[Federal Register Volume 67, Number 125 (Friday, June 28, 2002)]
[Rules and Regulations]
[Pages 43538-43545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16399]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9002]
RIN 1545-AX56


Agent for Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding the agent 
for subsidiaries of an affiliated group that files a consolidated 
return (agent for the group). The regulations address certain issues 
concerning the scope of the common parent's authority, as well as 
questions concerning the agent for the group when the common parent's 
existence terminates. These regulations affect all consolidated groups.

DATES: Effective Date: These regulations are effective June 28, 2002.
    Applicability Date: For dates of applicability, see Secs. 1.1502-
77(h) and 1.1502-78(f).

FOR FURTHER INFORMATION CONTACT: Gerald B. Fleming, (202) 622-7770, or 
George R. Johnson, (202) 622-7930 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1699. Responses to these collections 
of information are required to obtain a benefit (the approval by the 
IRS of the common parent's designation of a substitute agent for the 
consolidated group or recognition by the IRS of the common parent's 
successor as a default substitute agent).
    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.
    The estimated annual burden per respondent is 2 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the

[[Page 43539]]

Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503.
    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

    On September 26, 2000, a notice of proposed rulemaking (REG-103805-
99) relating to the agent for the group was published in the Federal 
Register (65 FR 57755). No public hearing was requested or held. 
Written comments responding to the notice of proposed rulemaking were 
received. After consideration of all the comments, the proposed 
regulations are adopted as amended by this Treasury decision.

Explanation and Summary of Comments

    These final regulations are substantially the same as the proposed 
regulations but reflect certain revisions based on various formal and 
informal comments that were received from the public and from IRS 
personnel. Many of the revisions are minor changes made to clarify 
certain aspects of the proposed regulations. Certain of the more 
significant revisions are discussed below.
    The final regulations reflect changes that clarify the examples of 
matters for which the common parent is the agent. Specifically, the 
example on elections is expanded to include other similar options that 
are available to a member in determining its separate taxable income 
and any changes in such options. The common parent should make any 
necessary requests related to those options or changes in such options 
(for example, to request a change in a subsidiary's method or period of 
accounting). In addition, an example is added to clarify that the 
common parent takes any action on behalf of a member of the group with 
respect to a foreign corporation. Finally, an example is added to 
clarify that a final partnership administrative adjustment (FPAA) under 
section 6223 may be sent to the common parent and that the mailing to 
the common parent will be considered a mailing to each group member 
that is a partner entitled to receive the FPAA.
    In light of statutory changes not reflected in the proposed 
regulations, the final regulations modify the identification of matters 
reserved to subsidiaries in paragraph (a)(3) of the proposed 
regulations. In particular, the reference to a DISC's change in annual 
accounting period pursuant to Sec. 1.991-1(b)(3)(ii) has been removed 
because such a change in accounting period is generally automatic and, 
in any event, is made by a DISC, which is not an includible corporation 
pursuant to section 1504(b)(7). In addition, the final regulations add 
as a specific matter reserved to subsidiaries any action by a 
subsidiary acting as the tax matters partner under the TEFRA 
partnership provisions of sections 6221 through 6234 and the 
accompanying regulations.
    The provisions requiring that a notice of deficiency or notice and 
demand for payment name each corporation that was a member of the group 
for the consolidated return year have been eliminated. The IRS and 
Treasury have determined that these provisions are inconsistent with 
the general rule that the common parent is agent for the group with 
respect to the group's consolidated tax liability.
    The final regulations have added a provision for a default 
substitute agent for the group under certain circumstances. If the 
common parent fails to designate a substitute agent before its 
existence terminates and it has a single successor that is a domestic 
corporation, that successor becomes the default substitute agent. 
Although the Commissioner's approval is not required, any such default 
substitute agent is advised to provide written notification to the IRS 
in accordance with procedures established by the Commissioner. Until 
notification is received, the Commissioner is not required to recognize 
the successor's status as default substitute agent and may continue to 
send communications to the old common parent and the Commissioner is 
not required to respond to communications (including, for example, a 
claim for refund) submitted by the successor on behalf of the 
consolidated group.
    Where the Commissioner designates a substitute agent for the group, 
the proposed regulations provide for the Commissioner and the 
designated agent to give notice of the designation to all members of 
the group. The final regulations provide for the Commissioner to give 
notice to the designated agent, which is responsible for giving notice 
to the remaining members of the group.
    One comment suggested that there should be a mechanism for 
taxpayers to request that the final regulations apply to taxable years 
beginning before the date of issuance of the final regulations. 
Treasury and the IRS recognize that some taxpayers may wish to have the 
additional flexibility afforded by paragraph (d)(1) of the final 
regulations allowing the designation of a successor of a member 
(including a successor of the common parent) as the substitute agent 
for the group. Accordingly, the final regulations permit a common 
parent to elect to apply paragraph (d)(1) of the final regulations with 
respect to designations for taxable years beginning before the date of 
adoption. Once such an election is made, the provisions of paragraph 
(d)(1) of the final regulations apply to any subsequent designation of 
a substitute agent for the consolidated return years subject to the 
election.

Effective Date

    The final regulations under Sec. 1.1502-77 apply to taxable years 
beginning on or after June 28, 2002. The current rules of Secs. 1.1502-
77 and 1.1502-77T, which are collectively retained in Sec. 1.1502-77A, 
continue to apply with respect to taxable years beginning before June 
28, 2002.
    The final regulations under Sec. 1.1502-78 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 June 28, 
2002.

Special Analyses

    It has been determined that these final regulations are 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 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.

Drafting Information

    The principal authors of these proposed regulations are Gerald B. 
Fleming and George R. Johnson, Office of the Associate Chief Counsel 
(Corporate). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

[[Page 43540]]

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    1. The authority citation for part 1 is amended by removing entries 
for ``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). 
* * *

    2. Section 1.338-1 is amended by adding a sentence at the end of 
paragraph (b)(2)(vii) to read as follows:


Sec. 1.338-1  General principles; status of old target and new target.

* * * * *
    (b) * * *
    (2) * * *
    (vii) * * * See also, for example, Sec. 1.1502-77(e)(4), providing 
that an election under section 338 does not result in a deemed 
termination of target's existence for purposes of the rules applicable 
to the agent for a consolidated group.
* * * * *
    3. In Sec. 1.1502-6, paragraph (b) is amended by removing the 
language ``district director'' and adding ``Commissioner'' in each 
place it appears.
    4. Immediately following Sec. 1.1502-41A, an undesignated center 
heading is added to read as follows:
    Regulations Applicable to Taxable Years Beginning Before June 28, 
2002
    5. Section 1.1502-77 is redesignated as Sec. 1.1502-77A, 
transferred immediately after the undesignated center heading 
``Regulations Applicable to Taxable Years Beginning Before June 28, 
2002'' and amended as follows:
    1. The section heading is revised.
    2. In the list below, for each paragraph indicated in the left 
column, remove the language in the middle column and add the language 
in the right column:

------------------------------------------------------------------------
           Paragraph                    Remove                 Add
------------------------------------------------------------------------
(a), last sentence............  district director.....  Commissioner
(b), first sentence...........  district director with  Commissioner
                                 whom the consolidated
                                 return is filed.
(b), first sentence...........  such district director  the Commissioner
(b), second sentence..........  such district director  the Commissioner
(c)...........................  district director.....  Commissioner
(d), first sentence...........  district director with  Commissioner
                                 whom the consolidated
                                 return is filed.
(d), first sentence...........  such district director  the Commissioner
(d), second sentence..........  district director.....  Commissioner
(d), second sentence (each      such district director  the Commissioner
 place it appears).
(d), third sentence (each       such district director  the Commissioner
 place it appears).
------------------------------------------------------------------------

    3. Paragraph (e) is removed and reserved.
    4. Paragraphs (f) and (g) are added.
    The revision and additions read as follows:


Sec. 1.1502-77A  Common parent agent for subsidiaries applicable for 
consolidated return years beginning before June 28, 2002.

* * * * *
    (f) Cross-reference. For further rules applicable to groups that 
include insolvent financial institutions, see Sec. 301.6402-7 of this 
chapter.
    (g) Effective date. This section applies to taxable years beginning 
before June 28, 2002, 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 June 28, 
2002.
    6. 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 (or a substitute agent described in paragraph (a)(1)(ii) of this 
section) for a consolidated return year is the sole agent (agent for 
the group) that is authorized to act in its own name with respect to 
all matters relating to the tax liability for that consolidated return 
year, for--
    (A) Each member in the group; and
    (B) Any successor (see paragraph (a)(1)(iii) of this section) of a 
member.
    (ii) Substitute agents. For purposes of this section, any 
corporation designated as a substitute agent pursuant to paragraph (d) 
of this section to replace the common parent or a previously designated 
substitute agent acts as agent for the group 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 includes any 
such substitute agent.
    (iii) Successor. For purposes of this section only, the term 
successor means an individual or entity (including a disregarded 
entity) 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 a member of the group. Such 
determination is made without regard to Sec. 1.1502-1(f)(4) or 1.1502-
6(a). (For inclusion of a successor in references to a subsidiary or 
member, see paragraph (c)(2) of this section.)
    (iv) Disregarded entity. If a subsidiary of a group becomes, or its 
successor is or becomes, a disregarded entity for Federal tax purposes, 
the common parent continues to serve as the agent with respect to that 
subsidiary's tax liability under Sec. 1.1502-6 for consolidated return 
years during which it was included in 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 exercise of or reliance on the 
common parent's agency authority pursuant to this section is binding on 
a transferee (or subsequent transferees) of a member, regardless of 
whether the member's existence terminates prior to such exercise or 
reliance.
    (vi) Purported common parent. If any corporation files a 
consolidated return purporting to be the common parent of a 
consolidated group but is subsequently determined not to have been the 
common parent of the claimed group, that corporation is treated, to the

[[Page 43541]]

extent necessary to avoid prejudice to the Commissioner, as if it were 
the common parent.
    (2) Examples of matters subject to agency. With respect to any 
consolidated return year for which it is the common parent--
    (i) The common parent makes any election (or similar choice of a 
permissible option) that is available to a subsidiary in the 
computation of its separate taxable income, and any change in an 
election (or similar choice of a permissible option) previously made by 
or for a subsidiary, including, for example, a request to change a 
subsidiary's method or period of accounting;
    (ii) All correspondence concerning the income tax liability for the 
consolidated return year is carried on directly with the common parent;
    (iii) The common parent files for all extensions of time, including 
extensions of time for payment of tax under section 6164, and any 
extension so filed is considered as having been filed by each member;
    (iv) The common parent gives waivers, gives bonds, and executes 
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, is considered as having also been given or 
executed by each member;
    (v) The common parent files claims for refund, and any refund is 
made directly to and in the name of the common parent and discharges 
any liability of the Government to any member with respect to such 
refund;
    (vi) The common parent takes any action on behalf of a member of 
the group with respect to a foreign corporation, for example, elections 
by, and changes to the method of accounting of, a controlled foreign 
corporation in accordance with Sec. 1.964-1(c)(3);
    (vii) Notices of claim disallowance are mailed only to the common 
parent, and the mailing to the common parent is considered as a mailing 
to each member;
    (viii) Notices of deficiencies are mailed only to the common parent 
(except as provided in paragraph (b) of this section), and the mailing 
to the common parent is considered as a mailing to each member;
    (ix) Notices of final partnership administrative adjustment under 
section 6223 with respect to any partnership in which a member of the 
group is a partner may be mailed to the common parent, and, if so, the 
mailing to the common parent is considered as a mailing to each member 
that is a partner entitled to receive such notice (for other rules 
regarding partnership proceedings, see paragraphs (a)(3)(v) and 
(a)(6)(iii) of this section);
    (x) The common parent files petitions and conducts proceedings 
before the United States Tax Court, and any such petition is considered 
as also having been filed by each member;
    (xi) Any assessment of tax may be made in the name of the common 
parent, and an assessment naming the common parent is considered as an 
assessment with respect to each member; and
    (xii) Notice and demand for payment of taxes is given only to the 
common parent, and such notice and demand is considered as a notice and 
demand to each member.
    (3) Matters reserved to subsidiaries. Except as provided in this 
paragraph (a)(3) and paragraph (a)(6) of this section, no subsidiary 
has authority to act for or to represent itself in any matter related 
to the tax liability for the consolidated return year. The following 
matters, however, are reserved exclusively to each subsidiary--
    (i) The making of the consent required by Sec. 1.1502-75(a)(1);
    (ii) Any action with respect to the subsidiary's liability for a 
federal tax other than the income tax imposed by chapter 1 of the 
Internal Revenue Code (including, for example, employment taxes under 
chapters 21 through 25 of the Internal Revenue Code, and miscellaneous 
excise taxes under chapters 31 through 47 of the Internal Revenue 
Code);
    (iii) The making of an election under section 936(e);
    (iv) The making of an election to be treated as a DISC under 
Sec. 1.992-2; and
    (v) Any actions by a subsidiary acting as tax matters partner under 
sections 6221 through 6234 and the accompanying regulations (but see 
paragraph (a)(2)(ix) of this section regarding the mailing of a final 
partnership administrative adjustment to the common parent).
    (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 remains the agent for the group with respect to that year 
until the common parent's existence terminates, regardless of whether 
one or more subsidiaries in that year cease to be members of the group, 
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 substitute agent designated by Commissioner. If 
the Commissioner replaces a previously designated substitute agent 
pursuant to paragraph (d)(3)(ii) of this section, the replaced 
substitute agent ceases to be the agent after the Commissioner 
designates another substitute 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 agent for the group through the 
date of the Sec. 1.1502-75(d) transaction, and the new common parent 
becomes the agent for the group beginning the day after the 
transaction, at which time it becomes the agent for the group with 
respect to the entire consolidated return year (including the period 
through the date of the transaction) and the former common parent is no 
longer the agent for that year.
    (5) Identifying members in notice of a lien. Notwithstanding any 
other provisions of this paragraph (a), any notice of a lien, any levy 
or any other proceeding to collect the amount of any assessment, after 
the assessment has been made, must name the entity from which such 
collection is to be made.
    (6) Direct dealing with a member--(i) Several liability. The 
Commissioner may, upon issuing to the common parent written notice that 
expressly invokes the authority of this provision, deal directly with 
any member of the group with respect to its liability under 
Sec. 1.1502-6 for the consolidated tax of the group, in which event 
such member has sole authority to act for itself with respect to that 
liability. However, if the Commissioner believes or 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 with respect to 
that member's liability under Sec. 1.1502-6 without giving the notice 
required by this provision.
    (ii) Information requests. The Commissioner may, upon informing the 
common parent, request information relevant to the consolidated tax 
liability from any member of the group. However, if the Commissioner 
believes or has reason to believe that the existence of the common 
parent has terminated, he may request such information from any member 
of the group without informing the common parent.
    (iii) Members as partners in partnerships. The Commissioner

[[Page 43542]]

generally will deal directly with any member in its capacity as a 
partner of a partnership that is subject to the provisions of sections 
6221 through 6234 and the accompanying regulations (but see paragraph 
(a)(2)(ix) of this section regarding the mailing of a final partnership 
administrative adjustment to the common parent). However, if requested 
to do so in accordance with the provisions of Sec. 301.6223(c)-1(b) of 
this chapter, the Commissioner may deal with the common parent as agent 
for such member on any matter related to the partnership, except in 
regards to a settlement under section 6224(c) and except to the extent 
the member acts as tax matters partner of the partnership.
    (b) Copy of notice of deficiency to entity that has ceased to be a 
member of the group. An entity that ceases to be a member of the group 
during or after a consolidated return year may file a written notice of 
that fact with the Commissioner and request a copy of any notice of 
deficiency with respect to the tax for a consolidated return year 
during which the entity was a member, or a copy of any notice and 
demand for payment of such deficiency, or both. Such filing does not 
limit 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 request does not limit an entity's tax liability under 
Sec. 1.1502-6. For purposes of this paragraph (b), references to an 
entity include a successor of such entity.
    (c) References to member or subsidiary. For purposes of this 
section, all references to a member or subsidiary for a consolidated 
return year include--
    (1) Each corporation that was a member of the group during any part 
of such year (except that any reference to a subsidiary does not 
include the common parent);
    (2) Except as indicated otherwise, a successor (as defined in 
paragraph (a)(1)(iii) of this section) of any corporation described in 
paragraph (c)(1) of this section; and
    (3) Each corporation whose income was included in the consolidated 
return for such year, notwithstanding that the tax liability of such 
corporation 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 of substitute 
agent by common parent. (i) If the common parent's existence 
terminates, it may designate a substitute agent for the group and 
notify the Commissioner, as provided in this paragraph (d)(1).
    (A) Subject to the Commissioner's approval under paragraph 
(d)(1)(ii) of this section, before the common parent's existence 
terminates, the common parent may designate, for each consolidated 
return year for which it is the common parent and for which the period 
of limitations either for assessment, for collection after assessment, 
or for claiming a credit or refund has not expired, one of the 
following to act as substitute 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)(iii) 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's existence terminates.
    (B) The common parent must notify the Commissioner in writing 
(under procedures prescribed by the Commissioner) of the designation 
and provide the following--
    (1) An agreement executed by the designated corporation agreeing to 
serve as the group's substitute 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 
does not apply unless and until it is approved by the Commissioner. The 
Commissioner's approval of such a designation is not effective before 
the existence of the common parent terminates.
    (2) Default substitute agent. If the common parent fails to 
designate a substitute agent for the group before its existence 
terminates and if the common parent has a single successor that is a 
domestic corporation, such successor becomes the substitute agent for 
the group upon termination of the common parent's existence. However, 
see paragraph (d)(4) of this section regarding the consequences of the 
successor's failure to notify the Commissioner of its status as default 
substitute agent in accordance with procedures established by the 
Commissioner.
    (3) Designation by the Commissioner. (i) In the event the common 
parent's existence terminates and no designation is made and approved 
under paragraph (d)(1) of this section and the Commissioner believes or 
has reason to believe that there is no successor of the common parent 
that satisfies the requirements of paragraph (d)(2) of this section (or 
the Commissioner believes or has reason to believe there is such a 
successor but has no last known address on file for such successor), 
the Commissioner may, at any time, with or without a request from any 
member of the group, designate a corporation described in paragraph 
(d)(1)(i)(A) of this section to act as the substitute agent. The 
Commissioner will notify the designated substitute agent in writing of 
its designation, and the designation is effective upon receipt by the 
designated substitute agent of such notice. The designated substitute 
agent must give notice of the designation to each corporation that was 
a member of the group during any part of the consolidated return year, 
but a failure by the designated substitute agent to notify any such 
member of the group does not invalidate the designation.
    (ii) At the request of any member, the Commissioner may, but is not 
required to, replace a substitute agent previously designated under 
paragraph (d)(3)(i) of this section with another corporation described 
in paragraph (d)(1)(i)(A) of this section.
    (4) Absence of designation or notification of default substitute 
agent. Until a designation of a substitute agent for the group under 
paragraph (d)(1) of this section has become effective, the Commissioner 
has received notification in accordance with procedures established by 
the Commissioner that a successor qualifying under paragraph (d)(2) of 
this section has become the substitute agent by default, or the 
Commissioner has designated a substitute agent under paragraph (d)(3) 
of this section--
    (i) Any notice of deficiency or other communication mailed to the 
common parent, even if no longer in existence, is considered as having 
been properly mailed to the agent for the group; and
    (ii) The Commissioner is not required to act on any communication 
(including, for example, a claim for refund) submitted on behalf of the 
group by any person other than the common parent (including a successor 
of the common parent qualifying as a default

[[Page 43543]]

substitute agent under paragraph (d)(2) 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) Its existence terminates 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 existence of the agent for the group 
terminates under circumstances described in paragraph (e)(1)(ii) of 
this section, until the Commissioner has approved the designation of a 
substitute agent for the group pursuant to paragraph (d)(1) of this 
section or the Commissioner designates a substitute agent and notifies 
the designated substitute agent pursuant to paragraph (d)(3) of this 
section, any post-termination action by that purported agent on behalf 
of the group has the same effect, to the extent necessary to avoid 
prejudice to the Commissioner, as if the agent's corporate existence 
had not terminated.
    (3) Exceptions where no eligible corporation exists. (i) For 
purposes of the common parent's term as agent under paragraph (a)(4)(i) 
of this section and the term as agent of the substitute agent 
designated under paragraph (d) of this section, if a corporation either 
becomes disregarded as an entity separate from its owner or is 
reclassified as a partnership for Federal tax purposes, its existence 
is not deemed to terminate if the effect of such termination would be 
that no corporation remains eligible to serve as the substitute agent 
for the group's consolidated return year.
    (ii) Similarly, for purposes of paragraph (d) of this section, an 
entity that is either disregarded as an entity separate from its owner 
or reclassified as a partnership for Federal tax purposes is not 
precluded from designation as a substitute agent merely because of such 
classification if the effect of the inability to make such designation 
would be that no corporation remains eligible to serve as the 
substitute agent for the group's consolidated return year.
    (iii) Any entity described in paragraphs (e)(3)(i) or (ii) of this 
section that remains or becomes the agent for the group is treated as a 
corporation for purposes of this section.
    (4) Exception for section 338 transactions. Notwithstanding section 
338(a)(2), a target corporation for which an election is made under 
section 338 is not deemed to terminate for purposes of this section.
    (f) Examples. The following examples illustrate the principles of 
this section. Unless otherwise indicated, each example addresses the 
question of which corporation is the proper party to execute a consent 
to waive the statute of limitations for Years 1 and 2 or the more 
general question of which corporation may be designated as a substitute 
agent for the group for Years 1 and 2. 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. For none of the tax years at issue does the Commissioner 
exercise the authority under paragraph (a)(6) of this section to deal 
with any member separately. 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 
substitute agent also contains a statement signed on behalf of the 
designated agent that it agrees to act as the group's substitute 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 agent for the P group for Years 1 and 2. 
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, 
all of the outstanding stock of 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 for 
the P group for Years 1 and 2. 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 substitute 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 
substitute agent for the P group for Years 1 and 2. S is the only 
member that P can designate as the substitute agent for both Years 1 
and 2 because it is the only subsidiary that was a member of the 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 
substitute agent for the P group for Year 1. Alternatively, P could 
designate a different substitute agent for each year, selecting S or 
S-1 as the substitute agent for Year 1, and S or S-2 as the 
substitute agent for Year 2. P could also designate its successor Y 
as the substitute 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 substitute 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 substitute 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 substitute 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 substitute 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 P 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 for the P 
group for Years 1 and 2, even though the P group continues with W as 
its new common parent pursuant to Sec. 1.1502-75(d)(3)(i). 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 agent for the P group for Year 3. 
Beginning on March 2 of Year 3, W becomes the agent for the P group 
with respect to all of Year 3 (including the period through March 1) 
and subsequent consolidated return years. For as long as P remains 
in existence, P remains the agent of the P group under paragraph (a) 
of this

[[Page 43544]]

section for Years 1 and 2, and therefore 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 6. Reverse triangular merger of common parent-subsequent 
spinoff of common parent. The facts are the same as in Example 5, 
except that on April 1 of Year 4, in a transaction unrelated to the 
Year 3 reverse acquisition, 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. Beginning on March 2 of Year 3, W becomes the 
agent for the P group with respect to Year 3 (including the period 
through March 1) and subsequent consolidated return years. Although 
P is no longer a member of the P group after the Year 4 spinoff, P 
remains the agent for the P group under paragraph (a) of this 
section for Years 1 and 2. Thus, 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 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. 
Although 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, paragraph (e)(4) of this section 
provides that P's existence is not deemed to terminate for purposes 
of this section notwithstanding the general rule of section 
338(a)(2). Therefore, the election under section 338(g) does not 
result in a termination of P under paragraph (e) of this section, 
and new P remains the agent of the P group for Year 1 and the period 
ending March 31 of Year 2 (short Year 2). 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 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--(i) In general. This section 
applies with respect to taxable years beginning on or after June 28, 
2002.
    (ii) Election to apply for prior taxable years. Notwithstanding 
paragraphs (h)(1)(i) and (h)(2) of this section, the common parent may 
elect to apply paragraph (d)(1) of this section in lieu of Sec. 1.1502-
77A(d) in designating a substitute agent for taxable years beginning 
before June 28, 2002. The common parent makes such an election by 
expressly referring to the election under this paragraph (h)(1)(ii) in 
notifying the Commissioner of the designation of the substitute agent. 
Once made, such election applies to any subsequent designation of a 
substitute agent for the consolidated return year(s) subject to the 
election.
    (2) Prior law. For taxable years beginning before June 28, 2002, 
see Sec. 1.1502-77A.


Sec. 1.1502-77T(a)  [Redesignated as Sec. 1.1502-77A(e) and Amended]

    7. Section 1.1502-77T(a) is redesignated as Sec. 1.1502-77A(e) and 
is amended by removing the language ``district director'' and adding 
``Commissioner'' in each place it appears.


Sec. 1.1502-77T  [Removed]

    8. Section 1.1502-77T is removed.
    9. 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. Paragraph (b)(2) is amended by removing the language 
``6213(b)(2)'' and adding ``6213(b)(3)'' in its place.
    4. In paragraph (c), the last sentence of Example (1) is amended by 
adding the language ``for the carryback year'' after ``parent.''
    5. In paragraph (c), the last sentence of Example (2) is amended by 
removing the language ``S-1'' and adding ``P'' in its place.
    6. In paragraph (c) Example (3), the seventh sentence is amended by 
removing the language ``Z must'' and adding ``X must'' in its place.
    7. In paragraph (c) Example (3), the last sentence is amended by 
removing the language ``6213(b)(2)'' and adding ``6213(b)(3)'' in its 
place.
    8. Paragraph (e)(2)(v) is removed.
    9. Paragraphs (f) is added.
    The revision and addition 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 substitute 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 that 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 that may be carried back to a consolidated return year, 
after taking into account the

[[Page 43545]]

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 substitute agent designated under 
Sec. 1.1502-77(d) for the carryback year) shall make any application 
under section 6411.
* * * * *
    (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 June 28, 
2002, except that the provisions of paragraph (e)(2) apply for 
applications by new members of consolidated groups for tentative 
carryback adjustments resulting from net operating losses, net capital 
losses, or unused business credits arising in separate return years of 
new members that begin on or after January 1, 2001.
    (2) Prior law. For 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 on or before June 28, 2002, see Sec. 1.1502-78 in 
effect prior to June 28, 2002, as contained in 26 CFR part 1 revised 
April 1, 2002.
    10. 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

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    11. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    12. The authority for part 602 is amended by adding an entry in 
numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.1502-77...............................................       1545-1699
 
                  *        *        *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: May 20, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02-16399 Filed 6-27-02; 8:45 am]
BILLING CODE 4830-01-P