Guidance Under Section 1502; Amendment of Tacking Rule Requirements of Life-Nonlife Consolidated Regulations, 23856-23857 [06-3884]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 79 (Tuesday, April 25, 2006)]
[Rules and Regulations]
[Pages 23856-23857]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-3884]



[[Page 23856]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9258]
RIN 1545-BE86


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulation.

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SUMMARY: 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 set forth in the 
notice of proposed rulemaking on this subject in the Proposed Rules 
section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective April 25, 2006.
    Applicability Date: For dates of applicability, see Sec.  1.1502-
47T(b)(2).

FOR FURTHER INFORMATION CONTACT: Drafting Attorney, Ross Poulsen, (202) 
622-7770 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    In 1983, the IRS issued Sec.  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, Sec.  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 Sec.  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 system.
    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 Sec.  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 Sec.  1.1502-76 to reflect 
amendments to section 843.

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 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 the Proposed Rules section in this 
issue of the Federal Register. 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.

Drafting Information

    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.

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 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. * * *

0
Par. 2. Section 1.1502-47 is amended by:
0
1. Revising paragraph (b).
0
2. Revising paragraph (d)(12)(v).
0
3. Removing paragraph (d)(14) Example (10) and Example (11).
0
4. Redesignating paragraph (d)(14) Example (12) through Example (16) as 
paragraph (d)(14) Example (10) through Example (14).
0
5. Revising paragraph (d)(14) newly-designated Example (11), Example 
(13), and Example (14).
    The revisions and additions read as follows:


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

* * * * *

[[Page 23857]]

    (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 Sec.  1.1502-47T(b)(2).
* * * * *
    (d) * * *
    (12) * * *
    (v) [Reserved]. For further guidance, see Sec.  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 Sec.  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 Sec.  1.1502-47T(d)(12)(v) does not 
apply. L2 experienced a disproportionate asset 
acquisition in 1982. See Sec.  1.1502-47T(d)(12)(v)(C).
* * * * *

0
Par. 3. Section 1.1502-47T is added to read as follows:


Sec.  1.1502-47T  Consolidated returns by life-nonlife groups 
(temporary).

    (a) Through (b)(1) [Reserved]. For further guidance, see Sec.  
1.1502-47(a) through (b)(1).
    (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 
Sec.  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 Sec.  
1.1502-47(c) through (d)(12)(iv).
    (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 Sec.  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 Sec.  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 this section.
    (vi) Through (s) [Reserved]. For further guidance, see Sec.  
1.1502-47(d)(12)(vi) through (s).

0
Par. 4. Section 1.1502-76 is amended by revising paragraph (a) to read 
as follows:


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

    (a) [Reserved]. For further guidance, see Sec.  1.1502-76T(a).
* * * * *

0
Par. 5. Section 1.1502-76T is added to read as follows:


Sec.  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 Sec.  
1.1502-76(b) through (c)(3).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: April 12, 2006.

Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-3884 Filed 4-24-06; 8:45 am]
BILLING CODE 4830-01-P