Clarification of Controlled Group Qualification Rules, 49829-49831 [E9-23396]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 187 (Tuesday, September 29, 2009)]
[Proposed Rules]
[Pages 49829-49831]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-23396]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-135005-07]
RIN 1545-BG94


Clarification of Controlled Group Qualification Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation to clarify which 
corporations are included in a controlled group of corporations. The 
regulation clarifies that a corporation that satisfies the controlled 
group rules for stock ownership and qualification is a member of such 
group, without regard to its status as a component member.

DATES: Written or electronic comments and request for a public hearing 
must be received by December 28, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-135005-07), room 
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
135005-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-135005-07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Grid Glyer (202) 622-7930; concerning submissions of comments, 
Oluwafunmilayo Taylor (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 1563(a) defines four types of controlled groups of 
corporations. This definition is relevant for purposes of allocating 
certain tax benefits under section 1561, as well as other provisions of 
the Internal Revenue Code that incorporate the concept of a controlled 
group of corporations. In order for a corporation to be included in one 
of these controlled groups under section 1563(a), it must satisfy the 
stock ownership test for that type of group. In addition, other rules 
in section 1563 may also apply in order to determine whether a 
corporation satisfies the applicable stock ownership test. For example, 
section 1563(c) excludes certain stock of a corporation (for example, 
nonvoting stock that is limited and preferred as to dividends) from the 
definition of stock, section 1563(d) determines when to take into 
account the stock owned by a corporation, and section 1563(e) 
determines when stock of a corporation is constructively owned.
    Section 1563(b) describes which corporations are ``component 
members'' of a section 1563(a) controlled group of corporations for 
purposes of section 1561 and section 1563, in part by excluding certain 
corporations under section 1563(b)(2). For example, certain special 
purpose corporations, such as tax-exempt corporations, are treated as 
excluded members and not as component members. See sections 
1563(b)(2)(B) through 1563(b)(2)(E). Notwithstanding that a corporation 
is not a ``component member,'' however, the IRS has consistently taken 
the position that the determination of whether a corporation is 
included in a controlled group under section 1563(a) is determined 
without applying section 1563(b).

Explanation of Provisions

    The Treasury Department and the IRS propose to amend Sec.  1.1563-1 
to clarify

[[Page 49830]]

that an excluded member of a controlled group, such as a corporation 
described in sections 1563(b)(2)(B) through 1563(b)(2)(E), is 
nevertheless a member of the group. Specifically, the proposal will add 
paragraph (a)(1)(ii) to Sec.  1.1563-1 and an Example to Sec.  1.1563-
1(b)(4).
    Section 1563 was originally promulgated to limit the use of the tax 
benefit items described in section 1561 by the component members of a 
controlled group as defined in section 1563. S. Rep. No. 88-830 at 150 
(1964), 1964-1 (Part 2) CB 502, 654. However, since then, certain other 
statutory and regulatory provisions have referenced the controlled 
group rules of section 1563 for other purposes. Some of these 
provisions adjust the definition of a controlled group to state that 
certain provisions of section 1563 do not apply.
    For example, section 41(f)(1)(A)(i) provides that, in determining 
the amount of the credit for increasing research activities under 
section 41, all members of the same controlled group shall be treated 
as a single taxpayer. Section 41(f)(5)(B) provides that the term 
``controlled group of corporations'' has the same meaning given to such 
term by section 1563(a), except that the determination shall be made 
without regard to subsections (a)(4) and (e)(3)(C) of section 1563. The 
effect of not applying section 1563(a)(4) is to treat two or more life 
insurance companies, which would otherwise be treated as members of a 
separate life insurance controlled group, each as a member of a 
controlled group described in section 1563(a)(1)-(3) (Section 
1563(e)(3)(B) deals with an application of the constructive ownership 
rules; however, because that application is not relevant to the issue 
being addressed in this preamble, it will not be further discussed.). 
However, section 41(f)(5) and similar provisions make no reference to 
subsection (b) of section 1563. Section 1563(b), among other things, 
defines which corporations are ``component members'' and ``excluded 
members'' for purposes of section 1561 and section 1563. Nevertheless, 
some taxpayers have argued that a corporation that is an ``excluded 
member'' within the meaning of section 1563(b)(2) cannot, as a 
consequence, be a ``member'' of a section 1563(a) controlled group 
generally. This line of argument tends to equate a corporation's 
membership generally with such corporation's status as a component 
member.
    The Treasury Department and the IRS disagree with such arguments 
and believe that an excluded member under section 1563(b)(2), while not 
a component member of a controlled group under section 1563(b)(1), is 
nevertheless a member of a controlled group under section 1563(a). See 
also Sec.  1.414(b)-1(a).
    This position is supported by the clear language of the statute. 
Section 1563(b)(2) provides, in the introductory text, that a 
``corporation which is a member of a controlled group of corporations * 
* * shall be treated as an excluded member of such group * * *''. 
Moreover, this position is also supported by the legislative history 
for sections 1561 and 1563, which states that ``the determination of 
the corporations included within a parent-subsidiary controlled group, 
or a brother-sister controlled group, is made without regard to the 
type of corporation involved.'' S. Rep. No. 88-830 at 152 (1964), 1964-
1 (Part 2) CB 505, 656; see also H.R. Rep. 88-749 at A201-202 (1963), 
1964-1 (Part 2) CB 248, 449-450 (providing examples where an ``excluded 
member'' is treated as a member of a controlled group of corporations). 
Compare section 1504(a)(1)(A) (affiliated group comprised of includible 
corporations only). Therefore, this proposed regulation clarifies that 
a corporation identified in section 1563(b)(2) as an excluded member of 
a controlled group is nevertheless a member of such group for purposes 
of section 1563(a). Accordingly, a corporation whose stock is held by 
such an excluded member may be treated as a component member of the 
controlled group of corporations.
    Finally, this proposed regulation further illustrates that an 
excluded member of a controlled group is treated as a member of such 
group by adding an example demonstrating that a controlled group can 
consist solely of excluded members.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to this regulation and because this 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) this regulation has been submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before this proposed regulation is adopted as a final regulation, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed regulation and how it can be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing may be scheduled if requested in writing by 
any person that timely submits written or electronic comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the public hearing will be published in the Federal Register.

Drafting Information

    The principal author of this regulation is Grid Glyer of the Office 
of Associate Chief Counsel (Corporate). However, other personnel from 
the IRS and the Treasury Department participated in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.1563-1 is amended by:
    1. Redesignating paragraph (a)(1)(ii) as paragraph (a)(1)(iii) and 
adding paragraph (a)(1)(ii).
    2. Adding Example 4 to paragraph (b)(4).
    3. Adding a sentence at the end of paragraph (e).
    The additions to read as follows:


Sec.  1.1563-1  Definition of controlled group of corporations and 
component members and related concepts.

    (a) * * *
    (1) * * *
    (ii) Special rules. In determining whether a corporation is 
included in a controlled group of corporations, section 1563(b) shall 
not be taken into account. For rules defining a component member of a 
controlled group of corporations, including rules defining an excluded 
member and an additional

[[Page 49831]]

member, see section 1563(b) and paragraph (b) of this section.
* * * * *
    (b) * * *
    (4) * * *
    Example 4. Individual A owns all of the stock of corporations X, 
Y and Z. Each of these corporations is an S corporation. X, Y, and Z 
are each members of a brother-sister controlled group, even though 
each such corporation is treated as an excluded member of such 
group. See Sec.  1.1563-1(b)(2)(ii)(C).
* * * * *
    (e) * * * Paragraph (a)(1)(ii) of this section applies to taxable 
years beginning on or after the date of publication in the Federal 
Register of the Treasury decision adopting these rules as final 
regulations.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-23396 Filed 9-28-09; 8:45 am]
BILLING CODE 4830-01-P