Acquisition of an S Corporation by a Member of a Consolidated Group

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8842]

RIN 1545-AW32

Acquisition of an S Corporation by a Member of a Consolidated

Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 1502 of

the Internal Revenue Code. These final regulations provide specific

rules that apply to the acquisition of the stock of an S corporation by

a member of a consolidated group. These rules eliminate the compliance

burdens associated with filing a separate return for the day that an S

corporation is acquired by a consolidated group. Additionally, the

regulations clarify the rule for the filing of the separate return for

a corporation's items for the period not included in the consolidated

return.

DATES: Effective Date: These regulations are effective November 10,

1999.

Applicability Date: For dates of applicability, see Sec. 1.1502-

76(b)(6)(i).

FOR FURTHER INFORMATION CONTACT: Vincent Daly, (202) 622-7770 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

On December 17, 1998, the IRS published in the Federal Register a

notice of proposed rulemaking (REG-106219-98, 63 FR 69581), concerning

acquisitions by a consolidated group of at least eighty percent of the

stock of an S corporation. Although a comment was received questioning

the advisability of a special rule for the acquisition of an S

corporation, the IRS and Treasury have determined the rules are

necessary to eliminate the administrative burden of filing a separate

tax return for the day the S corporation is acquired. The proposed

regulations are adopted by this Treasury decision.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not required. It is hereby

certified that these regulations will not have a significant economic

impact on a substantial number of small entities. This certification is

based on the fact that the regulations will provide administrative

relief to small entities by removing the administrative burden of

filing a separate one-day return currently required for certain

acquisitions. Therefore, a Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of

proposed rulemaking preceding these regulations was submitted to the

Chief Counsel for Advocacy of the Small Business Administration for

comment on its impact on small business.

Drafting Information

The principal author of these regulations is Jeffrey L. Vogel of

the Office of the Assistant Chief Counsel (Corporate), IRS. However,

other personnel from the IRS and Treasury Department participated in

their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

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

Par. 2. Section 1.1362-3 is amended by adding a sentence to the end

of paragraph (a) to read as follows:

Sec. 1.1362-3 Treatment of S termination year.

(a) In general. * * * See, however, Sec. 1.1502-76(b)(1)(ii)(A)(2)

for special rules for an S election that terminates under section

1362(d) immediately before the S corporation becomes a member of a

consolidated group (within the meaning of Sec. 1.1502-1(h)).

* * * * *

Par. 3. Section 1.1502-76 is amended as follows:

1. The text of paragraph (b)(1)(ii)(A) following the paragraph

heading is redesignated as paragraph (b)(1)(ii)(A)(1).

2. A paragraph heading for newly designated paragraph

(b)(1)(ii)(A)(1) is added.

3. The first sentence of newly designated paragraph

(b)(1)(ii)(A)(1) is revised.

4. Paragraph (b)(1)(ii)(A)(2) is added.

5. Paragraph (b)(2)(v) is redesignated as paragraph (b)(2)(vi).

[[Page 61206]]

6. New paragraph (b)(2)(v) is added.

7. Paragraphs (b)(4) and (b)(5) are redesignated as paragraphs

(b)(5) and (b)(6), respectively.

8. New paragraph (b)(4) is added.

9. Newly designated paragraph (b)(5) is amended as follows:

a. Example 6 (b), first sentence is revised.

b. Example 6 (c), second sentence is revised.

c. Example 7 is added.

10. Newly designated paragraph (b)(6)(i) is revised.

The revisions and additions read as follows:

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

* * * * *

(b) * * * (1) * * *

(ii) * * *(A) End of the day rule--(1) In general. If a corporation

(S), other than one described in paragraph (b)(1)(ii)(A)(2) of this

section, becomes or ceases to be a member during a consolidated return

year, it becomes or ceases to be a member at the end of the day on

which its status as a member changes, and its tax year ends for all

Federal income tax purposes at the end of that day. * * *

(2) Special rule for former S corporations. If S becomes a member

in a transaction other than in a qualified stock purchase for which an

election under section 338(g) is made, and immediately before becoming

a member an election under section 1362(a) was in effect, then S will

become a member at the beginning of the day the termination of its S

corporation election is effective. S's tax year ends for all Federal

income tax purposes at the end of the preceding day. This paragraph

(b)(1)(ii)(A)(2) applies to transactions occurring after November 10,

1999.

* * * * *

(2) * * *

(v) Acquisition of S corporation. If a corporation is acquired in a

transaction to which paragraph (b)(1)(ii)(A)(2) of this section

applies, then paragraphs (b)(2)(ii) and (iii) of this section do not

apply and items of income, gain, loss, deduction, and credit are

assigned to each short taxable year on the basis of the corporation's

normal method of accounting as determined under section 446. This

paragraph (b)(2)(v) applies to transactions occurring after November

10, 1999.

* * * * *

(4) Determination of due date for separate return. Paragraph (c) of

this section contains rules for the filing of the separate return

referred to in this paragraph (b). In applying paragraph (c) of this

section, the due date for the filing of S's separate return shall also

be determined without regard to the ending of the tax year under

paragraph (b)(1)(ii) of this section or the deemed cessation of its

existence under paragraph (b)(2)(i) of this section.

(5) * * *

Example 6. Allocation of partnership items. * * *

(b) Analysis. Under paragraph (b)(2)(vi)(A) of this section, T

is treated, solely for purposes of determining T's tax year in which

the partnership's items are included, as selling or exchanging its

entire interest in the partnership as of P's sale of T's stock. * *

*

(c) Controlled partnership. * * * Under paragraph (b)(2)(vi)(B)

of this section, T's distributive share of the partnership items is

treated as T's items for purposes of paragraph (b)(2) of this

section. * * *

Example 7. Acquisition of S corporation. (a) Facts. Z is a small

business corporation for which an election under section 1362(a) was

in effect at all times since Year 1. At all times, Z had only 100

shares of stock outstanding, all of which were owned by individual

A. On July 1 of Year 3, P acquired all of the Z stock. P does not

make an election under section 338(g) with respect to its purchase

of the Z stock.

(b) Analysis. As a result of P's acquisition of the Z stock, Z's

election under section 1362(a) terminates. See sections

1361(b)(1)(B) and 1362(d)(2). Z is required to join in the filing of

the P consolidated return. See Sec. 1.1502-75. Z's tax year ends for

all Federal income tax purposes on June 30 of Year 3. If no

extension of time is sought, Z must file a separate return for the

period from January 1 through June 30 of Year 3 on or before March

15 of Year 4. See paragraph (b)(4) of this section. Z will become a

member of the P consolidated group as of July 1 of Year 3. See

paragraph (b)(1)(ii)(A)(2) of this section. P group's Year 3

consolidated return will include Z's items from July 1 to December

31 of Year 3.

(6) Effective date--(i) General rule. Except as provided in

paragraphs (b)(1)(ii) (A)(2) and (b)(2)(v) of this section, this

paragraph (b) applies to corporations becoming or ceasing to be members

of consolidated groups on or after January 1, 1995.

* * * * *

Bob Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: October 29, 1999.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 99-29085 Filed 11-9-99; 8:45 am]

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