|Treasury Decision 9258
||May 15, 2006
Guidance Under Section 1502;
Amendment of Tacking Rule Requirements
of Life-Nonlife Consolidated Regulations
Internal Revenue Service (IRS), Treasury.
This document contains temporary regulations concerning the requirements
for including insurance companies in a life-nonlife consolidated return. These
regulations affect corporations filing life-nonlife consolidated returns.
The text of these temporary regulations also serves as the text of the proposed
regulations (REG-133036-05) set forth in the notice of proposed rulemaking
on this subject in this issue of the Bulletin.
Effective Date: These regulations are effective
April 25, 2006.
Applicability Date: For dates of applicability, see §1.1502-47T(b)(2).
FOR FURTHER INFORMATION CONTACT:
Drafting Attorney, Ross Poulsen, (202) 622-7770 (not a toll-free number).
Background and Explanation of Provisions
In 1983, the IRS issued §1.1502-47 of the Income Tax Regulations
governing life-nonlife consolidated returns. Section 1.1502-47 provides rules
for determining whether a life insurance company meets the five-year affiliation
requirement of section 1504(c) of the Internal Revenue Code of 1986. As a
general rule, a newly-formed life insurance company must be affiliated with
the group for a period of five taxable years before it joins in the filing
of a consolidated return. However, §1.1502-47 sets forth an exception
to the five-year affiliation requirement (the tacking rule). The tacking rule
provides that, where an existing member of the group (the old corporation)
transfers property to a new member of the group (the new corporation), the
period during which the old corporation is affiliated with the group can be
tacked onto the period for the new corporation if five conditions are met.
Of the five conditions, the third condition of the tacking rule requires,
where both the old corporation and new corporation are life insurance companies,
that the transfer from the old corporation to the new corporation not be reasonably
expected to result in the separation of profitable activities from loss activities
(the separation condition). The preamble to §1.1502-47 expressed concern
that, under the so-called bottom-line method, life insurance companies could
separate profitable activities from loss activities in order to reduce consolidated
life insurance company taxable income. The bottom-line method required life
insurance companies in a consolidated group to determine their treatment under
the three-phase system, then applicable to life insurance companies, on a
separate entity basis. To address the concern, the separation condition was
included as a condition of the tacking rule.
In the Tax Reform Act of 1984, Public Law 98-369 (1984-3 C.B. 1), Congress
substantially revised the rules for taxing life insurance companies, largely
eliminating the three-phase system. Under current section 801, a life company
is taxed at the generally applicable corporate rate on its life insurance
company taxable income.
In the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat.
1418), Congress suspended, during 2005 and 2006, the rules that impose a tax
on direct or indirect distributions from a pre-1984 policyholders surplus
account, the last significant remaining vestige of the former three-phase
In light of the changes to the taxation of life insurance companies,
the IRS and Treasury Department believe that the separation condition should
be eliminated because the rationale for adopting the separation condition
is no longer relevant under current law.
Accordingly, these temporary regulations eliminate the separation condition
of the tacking rule in §1.1502-47(d)(12). These regulations apply to
taxable years for which the due date (without extensions) for filing returns
is after April 25, 2006.
In addition, this document amends §1.1502-76 to reflect amendments
to section 843.
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 has been determined under 5 U.S.C. 553(b)(B)
that notice and public procedure are unnecessary because this Treasury decision
merely conforms the regulations to current law. In addition, it has been determined
under 5 U.S.C. 553(d)(1) that a delayed effective date is not required because
these regulations relieve affected taxpayers of regulatory restrictions.
Accordingly, good cause is found for dispensing with notice and public comment
pursuant to 5 U.S.C. 553(b) and with a delayed effective date pursuant to
5 U.S.C. 553(d). For the applicability of the Regulatory Flexibility Act
refer to the Special Analyses section of the preamble to the cross-reference
notice of proposed rulemaking published in this issue of the Bulletin. Pursuant
to section 7805(f) of the Internal Revenue Code, these temporary regulations
will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-47T also issued under 26 U.S.C. 1502, 1503(c) and 1504(c).
* * *
Section 1.1502-76T also issued under 26 U.S.C. 1502. * * *
Par. 2. Section 1.1502-47 is amended by:
1. Revising paragraph (b).
2. Revising paragraph (d)(12)(v).
3. Removing paragraph (d)(14) Example (10) and Example
4. Redesignating paragraph (d)(14) Example (12) through Example
(16) as paragraph (d)(14) Example (10) through Example
5. Revising paragraph (d)(14) newly-designated Example (11), Example
(13), and Example (14).
The revisions and additions read as follows:
§1.1502-47 Consolidated returns by life-nonlife groups.
* * * * *
(b) Effective dates—(1) General
rule. This section is effective for taxable years for which the
due date (without extensions) for filing returns is after March 14, 1983,
except as provided in paragraph (b)(2) of this section.
(2) [Reserved]. For further guidance, see §1.1502-47T(b)(2).
* * * * *
(d) * * *
(12) * * *
(v) [Reserved]. For further guidance, see §1.1502-47T(d)(12)(v).
* * * * *
(14) * * *
Example (11). The facts are the same as in Example
(10) except that X owns all of the stock of S1,
L1, and S2. In addition, on
January 1, 1982, X transfers the stock of S1 and S2 to
L1. L1 is eligible in 1982 under
paragraph (d)(12)(iv) of this section. L1 would still
be eligible even if it owned a subsidiary during the base period but sold
the subsidiary prior to January 1, 1982. S1 and S2 are
ineligible in 1982.
* * * * *
Example (13). The facts are the same as in Example
(12) except that S2 (the first corporation
in §1.1502-75(d)(3)) acquires the stock of S1 in
exchange for the stock of S2. The result is that only
S2, S1, and L1 are
eligible in 1982.
Example (14). Since 1974, S had owned all of the
stock of L1. L1 is a large life
company. On January 1, 1982, L1 incorporates L2 and
transfers $40 million in cash and securities to L2 in
a transaction described in section 351(a). On March 1, 1982, L2 purchases
the assets of L3, an unrelated life company. The purchased
assets have a fair market value (without liabilities) of $ 30 million on March
1, 1982. L2 is ineligible for 1982 because the tacking
rule in §1.1502-47T(d)(12)(v) does not apply. L2 experienced
a disproportionate asset acquisition in 1982. See §1.1502-47T(d)(12)(v)(C).
* * * * *
Par. 3. Section 1.1502-47T is added to read as follows:
§1.1502-47T Consolidated returns by life-nonlife groups
(a) through (b)(1) [Reserved]. For further guidance, see §1.1502-47(a)
(2) Tacking rule effective dates. (i) In
general. The provisions of paragraph (d)(12)(v) of this section
apply to taxable years for which the due date (without extensions) for filing
returns is after April 25, 2006.
(ii) Prior law. For taxable years for which the
due date (without extensions) for filing returns is on or before April 25,
2006, see §1.1502-47 as contained in the 26 CFR part 1 edition revised
as of April 1, 2006.
(c) through (d)(12)(iv) [Reserved]. For further guidance, see §1.1502-47(c)
(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) and §1.1502-47(d)(12), 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 §1.1502-47(d)(12)(viii).
(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
(vi) through (s) [Reserved]. For further guidance, see §1.1502-47(d)(12)(vi)
Par. 4. Section 1.1502-76 is amended by revising paragraph (a) to read
§1.1502-76 Taxable year of members of group.
(a) [Reserved]. For further guidance, see §1.1502-76T(a).
* * * * *
Par. 5. Section 1.1502-76T is added to read as follows:
§1.1502-76T Taxable year of members of group (temporary).
(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) through (c)(3) [Reserved]. For further guidance, see §1.1502-76(b)
Mark E. Matthews,
Services and Enforcement.
Approved April 12, 2006.
Deputy Assistant Secretary of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on April 24, 2006, 8:45
a.m., and published in the issue of the Federal Register for April 25, 2006,
71 F.R. 23856)
The principal author of these regulations is Ross Poulsen, Office of
Associate Chief Counsel (Corporate). However, other personnel from the IRS
and Treasury Department participated in their development.
* * * * *
Internal Revenue Bulletin 2006-20
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