Guidance Necessary To Facilitate Business Electronic Filing Under Section 1561, 76904-76913 [06-9758]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 246 (Friday, December 22, 2006)]
[Rules and Regulations]
[Pages 76904-76913]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9758]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 5

[TD 9304]
RIN 1545-BF26


Guidance Necessary To Facilitate Business Electronic Filing Under 
Section 1561

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains temporary regulations that affect 
component members of controlled groups of corporations and consolidated 
groups filing life-nonlife Federal income tax returns. They provide 
guidance regarding the apportionment of tax benefit items and the 
amount and type of information these members are required to submit 
with their returns. The text of the 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 on December 22, 
2006.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1502-43T(e)(1), 1.1502-47T(t)(1), 1.1561-1T(d)(1), 1.1561-2T(f)(1), 
1.1561-3T(d)(1) and 1.1563-1T(e)(1). The applicability of these 
regulations will expire on December 21, 2009.

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

SUPPLEMENTARY INFORMATION:

Background

    Section 1561(a) provides that the component members of a controlled 
group of corporations (as those terms are defined in section 1563) are 
limited to using the amounts of certain tax benefit items described 
therein in the same manner as if they were one corporation. Although 
section 1561(a) provides that these amounts shall generally be divided 
equally among those members, it also provides that if those members 
consent to adopt an apportionment plan, then, except as provided below, 
they will be permitted to allocate these amounts among themselves 
unequally. Section 1.1561-3(b) provides the procedural format by which 
those members may adopt an apportionment plan.
    On May 26, 2006, the IRS and Treasury Department released temporary 
regulations (TD 9264), which, among other things, eliminated regulatory 
impediments to the electronic filing (e-filing) of many statements that 
corporate taxpayers were previously required to include on or with 
their Federal income tax returns. As noted in section 2.C. of the 
preamble to those regulations, Sec.  1.1561-3(b) presents an impediment 
to the e-filing of that information which each member of a controlled 
group is required to provide with its Federal income tax return when it 
makes the consent provided therein. These temporary regulations remove 
that impediment and also clarify the amount and type of information 
that each member of such group is required to submit with its return, 
whether or not the group chooses to apportion unequally the specified 
tax benefit items among its members. Thus, these regulations require 
each member of such group to provide the requisite information, whether 
or not it consents to adopt an apportionment plan, on a form (i.e., 
Schedule O or any successor to that form) to be filed with each 
member's Federal income tax return for each taxable year for which it 
is a component member of a controlled group.

Explanation of Provisions

1. Revision of the Regulations Under Section 1561

    The IRS and Treasury Department are publishing temporary 
regulations under section 1561 for several reasons. First, the current 
regulations are outdated in that they refer to tax benefit items that 
are no longer listed in section 1561(a). Except as provided below, to 
minimize this issue in the future, the temporary regulations refer 
generically to the tax benefit items listed in section 1561(a) rather 
than refer specifically to those items by listing and describing each 
one.
    Second, the current regulations do not provide guidance to 
taxpayers regarding how to allocate the amounts of the section 1561(a) 
tax benefit items among the component members of a controlled group of 
corporations which have an apportionment plan in effect. As a result, 
the IRS often can not determine whether taxpayers have correctly 
allocated these items. Thus, the temporary regulations refer to a new 
form (i.e., Schedule O or any successor to that form) on which such 
members will provide information about these items.
    Except as provided below, each component member of a controlled 
group must file this form every year with its Federal income tax return 
whether or not: (1) An apportionment plan is in effect, or (2) any 
change is made to the group's apportionment of its section 1561(a) tax 
benefit items from the previous year. However, whenever one or more of 
the component members of a controlled group of corporations are also 
members of a consolidated group, the parent of such consolidated group 
shall file one form on behalf of all of its members. That form shall 
contain all the information required for each such member.
    Finally, Sec.  1.1561-3(b) presents an impediment to e-filing where 
such members have consented to the adoption of an apportionment plan. 
That section requires each member of a controlled group to attach to 
its return, for each year following the adoption of the plan, a copy of 
its signed consent to such plan. As explained in TD 9264,

[[Page 76905]]

that signature requirement presents an impediment to e-filing. These 
temporary regulations eliminate this impediment and provide that the 
form will be the mechanism by which such member adopts (and also amend 
or terminate) such plan. Thus, each member of the group (that is not a 
member of a consolidated group) will file this form to consent to adopt 
a plan, even if it is a wholly-owned subsidiary of the group. Compare 
Sec.  1.1561-3(b)(2)(i) (a wholly-owned subsidiary of a controlled 
group was not required to consent to adopt a plan because it was deemed 
to consent if all the component members of that group that are not 
wholly owned subsidiaries consent). Thus, these temporary regulations 
eliminate the deemed consent provision of Sec.  1.1561-3(b)(2)(i).

2. Regulation Authorizing the Component Members of a Controlled Group 
To Apportion the Accumulated Earnings Credit Unequally if They Have an 
Apportionment Plan in Effect

    Section 1561(a) provides that the component members of a controlled 
group of corporations must divide the amount of the accumulated 
earnings credit (the credit) equally unless the Secretary prescribes 
regulations permitting an unequal allocation of that amount. However, 
Sec.  1.1561-2(c) requires that they divide that amount equally. The 
IRS and Treasury Department have concluded that they no longer will 
require such members to divide that amount equally. Therefore, these 
temporary regulations now provide that the component members of a 
controlled group may choose to allocate the amount of that credit 
unequally among themselves if they have an apportionment plan in 
effect.

3. Revisions to Sec.  1.1563-1

A. Reformatting the Regulation
    For the sake of consistency, the IRS and Treasury Department are 
reformatting Sec.  1.1563-1 to conform it to current formatting 
conventions. It is not intended that any such reformatting constitute a 
substantive change. Moreover, the changes described in this paragraph 
of the preamble are only limited to formatting. Thus, for example, 
except for the changes described below, no examples in Sec.  1.1563-1 
have been updated to reflect current law. Such changes are beyond the 
scope of this project and will be addressed in a separate regulation 
project.
B. Updating the Definition of a Brother-Sister Controlled Group
    Section 900 of the American Jobs Creation Act of 2004, Pub. L. 108-
357, 118 Stat. 1418 (the 2004 amendment), revised the definition of a 
brother-sister controlled group in section 1563(a)(2). Prior to this 
2004 amendment, commonly owned corporations qualified as a brother-
sister controlled group if five or fewer persons who are individuals, 
estates, or trusts own (within the meaning of section 1563(d)(2)) stock 
possessing: (A) At least 80 percent of the total combined voting power 
of all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of stock of each corporation (the 
80 percent requirement) and (B) more than 50 percent of the total 
combined voting power of all classes of stock entitled to vote or more 
than 50 percent of the total value of shares of all classes of stock of 
each corporation, taking into account the stock ownership of each such 
person only to the extent such stock ownership is identical with 
respect to each such corporation (the more-than-50 percent 
requirement).
    The 2004 amendment eliminated the 80 percent requirement from the 
section 1563(a)(2) definition of a brother-sister controlled group. As 
a result, for purposes of section 1561, corporations are component 
members of a brother-sister controlled group if just the more-than-50 
percent requirement is satisfied. However, for all other provisions of 
law that incorporate the section 1563(a) definition of a brother-sister 
controlled group, both the more-than-50 percent requirement and the 80 
percent requirement must be satisfied in order to qualify as a brother-
sister controlled group. See section 1563(f)(5). Therefore, these 
temporary regulations reflect this change.
    These temporary regulations apply to tax years beginning on or 
after the date they are published in the Federal Register. However, the 
above described 2004 amendment to section 1563(a)(2) is effective for 
tax years beginning after October 22, 2004.
C. Clarifying That an S Corporation Is Treated as an Excluded Member of 
a Controlled Group Under Current Law
    Section 1.1561-1(c)(1) provides that, for purposes of sections 1561 
and 1563, the term corporation includes an electing small business 
corporation and refers to Sec.  1.1563-1(b)(2)(ii)(c) for the treatment 
of such a corporation as an excluded member of a controlled group of 
corporations. Specifically, Sec.  1.1563-1(b)(2)(ii)(c) provides that 
only an electing small business corporation which is not subject to the 
tax imposed by section 1378 will be treated as an excluded member.
    Section 1378, as in effect when Sec.  1.1563-1(b)(2)(ii)(c) was 
published (old section 1378), taxed the income of an electing small 
business corporation if its income exceeded a certain threshold. That 
income was taxed at the lower of the rate determined under section 
1201(a) or section 11. Thus, when such corporation was subject to tax 
under section 11, it was appropriate to treat such corporation as a 
component member of a controlled group for purposes of allocating its 
section 11 tax benefit amount.
    Old section 1378 was ultimately repealed as part of the Tax Reform 
Act of 1986 (Pub. L. 99-514, 100 Stat. 2085). Thus, Sec.  1.1563-
1(b)(2)(ii)(c) became obsolete.
    Under current law, an S corporation (the successor to an electing 
small business corporation) is generally subject to tax at the entity 
level under only two provisions: (1) Section 1374, which imposes tax on 
certain recognized built-in gain, and (2) section 1375, which imposes 
tax on passive investment income under certain circumstances. However, 
in both cases, the amount of tax imposed on an S corporation is 
computed by applying the highest rate of tax specified in section 
11(b). See sections 1374(b)(1) and 1375(a). Thus, under either of these 
provisions, no portion of any of the lower tax bracket amounts of 
section 11(b) could be allocated to such a corporation.
    In other instances, an S corporation is partially liable for taxes 
that were imposed on the income of its predecessor C corporation that 
it must now recapture. See, e.g., sections 167(g), 460(b), 1363(d) and 
1371(d)(2). However, these recapture taxes are not being imposed on an 
S corporation's own income.
    Since an S corporation is not currently subject to any tax to which 
either the tax bracket amounts of section 11(b) apply, or any other tax 
benefit item to which section 1561(a) applies, it is appropriate to 
treat that corporation as an excluded member of a controlled group.
    These temporary regulations clarify that only to the extent that a 
particular tax (and thus a particular tax benefit item to which section 
1561(a)) applies to an S corporation is that type of corporation 
treated as a component member of the group. This general reference to a 
tax that applies to an S corporation is intended to avoid the issue in 
Sec.  1.1563-1(b)(2)(ii)(c) of

[[Page 76906]]

referring to a particular Code section that later became obsolete 
(i.e., old section 1378).
D. Clarifying That the Life Insurance Company Provisions Do Not Apply 
to the Controlled Group Rules Where That Type of Company Is a Member 
(Whether Eligible or Ineligible) of a Life-Nonlife Affiliated Group for 
the Consolidated Return Year for Which a Section 1504(c)(2) Election Is 
Effective
    The current regulations under section 1563 describe the treatment 
of life insurance companies under the controlled group rules. Section 
1.1563-1(a)(5) provides that two or more life insurance companies that 
are members of a controlled group are treated as a distinct controlled 
group of corporations composed only of life insurance companies. 
Section 1.1563-1(b)(2)(ii)(e) defines a life insurance company as an 
excluded member unless that type of company is a member of a separate 
life insurance company controlled group described in Sec.  1.1563-
1(a)(5).
    Section 1504(c)(2) provides that if an affiliated group includes 
any domestic life insurance companies that would otherwise not be 
treated as includible members of the group, then, except as provided 
therein, the common parent of such group may elect (pursuant to 
regulations prescribed by the Secretary) to treat all such companies as 
includible corporations. Paragraph (f)(6) of Sec.  1.1502-47 implements 
section 1504(c)(2) as it relates to section 1563.
    These temporary regulations provide that if one or more life 
insurance companies are members (whether eligible or ineligible) of an 
affiliated group for the consolidated return year for which a section 
1504(c)(2) election is effective, then those members are not treated as 
either excluded members of the controlled group or as members of a 
separate life insurance controlled group. See Sec.  1.1502-47(f)(6). 
Rather, any eligible members are treated as members of the consolidated 
group, and any ineligible members are treated, along with the eligible 
and includible members of the consolidated group, as members of a life-
nonlife controlled group.
    These temporary regulations apply to tax years beginning on or 
after the date they are published in the Federal Register. However, 
paragraph (f)(6) of Sec.  1.1502-47 applies to tax years of 
consolidated groups beginning on or after January 1, 1982. See TD 7877.

4. Revisions to Two Consolidated Return Regulations

A. Sec.  1.1502-43
    Section 1.1502-43 provides rules for calculating the consolidated 
accumulated earnings tax. Section 1.1502-43(d) is currently reserved. 
These temporary regulations clarify that if the consolidated group is 
part of a controlled group then section 1561 applies in determining the 
amount of that credit.
    These temporary regulations apply to consolidated return years for 
which a return is due (without extensions) after the date it is 
published in the Federal Register. However, pursuant to the Tax Reform 
Act of 1969, Pub. L. 91-172, 78 Stat. 116, the accumulated earnings 
credit became a full tax benefit item under section 1561(a) for tax 
years beginning after December 31, 1974.
B. Sec.  1.1502-47
    Section 1.1502-47 provides rules for a life-nonlife consolidated 
group to calculate its consolidated taxable income. Paragraph (s) of 
Sec.  1.1502-47 requires a consolidated group to provide a notation on 
the face of its return identifying it as a life-nonlife return. This 
requirement presents an impediment to e-filing. These temporary 
regulations remove the impediment by deleting the requirement to 
provide that notation.

5. Deleting Obsolete Regulations

    As part of this Treasury decision, the IRS and Treasury Department 
are deleting numerous obsolete regulations. This effort is part of an 
ongoing process to remove those types of regulations from the Code of 
Federal Regulations (the CFR). Therefore, the following regulations are 
deleted from the CFR: Sec.  1.342-1, 1.371-1 through 1.371-2, 1.372-1, 
1.374-1 through 1.374-4, 1.1018-1, 1.1562-0 through 1.1562-7, 1.1564-1 
and 5.1561-1.

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 also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
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 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 Grid Glyer, Office of 
Associate Chief Counsel (Corporate). However, other personnel from the 
IRS and Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 5

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 5 are 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 1.1502-43T also issued under 26 U.S.C. 1502. * * *
    Section 1.1561-2T also issued under 26 U.S.C. 1561. * * *

Sec.  1.108-1  [Removed]

0
Par. 2. Section 1.108-1 is removed and reserved.


Sec.  4.342-1  [Removed]

0
Par. 3. Section 1.342-1 is removed.


Sec.  1.371-1  [Removed]

0
Par. 4. Section 1.371-1 is removed.


Sec.  1.371-2  [Removed]

0
Par. 5. Section 1.371-2 is removed.


Sec.  1.372-1  [Removed]

0
Par. 6. Section 1.372-1 is removed.


Sec.  1.374-1  [Removed]

0
Par. 7. Section 1.374-1 is removed.


Sec.  1.374-2  [Removed]

0
Par. 8. Section 1.374-2 is removed.


Sec.  1.374-3  [Removed]

0
Par. 9. Section 1.374-3 is removed.


Sec.  1.374-4  [Removed]

0
Par. 10. Section 1.374-4 is removed.

[[Page 76907]]

Sec.  1.924(a)-1T  [Amended]

0
Par. 10A. For each entry in the ``Location'' column of the following 
table, remove the language in the ``Remove'' column and add the 
language in the ``Add'' column in its place:

------------------------------------------------------------------------
            Location                    Remove                Add
------------------------------------------------------------------------
The fifth sentence of Sec.        a statement.......  completing the
 1.924(a)-1T(j)(2)(i).                                 form (i.e.,
                                                       Schedule O or any
                                                       successor to that
                                                       form).
The fifth sentence of Sec.        Sec.   1.1561-3(b)  Sec.   1.1561-3T.
 1.924(a)-1T(j)(2)(i).
The sixth sentence of Sec.        Sec.   1.1561-3(c)  Sec.   1.1561-
 1.924(a)-1T(j)(2)(i).                                 3T(a).
------------------------------------------------------------------------

Sec.  1.1018-1  [Removed]

0
Par. 11. Section 1.1018-1 is removed.

0
Par. 12. Section 1.1502-43 is amended by revising paragraph (d) and 
adding paragraph (e) to read as follows:


Sec.  1.1502-43  Consolidated accumulated earnings tax.

* * * * *
    (d) [Reserved]. For further guidance, see Sec.  1.1502-43T(d).
    (e) [Reserved]. For further guidance, see Sec.  1.1502-43T(e)(1).

0
Par. 13. Section 1.1502-43T is added to read as follows:


Sec.  1.1502-43T  Consolidated accumulated earnings tax (temporary).

    (a) through (c) [Reserved]. For further guidance, see Sec.  1.1502-
43(a) through (c).
    (d) Consolidated accumulated earnings credit--(1) In general. 
[Reserved]
    (2) Special rule if consolidated group part of controlled group. If 
a consolidated group is treated as a component member of a controlled 
group, or if each member of a consolidated group is treated as a 
component member of a controlled group, see section 1561 for 
determining the portion of the accumulated earnings credit to be 
allocated to such group or to such members.
    (e) Effective date--(1) Applicability date. This section applies to 
any consolidated Federal income tax return due (without extensions) 
after December 22, 2006. However, a consolidated group may apply this 
section to any consolidated Federal income tax return filed on or after 
December 22, 2006.
    (2) Expiration date. The applicability of this section will expire 
on December 21, 2009.

0
Par. 14. Section 1.1502-47 is amended by revising paragraph (s) and 
adding paragraph (t) to read as follows:


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

* * * * *
    (s) [Reserved]. For further guidance, see Sec.  1.1502-47T(s).
    (t) [Reserved]. For further guidance, see Sec.  1.1502-47T(t)(1).

0
Par. 15. Section 1.1502-47T is amended by revising paragraph (s) and 
adding paragraph (t) to read as follows:


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

* * * * *
    (s) Filing requirements. Nonlife consolidated taxable income or 
loss under paragraph (h) of Sec.  1.1502-47 shall be determined on a 
separate Form 1120 or 1120-PC, and consolidated partial LICTI under 
paragraph (j) of Sec.  1.1502-47 shall be determined on a separate Form 
1120-L. The consolidated return shall be made on a separate Form 1120, 
1120-PC, or 1120-L filed by the common parent (if the group includes a 
life company), which shows the set-offs under paragraphs (g), (m), and 
(n) of Sec.  1.1502-47 and clearly indicates on the face of the return 
that it is a life-nonlife consolidated return (if the group includes a 
life company). See also Sec.  1.1502-75(j), relating to statements and 
schedules for subsidiaries.
    (t) Effective date--(1) Applicability date. Paragraph (s) of this 
section applies to any consolidated Federal income tax return due 
(without extensions) after December 22, 2006. However, a consolidated 
group may apply paragraph (s) of this section to any consolidated 
Federal income tax return filed on or after December 22, 2006.
    (2) Expiration date. The applicability of paragraph (s) of this 
section will expire on December 21, 2009.

0
Par. 16. Section 1.1502-90 is amended by:
0
1. Removing and reserving the entry for Sec.  1.1502-95(e)(8).
0
2. Removing and reserving the entry for Sec.  1.1502-95(f).
0
3. Reserving an entry for Sec.  1.1502-95(g).
0
4. Adding entries for Sec.  1.1502-95T.
    The additions read as follows:


Sec.  1.1502-90  Table of contents.

* * * * *


Sec.  1.1502-95  Rules on ceasing to be a member of a consolidated 
group (or loss subgroup).

* * * * *
    (g) [Reserved].


Sec.  1.1502-95T  Rules on ceasing to be a member of a consolidated 
group (or loss subgroup) (temporary).

    (a) through (e)(7) [Reserved].
    (e)(8) Reporting requirements.
    (i) Common Parent.
    (ii) Former Member.
    (iii) Exception.
    (f) Filing the election to apportion the section 382 limitation and 
net unrealized built-in gain.
    (1) Form of the election to apportion.
    (i) Statement.
    (ii) Agreement.
    (2) Signing the agreement.
    (3) Filing of the election.
    (i) Filing by the common parent.
    (ii) Filing by the former member.
    (4) Revocation of election.
    (g) Effective date.
    (1) Applicability date.
    (2) Expiration date.


Sec.  1.1561-0  [Removed]

0
Par. 17. Section 1.1561-0 is removed.


Sec.  1.1561-1  [Removed]

0
Par. 18. Section 1.1561-1 is removed.

0
Par. 19. Section 1.1561-1T is added to read as follows:


Sec.  1.1561-1T  General rules regarding certain tax benefits available 
to the component members of a controlled group of corporations 
(temporary).

    (a) In general. (1) Part II (section 1561 and following) of 
subchapter B of chapter 6 of the Internal Revenue Code (part II) 
provides rules to limit the amounts of certain specified tax benefit 
items of component members of a controlled group of corporations on a 
December 31, for their taxable years which include such December 31. 
The component members of such a group shall be limited for purposes of 
subtitle A of the Code to the amounts of certain items, set forth in 
section 1561(a), as if they were one corporation. Certain other tax 
items also set forth in section 1561(a) (e.g., the additional tax 
imposed by section 11(b)(1) and the section 55(d)(3) phase out of the 
alternative minimum tax exemption amount) will be determined by 
combining the taxable income of all such members and then allocating 
the amount of such items among such members.

[[Page 76908]]

    (2) For certain definitions (including the definition of a 
controlled group of corporations and a component member) and special 
rules for purposes of this part II see section 1563.
    (b) Special rules. (1) For purposes of this part II, the term 
corporation includes a small business corporation (as defined in 
section 1361). However, for the treatment of such a corporation as an 
excluded member of a controlled group of corporations see Sec.  1.1563-
1(b)(2)(ii)(C).
    (2) In the case of corporations electing a 52-53-week taxable year 
under section 441(f)(1), the provisions of this part II shall be 
applied in accordance with the special rule of section 441(f)(2)(A). 
See Sec.  1.441-2.
    (c) Tax avoidance. The provisions of this part II do not delimit or 
abrogate any principle of law established by judicial decision, or any 
existing provisions of the Code, such as sections 269, 482, and 1551, 
which have the effect of preventing the avoidance or evasion of income 
taxes.
    (d) Effective date--(1) Applicability date. This section applies to 
any taxable year beginning on or after December 22, 2006. However, 
taxpayers may apply this section to any Federal income tax return filed 
on or after December 22, 2006.
    (2) Expiration date. The applicability of this section will expire 
on December 21, 2009.

0
Par. 20. Section 1.1561-2 is amended by removing and reserving 
paragraphs (a) and (b), revising paragraph (c), removing and reserving 
paragraph(d), and adding paragraph (f) to read as follows:


Sec.  1.1561-2  Determination of amount of tax benefits.

* * * * *
    (c) [Reserved]. For further guidance, see Sec.  1.1561-2T(c).
* * * * *
    (f) [Reserved]. For further guidance, see Sec.  1.1561-2T(f)(1).

0
Par. 21. Section 1.1561-2T is added to read as follows:


Sec.  1.1561-2T  Determination of amount of tax benefits (temporary).

    (a) through (b) [Reserved].
    (c) Accumulated earnings credit. The component members of a 
controlled group of corporations may allocate the amount of the 
accumulated earnings credit unequally if they have an apportionment 
plan in effect.
    (d) [Reserved].
    (e) [Reserved]. For further guidance, see Sec.  1.1561-2(e).
    (f) Effective date--(1) Applicability date. This section applies to 
any taxable year beginning on or after December 22, 2006. However, 
taxpayers may apply this section to any Federal income tax return filed 
on or after December 22, 2006.
    (2) Expiration date. The applicability of this section will expire 
on December 21, 2009.


Sec.  1.1561-3  [Removed]

0
Par. 22. Section 1.1561-3 is removed.

0
Par. 23. Section 1.1561-3T is added to read as follows:


Sec.  1.1561-3T  Allocation of the section 1561(a) tax items 
(temporary).

    (a) Filing of form--(1) In general. For each taxable year that a 
corporation is a component member of the same controlled group of 
corporations on a December 31, for its taxable year that includes such 
December 31, such corporation and all other component members of such 
group must each file the required form (i.e., Schedule O or any 
successor to that form) with each Federal income tax return. Each such 
corporation must file that form with its return whether or not--
    (i) An apportionment plan is in effect; or
    (ii) Any change is made in the group's apportionment of its section 
1561(a) tax benefit items from the previous year.
    (2) Exception for component members that are members of a 
consolidated group. If one or more of the component members of a 
controlled group of corporations are also members of a consolidated 
group, the parent of such consolidated group shall file only one form 
on behalf of all of such members. Such form shall contain the 
information required for each such member.
    (b) No apportionment plan in effect. If the component members of a 
controlled group of corporations do not have an apportionment plan in 
effect, the amounts of the section 1561(a) items must be divided 
equally among all such members. For purposes of the preceding sentence, 
if any component members of a controlled group of corporations are also 
members of a consolidated group, such members will each be treated as a 
separate component member of the controlled group.
    (c) Apportionment plan in effect--(1) Adoption of plan. The 
component members of a controlled group of corporations consent to the 
adoption (or amendment) of an apportionment plan by checking the box to 
that effect on such form. For purposes of this paragraph (c)--
    (i) An apportionment plan that is adopted (including a plan that 
has been amended) continues in effect until it is terminated;
    (ii) A consolidated group is treated as one component member of 
such group; and
    (iii) The members must allocate the amounts of the section 1561(a) 
items between or among themselves as described in the plan.
    (2) Limitation on adopting a plan--(i) Sufficient statute of 
limitations period. The members may only adopt or amend such a plan if 
there is at least one year remaining in the statutory period (including 
any extensions thereof) for the assessment of a deficiency against 
every member the tax liability of which would be increased by the 
adoption of such a plan.
    (ii) Insufficient statute of limitations period. If any member 
cannot satisfy the requirement of paragraph (c)(2)(i) of this section, 
the members may not adopt or amend such a plan unless the member not 
satisfying such requirement has entered into an agreement with the 
Internal Revenue Service to extend the statute of limitations for the 
limited purpose of assessing any deficiency against such member 
attributable to the adoption of such a plan.
    (3) Termination of plan. An apportionment plan that is in effect 
for the component members of a controlled group with respect to a 
particular December 31 is terminated with respect to a succeeding 
December 31 if--
    (i) Each member of such group consents to the termination of such a 
plan for such succeeding December 31 by checking the box to that effect 
on its form;
    (ii) The controlled group ceases to remain in existence (within the 
meaning of section 1563(a)) during the calendar year ending on such 
succeeding December 31;
    (iii) Any corporation which was a component member of such group on 
the particular December 31 is not a component member of such group on 
such succeeding December 31; or
    (iv) Any corporation which was not a component member of such group 
on the particular December 31 is a component member of such group on 
such succeeding December 31.
    (d) Effective date--(1) Applicability date. This section applies to 
any taxable year beginning on or after December 22, 2006. However, 
taxpayers may apply this section to any Federal income tax return filed 
on or after December 22, 2006.
    (2) Expiration date. The applicability of this section will expire 
on December 21, 2009.


Sec.  1.1562-0  [Removed]

0
Par. 24. Section 1.1562-0 is removed.

[[Page 76909]]

Sec.  1.1562-1  [Removed]

0
Par. 25. Section 1.1562-1 is removed.


Sec.  1.1562-2  [Removed]

0
Par. 26. Section 1.1562-2 is removed.


Sec.  1.1562-3  [Removed]

0
Par. 27. Section 1.1562-3 is removed.


Sec.  1.1562-4  [Removed]

0
Par. 28. Section 1.1562-4 is removed.


Sec.  1.1562-5  [Removed]

0
Par. 29. Section 1.1562-5 is removed.


Sec.  1.1562-6  [Removed]

0
Par. 30. Section 1.1562-6 is removed.


Sec.  1.1562-7  [Removed]

0
Par. 31. Section 1.1562-7 is removed.


Sec.  1.1563-1  [Removed]

0
Par. 32. Section 1.1563-1 is removed.

0
Par. 33. Section 1.1563-1T is amended by revising paragraphs (a), (b), 
(c)(1), (c)(2)(iv), (d) and (e) to read as follows:


Sec.  1.1563-1T  Definition of controlled group of corporations and 
component members (temporary).

    (a) Controlled group of corporations--(1) In general. For purposes 
of sections 1561 through 1563, the term controlled group of 
corporations means any group of corporations which is either a parent-
subsidiary controlled group (as defined in paragraph (a)(2) of this 
section), a brother-sister controlled group (as defined in paragraph 
(a)(3)(i) of this section), a combined group (as defined in paragraph 
(a)(4) of this section), or a life insurance controlled group (as 
defined in paragraph (a)(5) of this section). For the exclusion of 
certain stock for purposes of applying the definitions contained in 
this paragraph, see section 1563(c) and Sec.  1.1563-2.
    (2) Parent-subsidiary controlled group. (i) The term parent-
subsidiary controlled group means one or more chains of corporations 
connected through stock ownership with a common parent corporation if--
    (A) Stock possessing at least 80 percent of the total combined 
voting power of all classes of stock entitled to vote or at least 80 
percent of the total value of shares of all classes of stock of each of 
the corporations, except the common parent corporation, is owned 
(directly and with the application of Sec.  1.1563-3(b)(1), relating to 
options) by one or more of the other corporations; and
    (B) The common parent corporation owns (directly and with the 
application of Sec.  1.1563-3(b)(1), relating to options) stock 
possessing at least 80 percent of the total combined voting power of 
all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of stock of at least one of the 
other corporations, excluding, in computing such voting power or value, 
stock owned directly by such other corporations.
    (ii) The definition of a parent-subsidiary controlled group of 
corporations may be illustrated by the following examples:

    Example 1. P Corporation owns stock possessing 80 percent of the 
total combined voting power of all classes of stock entitled to vote 
of S Corporation. P is the common parent of a parent-subsidiary 
controlled group consisting of member corporations P and S.
    Example 2. Assume the same facts as in Example 1. Assume further 
that S owns stock possessing 80 percent of the total value of shares 
of all classes of stock of T Corporation. P is the common parent of 
a parent-subsidiary controlled group consisting of member 
corporations P, S, and T. The result would be the same if P, rather 
than S, owned the T stock.
    Example 3. L Corporation owns 80 percent of the only class of 
stock of M Corporation and M, in turn, owns 40 percent of the only 
class of stock of O Corporation. L also owns 80 percent of the only 
class of stock of N Corporation and N, in turn, owns 40 percent of 
the only class of stock of O. L is the common parent of a parent-
subsidiary controlled group consisting of member corporations L, M, 
N, and O.
    Example 4. X Corporation owns 75 percent of the only class of 
stock of Y and Z Corporations; Y owns all the remaining stock of Z; 
and Z owns all the remaining stock of Y. Since intercompany 
stockholdings are excluded (that is, are not treated as outstanding) 
for purposes of determining whether X owns stock possessing at least 
80 percent of the voting power or value of at least one of the other 
corporations, X is treated as the owner of stock possessing 100 
percent of the voting power and value of Y and of Z for purposes of 
paragraph (a)(2)(i)(B) of this section. Also, stock possessing 100 
percent of the voting power and value of Y and Z is owned by the 
other corporations in the group within the meaning of paragraph 
(a)(2)(i)(A) of this section. (X and Y together own stock possessing 
100 percent of the voting power and value of Z, and X and Z together 
own stock possessing 100 percent of the voting power and value of 
Y.) Therefore, X is the common parent of a parent-subsidiary 
controlled group of corporations consisting of member corporations 
X, Y, and Z.

    (3) Brother-sister controlled group--(i) In general. The term 
brother-sister controlled group means two or more corporations if the 
same five or fewer persons who are individuals, estates, or trusts own 
(directly and with the application of the rules contained in Sec.  
1.1563-3(b)) stock possessing more than 50 percent of the total 
combined voting power of all classes of stock entitled to vote or more 
than 50 percent of the total value of shares of all classes of stock of 
each corporation, taking into account the stock ownership of each such 
person only to the extent such stock ownership is identical with 
respect to each such corporation.
    (ii) Additional stock ownership requirement for purposes of certain 
other provisions of law. For purposes of any provision of law (other 
than sections 1561 through 1563) that incorporates the section 1563(a) 
definition of a controlled group, the term brother-sister controlled 
group means two or more corporations if the same five or fewer persons 
who are individuals, estates, or trusts own (directly and with the 
application of the rules contained in Sec.  1.1563-3(b)) stock 
possessing--
    (A) At least 80 percent of the total combined voting power of all 
classes of stock entitled to vote or at least 80 percent of the total 
value of shares of all classes of stock of each corporation (the 80 
percent requirement);
    (B) More than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking 
into account the stock ownership of each such person only to the extent 
such stock ownership is identical with respect to each such corporation 
(the more-than-50 percent identical ownership requirement); and
    (C) The five or fewer persons whose stock ownership is considered 
for purposes of the 80 percent requirement must be the same persons 
whose stock ownership is considered for purposes of the more-than-50 
percent identical ownership requirement.
    (iii) Examples. The principles of paragraph (a)(3)(ii) of this 
section may be illustrated by the following examples:

    Example 1. (i) The outstanding stock of corporations P, Q, R, S, 
and T, which have only one class of stock outstanding is owned by 
the following unrelated individuals:

[[Page 76910]]



                                                                      Corporations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       P           Q           R           S           T
                   Individuals                     (percent)   (percent)   (percent)   (percent)   (percent)              Identical ownership
--------------------------------------------------------------------------------------------------------------------------------------------------------
A...............................................          55          51          55          55          55  51.
B...............................................          45          49  ..........  ..........  ..........  (45% in P & Q).
C...............................................  ..........  ..........          45  ..........  ..........
D...............................................  ..........  ..........  ..........          45  ..........
E...............................................  ..........  ..........  ..........  ..........          45
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................         100         100         100         100         100
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) Corporations P and Q are members of a brother-sister 
controlled group of corporations. Although the more-than-50 percent 
identical ownership requirement is met for all 5 corporations, 
corporations R, S, and T are not members because at least 80 percent 
of the stock of each of those corporations is not owned by the same 
5 or fewer persons whose stock ownership is considered for purposes 
of the more-than-50 percent identical ownership requirement.
    Example 2. (i) The outstanding stock of corporations U and V, 
which have only one class of stock outstanding, is owned by the 
following unrelated individuals:

------------------------------------------------------------------------
                                                       Corporations
                                                 -----------------------
                   Individuals                         U           V
                                                   (percent)   (percent)
------------------------------------------------------------------------
A...............................................          12          12
B...............................................          12          12
C...............................................          12          12
D...............................................          12          12
E...............................................          13          13
F...............................................          13          13
G...............................................          13          13
H...............................................          13          13
                                                 -----------------------
    Total.......................................         100         100
------------------------------------------------------------------------

    (ii) Any group of five of the shareholders will own more than 50 
percent of the stock in each corporation, in identical holdings. 
However, U and V are not members of a brother-sister controlled 
group because at least 80 percent of the stock of each corporation 
is not owned by the same five or fewer persons.
    Example 3. (i) Corporations X and Y each have two classes of 
stock outstanding, voting common and non-voting common. (None of 
this stock is excluded from the definition of stock under section 
1563(c).) Unrelated individuals A and B own the following 
percentages of the class of stock entitled to vote (voting) and of 
the total value of shares of all classes of stock (value) in each of 
corporations X and Y:

----------------------------------------------------------------------------------------------------------------
                                                                       Corporations
              Individuals               ------------------------------------------------------------------------
                                                      X                                   Y
----------------------------------------------------------------------------------------------------------------
A......................................  100% voting, 60% value....  75% voting, 60% value.
B......................................  0% voting, 10% value......  25% voting, 10% value.
----------------------------------------------------------------------------------------------------------------

    (ii) No other shareholder of X owns (or is considered to own) 
any stock in Y. X and Y are a brother-sister controlled group of 
corporations. The group meets the more-than-50 percent identical 
ownership requirement because A and B own more than 50 percent of 
the total value of shares of all classes of stock of X and Y in 
identical holdings. (The group also meets the more-than-50 percent 
identical ownership requirement because of A's voting stock 
ownership.) The group meets the 80 percent requirement because A and 
B own at least 80 percent of the total combined voting power of all 
classes of stock entitled to vote.
    Example 4. Assume the same facts as in Example 3 except that the 
value of the stock owned by A and B is not more than 50 percent of 
the total value of shares of all classes of stock of each 
corporation in identical holdings. X and Y are not a brother-sister 
controlled group of corporations. The group meets the more-than-50 
percent identical ownership requirement because A owns more than 50 
percent of the total combined voting power of the voting stock of 
each corporation. For purposes of the 80 percent requirement, B's 
voting stock in Y cannot be combined with A's voting stock in Y 
since B, who does not own any voting stock in X, is not a person 
whose ownership is considered for purposes of the more-than-50 
percent identical ownership requirement. Because no other 
shareholder owns stock in both X and Y, these other shareholders' 
stock ownership is not counted towards meeting either the more-than-
50 percent identical ownership requirement or the 80 percent 
ownership requirement.

    (iv) Special rule if prior law applies. Paragraph (a)(3)(ii) of 
this section, as amended by TD 8179, applies to taxable years ending on 
or after December 31, 1970. See, however, the transitional rule in 
paragraph (d) of this section.
    (4) Combined group. (i) The term combined group means any group of 
three or more corporations if--
    (A) Each such corporation is a member of either a parent-subsidiary 
controlled group of corporations or a brother-sister controlled group 
of corporations; and
    (B) At least one of such corporations is the common parent of a 
parent-subsidiary controlled group and also is a member of a brother-
sister controlled group.
    (ii) The definition of a combined group of corporations may be 
illustrated by the following examples:

    Example 1. Smith, an individual, owns stock possessing 80 
percent of the total combined voting power of all classes of the 
stock of corporations X and Y. Y, in turn, owns stock possessing 80 
percent of the total combined voting power of all classes of the 
stock of corporation Z. X, Y, and Z are members of the same combined 
group since--
    (i) X, Y, and Z are each members of either a parent-subsidiary 
or brother-sister controlled group of corporations; and
    (ii) Y is the common parent of a parent-subsidiary controlled 
group of corporations consisting of Y and Z, and also is a member of 
a brother-sister controlled group of corporations consisting of X 
and Y.
    Example 2. Assume the same facts as in Example 1, and further 
assume that corporation X owns 80 percent of the total value of 
shares of all classes of stock of corporation T. X, Y, Z, and T are 
members of the same combined group.
    (5) Life insurance controlled group. (i) The term life insurance 
controlled group means two or more life insurance companies each of 
which is a member of a controlled group of corporations described in 
paragraph (a)(2), (a)(3)(i), or (a)(4) of this section and to which 
Sec.  1.1502-47(f)(6) does not apply. Such insurance companies shall be 
treated as a controlled group of corporations separate from any other 
corporations which are members of a controlled group described in such 
paragraph (a)(2), (a)(3)(i), or (a)(4). For purposes of

[[Page 76911]]

this section, the common parent of the controlled group described in 
paragraph (a)(2) of this section shall be referred to as the common 
parent of the life insurance controlled group.
    (ii) The following examples illustrate the definition of a life 
insurance controlled group. In these examples, L indicates a life 
company, another letter indicates a nonlife company and each 
corporation uses the calendar year as its taxable year.

    Example 1. Since January 1, 1999, corporation P has owned all 
the stock of corporations and Y, and L1 has owned all the 
stock of corporation X. On January 1, 2005, Y acquired all of the 
stock of corporation L2. Since L1 and 
L2 are members of a parent-subsidiary controlled group of 
corporations, such companies are treated as members of a life 
insurance controlled group separate from the parent-subsidiary 
controlled group consisting of P, X and Y. For purposes of this 
section, P is referred to as the common parent of the life insurance 
controlled group even though P is not a member of such group.
    Example 2. The facts are the same as in Example 1, except that, 
beginning with the 2005 tax year, the P affiliated group elected to 
file a consolidated return and P made a section 1504(c)(2) election. 
Pursuant to paragraph (a)(5)(i) of this section, L1 and 
L2 are not members of a separate life insurance 
controlled group. Instead, P, X, Y, L1 and L2 
constitute one controlled group. See Sec.  1.1502-47(f)(6).

    (6) Voting power of stock. For purposes of this section, and 
Sec. Sec.  1.1563-2 and 1.1563-3, in determining whether the stock 
owned by a person (or persons) possesses a certain percentage of the 
total combined voting power of all classes of stock entitled to vote of 
a corporation, consideration will be given to all the facts and 
circumstances of each case. A share of stock will generally be 
considered as possessing the voting power accorded to such share by the 
corporate charter, by-laws, or share certificate. On the other hand, if 
there is any agreement, whether express or implied, that a shareholder 
will not vote his stock in a corporation, the formal voting rights 
possessed by his stock may be disregarded in determining the percentage 
of the total combined voting power possessed by the stock owned by 
other shareholders in the corporation, if the result is that the 
corporation becomes a component member of a controlled group of 
corporations. Moreover, if a shareholder agrees to vote his stock in a 
corporation in the manner specified by another shareholder in the 
corporation, the voting rights possessed by the stock owned by the 
first shareholder may be considered to be possessed by the stock owned 
by such other shareholder if the result is that the corporation becomes 
a component member of a controlled group of corporations.
    (b) Component members--(1) In general. For purposes of sections 
1561 through 1563, a corporation is a component member of a controlled 
group of corporations on a December 31 (and with respect to the taxable 
year which includes such December 31) if such corporation--
    (i) Is a member of such controlled group on such December 31 and is 
not treated as an excluded member under paragraph (b)(2) of this 
section; or
    (ii) Is not a member of such controlled group on such December 31 
but is treated as an additional member under paragraph (b)(3) of this 
section.
    (2) Excluded members. (i) A corporation, which is a member of a 
controlled group of corporations on the December 31 included within its 
taxable year, but was a member of such group for less than one-half of 
the number of days in such taxable year which precede such December 31, 
shall be treated as an excluded member of such group on such December 
31.
    (ii) A corporation which is a member of a controlled group of 
corporations on any December 31 shall be treated as an excluded member 
of such group on such date if, for its taxable year including such 
date, such corporation is--
    (A) Exempt from taxation under section 501(a) (except a corporation 
which is subject to tax on its unrelated business taxable income under 
section 511) or 521 for such taxable year;
    (B) A foreign corporation not subject to taxation under section 
882(a) for the taxable year;
    (C) An S corporation (as defined in section 1361) for purposes of 
any tax benefit item described in section 1561(a) to which it is not 
subject;
    (D) A franchised corporation (as defined in section 1563(f)(4) and 
Sec.  1.1563-4); or
    (E) An insurance company subject to taxation under section 801, 
unless such insurance company (without regard to this paragraph 
(b)(2)(ii)(E)) is a component member of a life insurance controlled 
group described in paragraph (a)(5)(i) of this section or unless Sec.  
1.1502-47(f)(6) applies (which treats a life insurance company, for 
which a section 1504(c)(2) election is effective, as a member (whether 
eligible or ineligible) of a life-nonlife affiliated group).
    (3) Additional members. A corporation shall be treated as an 
additional member of a controlled group of corporations on the December 
31 included within its taxable year if it--
    (i) Is not a member of such group on such December 31;
    (ii) Is not described, with respect to such taxable year, in 
paragraph (b)(2)(ii)(A), (B), (C), (D), or (E) of this section; and
    (iii) Was a member of such group for one-half (or more) of the 
number of days in such taxable year which precede such December 31.
    (4) Examples. The provisions of this paragraph may be illustrated 
by the following examples:

    Example 1. Brown, an individual, owns all of the stock of 
corporations W and X on each day of 1964. W and X each uses the 
calendar year as its taxable year. On January 1, 1964, Brown also 
owns all the stock of corporation Y (a fiscal year corporation with 
a taxable year beginning on July 1, 1964, and ending on June 30, 
1965), which stock he sells on October 15, 1964. On December 1, 
1964, Brown purchases all the stock of corporation Z (a fiscal year 
corporation with a taxable year beginning on September 1, 1964, and 
ending on August 31, 1965). On December 31, 1964, W, X, and Z are 
members of the same controlled group. However, the component members 
of the group on such December 31 are W, X, and Y. Under paragraph 
(b)(2)(i) of this section, Z is treated as an excluded member of the 
group on December 31, 1964, since Z was a member of the group for 
less than one-half of the number of days (29 out of 121 days) during 
the period beginning on September 1, 1964 (the first day of its 
taxable year) and ending on December 30, 1964. Under paragraph 
(b)(3) of this section, Y is treated as an additional member of the 
group on December 31, 1964, since Y was a member of the group for at 
least one-half of the number of days (107 out of 183 days) during 
the period beginning on July 1, 1964 (the first day of its taxable 
year) and ending on December 30, 1964.
    Example 2. On January 1, 1964, corporation P owns all the stock 
of corporation S, which in turn owns all the stock of corporation S-
1. On November 1, 1964, P purchases all of the stock of corporation 
X from the public and sells all of the stock of S to the public. 
Corporation X owns all the stock of corporation Y during 1964. P, S, 
S-1, X, and Y file their returns on the basis of the calendar year. 
On December 31, 1964, P, X, and Y are members of a parent-subsidiary 
controlled group of corporations; also, corporations S and S-1 are 
members of a different parent-subsidiary controlled group on such 
date. However, since X and Y have been members of the parent-
subsidiary controlled group of which P is the common parent for less 
than one-half the number of days during the period January 1 through 
December 30, 1964, they are not component members of such group on 
such date. On the other hand, X and Y have been members of a parent-
subsidiary controlled group of which X is the common parent for at 
least one-half the number of days during the period January 1 
through December 30, 1964, and therefore they are component members 
of such group on December 31, 1964. Also since S and S-1 were 
members of the parent-subsidiary controlled group of which P is the 
common parent for at least

[[Page 76912]]

one-half the number of days in the taxable years of each such 
corporation during the period January 1 through December 30, 1964, 
P, S, and S-1 are component members of such group on December 31, 
1964.
    Example 3. Throughout 1964, corporation M owns all the stock of 
corporation F which, in turn, owns all the stock of corporations L-
1, L-2, X, and Y. M is a domestic mutual insurance company subject 
to taxation under section 821, F is a foreign corporation not 
engaged in a trade or business within the United States, L-1 and L-2 
are domestic life insurance companies subject to taxation under 
section 802, and X and Y are domestic corporations subject to tax 
under section 11 of the Code. Each corporation uses the calendar 
year as its taxable year. On December 31, 1964, M, F, L-1, L-2, X, 
and Y are members of a parent-subsidiary controlled group of 
corporations. However, under paragraph (b)(2)(ii) of this section, 
M, F, L-1, and L-2 are treated as excluded members of the group on 
December 31, 1964. Thus, on December 31, 1964, the component members 
of the parent-subsidiary controlled group of which M is the common 
parent include only X and Y. Furthermore, since paragraph 
(b)(2)(ii)(E) of this section does not result in L-1 and L-2 being 
treated as excluded members of a life insurance controlled group, L-
1 and L-2 are component members of a life insurance controlled group 
on December 31, 1964.

    (5) Application of constructive ownership rules. For purposes of 
paragraphs (b)(2)(i) and (3) of this section, it is necessary to 
determine whether a corporation was a member of a controlled group of 
corporations for one-half (or more) of the number of days in its 
taxable year which precede the December 31 falling within such taxable 
year. Therefore, the constructive ownership rules contained in Sec.  
1.1563-3(b) (to the extent applicable in making such determination) 
must be applied on a day-by-day basis. For example, if P Corporation 
owns all the stock of X Corporation on each day of 1964, and on 
December 30, 1964, acquires an option to purchase all the stock of Y 
Corporation (a calendar-year taxpayer which has been in existence on 
each day of 1964), the application of Sec.  1.1563-3(b)(1) on a day-by-
day basis results in Y being a member of the brother-sister controlled 
group on only one day of Y's 1964 year which precedes December 31, 
1964. Accordingly, since Y is not a member of such group for one-half 
or more of the number of days in its 1964 year preceding December 31, 
1964, Y is treated as an excluded member of such group on December 31, 
1964.
    (c) Overlapping groups--(1) In general. If on a December 31 a 
corporation is a component member of a controlled group of corporations 
by reason of ownership of stock possessing at least 80 percent of the 
total value of shares of all classes of stock of the corporation, and 
if on such December 31 such corporation is also a component member of 
another controlled group of corporations by reason of ownership of 
other stock (that is, stock not used to satisfy the at-least-80 percent 
total value test) possessing at least 80 percent of the total combined 
voting power of all classes of stock of the corporation entitled to 
vote, then such corporation shall be treated as a component member only 
of the controlled group of which it is a component member by reason of 
the ownership of at least 80 percent of the total value of its shares.
    (2) Brother-sister controlled groups.
* * * * *
    (iv) The provisions of this paragraph (c)(2) may be illustrated by 
the following examples (in which it is assumed that all the individuals 
are unrelated):

    Example 1. (i) On each day of 1970 all the outstanding stock of 
corporations M, N, and P is held in the following manner:

----------------------------------------------------------------------------------------------------------------
                                                                                   Corporations
                           Individuals                           -----------------------------------------------
                                                                    M (percent)     N (percent)     P (percent)
----------------------------------------------------------------------------------------------------------------
A...............................................................              55              40               5
B...............................................................              40              20              40
C...............................................................               5              40              55
----------------------------------------------------------------------------------------------------------------

    (ii) Since the more-than-50 percent identical ownership 
requirement of section 1563(a)(2) is met with respect to 
corporations M and N and with respect to corporations N and P, but 
not with respect to corporations M, N, and P, corporation N would, 
without the application of this paragraph (c)(2), be a component 
member on December 31, 1970, of overlapping groups consisting of M 
and N and of N and P. If N does not file an election in accordance 
with paragraph (c)(2)(i) of this section, the Internal Revenue 
Service will determine the group in which N is to be included.
    Example 2. (i) On each day of 1970, all the outstanding stock of 
corporations S, T, W, X, and Z is held in the following manner:

----------------------------------------------------------------------------------------------------------------
                                                                           Corporations
                  Individuals                   ----------------------------------------------------------------
                                                      S            T            W            X            Z
----------------------------------------------------------------------------------------------------------------
D..............................................           52           52           52           52           52
E..............................................           40            2            2            2            2
F..............................................            2           40            2            2            2
G..............................................            2            2           40            2            2
H..............................................            2            2            2           40            2
I..............................................            2            2            2            2           40
----------------------------------------------------------------------------------------------------------------

    (ii) On December 31, 1970, the more-than-50 percent identical 
ownership requirement of section 1563(a)(2) may be met with regard 
to any combination of the corporations but all five corporations 
cannot be included as component members of a single controlled group 
because the inclusion of all the corporations in a single group 
would be dependent upon taking into account the stock ownership of 
more than five persons. Therefore, if the corporations do not file a 
statement in accordance with paragraph (c)(2)(ii) of this section, 
the Internal Revenue Service will determine the group in which each 
corporation is to be included. The corporations or the Internal 
Revenue Service, as the case may be, may designate that three 
corporations be included in one group and two corporations in 
another, or that any four corporations be included in one group and 
that the remaining corporation not be i