Rev. Rul. 61-143

Advice has been requested whether, upon making a consolidated income tax return of an affiliated group of corporations, a net loss of a Western Hemisphere trade corporation, included therein, should be subtracted from the total taxable income of two regulated public utilities, also included therein, in computing the portion, if any, of the consolidated taxable income of the entire affiliated group that is not subject to the additional two percent tax imposed by section 1503(a) of the Internal Revenue Code of 1954.

A parent corporation and its 20 subsidiaries were privileged to file a consolidated income tax return for the current taxable year. The consolidated return included taxable income of two regulated public utilities totaling 15 x dollars and a net loss of a Western Hemisphere trade corporation of 2 x dollars. The entire affiliated group reported consolidated taxable income of 63 x dollars which included, in addition to the consolidated taxable income of 13 x dollars of the regulated public utilities and the Western Hemisphere trade corporation, 50 x dollars consolidated taxable income of the 18 other corporations included in the affiliated group.

Section 1503(b) of the Code provides that if the affiliated group includes one or more Western Hemisphere trade corporations or one or more regulated public utilities, the increase of 2 percent provided in section 1503(a) shall be applied only on the amount by which the consolidated taxable income of the affiliated group exceeds the portion, if any , of the consolidated taxable income attributable to the Western Hemisphere trade corporations and regulated public utilities included in such group.

Section 1.503-1(b) of the Income Tax Regulations provides that if the affiliated group includes one or more Western Hemisphere trade corporations or one or more regulated public utilities, the increase in tax described in section 1503(a) shall be applied in a manner provided in the regulations under section 1502.

Section 1.1502-30(b)(1) of the regulations provides that if the affiliated group filing a consolidated return includes a Western Hemisphere trade corporation or a regulated public utility, the increase of 2 percent, provided in section 1503(a) of the Code, in the corporation surtax rate shall be applied only on that portion of the consolidated taxable income attributable to the members of the group other than the Western Hemisphere trade corporation or the regulated public utility without any increase with respect to any partially tax exempt interest of such Western Hemisphere trade corporation or such regulated public utility. Inasmuch as such regulation merely relates to a case where a Western Hemisphere trade corporation or a regulated public utility is included in the affiliated group, it has no decisive bearing on the issue considered in the instant case where a Western Hemisphere trade corporation and two regulated public utilities are included in the affiliated group involved.

In Senate Report No. 2375, 81st Cong., 2nd Sess., C.B. 1950-2, 483, at 535, relating to the amendment of section 141(c) of the 1939 Code (the predecessor of section 1503 of the 1954 Code) by section 121(f) of the Revenue Act of 1950, it is stated:

Subsection (f) of section 121, for which there is no corresponding provision in the bill as passed by the House, amends section 141(c) (relating to computation and payment of tax on consolidated returns) to provide that in the case of an affiliated group of corporations including one or more Western Hemisphere trade corporations filing a consolidated return the 2 percent additional tax shall be applied on the amount by which the consolidated corporation surtax net income of the affiliated group exceeds the portion of the consolidated corporation surtax net income attributable to the Western Hemisphere trade corporations. If the consolidated corporation surtax net income of the Western Hemisphere trade corporations is less than zero, the 2 percent additional tax shall be applied against the consolidated corporation surtax net income of the entire affiliated group, including the Western Hemisphere trade corporations.

Thus, under section 141(c) of the 1939 Code, the consolidated net income, if any , of Western Hemisphere trade corporations included in the consolidated net income of an affiliated group was excluded for the purposes of the two percent additional tax. However, if the Western Hemisphere trade corporations included in the affiliated group had a consolidated net loss , such consolidated net loss was not excluded in the determination of the consolidated net income subject to the 2 percent additional tax. Otherwise, a larger amount would be subject to such additional tax than is subject to the regular tax. Although the provisions of section 141(c) of the 1939 Code were broadened in section 1503 of the 1954 Code to include regulated public utilities, there is no indication in section 1503(b), or in the history of that legislation, of any different intent with respect to the treatment of consolidated net income, or consolidated net loss, of Western Hemisphere trade corporations and regulated public utilities included in affiliated groups filing consolidated returns.

Hence, if such a Western Hemisphere trade corporation has net income of 15 x dollars and such a regulated public utility has a net loss of 5 x dollars, the amount of their consolidated net income of 10 x dollars is to be excluded from the consolidated net income of the entire affiliated group in determining the extent the latter is subject to the two percent additional tax; whereas, if they have no consolidated net income , or they have a consolidated net loss , there is no amount to be so excluded, for no portion of the consolidated net income of the entire affiliated group is attributable to them.

Applying the specific language of section 1503(b), supra , here pertinent, `the consolidated taxable income of the affiliated group' in the instant case is 63 x dollars; `the portion (if any) of the consolidated taxable income attributable to the Western Hemisphere trade corporations and regulated public utilities included in such group' is 15 x dollars minus 2 x dollars, or 13 x dollars; and `the amount by which' 63 x dollars `exceeds' 13 x dollars is 50 x dollars, to which `the increase of 2 percent provided in subsection (a) shall be applied.'

Accordingly, in the instant case, it is held that the net loss of the Western Hemisphere trade corporation (2 x dollars) must be subtracted from the total taxable income of the two regulated public utilities (15 x dollars) in computing the portion, if any, of the consolidated taxable income of the entire affiliated group which is to be excluded therefrom (13 x dollars) in determining the amount of consolidated taxable income that is subject to the additional two percent tax imposed by section 1503(a) of the Code.