, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Gerald B. 
Fleming or George R. Johnson, (202) 622-7930; concerning submissions of 
comments, the hearing and/or to be placed on the building access list 
to attend the hearing, Sonya Cruse, (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)).
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. 
Comments on the collection of information should be received by 
November 27, 2000.
    Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the collection will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in the proposed regulations is in 
Sec. 1.1502-77(d). This information is required for the common parent 
to notify the IRS of the designation of a new agent for the 
consolidated group when the common parent's existence is about to 
terminate and for the designated corporation to confirm that it agrees 
to serve as the group's new agent and qualifies to be the group's 
agent. The collection of information is required to obtain a benefit, 
i.e., to designate a new agent for the consolidated group. The likely 
respondents are business or other for-profit institutions.
    The regulations provide that a common parent or a previously 
designated agent of a consolidated group should notify the Commissioner 
in writing, in accordance with procedures prescribed by the 
Commissioner, that it anticipates going out of existence and that it 
designates another corporation to serve as the group's agent for 
specified prior consolidated return years. In addition, the 
notification should include a statement by the designated corporation 
agreeing to serve as the group's agent and, if the designated 
corporation was not itself a member of the group, a statement that it 
is or will be liable for the tax. An agent designated by the 
Commissioner is required to give notice to each corporation (or any 
successor) that was a member of the group during any part of the 
relevant consolidated return year. The burden for the collection of 
information in Sec. 1.1502-77(d) is as follows:
    Estimated total annual reporting burden: 200 hours.
    Estimated average annual burden per respondent: 2 hours.
    Estimated number of respondents: 100.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document proposes amendments to 26 CFR part 1 under section 
1502 of the Internal Revenue Code of 1986 (Code). The proposed 
amendments clarify and supplement existing rules under Sec. 1.1502-77 
concerning the agent for a consolidated group and the designation of a 
new agent to act for the group. The proposed amendments also clarify 
rules concerning the common parent as agent for a corporation whose 
income is improperly included in a consolidated return. In addition, 
the

[[Page 57756]]

proposed amendments modify and clarify the rules concerning the proper 
party to apply for and receive a refund payment due to a tentative 
carryback adjustment under Sec. 1.1502-78. The proposed regulations 
also terminate Sec. 1.1502-77T for tax years beginning on or after the 
effective date of final regulations amending Sec. 1.1502-77.
    Section 1.1502-77(a) currently provides that the common parent is 
the ``sole agent'' for the consolidated group with respect to nearly 
all procedural tax matters relating to the group's tax liability for a 
consolidated return year. Notwithstanding this general rule, 
Sec. 1.1502-77(a) provides that the IRS may, upon notifying the common 
parent, deal directly with any member of the group in respect of its 
liability, in which case that member shall have full authority to act 
for itself.
    Because the common parent's authority to act as agent for the group 
terminates when the common parent corporation ceases to exist, 
Sec. 1.1502-77(d) provides for the designation of a new agent to act 
for the group. Section 1.1502-77(d) first grants the terminating common 
parent, prior to going out of existence, the authority to designate a 
remaining member to act as agent for the group (a designated agent) 
regarding the group's prior consolidated return years. If the common 
parent goes out of existence without designating a new agent, 
Sec. 1.1502-77(d) provides that the remaining members of the group may 
designate a new agent. A designation of a new agent under this 
provision, by either the common parent or the remaining members, is 
subject to the approval of the district director with which the group 
files its return. Section 1.1502-77(d) also grants the IRS the 
authority to deal separately with each remaining member of the group 
with respect to its liability in the event that neither the common 
parent nor the surviving members designate a new agent.
    Decisions of the United States Tax Court have highlighted 
difficulties in applying these rules to situations where a group 
continues to exist following a transaction described in Sec. 1.1502-
75(d) (a group structure change), in which a new common parent has 
replaced the former common parent (which may or may not have remained 
in existence or remained a member of the group). See Interlake Corp. v. 
Commissioner, 112 T.C. 103 (1999); Union Oil Co. v. Commissioner, 101 
T.C. 130 (1993); Southern Pacific Co. v. Commissioner, 84 T.C. 395, 404 
(1985).
    On September 8, 1988, various final and temporary regulations under 
section 1502 were published in the Federal Register (53 FR 34729). At 
the same time, a notice of proposed rulemaking (LR-66-88) cross-
referenced to the text of the temporary regulations was also published 
(53 FR 34779). Included in the temporary regulations was Sec. 1.1502-
77T. In situations where the corporation that was the common parent of 
the group ceases to be the common parent, Sec. 1.1502-77T provides 
alternative agents to act for a consolidated group, but only for 
purposes of mailing notices of deficiency and waiving periods of 
limitations. Specifically, Sec. 1.1502-77T allows the following 
alternative agents to act on behalf of the group: (1) the common parent 
of the group for all or any part of the year to which the notice or 
waiver applies, (2) a successor to the former common parent in a 
transaction to which section 381(a) applies, (3) the agent designated 
by the group under Sec. 1.1502-77(d), or (4) if the group remains in 
existence under Sec. 1.1502-75(d)(2) or (3), the common parent of the 
group at the time the notice is mailed or the waiver given.
    The IRS received no comments on Sec. 1.1502-77T and has not issued 
final regulations concerning alternative agents.

Reasons for Change

    Given the common parent's role as the agent for the group, issues 
arise about who has authority to act on behalf of the group for 
consolidated return years where the common parent has ceased to exist 
(e.g., due to a merger or liquidation) or where, while continuing to 
exist, it has ceased to be the common parent of the group (e.g., as a 
result of being acquired by another corporation). Other issues arise 
concerning the proper agent, as well as the scope of that agency, where 
a consolidated return improperly includes the income of a corporation 
that should have filed separately or when the IRS issues a tentative 
refund in response to a claim filed by a former member of the group.
    Although the current provisions of Secs. 1.1502-77 and 1.1502-77T 
provide guidance in limited situations, numerous issues have arisen in 
situations outside the scope of these provisions. The alternative agent 
approach of Sec. 1.1502-77T addressed agency issues regarding notices 
of deficiency and waivers of periods of limitations. It was intended to 
offer flexibility in allowing both taxpayers and the IRS to choose from 
among several potential agents to act for the group and also to ensure 
that whichever corporation is selected would be a permissible agent to 
act for the group. However, an alternative agent provided by 
Sec. 1.1502-77T is the agent for the group only for purposes of mailing 
notices of deficiency or for executing consents to extend periods of 
limitations. Under Sec. 1.1502-77T, an alternative agent has no 
authority to act as the group's agent for other purposes (e.g., filing 
a refund claim, receiving refund payments or executing a closing 
agreement). As a result, under the current rules, absent a designation 
of one of the remaining members to act as agent under Sec. 1.1502-
77(d), the IRS may have no option other than to deal separately with 
each remaining member for any purpose not covered by Sec. 1.1502-77T.
    The IRS and Treasury initially considered the possibility of 
expanding the scope of the authority of alternative agents under 
Sec. 1.1502-77T to include all matters under the common parent's scope 
of authority as set forth in Sec. 1.1502-77(a). However, it was 
ultimately concluded that the shortcomings of the alternative agent 
approach outweigh its benefits. In particular, that approach lacks 
certainty because the IRS could deal with any one of several 
alternative agents and more than one corporation could initiate actions 
on behalf of the group. Also, a corporation could serve as an 
alternative agent without having been related to members of the group 
during the consolidated return year at issue or without being liable 
for the consolidated tax for that year.
    In lieu of expanding the alternative agent approach of Sec. 1.1502-
77T, the IRS and Treasury propose to revise the rules of Sec. 1.1502-77 
and to terminate the application of Sec. 1.1502-77T. Under the proposed 
regulations, as discussed in more detail below, the common parent 
remains the agent for the group's consolidated return year as long as 
it remains in existence, regardless of whether it continues to be a 
common parent or a member of the group, or whether the group continues 
under Sec. 1.1502-75(d).
    The proposed regulations set forth procedures for a common parent 
to designate a new agent for the group when the common parent ceases to 
exist, and permit the IRS to designate a new agent if the common parent 
fails to do so. The proposed regulations do not contain a provision 
allowing the remaining members to designate a new agent if the common 
parent fails to make a designation before it ceases to exist. The 
proposed regulations provide that the common parent acts as the agent 
with regard to the liability of any corporation whose income is 
improperly included in the group's return but whose liability is 
subsequently computed on the basis of

[[Page 57757]]

a separate return or as a member of another consolidated group.
    Finally, the proposed regulations modify the rule in Sec. 1.1502-
78(a) concerning an application under section 6411 for a tentative 
carryback adjustment with respect to a loss or business credit arising 
in a separate return limitation year. Under the proposed amendments, 
the application should be filed by the common parent for the carryback 
year instead of the corporation to which the loss or credit is 
attributable. In addition, the proposed amendments clarify that any 
refund under Sec. 1.1502-78(b) related to a tentative carryback 
adjustment must be paid to the corporation that was the common parent 
(or is the designated agent) for the carryback year. The proposed 
amendments also replace the word ``investment'' with ``business'' in 
the term unused investment credit in Sec. 1.1502-78(a) to conform to 
changes in section 6411.

Explanation of Provisions

    In order to reduce uncertainty for both taxpayers and the IRS, the 
proposed amendments to Sec. 1.1502-77(a) provide that the common parent 
for a consolidated return year remains the agent for the group for that 
year as long as it continues to exist. This rule applies even if the 
common parent, for whatever reason, ceases to be the common parent. 
Thus, for example, if the common parent becomes a subsidiary member of 
the consolidated group, which continues under Sec. 1.1502-75(d), if the 
common parent becomes a stand-alone corporation, or even if the common 
parent becomes a subsidiary member of another group, it remains the 
agent of the group for those consolidated return years during which it 
was the group's common parent. Cf. Interlake Corp. v. Commissioner, 112 
T.C. 103 (1999); Union Oil Co. v. Commissioner, 101 T.C. 130 (1993).
    The proposed regulations provide a rule for situations where a 
corporation files a consolidated return as the common parent of an 
affiliated group but is subsequently determined not to be the actual 
common parent of that group. In such situations, the corporation that 
filed as the common parent is considered to be the agent for each 
member of the claimed group even though it was not actually the common 
parent. This situation may arise, for example, where the common parent 
fails to own stock satisfying the 80-percent voting and value 
requirement of section 1504(a)(2).
    The proposed regulations clarify that the common parent's authority 
as agent for a taxable year extends to any successor of a member. For 
purposes of Sec. 1.1502-77 only, the term successor means a party that, 
pursuant to applicable law, has become primarily liable for the tax 
liabilities of the common parent or any subsidiary member. Such 
determination is made without regard to Sec. 1.1502-1(f)(4) (defining 
the term successor for purposes of the definition of a separate return 
limitation year). The proposed regulations also clarify that the common 
parent remains the sole agent with respect to the consolidated tax 
liability under Sec. 1.1502-6 of a subsidiary (or its successor) that 
is or becomes a disregarded entity for Federal tax purposes.
    Where transferee liability exists under applicable law, the 
proposed regulations provide that, for purposes of assessing, paying or 
collecting transferee liability, actions of the common parent with 
respect to the group's tax liability will derivatively affect the 
liability of a transferee of a member, regardless of whether the 
transferor member remains in existence. This provision is essentially 
an application of general principles of transferee liability in the 
context of a consolidated group. Under case law, the actions of a 
transferor derivatively affect the liability of a transferee, even if 
the actions are taken after the transfer occurs. See, e.g., United 
States v. Vassallo, Inc., 274 F.2d 791, 793-794 (3d Cir. 1960). As 
provided in the proposed regulations, the common parent's actions on 
behalf of the group are always binding on each member of the group. 
Therefore, any actions of a common parent with respect to the group's 
liability for a consolidated return year will derivatively affect the 
liability of a transferee of a transferor member that remains in 
existence, even if the action occurs after the transfer giving rise to 
the transferee liability.
    The proposed regulations recognize the derivative effect of the 
common parent's actions on transferee liability and further provide 
that actions taken by or with respect to the common parent, as agent 
for the group, after a transferor member has ceased to exist, also 
derivatively affect the liability of a transferee of such member to the 
same extent as if the transferor member had remained in existence. For 
example, under this provision, a waiver extending the limitations 
period for assessment, executed by the common parent (as agent for the 
group) after a member ceases to exist, would have the derivative effect 
of extending the limitations period with respect to a transferee of 
such member.
    The proposed regulations revise the rules governing the designation 
of a new agent for the group when the common parent ceases to exist. 
They retain the current provision under Sec. 1.1502-77(d) for the 
common parent to notify the IRS and designate, subject to the approval 
of the IRS, another member to act as the group's agent for the 
consolidated return year.
    As under the current rule, the proposed regulations provide that 
the common parent may designate one of the remaining members of the 
group as the new agent for the group. The proposed regulations provide 
that the member designated as the agent for a consolidated return year 
must have been a member of the group during the consolidated return 
year and must not subsequently have been disregarded as an entity 
separate from its owner or treated as a partnership for purposes of 
Federal taxes. However, the common parent may also designate a domestic 
corporation (that is not disregarded as an entity separate from its 
owner or classified as a partnership for Federal tax purposes) that is 
primarily liable as a successor of any corporation that was a member of 
the group during the consolidated return year. In addition, the common 
parent will be permitted to designate any domestic corporation (that is 
not disregarded as an entity separate from its owner or classified as a 
partnership for Federal tax purposes) that is to become primarily 
liable as the common parent's successor in connection with a 
transaction in which the common parent's existence terminates. If an 
agent previously designated under this provision ceases to exist, the 
proposed regulations provide for such terminating agent to designate a 
new agent in the same manner that is available to a common parent that 
is going out of existence.
    For purposes of the designation provision, a corporation's 
existence is deemed to cease not only if the corporation ceases to 
exist under applicable law, but also if the corporation becomes a 
disregarded entity or reclassified as a partnership for Federal tax 
purposes. However, if treating a corporation as ceasing to exist when 
it becomes a disregarded entity or reclassified as a partnership would 
leave no other corporation eligible to serve as a designated agent for 
the group, its existence would not be deemed to terminate. As used in 
the proposed regulations, the term disregarded entity includes a 
qualified subchapter S subsidiary for which an election is made 
pursuant to section 1361(b)(3)(B), a qualified REIT subsidiary within 
the meaning of section 856(i)(2), or an entity that is disregarded as 
an entity separate from

[[Page 57758]]

its owner under the ``check-the-box'' rules of Sec. 301.7701-3. If, as 
a result of becoming a disregarded entity or reclassified as a 
partnership, the group's agent ceases to exist for Federal tax purposes 
without designating a new agent and subsequently purports to act on 
behalf of the group, any actions taken by the purported agent will, to 
the extent determined appropriate by the Commissioner, have the same 
effect as if the agent's existence had not terminated.
    In the event the common parent (or a previously designated agent) 
fails to designate a new agent before going out of existence, the 
proposed regulations authorize the IRS to designate a new agent for the 
group. The IRS may designate one of the remaining members of the group 
for the consolidated return year (that has not been disregarded as an 
entity separate from its owner or reclassified as a partnership for 
Federal tax purposes), or any domestic corporation (that is not 
disregarded as an entity separate from its owner or classified as a 
partnership for Federal tax purposes) that is primarily liable as a 
successor of such a member, to act as the group's agent. This provides 
the IRS with a readily available option in cases where it needs to 
address a consolidated group's tax liability and no new agent has 
otherwise been designated. Any corporation that the IRS designates as 
the agent for the consolidated return year generally will continue as 
the group's agent as long as it remains in existence. At the request of 
one or more members, however, the IRS may (but is not required to) 
replace a designated agent with another member (or successor of a 
member) for the consolidated return year.
    The proposed regulations direct the IRS and the designated agent to 
provide notification of the designation to the other remaining members/
successors. Any failure by the IRS and/or the designated agent to give 
notification to a member/successor does not invalidate the designation.
    Under the current regulations, the remaining members for a 
consolidated return year may designate a new agent in the event the 
common parent does not designate a new agent that is approved by the 
IRS. In practice, taxpayers have seldom utilized this provision because 
it is unwieldy and largely impracticable except for groups comprising 
only a few members. Accordingly, in light of the infrequency with which 
taxpayers use this provision, and in the interest of providing simple 
and administrable procedures, the IRS and Treasury have concluded that 
there is no longer a need to provide for any designation by the 
remaining members.
    As under the current regulations, the proposed regulations provide 
that a designation by the common parent or a designated agent cannot 
become effective until it is approved by the IRS. The proposed 
regulations clarify that the Commissioner's approval of a designation 
by a common parent (or designated agent) will not be effective before 
the corporation making the designation ceases to exist. In the absence 
of an effective approved designation, a notice of deficiency or any 
other communication mailed to the former common parent or former 
designated agent, even if no longer in existence, is treated as having 
been properly mailed to all members and successors.
    The proposed regulations retain the provision in the current 
regulations authorizing the Commissioner, upon notifying the common 
parent, to deal separately with a member concerning that member's 
several liability for the consolidated tax. In such a case, the member 
would have full authority to act for itself.
    The proposed regulations eliminate Sec. 1.1502-77T for consolidated 
return years beginning after the date that the final regulations under 
Sec. 1.1502-77 are published in the Federal Register.
    The proposed regulations provide that the common parent is the sole 
agent for any corporation that is improperly included in the group's 
return and whose tax liability should have been computed on the basis 
of a separate return or as a member of another consolidated group. This 
provision is consistent with the current rule of Sec. 1.1502-77(c)(2), 
relating to the effect of waivers of periods of limitations on 
assessment that are executed by the common parent. The proposed 
regulations are also consistent with rulings of the Tax Court in 
several cases. See Intervest Enterprises, Inc. v. Commissioner, 59 T.C. 
91, 96-97 (1972); Lone Star Life Insurance Company v. Commissioner, 
T.C. Memo. 1997-465; INI, Inc. v. Commissioner, T.C. Memo. 1995-112, 
aff'd per curiam, 107 F.3d 27 (11th Cir. 1997). See also Alumax Inc. v. 
Commissioner, 109 T.C. 133, 196 (1997) (holding that the improper 
inclusion of a corporation in a consolidated return does not alter the 
agency relationship established under Sec. 1.1502-77(c)), aff'd on 
other grounds, 165 F.3d 822 (11th Cir. 1999).
    The proposed regulations amend Sec. 1.1502-78(a) to provide that 
the common parent for the carryback year should file any application 
under section 6411 for a tentative carryback adjustment with respect to 
a loss or credit arising in a separate return limitation year that may 
be carried back to a consolidated return year. The current rule, which 
provides that the corporation to which such loss or credit is 
attributable should file such application, is inconsistent with the 
general rule of Sec. 1.1502-77 that the common parent is the sole agent 
for the group and with the rule of Sec. 1.1502-78(b) that payment of 
any resulting refund is made to the common parent.
    In Interlake Corp. v. Commissioner, 112 T.C. 103, 112-113 (1999), 
the Tax Court found that Sec. 1.1502-78(b) is unclear as to whether the 
common parent in the carryback year or the common parent in the loss 
year should be the group's agent to receive a refund resulting from a 
tentative carryback adjustment. 112 T.C. at 112-113. The proposed 
regulations amend Sec. 1.1502-78(b) to provide expressly that the 
refund should be paid to the common parent or designated agent for the 
group's carryback year.
    Finally, because the position of district director will be 
eliminated in the restructuring of the IRS, the proposed regulations 
substitute ``the Commissioner'' for various references to the district 
director in Sec. 1.1502-77. If the proposed rules are adopted, 
procedures for the designation of a new agent under the new IRS 
structure, by either a terminating common parent or the Commissioner, 
will be announced when final regulations are issued. It is anticipated 
that such procedures will be embodied in a revenue procedure that may 
also include provisions for one or more members of a group to request 
that the Commissioner designate an agent in situations where the common 
parent or previously designated agent failed to designate a new agent 
before it ceased to exist, whether or not the Commissioner has already 
designated an agent. Comments are invited concerning these procedures.

Proposed Effective Date

    The amendments to Sec. 1.1502-77 are proposed to apply to 
consolidated return years beginning on or after the date final 
regulations are published in the Federal Register. The current rules of 
Secs. 1.1502-77 and 1.1502-77T continue to apply with respect to 
consolidated return years beginning before the effective date of final 
regulations under Sec. 1.1502-77. Thus, the alternative agent approach 
of the temporary regulation would continue to apply for purposes of 
mailing notices of deficiency and executing waivers of periods of 
limitations on assessment with respect to consolidated return

[[Page 57759]]

years beginning before the date final regulations are published in the 
Federal Register.
    The amendments to Sec. 1.1502-78 are proposed to apply to taxable 
years to which a loss or credit may be carried back and for which the 
due date (without extensions) of the original return is after the date 
final regulations are published in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 do not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that these regulations will primarily affect 
affiliated groups of corporations that have elected to file 
consolidated returns, which tend to be larger businesses, and, 
moreover, that any burden on taxpayers is minimal. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, these regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are timely submitted 
to the IRS.
    The IRS and Treasury request comments on the clarity of the 
proposed rules and how they may be made easier to understand or to 
implement. In addition, comments are requested on the treatment in the 
proposed regulations of entities that become disregarded as entities 
separate from their owners or become partnerships for Federal tax 
purposes. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for January 22, 2001, beginning 
at 10 a.m. in room 4718, Internal Revenue Service Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the 10th Street entrance, located 
between Constitution and Pennsylvania Avenues, NW. In addition, all 
visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 15 minutes before the hearing 
starts.
    For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must request to speak, and 
submit written comments and an outline of the topics to be discussed 
and the time to be devoted to each topic (a signed original and eight 
(8) copies) by December 26, 2000.
    A period of ten minutes will be allocated to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Gerald B. 
Fleming, George R. Johnson and Steven J. Hankin, Office of the 
Assistant Chief Counsel (Field Service). 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing entries for sections 1.1502-77(e) and 1.1502-78(b) and adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

Section 1.1502-77 also issued under 26 U.S.C. 1502 and 6402(j).
Section 1.1502-78 also issued under 26 U.S.C. 1502, 6402(j), and 
6411(c). * * *
Section 1.1502-77A also issued under 26 U.S.C. 1502 and 6402(j). * * 
*


Sec. 1.1502-41A  [Amended]

    Par. 2. Immediately following Sec. 1.1502-41A, an undesignated 
center heading is added to read as follows:

Regulations Applicable to Taxable Years Beginning Before the Date 
Final Regulations Are Published In the Federal Register


Sec. 1.1502-79A  [Amended]

    Par. 3. Immediately before Sec. 1.1502-79A, an undesignated center 
heading is added to read as follows:
Regulations Applicable to Taxable Years Before January 1, 1997
    Par. 4. Section 1.1502-77 is redesignated as Sec. 1.1502-77A and 
transferred immediately after the undesignated center heading 
``Regulations Applicable to Taxable Years Beginning Before the Date 
Final Regulations Are Published In the Federal Register''; the section 
heading of newly designated Sec. 1.1502-77A is revised; paragraph (e) 
is redesignated as paragraph (f); and paragraph (g) is added to read as 
follows:


Sec. 1.1502-77A  Common parent agent for subsidiaries applicable for 
consolidated return years beginning before the date final regulations 
are published in the Federal Register.

* * * * *
    (g) Effective date. This section applies to consolidated return 
years beginning before the date final regulations under Sec. 1.1502-77 
are published in the Federal Register, except paragraph (e) of this 
section applies to statutory notices and waivers of the statute of 
limitations for taxable years for which the due date (without 
extensions) of the consolidated return is after September 7, 1988, and 
which begin before the date final regulations under Sec. 1.1502-77 are 
published in the Federal Register.
    Par. 5. New Sec. 1.1502-77 is added to read as follows:


Sec. 1.1502-77  Agent for the group.

    (a) Scope of agency--(1) In general--(i) Common parent. Except as 
provided in paragraphs (a)(3) and (6) of this section, the common 
parent for a consolidated return year, for all matters relating to the 
tax liability for the consolidated return year, shall be the sole agent 
for--
    (A) Each subsidiary in the group; and
    (B) Any successor of any member (including the common parent).
    (ii) Other agents. For purposes of this section, any corporation 
described in paragraphs (a)(1)(ii)(A) and (B) of this section will act 
as the agent in place of the common parent to the same extent and 
subject to the same limitations as are applicable to the common parent, 
and any reference in this section to the common parent will include any 
such other agent--

[[Page 57760]]

    (A) Any corporation designated as the agent pursuant to paragraph 
(d) of this section to replace the common parent or a previously 
designated agent; and
    (B) Any corporation that files a consolidated return as the common 
parent for a group, notwithstanding that such corporation is 
subsequently determined not to have been the proper agent for the 
claimed group.
    (iii) Successor. For purposes of this section only, the term 
successor means a party that is primarily liable, pursuant to 
applicable law (including, for example, by operation of a state or 
Federal merger statute), for the tax liability of the common parent or 
any subsidiary of the group. Such determination is made without regard 
to Sec. 1.1502-1(f)(4).
    (iv) Disregarded entity. If a subsidiary of a group or its 
successor is or becomes a disregarded entity for Federal tax purposes, 
the common parent will continue to serve as the sole agent with respect 
to that subsidiary's tax liability under Sec. 1.1502-6 for consolidated 
return years during which it was a member of the group, even though the 
entity generally is not treated as a person separate from its owner for 
Federal tax purposes.
    (v) Transferee liability. For purposes of assessing, paying and 
collecting transferee liability, any action taken by or directed to the 
common parent with respect to the group's tax liability will 
derivatively affect the liability of a transferee (or subsequent 
transferees) of a member, regardless of whether the member terminates 
its existence prior to such action.
    (2) Specific matters subject to agency. As sole agent, the common 
parent is authorized to act in its own name for all matters relating to 
the tax liability for the consolidated return year. Except as provided 
in paragraphs (a)(3) and (6) of this section, no subsidiary or 
successor shall have authority to act for or to represent itself in any 
such matter. For example--
    (i) Any election available to a subsidiary corporation in the 
computation of its separate taxable income must be made by the common 
parent, as must any change in an election previously made by or for a 
subsidiary corporation;
    (ii) All correspondence will be carried on directly with the common 
parent;
    (iii) The common parent shall file for all extensions of time, 
including extensions of time for payment of tax under section 6164;
    (iv) The common parent in its own name will give waivers, give 
bonds, and execute closing agreements, offers in compromise, and all 
other documents, and any waiver or bond so given, or agreement, offer 
in compromise, or any other document so executed, shall be considered 
as having also been given or executed by each member or any successor 
thereof;
    (v) The common parent will file claims for refund, and any refund 
will be made directly to and in the name of the common parent and will 
discharge any liability of the Government to any member or any 
successor thereof with respect to such refund;
    (vi) Notices of claim disallowance will be mailed only to the 
common parent, and the mailing to the common parent shall be considered 
as a mailing to each member or any successor thereof;
    (vii) Notices of deficiencies will be mailed only to the common 
parent, and the mailing to the common parent shall be considered as a 
mailing to each member or any successor thereof;
    (viii) The common parent will file petitions and conduct 
proceedings before the United States Tax Court, and any such petition 
shall be considered as also having been filed by each member or any 
successor thereof;
    (ix) Any assessment of tax may be made in the name of the common 
parent, and an assessment naming the common parent shall be considered 
as an assessment with respect to each member and any successor thereof; 
and
    (x) Notice and demand for payment of taxes will be given only to 
the common parent and such notice and demand will be considered as a 
notice and demand to each member or any successor thereof.
    (3) Matters reserved to subsidiaries. Notwithstanding the role of 
the common parent as exclusive agent under paragraph (a)(1) of this 
section, the following matters shall be reserved to each subsidiary 
and, if applicable, to a successor of a subsidiary--
    (i) The making of the consent required by Sec. 1.1502-75(a)(1);
    (ii) The making of an election under section 936(e);
    (iii) The making of an election to be treated as a DISC under 
Sec. 1.992-2; and
    (iv) A change of the annual accounting period pursuant to 
Sec. 1.991-1(b)(3)(ii).
    (4) Term of agency--(i) In general. Except as provided in paragraph 
(a)(4)(iii) of this section, the common parent for the consolidated 
return year shall remain the sole agent with respect to that year until 
its existence terminates, regardless of whether one or more 
subsidiaries become or cease to be members of the group at any time, 
whether the group files a consolidated return for any subsequent year, 
whether the common parent ceases to be the common parent or a member of 
the group in any subsequent year, or whether the group continues 
pursuant to Sec. 1.1502-75(d) with a new common parent in any 
subsequent year.
    (ii) Replacement of agent designated by Commissioner. If the 
Commissioner replaces a previously designated agent pursuant to 
paragraph (d)(2)(ii) of this section, the term of the replaced agent 
shall terminate when the Commissioner designates another agent.
    (iii) New common parent after a group structure change. If the 
group continues in existence with a new common parent pursuant to 
Sec. 1.1502-75(d) during a consolidated return year, the common parent 
at the beginning of the year is the group's sole agent through the date 
of the transaction, and the new common parent becomes the continuing 
group's sole agent beginning the day after the transaction.
    (5) Identifying members in notices. Notwithstanding the provisions 
of this paragraph (a)--
    (i) Any notice of deficiency with respect to the tax for a 
consolidated return year will name each corporation that was a member 
of the group during any part of such period (but a failure to include 
the name of any such member will not affect the validity of the notice 
of deficiency as to the other members or their successors), and any 
notice of deficiency that is valid as to a member so named will be 
valid as to any successor of such member;
    (ii) Any notice and demand for payment will name each corporation 
that was a member of the group during any part of the applicable 
consolidated return year (but a failure to include the name of any such 
member will not affect the validity of the notice and demand as to the 
other members or their successors), and any notice and demand for 
payment that is valid as to a member so named will be valid as to any 
successor of such member;
    (iii) Any notice of a lien, any levy or any other proceeding to 
collect the amount of any assessment, after the assessment has been 
made, will name the taxpayer from which such collection is to be made;
    (iv) Any notice described in paragraphs (a)(5)(i) through (iii) of 
this section that fails to include the name of a member during the 
consolidated return year shall still be valid as to that member's 
successor, if such successor is named in the notice; and
    (v) If a notice of deficiency fails to name a member or its 
successor, any assessment of tax based on such notice shall still be a 
valid assessment as to the other members or their successors.

[[Page 57761]]

    (6) Direct dealing with a member. Notwithstanding the provisions of 
this paragraph (a), the Commissioner may, upon notifying the common 
parent, deal directly with any member of the group or any successor of 
a member with respect to its several liability for the consolidated tax 
of the group, in which event such member or successor shall have full 
authority to act for itself.
    (b) Copy of notice of deficiency to corporation which has ceased to 
be a member of the group. If a corporation has ceased to be a member of 
the group during or after a consolidated return year and if such 
corporation or its successor files written notice of such cessation 
with the Commissioner, then the Commissioner upon request of such 
corporation or its successor will furnish a copy of any notice of 
deficiency with respect to the tax for a consolidated return year for 
which the corporation was a member or a copy of any notice and demand 
for payment of such deficiency. The filing of such written notification 
and request by a corporation or its successor shall not have the effect 
of limiting the scope of the agency of the common parent provided for 
in paragraph (a) of this section. Any failure by the Commissioner to 
comply with such written request shall not have the effect of limiting 
the tax liability under Sec. 1.1502-6 of such corporation or its 
successor.
    (c) References to member or subsidiary. For purposes of this 
section, all references to a member or subsidiary shall include--
    (1) Each corporation that was a member of the group during any part 
of such taxable year (except that any reference to a subsidiary shall 
not include the common parent); and
    (2) Each claimed member the income of which was included in the 
consolidated return for such taxable year, notwithstanding that the tax 
liability of any such claimed member should have been computed on the 
basis of a separate return, or as a member of another consolidated 
group, under the provisions of Sec. 1.1502-75.
    (d) Termination of common parent--(1) Designation by common parent. 
(i) If the common parent will terminate its existence, it shall--
    (A) Designate, subject to the approval of the Commissioner, for 
each consolidated return year for which the period of limitations for 
assessment, for collection after assessment, or for claiming a credit 
or refund has not expired, one of the following to act as agent in its 
place--
    (1) Any corporation that was a member of the group during any part 
of the consolidated return year and, except as provided in paragraph 
(e)(3)(ii) of this section, has not subsequently been disregarded as an 
entity separate from its owner or reclassified as a partnership for 
Federal tax purposes; or
    (2) Any successor (as defined in paragraph (a)(1) of this section) 
of such a corporation or of the common parent that is a domestic 
corporation (and, except as provided in paragraph (e)(3)(ii) of this 
section, is not disregarded as an entity separate from its owner or 
classified as a partnership for Federal tax purposes), including a 
corporation that will become a successor at the time that the common 
parent ceases to exist; and
    (B) Notify the Commissioner (under procedures prescribed by the 
Commissioner) of the designation, including--
    (1) A statement by the designated corporation agreeing to serve as 
the group's new agent; and
    (2) If the designated corporation was not itself a member of the 
group during the consolidated return year (because the designated 
corporation is a successor of a member of the group for the 
consolidated return year), a statement by the designated corporation 
acknowledging that it is or will be primarily liable for the 
consolidated tax as a successor of a member.
    (ii) A designation under paragraph (d)(1)(i)(A) of this section 
will not be effective until it is approved by the Commissioner. The 
Commissioner's approval of such a designation will not be effective 
before the existence of the common parent terminates.
    (2) Designation by the Commissioner. (i) In the event the common 
parent terminates its existence and no designation is made and approved 
under paragraph (d)(1) of this section, the Commissioner may, with or 
without the request of any member of the group or its successor, at any 
time designate, effective immediately, a corporation described in 
paragraph (d)(1)(i)(A) of this section to act as the agent. The 
designation will be made in accordance with procedures prescribed by 
the Commissioner.
    (ii) At the request of any member or successor of a member, the 
Commissioner may, but is not required to, replace an agent previously 
designated under this paragraph (d)(2) with another corporation 
described in paragraph (d)(1)(i)(A) of this section.
    (iii) The Commissioner and the designated agent shall give notice 
of any designation to each corporation that was a member of the group 
during any part of the consolidated return year or its successor. A 
failure by the Commissioner and/or designated agent to notify any such 
member of the group or its successor does not invalidate the 
designation.
    (3) Absence of designation. Until either a notice in writing 
designating a new agent has become effective or the Commissioner has 
designated a new agent, any notice of deficiency or other communication 
mailed to the common parent, even if no longer in existence, shall be 
considered as having been properly mailed to the agent of the group; or 
if the Commissioner has reason to believe that the existence of the 
common parent has terminated, he may, if he deems it advisable, deal 
directly with any member or its successor with respect to the member's 
several liability under Sec. 1.1502-6 without having to give notice 
pursuant to paragraph (a)(6) of this section.
    (e) Termination of a corporation's existence--(1) In general. For 
purposes of paragraphs (a)(1)(v), (a)(4)(i), and (d) of this section, 
the existence of a corporation is deemed to terminate if--
    (i) It ceases to exist under applicable law; or
    (ii) Except as provided in paragraph (e)(3) of this section, it 
becomes, for Federal tax purposes, either--
    (A) An entity that is disregarded as an entity separate from its 
owner; or
    (B) An entity that is reclassified as a partnership.
    (2) Purported agency. If the group's agent ceases to exist under 
circumstances described in paragraph (e)(1)(ii) of this section without 
designating a new agent for the group pursuant to paragraph (d)(1) of 
this section, and the agent subsequently purports to act as agent for 
the group, any actions by that purported agent on behalf of the group 
will, to the extent determined appropriate by the Commissioner, have 
the same effect as if the agent's existence had not terminated.
    (3) Exceptions where no eligible corporation exists. (i) For 
purposes of paragraphs (a)(4)(i) and (d) of this section, if a 
corporation becomes either disregarded as an entity separate from its 
owner or reclassified as a partnership for Federal tax purposes, its 
existence shall not be deemed to terminate if the effect of such 
termination would be that no corporation remains eligible to serve as 
the designated agent for the group's consolidated return year.
    (ii) Similarly, an entity that is either disregarded as an entity 
separate from its owner or reclassified as a partnership for Federal 
tax purposes shall not be precluded from designation as an agent merely 
because of such classification if the effect of the inability to make 
such

[[Page 57762]]

designation would be that no corporation remains eligible to serve as 
the designated agent for the group's consolidated return year.
    (f) Examples. The following examples illustrate the principles of 
this section. In each example, as of January 1 of Year 1, the P group 
consists of P and its two subsidiaries, S and S-1. P, as the common 
parent of the P group, files consolidated returns for the P group in 
Years 1 and 2. On January 1 of Year 1, domestic corporations S-2, U, V, 
W, W-1, X, Y, Z and Z-1 are not related to P or the members of the P 
group. All corporations are calendar year taxpayers. Any surviving 
corporation in a merger is a successor as described in paragraph 
(a)(1)(iii) of this section. Any notification to the Commissioner of 
the designation of the P group's new agent also contains a statement 
signed on behalf of the designated agent that it consents to act as the 
group's new agent and, in the case of a successor, that it is primarily 
liable as a successor of a member. The examples are as follows:

    Example 1. Disposition of all group members. On December 31 of 
Year 1, P sells all the stock of S-1 to X. On December 31 of Year 2, 
P distributes all the stock of S to P's shareholders. P files a 
separate return for Year 3. Although P is no longer a common parent 
after Year 2, P remains the sole agent of the P group for Years 1 
and 2. Except as provided in paragraph (a)(6) of this section, for 
as long as P remains in existence, only P may execute a waiver of 
the period of limitations on assessment on behalf of the group for 
Years 1 and 2.
    Example 2. Acquisition of common parent by another group. The 
facts are the same as in Example 1, except on January 1 of Year 3, P 
is acquired by Y. P thereafter joins in the Y group consolidated 
return as a member of Y group. Although P is a member of Y group in 
Year 3, P remains the agent of the P group for Years 1 and 2. Except 
as provided in paragraph (a)(6) of this section, for as long as P 
remains in existence, only P may execute a waiver of the period of 
limitations on assessment on behalf of the P group for Years 1 and 
2.
    Example 3. Merger of common parent--designation of remaining 
member as new agent. On December 31 of Year 1, P sells all the stock 
of S-1 to X. On July 1 of Year 2, P acquires all the stock of S-2. 
On November 30 of Year 2, P distributes all the stock of S to P's 
shareholders. On January 1 of Year 3, P merges into Y corporation. 
Just before the merger, P notifies the Commissioner in writing of 
the planned merger and of its designation of S as the new agent of 
the P group for Years 1 and 2. S is the only member that P can 
designate as the new agent for both Years 1 and 2 because it is the 
only subsidiary that was a member of P group during part of both 
years. Although S-2 is the only remaining subsidiary of the P group 
when P merges into Y, S-2 was a member of the P group only in Year 
2. For that reason, S-2 cannot be the group's agent for Year 1. 
Alternatively, P could designate a different agent for each year, 
selecting S or S-1 as the new agent for Year 1; and S or S-2 as the 
new agent for Year 2. P could also designate its successor Y as the 
new agent for both Years 1 and 2.
    Example 4. Forward triangular merger of common parent. On 
January 1 of Year 3, P merges with and into Z-1, a subsidiary of Z, 
in a forward triangular merger described in section 368(a)(1)(A) and 
(a)(2)(D). The transaction constitutes a reverse acquisition under 
Sec. 1.1502-75(d)(3)(i) because P's shareholders receive more than 
50% of Z's stock in exchange for all of P's stock. Just before the 
merger, P notifies the Commissioner in writing of the planned merger 
and its designation of Z-1, the corporation that will survive the 
planned merger, as the new agent of the P group for Years 1 and 2. 
Because Z-1 will be P's successor (within the meaning of paragraph 
(a)(1) of this section) after the planned merger, P may designate Z-
1 as the new agent for the P group for Years 1 and 2, pursuant to 
paragraph (d)(1) of this section. Alternatively, P could have 
designated S or S-1 as the new agent for the P group for Years 1 and 
2. Although Z is the new common parent of the P group, which 
continues pursuant to Sec. 1.1502-75(d)(3)(i), P may not designate Z 
as the new agent for Years 1 and 2 because Z was not a member of the 
group during any part of Years 1 or 2 and is not a successor of P or 
any other member of the group.
    Example 5. Reverse triangular merger of common parent. On March 
1 of Year 3, W-1, a subsidiary of W, merges into P, in a reverse 
triangular merger described in section 368(a)(1)(A) and (a)(2)(E). P 
survives the merger with W-1. The transaction constitutes a reverse 
acquisition under Sec. 1.1502-75(d)(3)(i) because P's shareholders 
receive more than 50% of W's stock in exchange for all of P's stock. 
Under paragraph (a) of this section, P remains the agent of the P 
group for Years 1 and 2, even though the P group continues with W as 
its new common parent. Because the transaction constitutes a reverse 
acquisition, the P group is treated as remaining in existence with W 
as its common parent. Before March 2 of Year 3, P is the sole agent 
for the P group for Year 3. Beginning on March 2 of Year 3, W 
becomes the sole agent for the P group with respect to all of Year 3 
(including the period through March 1) and subsequent consolidated 
return years.
    Example 6. Reverse triangular merger of common parent--spinoff 
of common parent. The facts are the same as in Example 5, except 
that on April 1 of Year 3, P distributes the stock of its 
subsidiaries S and S-1 to W, and W then distributes the stock of P 
to the W shareholders. Although P is no longer a member of the P 
group and W is the continuing P group's new common parent, P remains 
the agent for the P group under paragraph (a) of this section for 
Years 1 and 2. Before March 2 of Year 3, P is the sole agent for the 
P group for Year 3. Beginning on March 2 of Year 3, W becomes the 
sole agent for the P group with respect to Year 3 (including the 
period through March 1) and subsequent consolidated return years.
    Example 7. Qualified stock purchase and section 338 election. On 
March 31 of Year 2, V purchases the stock of P in a qualified stock 
purchase (within the meaning of section 338(d)(3)), and V makes a 
timely election pursuant to section 338(g) with respect to P. 
Section 338(a)(2) provides that P is treated as a new corporation as 
of the beginning of the day after the acquisition date for purposes 
of subtitle A. For purposes of other subtitles, such as subtitle F 
(Procedure and Administration), however, new P is treated as a 
continuation of old P. Therefore, new P remains the agent of the P 
group for Year 1 and the period ending March 31 of Year 2 (short 
Year 2). Except as provided in paragraph (a)(6) of this section, for 
as long as new P remains in existence, only new P may execute a 
waiver of the period of limitations on assessment on behalf of the P 
group for Year 1 and short Year 2.
    Example 8. Fraudulent conveyance of assets. On March 15 of Year 
2, P files a consolidated return that includes the income of S and 
S-1 for Year 1. On December 1 of Year 2, S-1 transfers assets having 
a fair market value of $100x to U in exchange for $10x. This 
transfer of assets for less than fair market value constitutes a 
fraudulent conveyance under applicable state law. On March 1 of Year 
5, P executes a waiver extending to December 31 of Year 6 the period 
of limitations on assessment with respect to the group's Year 1 
consolidated return. On February 1 of Year 6, the Commissioner 
issues a notice of deficiency to P asserting a deficiency of $30x 
for the P group's Year 1 consolidated tax liability. P does not file 
a petition for redetermination in the Tax Court, and the 
Commissioner makes a timely assessment against the P group. P, S and 
S-1 are all insolvent and are unable to pay the deficiency. On 
February 1 of Year 8, the Commissioner sends a notice of transferee 
liability to U, which does not file a petition in the Tax Court. On 
August 1 of Year 8, the Commissioner assesses the amount of the P 
group's deficiency against U. Under section 6901(c), the 
Commissioner may assess U's transferee liability within one year 
after the expiration of the period of limitations against the 
transferor S-1. By operation of section 6213(a) and 6503(a), the 
issuance of the notice of deficiency to P and the expiration of the 
90-day period for filing a petition in the Tax Court have the effect 
of further extending by 150 days the P group's limitations period on 
assessment from the previously extended date of December 31 of Year 
6 to May 30 of Year 7. Pursuant to paragraph (a)(1)(v) of this 
section, the waiver executed by P on March 1 of Year 5 to extend the 
period of limitations on assessment to December 31 of Year 6 and the 
further extension of the P group's limitations period to May 30 of 
Year 7 (by operation of sections 6213(a) and 6503(a)) have the 
derivative effect of extending the period of limitations on 
assessment of U's transferee liability to May 30 of Year 8. By 
operation of section 6901(f), the issuance of the notice of 
transferee liability to U and the expiration of the 90-day period 
for filing a petition in the Tax Court have the effect of further 
extending the limitations period on assessment of U's liability as a 
transferee by 150 days, from May 30 of Year 8 to October 27 of Year 
8. Accordingly, the Commissioner may send a

[[Page 57763]]

notice of transferee liability to U at any time on or before May 30 
of Year 8 and assess the unpaid liability against U at any time on 
or before October 27 of Year 8. The result would be the same even if 
S-1 ceased to exist before March 1 of Year 5, the date P executed 
the waiver.

    (g) Cross-reference. For further rules applicable to groups that 
include insolvent financial institutions, see Sec. 301.6402-7 of this 
chapter.
    (h) Effective date--(1) Application. This section applies with 
respect to taxable years beginning on or after the date final 
regulations are published in the Federal Register.
    (2) Prior law. For taxable years beginning before the date final 
regulations are published in the Federal Register, see Sec. 1.1502-77A.
    Par. 6. Section 1.1502-77T(a) is redesignated as Sec. 1.1502-77A(e) 
and Sec. 1.1502-77T is removed.
    Par. 7. The amendments to Sec. 1.1502-78(a), as contained in the 
notice of proposed rulemaking (LR-97-79) published in the Federal 
Register on July 31, 1984 (49 FR 30528), are withdrawn.
    Par. 8. Section 1.1502-78 is amended as follows:
    1. Paragraph (a) is revised.
    2. Paragraph (b)(1) is amended by adding the language ``for the 
carryback year (or agent designated under Sec. 1.1502-77(d) for the 
carryback year)'' at the end of the first sentence.
    3. In paragraph (c), the last sentence of Example (1) is amended by 
adding the language ``for the carryback year'' after ``parent.''
    4. In paragraph (c), the last sentence of Example (2) is amended by 
removing the language ``S-1'' and adding ``P'' in its place.
    5. In paragraph (c), Example (3), the seventh sentence is amended 
by removing ``Z must'' and adding ``X must'' in its place.
    6. Paragraphs (e) and (f) are added.
    The revision and additions read as follows:


Sec. 1.1502-78  Tentative carryback adjustments.

    (a) General rule. If a group has a consolidated net operating loss, 
a consolidated net capital loss, or a consolidated unused business 
credit for any taxable year, then any application under section 6411 
for a tentative carryback adjustment of the taxes for a consolidated 
return year or years preceding such year shall be made by the common 
parent corporation for the carryback year (or agent designated under 
Sec. 1.1502-77(d) for the carryback year) to the extent such loss or 
unused business credit is not apportioned to a corporation for a 
separate return year pursuant to Sec. 1.1502-21(b), 1.1502-22(b), or 
1.1502-79(c). In the case of the portion of a consolidated net 
operating loss or consolidated net capital loss or consolidated unused 
business credit to which the preceding sentence does not apply and 
which is to be carried back to a corporation that was not a member of a 
consolidated group in the carryback year, the corporation to which such 
loss or credit is attributable shall make any application under section 
6411. In the case of a net capital loss or net operating loss or unused 
business credit arising in a separate return year which may be carried 
back to a consolidated return year, after taking into account the 
application of Sec. 1.1502-21(b)(3)(ii)(B) with respect to any net 
operating loss arising in another consolidated group, the common parent 
for the carryback year (or agent designated under Sec. 1.1502-77(d) for 
the carryback year) shall make any application under section 6411.
* * * * *
    (e) Cross-reference. For further rules applicable to groups that 
include insolvent financial institutions, see Sec. 301.6402-7 of this 
chapter.
    (f) Effective date--(1) In general. This section applies to taxable 
years to which a loss or credit may be carried back and for which the 
due date (without extensions) of the original return is after the date 
final regulations are published in the Federal Register.
    (2) Prior law. For taxable years to which a loss or credit may be 
carried back and for which the due date (without extensions) is on or 
before the date final regulations are published in the Federal 
Register, see Sec. 1.1502-78 in effect prior to the date final 
regulations are published in the Federal Register, as contained in 26 
CFR part 1 revised as of April 1, 2000.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-24039 Filed 9-25-00; 8:45 am]
BILLING CODE 4830-01-P