[Federal Register Volume 72, Number 139 (Friday, July 20, 2007)]
[Rules and Regulations]
[Pages 39734-39737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14084]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9342]
RIN 1545-BE85


Guidance Under Section 1502; Amendment of Tacking Rule 
Requirements of Life-Nonlife Consolidated Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 1502 
concerning the requirements for including insurance companies in a 
life-nonlife consolidated return. These regulations conform the 
consolidated return rules to certain changes in law. These regulations 
affect corporations filing life-nonlife consolidated returns.

DATES: Effective Date: These regulations are effective July 20, 2007.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1502-47(b) and 1.1502-76(d).

FOR FURTHER INFORMATION CONTACT: Ross Poulsen (202) 622-7790 or Marcie 
Barese (202) 622-7790 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 1504(c) of the Internal Revenue Code permits life companies 
to join in the filing of a consolidated return with nonlife 
corporations with certain restrictions, the principal one of which is 
that a life company must be a member of the affiliated group (without 
regard to section 1504(b)(2)) for five taxable years before it may join 
in the filing of the consolidated group's return. Section 1.1502-47 
contains an exception to this requirement (the tacking rule) for 
transactions that meet certain conditions. The original tacking rule 
contained five conditions, including ``the separation condition.''
    Before 1981, section 843 required all insurance companies taxed 
under Subchapter L to adopt a calendar year

[[Page 39735]]

tax year. The consolidated return regulations required all members of a 
consolidated group to adopt the tax year of the common parent, but, in 
order to accommodate section 843, required a fiscal-year consolidated 
group to change its tax year to a calendar year if, on the last day of 
its fiscal year, it included an insurance company required by section 
843 to use a calendar year (Old Sec.  1.1502-76(a)(2)). In 1981, an 
amendment to section 843 became effective, providing that, under 
regulations prescribed by the Secretary, an insurance company joining 
in the filing of a consolidated return may adopt the fiscal year of the 
common parent corporation.
    On April 25, 2006, temporary regulations (TD 9258) were published 
in the Federal Register (71 FR 23856) amending the tacking rule of the 
life-nonlife consolidated return regulations and the regulations 
relating to taxable years of members of a consolidated group. A notice 
of proposed rulemaking (REG-133036-05) cross-referencing those 
temporary regulations was published in the Federal Register (71 FR 
23882) on the same day. The temporary regulations removed the 
separation condition of the tacking rule and Old Sec.  1.1502-76(a)(2).
    On May 30, 2006, temporary regulations (TD 9264) were published in 
the Federal Register (71 FR 30591), in part, amending the regulations 
relating to taxable years of members of a consolidated group. A notice 
of proposed rulemaking (REG-134317-05) cross-referencing those 
temporary regulations was published in the Federal Register (71 FR 
30640) on the same day. The temporary regulations eliminated 
impediments to the electronic filing of the statement made under Sec.  
1.1502-76(b)(2)(ii).
    The IRS and Treasury Department considered several comments 
responding to the proposed and temporary regulations. After 
consideration of these comments, the final regulations adopt the 
provisions of the proposed regulations without substantive change and 
the corresponding temporary regulations are removed.

Explanation and Summary of Comments

Effective Date of Sec.  1.1502-47

    The IRS received two comments from the public relating to the 
effective date of Prop. Reg. Sec.  1.1502-47 and Temp. Reg. Sec.  
1.1502-47T. The proposed and temporary regulations are effective for 
taxable years for which the due date (without extensions) for filing 
returns is after April 25, 2006, (their date of publication). Several 
commentators noted that the preamble to the temporary regulations 
indicated that the purpose of the separation condition was largely 
eliminated in 1984 after Congress repealed the three phase system of 
life insurance company taxation, and it became even less relevant after 
Congress suspended taxation on distributions from policyholders surplus 
accounts made during 2005 and 2006. On that basis, these commentators 
requested that the effective date of the final regulations be 
applicable retroactively for all open tax years. While making this 
request, however, the commentators recognized that retroactive 
application of the regulations would present serious administrative 
concerns. The IRS and Treasury Department agree with the commentators 
that retroactive application of the final regulations raises 
significant questions of administrability. Therefore, in the interest 
of sound tax administration, the IRS and Treasury Department decline to 
adopt this suggestion.
    Alternatively, the commentators requested that these final 
regulations be applicable for returns due after the effective date of 
the temporary regulations. We agree with this suggestion. Accordingly, 
the temporary regulations are applicable to returns due (without 
extensions) after April 25, 2006, and on or before the effective date 
of these final regulations. These final regulations are applicable to 
returns due (without extensions) after their effective date.

Comments on Prop. Reg. Sec.  1.1502-76 and Temp. Reg. Sec.  1.1502-76T

    One commentator raised several concerns with the proposal to remove 
Old Sec.  1.1502-76(a)(2). First, the commentator reads both the 
language of section 843 and the legislative history of the amendment to 
section 843 as demonstrating congressional intent to create a choice, 
when an insurance company joins a fiscal-year consolidated group, of 
whether the group remains on the fiscal year (requiring the joining 
insurance member to adopt the fiscal year) or adopts a calendar year 
tax year. Amended section 843 provides that (under regulations) an 
insurance company joining in the filing of a consolidated return ``may 
adopt'' the taxable year of the common parent corporation. The 
legislative history of amended section 843 acknowledges that ``[s]ome 
life companies may not want to adopt a [fiscal] year * * *.'' S. Rep. 
No. 94-938, at 455-56 (1976).
    The IRS and Treasury Department do not agree with the commentator's 
interpretation of the statute or the legislative history. The election 
discussed in the legislative history is the election under section 
1504(c) allowing a life company to join in the consolidated return of a 
nonlife group. The legislative history notes that ``[i]f this election 
is not made, existing law will continue to apply.'' The legislative 
history goes on to state:

    It is understood that although generally companies will probably 
desire to file consolidated returns with the life or other mutual 
insurance companies, some may choose to continue to file separate 
returns under existing law. Where this occurs, it is likely to arise 
from the fact that the parent corporation (whose year the other 
members joining in the filing of the consolidated return must 
follow) uses a fiscal year as its taxable year. Some life companies 
may not want to adopt a taxable year other than a calendar year 
since filings with State insurance commissioners are required by 
these life companies on a calendar year basis.

S. Rep. No. 94-938, at 455-56 (1976).

    Rather than suggesting that the group has an election to change its 
taxable year when a newly-joining life company does not desire to adopt 
the group's fiscal year, the legislative history suggests that Congress 
expected, in such cases, that no section 1504(c) election would be made 
and the life company would continue filing separately. Further, the 
legislative history is clear that Congress amended section 843 in order 
to accommodate the consolidated return rules relating to taxable years 
of members of consolidated groups, not to modify or override them.
    The sole purpose of Old Sec.  1.1502-76(a)(2) was to conform the 
consolidated rules to section 843. Once section 843 was amended, not 
only was the purpose of Old Sec.  1.1502-76(a)(2) eliminated, but Old 
Sec.  1.1502-76(a)(2) was no longer operative because it only applies 
to groups with ``an includible insurance company required by section 
843 to file its return on the basis of a calendar year * * *.'' For 
these reasons, the IRS and Treasury Department decline to create a 
regulatory election allowing fiscal-year consolidated groups to switch 
to a calendar year upon including an insurance company in its 
consolidated group.
    Another comment noted that the legislative history of the amendment 
to section 843 contemplates that the Secretary will write regulations 
that require insurance companies adopting the fiscal year of a 
consolidated group to maintain adequate records reconciling all of the 
items on its fiscal year tax return with the corresponding

[[Page 39736]]

items on its calendar year statements filed with State insurance 
commissioners. Since the amendment to section 843, the input received 
by the IRS and Treasury Department from taxpayers has not suggested a 
need for guidance in this area. However, the IRS and Treasury 
Department welcome comments on this topic.
    The final comment suggested that a rule be added allowing an 
insurance company that joins a fiscal-year consolidated group and 
leaves the group before the end of the group's tax year to maintain its 
calendar year. The comment observed that, without such a rule, Sec.  
1.1502-76T(a) and section 843 create unnecessary work for such an 
insurance company because upon joining the group, the insurance company 
would be required to adopt the common parent's fiscal year under Sec.  
1.1502-76T(a)(1) and upon leaving the group, the insurance company 
would have to readopt a calendar year under section 843.
    The IRS and Treasury Department decline to adopt this suggestion 
because they believe that the number of taxpayers affected by such a 
scenario would be too minimal to justify the creation of a special 
rule.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. Pursuant to 5 
U.S.C. 553(d)(3) it has been determined that a delayed effective date 
is unnecessary because this rule finalizes currently effective 
temporary rules regarding including life insurance companies in a life-
nonlife consolidated return. 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 primarily affect affiliated groups of 
corporations with one or more life insurance company members, which 
tend to be larger businesses. Moreover, the number of taxpayers 
affected 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 Internal Revenue Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Marcie Barese, Office 
of Associate Chief Counsel (Corporate). However, other personnel from 
the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entries for Sec. Sec.  1.1502-47T and 1.1502-76T to read, in part, 
as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-47 also issued under 26 U.S.C. 1502, 1503(c) and 
1504(c). * * *


0
Par. 2. Section 1.1502-47 is amended by revising paragraphs (b)(2) and 
(d)(12)(v).
    The revisions read as follows:


Sec.  1.1502-47  Consolidated returns by life-nonlife groups.

* * * * *
    (b) * * *
    (2) Tacking rule effective dates--(i) In general. Paragraph 
(d)(12)(v) of this section applies to any original consolidated Federal 
income tax return due (without extensions) after July 20, 2007.
    (ii) Prior law. For original consolidated Federal income tax 
returns due (without extensions) after April 25, 2006, and on or before 
July 20, 2007, see Sec.  1.1502-47T as contained in 26 CFR part 1 in 
effect on April 1, 2007. For original consolidated Federal income tax 
returns due (without extensions) on or before April 25, 2006, see Sec.  
1.1502-47 as contained in 26 CFR part 1 in effect on April 1, 2006.
* * * * *
    (d) * * *
    (12) * * *
    (v) Tacking rule. The period during which an old corporation is in 
existence and a member of the group engaged in active business is 
included in (or tacks onto) the period for the new corporation if the 
following four conditions listed in this paragraph (d)(12)(v) are met. 
For purposes of this paragraph (d)(12)(v), a new corporation is a 
corporation (whether or not newly organized) during the period its 
eligibility depends upon the tacking rule. The four conditions are as 
follows--
    (A) The first condition is that, at any time, 80 percent or more of 
the new corporation's assets it acquired (other than in the ordinary 
course of its trade or business) were acquired from the old corporation 
in one or more transactions described in section 351(a) or 381(a). This 
asset test is applied by using the fair market values of assets on the 
date they were acquired and without regard to liabilities. Assets 
acquired in the ordinary course of business will be excluded from total 
assets only if they were acquired after the new corporation became a 
member of the group (determined without section 1504(b)(2)). In 
addition, assets that the old corporation acquired from outside the 
group in transactions not conducted in the ordinary course of its trade 
or business are not included in the 80 percent (but are included in 
total assets) if the old corporation acquired those assets within five 
calendar years before the date of their transfer to the new 
corporation.
    (B) The second condition is that at the end of the taxable year 
during which the first condition is first met, the old corporation and 
the new corporation must both have the same tax character. For purposes 
of this paragraph (d)(12), a corporation's tax character is the section 
under which it would be taxed (i.e., sections 11, 802, 821, or 831) if 
it filed a separate return. If the old corporation is not in existence 
(or adopts a plan of complete liquidation) at the end of that taxable 
year, this paragraph (d)(12)(v)(B) will apply to the old corporation's 
taxable year immediately preceding the beginning of the taxable year 
during which the first condition is first met.
    (C) The third condition is that, at the end of the taxable year 
during which the first condition is first met, the new corporation does 
not undergo a disproportionate asset acquisition under paragraph 
(d)(12)(viii) of this section.
    (D) The fourth condition is that, if there is more than one old 
corporation, the first two conditions apply to all of the corporations. 
Thus, the second condition (tax character) must be met by all of the 
old corporations transferring assets taken into account in meeting the 
test in paragraph (d)(12)(v)(A) of this section.
* * * * *


Sec.  1.1502-47T  [Removed]

0
Par. 3. Section 1.1502-47T is removed.
0
Par. 4. Section 1.1502-76 is amended by revising paragraphs (a), 
(b)(2)(ii)(D), and (d).
    The revisions read as follows:

[[Page 39737]]

Sec.  1.1502-76  Taxable year of members of group.

    (a) Taxable year of members of group. The consolidated return of a 
group must be filed on the basis of the common parent's taxable year, 
and each subsidiary must adopt the common parent's annual accounting 
period for the first consolidated return year for which the 
subsidiary's income is includible in the consolidated return. If any 
member is on a 52-53-week taxable year, the rule of the preceding 
sentence shall, with the advance consent of the Commissioner, be deemed 
satisfied if the taxable years of all members of the group end within 
the same 7-day period. Any request for such consent shall be filed with 
the Commissioner of Internal Revenue, Washington, DC 20224, not later 
than the 30th day before the due date (not including extensions of 
time) for the filing of the consolidated return.
    (b) * * *
    (2) * * *
    (ii) * * *
    (D) Election--(1) Statement. The election to ratably allocate items 
under this paragraph (b)(2)(ii) must be made in a separate statement 
entitled, ``THIS IS AN ELECTION UNDER Sec.  1.1502-76(b)(2)(ii) TO 
RATABLY ALLOCATE THE YEAR'S ITEMS OF [INSERT NAME AND EMPLOYER 
IDENTIFICATION NUMBER OF THE MEMBER].'' The election must be filed by 
including a statement on or with the returns including the items for 
the years ending and beginning with S's change in status. If two or 
more members of the same consolidated group, as a consequence of the 
same plan or arrangement, cease to be members of that group and remain 
affiliated as members of another consolidated group, an election under 
this paragraph (b)(2)(ii)(D)(1) may be made only if it is made by each 
such member. Each statement must also indicate that an agreement, as 
described in paragraph (b)(2)(ii)(D)(2) of this section, has been 
entered into. Each party signing the agreement must retain either the 
original or a copy of the agreement as part of its records. See Sec.  
1.6001-1(e).
    (2) Agreement. For each election under this paragraph (b)(2)(ii), 
the member and the common parent of each affected group must sign and 
date an agreement. The agreement must--
    (i) Identify the extraordinary items, their amounts, and the 
separate or consolidated returns in which they are included;
    (ii) Identify the aggregate amount to be ratably allocated, and the 
portion of the amount included in the separate and consolidated 
returns; and
    (iii) Include the name and employer identification number of the 
common parent (if any) of each group that must take the items into 
account.
* * * * *
    (d) Effective/applicability date--(1) Taxable years of members of 
group effective date. (i) In general. Paragraph (a) of this section 
applies to any original consolidated Federal income tax return due 
(without extensions) after July 20, 2007.
    (ii) Prior law. For original consolidated Federal income tax 
returns due (without extensions) after April 25, 2006, and on or before 
July 20, 2007, see Sec.  1.1502-76T as contained in 26 CFR part 1 in 
effect on April 1, 2007. For original consolidated Federal income tax 
returns due (without extensions) on or before April 25, 2006, see Sec.  
1.1502-76 as contained in 26 CFR part 1 in effect on April 1, 2006.
    (2) Election to ratably allocate items effective date--(i) In 
general. Paragraph (b)(2)(ii)(D) of this section applies to any 
original consolidated Federal income tax return due (without 
extensions) after July 20, 2007.
    (ii) Prior law. For original consolidated Federal income tax 
returns due (without extensions) after May 30, 2006, and on or before 
July 20, 2007, see Sec.  1.1502-76T as contained in 26 CFR part 1 in 
effect on April 1, 2007. For original consolidated Federal income tax 
returns due (without extensions) on or before May 30, 2006, see Sec.  
1.1502-76 as contained in 26 CFR part 1 in effect on April 1, 2006.


Sec.  1.1502-76T  [Removed]

0
Par. 5. Section 1.1502-76T is removed.


Sec.  1.502-35  [Amended]


Sec.  1.502-76  [Amended]

0
Par. 6. For each entry in the ``Location'' column of the following 
table, remove the language in the ``Remove'' column and add the 
language in the ``Add'' column in its place:

------------------------------------------------------------------------
          Location                   Remove                  Add
------------------------------------------------------------------------
Sec.   1.1502-                Sec.   1.1502-        Sec.   1.1502-
 35(c)(4)(ii)(B).              76T(b)(2)(ii)(D).     76(b)(2)(ii)(D).
Sec.   1.1502-                paragraph             paragraph
 76(b)(2)(ii)(A)(2).           (b)(2)(ii)(D) of      (b)(2)(ii)(D) of
                               Sec.   1.1502-76T.    this section.
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Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: July 16, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-14084 Filed 7-19-07; 8:45 am]
BILLING CODE 4830-01-P