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

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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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 rules
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 §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:

§1.1362-3 Treatment of S termination year.

(a) In general. * * * See, however, §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 §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).

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:

§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.6 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 §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.

* * * * *

Deputy Commissioner of Internal Revenue
Approved:
Assistant Secretary of the Treasury

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