[Federal Register Volume 76, Number 69 (Monday, April 11, 2011)]
[Rules and Regulations]
[Pages 19907-19908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8555]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9522]
RIN 1545-BG94


Clarification of Controlled Group Qualification Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains a final regulation that applies to a 
controlled group of corporations. The regulation clarifies that a 
corporation that satisfies the controlled group rules for stock 
ownership and qualification is a member of such group, without regard 
to its status as a component member.

DATES: 
    Effective Date: This regulation is effective on April 11, 2011.
    Applicability Date: For date of applicability, see Sec.  1.1563-
1(e).

FOR FURTHER INFORMATION CONTACT: Grid Glyer (202) 622-7930 (not a toll-
free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    This document contains an amendment to 26 CFR part 1. On September 
29, 2009, a notice of proposed rulemaking (NPRM) regarding the 
controlled group qualification rules under Sec.  1.1563-1 was published 
in the Federal Register (REG-135005-07; 74 FR 49829). The NPRM proposed 
to amend Sec.  1.1563-1 to clarify that a corporation described in 
section 1563(b) as an excluded member of a controlled group of 
corporations is nevertheless a member of the group. The NPRM further 
proposed to add an example demonstrating that a controlled group of 
corporations can consist solely of excluded members.
    One comment was received and no public hearing was requested or 
held. The public comment concerned the treatment of gross receipts 
between members of a controlled group of corporations for purposes of 
section 41, which provides a tax credit to taxpayers for increasing 
their research activities. In particular, the comment refers to CCA 
200233011, dated May 1, 2002. In that CCA, the IRS Office of Chief 
Counsel concluded first that a domestic corporation and its majority-
owned foreign subsidiaries should be treated as a single taxpayer for 
purposes of sections 41(f)(1)(A)(i), 41(f)(5) and 1563(a) because they 
were members of the same controlled group of corporations even though 
the foreign subsidiaries were treated as excluded members of the group.
    Second, the IRS Office of Chief Counsel concluded that, given the 
particular facts and circumstances of that case, the taxpayer should 
exclude sales to its majority-owned foreign subsidiaries when computing 
gross receipts for purposes of determining its base amount under 
section 41(c). The commenter requested guidance on the facts and 
circumstances that caused the IRS Office of Chief Counsel to exclude 
such sales in computing gross receipts. The IRS and the Treasury 
Department believe that the requested guidance is outside the scope of 
the NPRM, which only involves the first issue addressed in the CCA, and 
is consistent with the conclusion of the CCA on that issue.
    However, the final regulation makes one clarifying change. 
Paragraph (a)(1)(ii) of the proposed regulation states that in 
determining whether a corporation is included in a controlled group of 
corporations, section 1563(b) shall not be taken into account. Section 
1563(b) defines a component member, including an excluded member and an 
additional member. Paragraph (a)(1)(ii) as now revised will also 
provide that the underlying regulation, Sec.  1.1563-1(b), which 
defines a component member, shall not be taken into account in 
determining the members of a controlled group.

Special Analyses

    It has been determined that this regulation is not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to this regulation and because this regulation does not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) this regulation has been 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 this regulation is Grid Glyer of the Office 
of Associate Chief Counsel (Corporate). However, other personnel from 
the IRS and the Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.1563-1 is amended by:
0
1. Redesignating paragraph (a)(1)(ii) as paragraph (a)(1)(iii) and 
adding new paragraph (a)(1)(ii).
0
2. Adding Example 4 to paragraph (b)(4).
0
3. Adding a sentence at the end of paragraph (e).
    The additions read as follows:


Sec.  1.1563-1  Definition of controlled group of corporations and 
component members and related concepts.

    (a) * * *
    (1) * * *
    (ii) Special rules. In determining whether a corporation is 
included in a controlled group of corporations, section 1563(b) and 
paragraph (b) of this section shall not be taken into account. For 
rules defining a component member of a controlled group of 
corporations, including rules defining an excluded member and an 
additional member, see section 1563(b) and paragraph (b) of this 
section.
* * * * *
    (b) * * *
    (4) * * *

    Example 4.  Individual A owns all of the stock of corporations 
X, Y and Z. Each of these corporations is an S corporation. X, Y, 
and Z are each members of a brother-sister controlled group, even 
though each such corporation is treated as an excluded member of 
such group. See Sec.  1.1563-1(b)(2)(ii)(C).
* * * * *
    (e) Effective/Applicability date. * * * Paragraph (a)(1)(ii) of 
this section

[[Page 19908]]

applies to taxable years beginning on or after April 11, 2011.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: April 4, 2011.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-8555 Filed 4-8-11; 8:45 am]
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