Calculating and Apportioning the Section 11(b)(1) Additional Tax under Section 1561 for Controlled Groups., 72929-72936 [E7-24874]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 246 (Wednesday, December 26, 2007)]
[Rules and Regulations]
[Pages 72929-72936]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24874]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9369]
RIN 1545-BG40


Calculating and Apportioning the Section 11(b)(1) Additional Tax 
under Section 1561 for Controlled Groups.

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document removes the final regulation for Sec.  1.1561-2, 
amends Sec. Sec.  1.1561-2T and 1.1563-1T, and adds Sec.  1.1502-47T. 
These temporary regulations affect component members of a controlled 
group of corporations and consolidated groups filing life-nonlife 
Federal income tax returns. These temporary regulations provide 
guidance for calculating and apportioning between component members any 
amount of additional tax and any reduction in the amount exempted from 
the alternative minimum tax. These temporary regulations also update 
and clarify the allocation of tax-benefit items in the case in which a 
component member has a short taxable year not including a December 31st 
date. Finally, these temporary regulations provide explanations of two 
concepts: a group's testing date and a member's testing period for use 
in determining which members of the group and which taxable years of 
those members are subject to the controlled group rules. 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 temporary regulations are effective on 
December 26, 2007.
    Applicability Dates: For the dates of applicability, see Sec. Sec.  
1.1502-47T(t)(1), 1.1561-2T(f)(1) and 1.1563-1T(e)(1). The 
applicability of these temporary regulations will expire on December 
21, 2010.

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

SUPPLEMENTARY INFORMATION:

Background

A. Summary of Limitations on Controlled Groups of Corporations 
Regarding Lower Tax Brackets and Alternative Minimum Tax Exemption 
Amounts

    Section 1561(a) of the Internal Revenue Code (Code) provides that 
the component members of a controlled group of corporations (as those 
terms are defined in section 1563) are limited for their taxable years 
which include the same December 31st date to an amount of each of the 
tax-benefit items listed therein to which a corporation that is not a 
component member of a controlled group is entitled. Two of those items 
are the section 11(b)(1) tax-bracket amounts and the section 55(d)(2) 
exemption from the alternative minimum tax (the ``exemption amount''). 
See section 1561(a)(1) and (a)(3). Each of these two Code provisions 
requires reductions in calculating the amounts of each of these two 
tax-benefit items after the taxpayer has passed certain thresholds. The 
``additional taxes'' under section 11(b)(1) serve to reduce a 
corporation's use of the lower tax brackets after certain specified 
threshold levels of income are reached. Section 55(d)(3) requires 
reductions to the amount exempted from the alternative minimum tax.

B. The Additional Taxes Imposed by Section 11(b)(1) and the Alternative 
Minimum Tax Exemption Amount

    In general, section 11(b)(1) provides for a graduated income tax 
rate structure for taxing the income of a corporation. The income tax 
rates imposed on a corporation's income increase with each higher 
bracketed range of taxable income. The following chart shows the 
various tax rates imposed on a

[[Page 72930]]

corporation and the ranges of taxable income that are subject to each 
of these tax rates:

------------------------------------------------------------------------
                                         Range of taxable income subject
              Rate of tax                        to a rate of tax
------------------------------------------------------------------------
15%....................................  $50,000 (first $50,000 of
                                          corporation's taxable income).
25%....................................  $25,000 ($75,000-$50,000).
34%....................................  $9,925,000 ($10,000,000-
                                          $75,000).
35%....................................  > $10,000,000.
------------------------------------------------------------------------

    Section 11(b)(1) also imposes additional tax on the corporation's 
taxable income where its income exceeds two designated income 
thresholds. This additional tax is designed to reduce the tax benefit 
that a corporation derives from having some of its income taxed at a 
lower rate.
    For example, if a corporation's taxable income exceeds $100,000 
(but is not greater than $15 million), the total amount of the 
additional tax is the lesser of (1) the amount of 5 percent of the 
excess over $100,000 or (2) $11,750. This $11,750 amount represents the 
maximum tax benefit available to a corporation from having all of the 
first $75,000 of its taxable income taxed at the 15 and 25 percent tax 
rates rather than at a 34 percent tax rate. Similarly, if a 
corporation's taxable income exceeds $15 million, there is a further 
additional tax equal to the lesser of (1) the amount of 3 percent of 
the excess over $15 million, or (2) $100,000. This $100,000 amount 
represents the maximum tax benefit available to a corporation from 
having all of the first $10 million of its taxable income taxed at the 
34 percent tax rate rather than at a 35 percent tax rate.
    Section 55(d)(3) provides that a taxpayer's exemption amount shall 
be phased out (but not below zero) as the taxpayer's alternative 
minimum taxable income increases.

C. The Controlled Group Rules

    Under section 1561(a), the component members of a controlled group, 
with regard to taxable years containing a particular December 31st 
``testing date,'' are collectively limited to using one full amount of 
certain tax-benefit items. As noted above, one of the tax benefits so 
limited is the benefit of the lower tax brackets. Another is the 
$40,000 amount for exemption from the alternative minimum tax. Section 
1561(a) generally provides that the lower tax brackets and the $40,000 
exemption from alternative minimum tax are divided equally among the 
component members of the controlled group unless the group adopts an 
apportionment plan that provides for an unequal allocation.
    Section 1563(a) defines the four types of controlled groups. The 
two most common are parent-subsidiary (defined in section 1563(a)(1)) 
and brother-sister (defined in section 1563(a)(2)).
    Under section 1563(b), a corporation is a component member of a 
controlled group for a given taxable year if it was a member of such 
group on the December 31st date of its taxable year for at least one-
half the number of days of its taxable year that precedes that December 
31st date. In addition, pursuant to section 1563(b)(3), a corporation 
is treated as a component member of a controlled group if it was a 
member of such group during a calendar year, although not on December 
31st, but was a member of such group for at least one-half the number 
of days of its taxable year that precede that December 31st date 
(referred to as an ``additional member''). Conversely, pursuant to 
section 1563(b)(2), a corporation which is a member of a controlled 
group of corporations on December 31st of any taxable year is treated 
as an excluded member of the controlled group (with regard to that 
December 31st testing date), if such corporation is a member of such 
group for less than one-half the number of days in its taxable year 
which precede such December 31st. The December 31st date of a specified 
calendar year will be referred to as the group's testing date. The 
December 31st testing date is used for determining which taxable years 
of which members will be subject to the limitation rules imposed by, 
for example, section 1561(a). Furthermore, the total number of days of 
a member's taxable year that precede a specified December 31st testing 
date will be referred to as that member's ``testing period.''
    Section 1561(a) provides that in computing the amount of additional 
tax imposed by section 11(b)(1), and the phase-out of the exemption 
amount under section 55(d)(3), the component members shall, as a first 
step, combine their taxable incomes. Most controlled groups will easily 
be able to compute the total of their members' taxable incomes and 
determine whether this sum exceeds the applicable income thresholds. 
Therefore, it is unnecessary to provide any regulatory guidance with 
regard to such determination. However, the IRS and the Treasury 
Department recognize that various situations exist where a component 
member may encounter difficulties with obtaining the information needed 
to calculate its entitlement to the benefit of a lower bracket or its 
obligation to pay additional taxes. For the benefit of taxpayers that 
confront such problems, several such situations are discussed below and 
illustrated in the examples of the regulation, although they are not 
addressed in the text of these temporary regulations.
    Section 1561(a) provides that the taxable income of all of the 
component members of a controlled group of corporations for the taxable 
years which are subjected to the same December 31st testing date shall 
be taken into account, that is, added together, for the purpose of 
determining whether any member owes the additional tax imposed by 
section 11(b)(1) as well as for determining what portion of that 
additional tax is to be allocated to each member. As in the case of the 
additional tax, section 1561(a) provides that the alternative minimum 
taxable income of all of the component members of a controlled group of 
corporations for the taxable years that include the same December 31st 
date shall be taken into account, that is, added together, for the 
purpose of determining the reduction (under section 55(d)(3)) to the 
exemption amount as set forth in section 55(d)(2). Section 1561(a) 
further provides that the additional taxes, as well as the reduction to 
the exemption amount, shall each be apportioned among those members in 
the same manner that the corresponding tax-benefit item is apportioned. 
However, the current regulations do not provide any guidance on how to 
calculate and apportion these reductions to these two tax-benefit 
items.

Explanation of Provisions

A. Allocation of the Benefit Recapture Items

    Given that the additional taxes must be apportioned among the 
component members in the same manner as the tax-bracket amounts, these 
temporary regulations provide two methods for apportioning the amount 
of those additional taxes among the component members: the 
``proportionate method'' and the first-in-first-out (``FIFO'') method. 
Under the proportionate method, the additional tax is allocated to any 
component member to whom a tax-bracket amount was apportioned in the 
same proportion as the portion of the tax benefit from that tax bracket 
which was allocated to that member bears to the total tax-benefit 
amount provided to all members from the use of that tax bracket. These 
tax benefits are attributable to the tax savings to the members of the 
group resulting from having ranges of income (tax-bracket amounts) 
being taxed at lower rates,

[[Page 72931]]

instead of the higher tax rates to which income of the group is 
subject. The text of the regulations sets out the steps for applying 
this method. Under the FIFO method, the first dollars of the additional 
tax are to be allocated proportionately to each member to whom a tax-
bracket amount was apportioned, starting with the lowest tax bracket 
and continuing on successively to each next higher tax bracket until 
the entire amount of the additional tax has been fully apportioned 
among the members. For example, under the FIFO method of apportionment, 
the first $9,500 of additional tax liability of a controlled group 
would be apportioned entirely to the member(s) that were apportioned 
the 15 percent tax bracket. Unless the component members of a 
controlled group elect to use the FIFO method, they are required to use 
the proportionate method in apportioning the additional taxes among the 
component members.
    These temporary regulations also provide guidance in calculating 
and apportioning the reduction to the exemption amount. Specifically, 
they provide that any reduction to the exemption amount shall be 
apportioned to the component members in the same manner as the 
exemption amount.

B. Apportioning Certain Tax-Benefit Items Where a Component Member Has 
a Short Taxable Year Not Including a December 31st Date

    Section 1561(b) provides that where a corporation has a short 
taxable year which does not include a December 31st date, but is a 
component member of a controlled group of corporations for such year (a 
``short-year member''), then, for purposes of subtitle A of the Code, 
the tax-benefit items described in section 1561(b) (the ``section 
1561(b) tax-benefit items'') of such corporation for such year shall be 
the amount specified in section 1561(a) for that item, divided by the 
number of corporations which are component members of such group on the 
last day of that member's short taxable year. Thus, a short-year member 
is not permitted to be apportioned a different amount.
    Section 1561(b) further provides that the rules of section 1563(b) 
shall be applied as if the last day of the short-year member's short 
taxable year were substituted for December 31st. Thus, the 
determination of whether a short-year member qualifies as a member of 
the group is determined by looking to its testing period, which begins 
on the first day of its taxable year and ends on the day before the 
last day of such short taxable year. See the discussion of testing date 
and testing period in the following section of this preamble. Section 
1.1561-2(e) interprets this provision.
    These temporary regulations update and clarify the rules of current 
Sec.  1.1561-2(e). It is not intended that any such updating and 
clarification constitute a substantive change.

C. Definitions of a Group's Testing Date and a Member's Testing Period

    Section 1.1563-1T(b) defines component members and excluded members 
of controlled groups. These definitions depend upon whether a 
corporation was a member of a group on the December 31st of its taxable 
year (its ``testing date'') and was a member for at least one-half the 
number of days of its taxable year beginning on the first day of its 
taxable year and ending on December 30th of its taxable year (its 
``testing period'').
    These temporary regulations amend Sec.  1.1563-1T(b) to provide 
explanations of the concepts: Testing date and testing period.
    A testing date is defined as the date that a controlled group is 
required to use in determining which of its members and which of their 
taxable years will be subject to the controlled group rules. Generally, 
a group's testing date is the December 31st date included within all 
the members' taxable years, whether such corporations are on a calendar 
or fiscal taxable year. However, if a component member of a controlled 
group has a short taxable year that does not include a December 31st 
date, then the last day of its short taxable year serves as the 
member's testing date.
    A testing period is defined as the period of time that a member of 
a controlled group uses to determine its status as either a component 
member or an excluded member. The testing period begins on the first 
day of a member's taxable year and ends on the day before its testing 
date. Thus, in the case of a member on a fiscal taxable year, the 
portion of its taxable year beginning after December 31st and ending on 
the last day of its taxable year is not taken into account in 
determining its status as a component member or an excluded member.

D. Information Sharing Among Controlled Group Members

    The IRS and the Treasury Department wish to note certain 
circumstances in which corporations may experience complications in 
applying the controlled group rules generally or with respect to tax 
brackets and the alternative minimum tax exemption amount in 
particular. As noted above, no new rules are provided with respect to 
these situations, although they are illustrated in several examples in 
these temporary regulations. Because the controlled group rules apply 
to multiple corporations each filing its own return, the corporations 
must have access to sufficient information regarding the other members 
or potential members to comply with the rules. Taxpayers are alerted to 
their responsibilities to obtain this information. In certain 
situations, such information may have to be obtained from corporations 
that are no longer owned by related parties and taxpayers will need to 
make arrangements to ensure that they will have access to information 
that will enable them to meet their compliance obligations. Ideally, 
the corporations and their shareholders will take these issues into 
account when contemplating transfers of interests in the corporations 
to provide access to adequate information sharing afterwards.
    For example, if a corporation in a group changes hands during or 
shortly after the end of a taxable year, the formerly related 
corporations in the selling group will need information from the sold 
corporation about its income levels under the regular and alternative 
minimum tax systems, and the sold corporation will need information 
about the formerly related selling group members.
    In addition, if a corporation changes hands during a calendar year 
in a transaction that does not close the corporation's taxable year, 
events later in the year after the corporation is no longer related 
could affect the corporation's status as a member of the controlled 
group. For example, if the corporation changes hands early in the 
calendar year, the selling group might assume that the bulk of the 
testing period will fall after the sale and the corporation will not be 
a member for the year. However, if the corporation is liquidated by its 
new owners during the calendar year, the testing period for the year 
will be truncated and the corporation may be included for the taxable 
year in the selling controlled group because it was there for more than 
one-half of the now shorter testing period. The selling group will need 
to know that the sold corporation will now be treated as included in 
its group and the relevant data about its income for the taxable year.
    Furthermore, events after the close of the taxable year, such as 
amended returns, audit adjustments or loss carrybacks, could affect the 
entitlement of other group members to tax benefits such as the lower 
brackets or the alternative minimum tax exemption

[[Page 72932]]

amount, as well as other issues that might affect whether the group 
members will be under the regular or alternative minimum tax. In this 
case, again, the various members of the controlled group in the earlier 
year will need to have adequate information sharing to comply with 
their responsibilities.

E. Consolidated Return Amendment

    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 previously required a consolidated group to clearly 
indicate ``by notation'' on the face of its return that it is a life-
nonlife consolidated return. This requirement presented an impediment 
to e-filing. Accordingly, as part of TD 9304, the IRS and the Treasury 
Department amended Sec.  1.1502-47(s) and published Sec.  1.1502-47T(s) 
to remove this impediment by deleting the requirement that it indicate 
this ``by notation.'' However, Sec.  1.1502-47T(s) was inadvertently 
removed from the Code of Federal Regulations by TD 9342 when other 
portions of Sec.  1.1502-47T were published as final regulations. These 
temporary regulations republish Sec.  1.1502-47T(s).

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 this regulation. 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 Internal Revenue Code, this regulation will be 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 this regulation is Grid Glyer, Office of 
Associate Chief Counsel (Corporate). The other author of and principal 
reviewer for this regulation is Steven J. Hankin, Office of Associate 
Chief Counsel (Corporate). Other personnel from the IRS and the 
Treasury Department, however, participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

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 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-47T also issued under 26 U.S.C. 1502. * * *


0
Par. 2. Section 1.1502-47T is added to read as follows:


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

    (a) through (r) (Reserved). For further guidance, see Sec.  1.1502-
47(a) through (r).
    (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 ``U.S. Corporation Income Tax Return'' or 1120-PC, 
``U.S. Property and Casualty Insurance Company Income Tax Return'', and 
consolidated partial Life Insurance Company Taxable Income [defined in 
Sec.  1.1502-47(d)(3)] under paragraph (j) of Sec.  1.1502-47 shall be 
determined on a separate Form 1120-L ``U.S. Life Insurance Company 
Income Tax Return''. 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 26, 2007. However, a consolidated 
group may apply paragraph (s) of this section to any consolidated 
Federal income tax return filed on or after December 26, 2007.
    (2) Expiration date. The applicability of paragraph (s) of this 
section will expire on December 21, 2010.


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


Sec.  1.1561-0T  Table of contents (temporary).

    This section lists the table of contents for Sec. Sec.  1.1561-
1T through 1.1561-3T.
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.
    (b) Special rules.
    (c) Tax avoidance.
    (d) Effective date.
    (1) Applicability date.
    (2) Expiration date.
Sec.  1.1561-2T Special rules for allocating reductions to certain 
Section 1561(a) tax-benefit items (temporary).
    (a) Additional tax.
    (1) Calculation.
    (2) Apportionment.
    (i) General rule.
    (ii) Apportionment methods.
    (A) Proportionate method.
    (B) FIFO method.
    (3) Examples.
    (b) Reduction to the amount exempted from the alternative 
minimum tax.
    (1) Calculation.
    (2) Apportionment.
    (3) Example.
    (c) Accumulated earnings credit.
    (d) Reserved.
    (e) Short taxable year not including a December 31st date.
    (1) General rule.
    (2) Additional rules.
    (3) Examples.
    (f) Effective date.
    (1) Applicability dates.
    (i) Paragraphs (a) and (b) of this section.
    (ii) Paragraph (c) of this section.
    (iii) Paragraph (e) of this section.
    (2) Expiration dates.
Sec.  1.1561-3T Allocation of the section 1561(a) tax items 
(temporary).
    (a) Filing of form.
    (1) In general.
    (2) Exception for component members that are members of 
consolidated group.
    (b) No apportionment plan in effect.
    (c) Apportionment plan in effect.
    (1) Adoption of plan.
    (2) Limitation on adopting a plan.
    (i) Sufficient statute of limitations period.
    (ii) Insufficient statute of limitations period.
    (3) Termination of plan.
    (d) Effective date.
    (1) Applicability date.
    (2) Expiration date.


Sec.  1.1561-2  [Removed]

0
Par. 4. Section 1.1561-2 is removed.

0
Par. 5. Section 1.1561-2T is amended by revising the heading, adding 
paragraphs (a) and (b), and revising paragraphs (e) and (f) to read as 
follows:


Sec.  1.1561-2T  Special rules for allocating reductions to certain 
section 1561(a) tax-benefit items (temporary).

    (a) Additional tax-- (1) Calculation. For the purpose of 
determining the amount, if any, of the additional tax imposed by 
section 11(b)(1), the taxable incomes of all of the component members 
of a controlled group of corporations for the taxable years that 
include the same December 31st date shall be combined for determining

[[Page 72933]]

whether either of the income thresholds for imposing an additional tax 
have been attained.
    (2) Apportionment-- (i) General rule. Any additional tax determined 
under paragraph (a)(1) of this section shall be apportioned among such 
members in the same manner as the corresponding tax bracket of section 
11(b)(1) is apportioned. For rules to apportion the section 11(b)(1) 
tax brackets among the component members of a controlled group, see 
Sec.  1.1561-3T(b) or (c).
    (ii) Apportionment methods. Unless the component members of a 
controlled group elect to use the first-in-first-out (FIFO) method 
described in paragraph (a)(2)(ii)(B) of this section, such members are 
required to apportion the amount of the additional tax using the 
proportionate method described in paragraph (a)(2)(ii)(A) of this 
section. These component members can elect the FIFO method by 
specifically adopting such method in their apportionment plan.
    (A) Proportionate method. Under the proportionate method, the 
additional tax is allocated to each component member in the same 
proportion as the portion of the tax-benefit amount that inured to a 
member from utilizing lower tax brackets bears to the amount of the 
group's total tax-benefit amount inuring to the group from utilizing 
those lower tax brackets. The tax-benefit amount that inures to a 
corporation from using a particular tax bracket is the tax savings that 
such corporation realizes from having a portion of its taxable income 
taxed at the lower rate attributed to that tax bracket instead of the 
high tax rates to which it would otherwise be subject. The steps for 
applying the proportionate method of allocation are as follows:
    (1) Step 1. The regular tax (not including the additional tax) owed 
by a component member under a particular tax bracket is divided by the 
total tax owed by all component members under that tax bracket;
    (2) Step 2. The percentage calculated under Step 1 is multiplied by 
the total tax-benefit amount inuring to all the members of the group 
from their use of this tax bracket. This computed amount equals the 
portion of the group's tax-benefit amount that inured to such member 
from using its portion of this tax bracket;
    (3) Step 3. The amount determined under Step 2 is divided by the 
total tax-benefit amount, inuring to all the component members of the 
group from using all the tax brackets to which any component member's 
income was subject;
    (4) Step 4. The percentage calculated under Step 3 is multiplied by 
the amount of the group's additional tax. The amount determined under 
this Step 4 equals the amount of the additional tax apportioned to such 
member for that tax bracket; and
    (5) Step 5. If a component member is liable for regular tax (not 
including the additional tax) under more than one tax bracket, that 
member must calculate the amount of the additional tax apportioned to 
it with respect to each tax bracket. Accordingly, steps 1 through 4 
must be applied for each tax bracket applicable to that member. The sum 
of all the apportioned amounts of additional tax from each tax bracket 
for which the member is subject is the total amount of the additional 
tax apportioned to that member.
    (B) FIFO method. Under the FIFO method, the first dollars of the 
additional tax are to be allocated proportionately to the members 
starting with the lowest tax bracket (that is, the first tax bracket), 
up to the amount of the tax benefit inuring to those members from using 
that tax bracket. Any remaining amount of additional tax is then 
allocated proportionately among the component members who use the next 
higher tax bracket, and so on, until the entire amount of the 
additional tax has been fully apportioned among the members. For 
example, the first $9,500 of the additional tax liability of a 
controlled group is apportioned entirely to the member(s) that availed 
themselves of the benefit of the 15 percent tax bracket.
    (3) Examples. The provisions of this paragraph (a) may be 
illustrated by the following examples:

    Example 1. (i) Facts. A controlled group of corporations 
consists of three members: X, Y and Z. X owns all the stock of Y and 
Z. Each corporation files its separate return on a calendar year 
basis. For calendar year 2007, the component members of the 
controlled group have an apportionment plan in effect. The members 
apportioned 80% of the 15 percent tax-bracket amount ($40,000) to X 
and the remaining 10% ($10,000) to Y. The members apportioned 100% 
of the 25 percent tax-bracket amount ($25,000) to Y. However, these 
members have not adopted the FIFO method for apportioning the 
additional taxes. Therefore, they must follow the proportionate 
method. For 2007, X had taxable income (TI) of $40,000, Y had TI of 
$60,000 and Z had TI of $100,000. Thus the total TI of the group is 
$200,000.
    (ii) Calculating the tax from the tax brackets and the tax 
benefit derived from such tax. (A) Regular tax of group subjected to 
a 15 percent tax rate. (1) Calculating the group's tax which 
resulted from applying a 15 percent tax rate. The amount of tax 
under the 15 percent tax bracket is $7,500 (15% x $50,000).
    (2) The tax-benefit amount inuring to the group from using the 
15 percent tax bracket. A tax benefit inures to those members of the 
group who avail themselves of the 15 percent tax bracket. That tax 
benefit results from having the first $50,000 of its income taxed at 
the 15 percent tax rate, instead of at the 34 percent tax rate. 
Thus, the tax-benefit amount inuring to this group from using the 15 
percent tax bracket is $9,500 ($17,000 (34% x $50,000) minus $7,500 
(15% x $50,000)).
    (B) Regular tax of group subjected to a 25 percent tax rate. (1) 
Calculating the group's tax which resulted from applying a 25 
percent tax rate. The amount of tax under the 25 percent tax bracket 
is $6,250 (25% x $25,000 ($75,000 - $50,000)).
    (2) The tax-benefit amount inuring to the group from using the 
25 percent tax bracket. A tax benefit inures to those members of the 
group who avail themselves of the 25 percent tax bracket. That tax 
benefit results from having $25,000 of its income taxed at the 25 
percent tax rate, instead of at the 34 percent tax rate. Thus, the 
tax-benefit amount inuring to this group from using the 25 percent 
tax bracket is $2,250 ($8,500 (34% x $25,000) minus $6,250 (25% x 
$25,000)).
    (C) Regular tax of group subjected to a 34 percent tax rate. (1) 
Calculating the group's tax which resulted from applying a 34 
percent tax rate. The amount of tax under the 34 percent tax bracket 
is $42,500 (34% x $125,000 ($200,000 (total TI) - $75,000) (amount 
taxed at lower rates)).
    (2) The tax-benefit amount inuring to the group from using the 
34 percent tax bracket. The group's total TI of $200,000 is less 
than the $15,000,000 income threshold for imposing any 3 percent 
additional tax on the group. Therefore, there is no tax benefit 
inuring to the members of this group for using the 34 percent tax 
bracket.
    (D) The computation of the additional tax. Since the combined TI 
of the group exceeds $100,000, a 5 percent additional tax is imposed 
on the group. That 5 percent additional tax is the lesser amount of 
5 percent of the group's taxable income exceeding $100,000 or 
$11,750. Five percent of that excess amount of taxable income is 
$5,000 (5% x $100,000 ($200,000 -$100,000)). Since $5,000 is less 
than $11,750, the group's 5 percent additional tax is $5,000.
    (iii) Apportioning the amount of additional tax to each 
applicable tax bracket. (A) The apportioned tax under each bracket. 
The amount of tax owed by each member under each tax bracket 
pursuant to the apportionment plan is as follows:

[[Page 72934]]



------------------------------------------------------------------------
                                    Amount of    Amount of    Amount of
                                     tax owed     tax owed     tax owed
     Name of component member       under the    under the    under the
                                     15% tax      25% tax      34% tax
                                     bracket      bracket      bracket
------------------------------------------------------------------------
X................................       $6,000            0            0
Y................................       $1,500       $6,250       $8,500
Z................................            0            0      $34,000
------------------------------------------------------------------------

    (B) Apportioning the 5 percent additional tax among the 
component members of the controlled group. Since the group did not 
elect to adopt the FIFO method of apportionment, it is required to 
apportion the $5,000 of its 5 percent additional tax pursuant to the 
proportionate method in the following manner:
    (1) Amount of the additional tax apportioned to X. Pursuant to 
the plan, X was liable for $6,000 of the group's $7,500 regular tax 
(80%) owed under the 15 percent tax bracket (and X is not liable for 
any regular tax under any higher tax bracket). See Step 1 of 
paragraph (a)(2)(ii)(A) of this section. X's portion of the group's 
tax benefit which it derived from using the 15 percent tax rate is 
$7,600 (0.8 x $9,500). See Step 2. The tax benefit inuring to the 
entire group from using the 15 percent and 25 percent tax brackets 
is $11,750 ($9,500 (from the 15 percent tax bracket) + $2,250 (from 
the 25 percent tax bracket)). So, X's percentage portion of the 
group's total tax benefit is $7,600/$11,750 (64.68%). See Step 3. 
Thus, X's allocated portion of the 5 percent additional tax from 
using the 15 percent tax bracket is $3,234 (0.6468 x $5,000). See 
Step 4.
    (2) Amount of the additional tax apportioned to Y. (i) Regular 
tax apportioned to Y from using the 15 percent tax bracket. Pursuant 
to the plan, Y was liable for the remaining $1,500 of the group's 
$7,500 regular tax (20%) owed under the 15 percent tax bracket. See 
Step 1. Y's portion of the group's tax benefit which it derived from 
using the 15 percent tax rate is $1,900 ($9,500 - $7,600, or 0.2 x 
$9,500). See Step 2. So, Y's percentage portion of the group's total 
tax benefit is $1,900/$11,750 (16.17%). See Step 3. Thus, Y's 
allocated portion of the 5 percent additional tax from using the 15 
percent tax bracket is $809 (0.1617 x $5,000). See Step 4.
    (ii) Regular tax apportioned to Y from using the 25 percent tax 
bracket. Pursuant to the plan, Y was liable for 100% of the group's 
regular tax owed under the 25 percent tax bracket, an amount of 
$6,250. See Step 1. Y is, therefore, entitled to 100% of the group's 
tax benefit which it derived from using this tax bracket, an amount 
of $2,250. See Step 2. So, Y's percentage portion of the group's 
total tax benefit is $2,250/$11,750 (19.15%). See Step 3. Thus, Y's 
allocated portion of the 5 percent additional tax from using the 25 
percent tax bracket is $957 (0.1915 x $5,000). See Step 4. Y's total 
allocated portion of the additional tax is $1,766 ($809 + $957). See 
Step 5.

    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that on August 31, 2007, X of the X-Y-Z controlled group sold 
all of the stock of Z to M of the M-N controlled group, a pair of 
corporations unrelated to the X-Y group. Pursuant to the terms of 
the sales agreement, the members of the M-N group properly notified 
the members of the X-Y group on a timely basis that Z's taxable 
income for its 2007 taxable year, as based on the group's December 
31st testing date, was $100,000.
    (ii) Controlled group analysis. On December 31, 2007, X and Y 
are members of the selling controlled group and M, N, and Z are 
members of the buying controlled group. However, pursuant to section 
1563(b)(3), Z is treated as an additional member of the X-Y group on 
December 31, 2007, since it was a member for at least one-half the 
number of days (243 out of 364) during the period beginning on 
January 1 and ending on December 30, 2007. Conversely, pursuant to 
section 1563(b)(2)(A), Z is treated as an excluded member of the M-N 
controlled group. Therefore, on December 31, 2007, X, Y, and Z 
qualify as component members of the selling group, and only M and N 
qualify as component members of the buying group.
    (iii) Additional tax analysis. With regard to X and Y's 2007 
taxable years, X and Y together owed $5,000 of additional tax, as 
calculated in Example 1. X's allocated portion of the additional tax 
is $3,234, as calculated in the manner set forth in Example 1. Y's 
allocated portion of the additional tax is $1,766, also as 
calculated in the manner set forth in Example 1.

    Example 3. (i) Facts. The facts are the same as in Example 2, 
except that in 2012, pursuant to an IRS audit, Z's 2007 taxable 
income was redetermined. It was adjusted by an income increase of 
$10,000. Pursuant to the terms of the sales agreement, the members 
of the M-N group timely notified the members of the X-Y group of Z's 
income adjustment.
    (ii) Additional tax analysis. For 2007 the X-Y-Z group owed a 
revised additional tax in the amount of $5,500, allocated as 
follows: $3,557.40 to X and $1,942.60 to Y. X and Y each filed an 
amended 2007 tax return to report their portions of the $500 
increase to the group's additional tax. Pursuant to their 
apportionment plan for allocating their regular tax, and as a result 
of defaulting to the proportionate method for allocating the group's 
additional tax, X reported $323.40 as its share of the group's 
increase to its additional tax and Y reported $176.60 as its share 
of the group's increase to its additional tax.

    Example 4. The facts are the same as in Example 1, except that 
the members elected in their apportionment plan to adopt the FIFO 
method for apportioning the additional tax. Under the FIFO method, 
the 5 percent additional tax amount of $5,000 will be apportioned 
entirely to those members who would benefit from using the 15 
percent tax bracket, by reason that $5,000 of the group's additional 
tax is less than $9,500, which is the full tax-benefit amount 
inuring to a controlled group from having a 15 percent tax rate 
applied to the full income bracket subject to that rate. Since X 
derived 80 percent of the group's tax benefit by its use of the 15 
percent tax bracket, its share of the group's 5 percent additional 
tax is $4,000 (80% x $5,000), and Y's share of the group's 5 percent 
additional tax is, therefore, $1,000, which is the remaining amount 
of the group's 5 percent additional tax, attributable to the 15 
percent tax bracket.
    (b) Reduction to the amount exempted from the alternative 
minimum tax-- (1) Calculation. The alternative minimum taxable 
incomes for all the taxable years of the component members of a 
controlled group of corporations subjected to the same December 31st 
testing date shall be taken into account in calculating the 
reduction set forth in section 55(d)(3) to the amount exempted from 
the alternative minimum tax exemption (the exemption amount).
    (2) Apportionment. Any reduction to the exemption amount shall 
be apportioned to the component members of a controlled group in the 
same manner that the amount of the exemption (provided in section 
55(d)(2)) to the alternative minimum tax was allocated under section 
1561(a). For rules to apportion the section 55(d)(2) exemption 
amount among the component members of a controlled group, see Sec.  
1.1561-3T(b) or (c).

     (3) Example. (i) Facts. A controlled group of corporations 
consists of three members: X, Y, and Z. X owns all of the stock of Y 
and Z. Each corporation files its separate return on a calendar year 
basis. For calendar year 2007, the component members of this 
controlled group have an apportionment plan in effect. The group has 
chosen to apportion the entire section 55(d)(2) exemption amount of 
$40,000 to Z. For 2007, X had alternative minimum taxable income 
(AMTI) of $40,000, Y had AMTI of $60,000 and Z had AMTI of $100,000. 
Thus the total AMTI of the group is $200,000.
    (ii) Calculating the reduction to the exemption amount. Section 
55(d)(3)(A) provides that the section 55(d)(2) exemption amount 
shall be reduced by an amount equal to 25 percent of the amount by 
which the AMTI of a corporation exceeds $150,000. For the purpose of 
computing the group's AMTI, the AMTI of each of the component 
members, for their taxable years that have the same December 31st 
testing date, shall be taken into account. In accordance with these 
provisions, the $40,000 exemption amount is

[[Page 72935]]

reduced by $12,500 (25% x $50,000 ($200,000 - $150,000)). Pursuant 
to the group's allocation plan, the entire $12,500 reduction to the 
exemption amount is allocated to Z. Thus, after such allocation, Z's 
$40,000 exemption amount is reduced to $27,500 ($40,000 - $12,500).
* * * * *
    (e) Short taxable years not including a December 31st date-- (1) 
General rule. If a corporation has a short taxable year not 
including a December 31st testing date and, after applying the rules 
of section 1561(b) and paragraph (e)(2)(i) of this section, it 
qualifies as a component member of the group with respect to its 
short taxable year (short-year member), then, for purposes of 
subtitle A of the Internal Revenue Code, the amount of any tax-
benefit item described in section 1561(b) allocated to that 
component member's short taxable year shall be the amount specified 
in section 1561(a) for that item, divided by the number of 
corporations which are component members of that group on the last 
day of that component member's short taxable year. The component 
members of such group may not apportion, by their apportionment 
plan, an amount of such tax-benefit item to any short-year member 
that differs from an amount based on equal apportionment.
    (2) Additional rules. For purposes of paragraph (e)(1) of this 
section--
    (i) Section 1563(b) shall be applied as if the last day of the 
taxable year of a short-year member were substituted for December 
31, and
    (ii) The term short taxable year does not include any portion of 
a taxable year of a corporation for which its income is required to 
be included in a consolidated return under Sec.  1.1502-76.
    (3) Examples. The provisions of this paragraph (e) may be 
illustrated by the following examples:

    Example 1. Formation of a new member of a controlled group. (i) 
Facts. On January 2, 2007, corporation X transfers cash to newly 
formed corporation Y (which begins business on that date) and 
receives all of the stock of Y in return. X also owns all of the 
stock of corporation Z on each day of 2006 and 2007. X, Y, and Z 
have an apportionment plan in effect, apportioning the 15 percent 
tax-bracket amount as follows: 40% ($20,000) to each of X and Y and 
20% ($10,000) to Z. X, Y, and Z each file a separate return with 
respect to the group's December 31st 2007 testing date. X is on a 
calendar taxable year and Z is on a fiscal taxable year ending on 
March 31. Y adopts a fiscal year ending on June 30 and timely files 
a tax return for its short taxable year beginning on January 2, 
2007, and ending on June 30, 2007.
    (ii) Y's short taxable year. On June 30, 2007, Y is a component 
member of a parent-subsidiary controlled group of corporations 
composed of X, Y and Z. Pursuant to paragraph (e)(1) of this 
section, the group may not apportion any amount of the 15 percent 
tax bracket to Y's short taxable year ending on June 30, 2007. 
Rather, Y is entitled to exactly \1/3\ of such bracket amount, or 
$16,667.
    (iii) The members' subsequent taxable years. On December 31, 
2007, X, Y and Z are component members of a parent-subsidiary 
controlled group of corporations. For their taxable years that 
include December 31, 2007 (X's calendar year ending December 31, 
2007, Z's fiscal year ending March 31, 2008 and Y's fiscal year 
ending June 30, 2008), X, Y and Z apportion among themselves the 
full amount of all of the applicable tax brackets pursuant to their 
apportionment plan. For example, 40% of the 15 percent tax-bracket 
amount, or $20,000, was apportioned to each of X and Y, and the 
remaining 10%, or $10,000, was apportioned to Z.

    Example 2. Allocation of tax bracket to a liquidated member of a 
controlled group having a short taxable year. (i) Facts. On January 
1, 2007, corporation P owns all of the stock of corporations 
S1, S2 and S3 (the P group). Each 
of these four component members of the P group, with respect to the 
group's December 31, 2007 testing date, files its separate return on 
a calendar year basis. These members have an apportionment plan in 
effect (the P group plan) under which S1 and 
S2 are each entitled to 40% of the 15 percent tax-bracket 
amount ($20,000), and P and S3 are each entitled to 10% 
of the 15 percent tax-bracket amount ($5,000). On May 31, 2007, 
S1 liquidates and therefore files a return for the short 
taxable year beginning on January 1, 2007, and ending on May 31, 
2007. On July 31, 2007, S2 liquidates and therefore files 
a return for the short taxable year beginning on January 1, 2007 and 
ending on July 31, 2007. P and S3 each file a return for 
their 2007 calendar taxable years.
    (ii) Apportionment of the 15 percent tax bracket to S1 for its 
short taxable year. On May 31, 2007, S1 is a component 
member of the P group composed of P, S1, S2 
and S3. Pursuant to paragraph (e)(1) of this section, the 
group may not apportion any amount of the 15 percent tax bracket to 
S1's short taxable year ending on June 30, 2007. Rather, 
S1 is entitled to exactly \1/4\ of such bracket amount, 
or $12,500.
    (iii) Apportionment of the 15 percent tax bracket to S2 for its 
short taxable year. On July 31, 2007, S2 is a component 
member of the P group composed of P, S2 and 
S3. Pursuant to paragraph (e)(1) of this section, the 
group may not apportion any amount of the 15 percent tax bracket to 
S2's short taxable year ending on June 30, 2007. Rather, 
S2 is entitled to exactly \1/3\ of such bracket amount, 
or $16,667.
    (iv) Apportionment of the 15 percent tax bracket to P and S3 for 
each of their calendar taxable years. On December 31, 2007, P and 
S3 are component members of the P group. Accordingly, for 
P and S3's 2007 calendar taxable year, they are each 
apportioned $25,000 of the 15 percent tax bracket, pursuant to the 
applicable P group plan.

    Example 3. Liquidation of member after its transfer to another 
controlled group. (i) Facts. The facts are the same as in Example 2, 
except that P, on April 30, 2007, sold all of the stock of 
S2 to the M-N controlled group. At the time of the sale, 
M and N are both unrelated to any members of the P group. As in 
Example 2, S2 liquidates on July 31, 2007, and therefore 
files a tax return for its short taxable year beginning on January 
1, 2007, and ending on July 31, 2007. Pursuant to the sales 
agreement, the N-M group timely notified P that S2 had 
liquidated.
    (ii) Controlled group analysis. On April 30, 2007, the date of 
the sale of S2, the P group reasonably expected that 
S2 would be treated as an excluded member with respect to 
its December 31, 2007 testing date. On that April 30th date, 
S2 had been a member of the P group for less than one-
half the number of days of what it expected would be a full 2007 
calendar taxable year preceding December 31, 2007 (120 days (January 
1-April 30) out of 364 days (January 1-December 30)). Yet, as a 
result of S2's subsequent liquidation by the M-N group 
prior to December 31, 2007, S2 became a component member 
of the P group with respect to the P group's December 31, 2007 
testing date. With respect to that December 31st testing date, 
S2 thus was a member of the P group for more than one-
half of the number of days of its taxable year ending on July 31, 
2007, which days proceeded December 31st 2007 (120 days (January 1-
April 30 of 2007) out of 211 days (January 1-July 30 of 2007)). The 
allocation of the 15 percent tax-bracket amount to the P group 
members is determined in the same manner as in Example 2 and, 
therefore, the bracket amounts allocated to P, S1, 
S2 and S3 are the same as determined in 
Example 2. The allocation of the bracket amounts would be the same 
if, at the time P sold all of the S2 stock, the parties 
had made a section 338(h)(10) election.

    Example 4. Short taxable year including a December 31st date. 
Corporation X owns all of the stock of corporations Y and Z. X, Y 
and Z each file separate returns. X and Y are on a calendar taxable 
year and Z is on a fiscal taxable year beginning October 1 and 
ending September 30. On January 2, 2007, Z liquidates. Because Z's 
final taxable year (beginning on October 1, 2006 and ending on 
January 2, 2007) includes a December 31st date, that is, December 
31, 2006, it is not subject to the short taxable year rule of 
section 1561(b) and paragraph (e) of this section. Accordingly, Z is 
a component member of the X-Y-Z group, for the group's December 31, 
2006 testing date. Thus, the rules of this paragraph (e) do not 
limit the amount of any of the tax-benefit items of section 1561(a) 
available to Z or to this controlled group.

    (f) Effective date--(1) Applicability dates--(i) Paragraphs (a) and 
(b) of this section. Paragraphs (a) and (b) of this section apply to 
any taxable year beginning after December 31, 2007. However, taxpayers 
may apply paragraphs (a) and (b) of this section to any Federal income 
tax return filed on or after December 26, 2007, provided that all of 
the component members of a controlled group of corporations apply such 
paragraphs (a) and (b).
    (ii) Paragraph (c) of this section. Paragraph (c) of this section 
applies to any taxable year beginning on or after December 22, 2006. 
However, taxpayers may apply paragraph (c) of this section to any 
Federal income tax return filed on or after December 22, 2006, provided

[[Page 72936]]

that all of the component members of a controlled group of corporations 
apply such paragraph (c).
    (iii) Paragraph (e) of this section. Paragraph (e) of this section 
applies to any taxable year beginning on or after December 26, 2007. 
However, taxpayers may apply paragraph (e) of this section to any 
Federal income tax return filed on or after December 26, 2007.
    (2) Expiration dates. The applicability of paragraph (c) of this 
section will expire on December 21, 2009. The applicability of 
paragraphs (a), (b) and (e) of this section will expire on December 21, 
2010.

0
Par. 6. Section 1.1563-1T is amended by revising the heading and 
paragraphs (b)(1), (b)(2)(i), (b)(2)(ii) introductory text, (b)(3), and 
(e) to read as follows:


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

* * * * *
    (b) Component members--(1) In general--(i) Definition. For purposes 
of sections 1561 through 1563, a corporation is with respect to its 
taxable year a component member of a controlled group of corporations 
for the group's testing date if such corporation--
    (A) Is a member of such controlled group on such testing date and 
is not treated as an excluded member under paragraph (b)(2) of this 
section; or
    (B) Is not a member of such controlled group on such testing date 
but is treated as an additional member under paragraph (b)(3) of this 
section.
    (ii) Member of a controlled group of corporations. For purposes of 
sections 1561 through 1563, a member of a controlled group is a 
corporation connected with other member(s) of a controlled group under 
the stock ownership rules and the stock qualification rules set forth 
in section 1563. Under the above rules, for a corporation to qualify as 
a component member of the group with respect to a group's December 31st 
testing date (or the short-year testing date for a short-year member), 
that corporation does not have to be a member of that group on that 
group's testing date. In addition, a corporation that is a member of a 
controlled group on the group's testing date does not necessarily 
qualify as a component member of that group with respect to that 
testing date.
    (iii) Additional concepts used in applying the controlled group 
rules--
    (A) Testing date is the date used for determining the status of 
controlled group members as either component members or excluded 
members. That testing date is then also used to determine which taxable 
years of those component members are to be subjected to the controlled 
group rules. Generally, a member's testing date is the December 31st 
date included within that member's taxable year, whether such member is 
on a calendar or fiscal taxable year. However, if a component member of 
a controlled group has a short taxable year that does not include a 
December 31st date, then the last day of that short taxable year 
becomes that member's testing date; and
    (B) Testing period is the time period used for determining the 
status of controlled group members as either component members or 
excluded members. The testing period begins on the first day of a 
member's taxable year and ends on the day before its testing date 
(Generally, the testing date is December 31st, but for a component 
member having a short taxable year not ending on December 31st, the 
testing date for the short taxable year of that member (and only that 
member) becomes the last day of that member's short taxable year). 
Thus, for a member on a fiscal taxable year, the portion of its taxable 
year beginning after December 31st and ending on the last day of its 
taxable year is not taken into account for determining its status as a 
component member or an excluded member.
    (2) Excluded members--(i) A corporation, which is a member of a 
controlled group of corporations on the group's testing date, a date 
included within that member's taxable year, but who was a member of 
such group for less than one-half of the number of days of its testing 
period, shall be treated as an excluded member of such group for that 
group's testing date.
    (ii) A corporation which is a member of a controlled group of 
corporations on a testing date shall be treated as an excluded member 
of such group on such date if, for its taxable year including such 
date, such corporation is--
* * * * *
    (3) Additional members. A corporation shall be treated as an 
additional member of a controlled group of corporations, that is, an 
additional component member, on the group's testing date if it--
    (i) Is not a member of such group on such date;
    (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 its testing period.
* * * * *
    (e) Effective date--(1) Applicability date. Paragraph (b) of this 
section applies to any taxable year beginning on or after December 26, 
2007. However, taxpayers may apply paragraph (b) of this section to any 
Federal income tax return filed on or after December 26, 2007. 
Paragraphs (a) and (b) (as contained in 26 CFR part 1 in effect on 
April 1, 2007), and paragraphs (c)(1), (c)(2)(iv) and (d) of this 
section apply to taxable years beginning on or after December 22, 2006. 
However, taxpayers may apply the paragraphs described in the preceding 
sentence to any Federal income tax return filed on or after December 
22, 2006. Paragraphs (c)(2)(i) through (iii) of this section apply to 
any original Federal income tax return (including any amended return 
filed on or before the due date (including extensions) of such original 
return) timely filed on or after May 30, 2006.
    (2) Expiration date. The applicability of paragraph (b) of this 
section will expire on December 21, 2010. The applicability of 
paragraphs (a) and (b) (as contained in 26 CFR part 1 in effect on 
April 1, 2007), and paragraphs (c)(1), (c)(2)(iv) and (d) of this 
section will expire on December 21, 2009. The applicability of 
paragraphs (c)(2)(i) through (iii) of this section will expire on May 
26, 2009.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: December 17, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-24874 Filed 12-21-07; 8:45 am]
BILLING CODE 4830-01-P