Rev. Rul. 68-529

Advice has been requested with respect to the proper method of determining the portion of consolidated taxable income attributable to those members of an affiliated group which are Western Hemisphere trade corporations for the purpose of computing the `consolidated section 922 deduction' provided for in section 1.1502-31A(a)(15) of the Income Tax Regulations where the aggregate of the taxable incomes of the Western Hemisphere trade corporations exceeds the consolidated taxable income.

An affiliated group of corporations filed a consolidated income tax return for the calendar year 1965. The affiliated group includes a number of members qualifying as Western Hemisphere trade corporations. Each of the Western Hemisphere trade corporations had taxable income, the aggregate of which was 25 x dollars. Each of the remaining members of the group had a net (operating) loss, the aggregate of which was 5 x dollars. This resulted in a consolidated taxable income of 20 x dollars before the `consolidated section 922 deduction.'

Section 922 of the Internal Revenue Code of 1954 provides as follows:

In the case of a Western Hemisphere trade corporation there shall be allowed as a deduction in computing taxable income an amount computed as follows-

(1) First determine the taxable income of such corporation computed without regard to this section.

(2) Then multiply the amount determined under paragraph (1) by the fraction-

(A) the numerator of which is 14 percent, and

(B) the denominator of which is that percentage which equals the sum of the normal tax rate and the surtax rate for the taxable year prescribed by section 11.

Section 1.1502-31A(a)(15) of the regulations, applicable to taxable years beginning before January 1, 1966, provides as follows:

(15) Consolidated section 922 deduction. The consolidated section 922 deduction, relating to Western Hemisphere trade corporations, shall be that portion of the consolidated taxable income attributable to those members of the affiliated group which are Western Hemisphere trade corporations (computed without regard to the consolidated section 933 deduction) multiplied by the fraction specified in section 922(2) Emphasis added .

The first step in computing the `consolidated section 922 deduction' is to determine the portion of the consolidated taxable income attributable to those members of the affiliated group which are Western Hemisphere trade corporations. The consolidated return regulations, applicable to taxable years beginning before January 1, 1966, do not contain a specific rule for making such determination. However, an apportionment should be made by a method consistent with those contained in section 1.1502-31A(b)(6) of the regulations relating to apportionment of consolidated net operating loss, section 1.1502-31A(b)(7) of the regulations relating to apportionment of consolidated net capital loss, section 1.1502-31A(b)(13) of the regulations relating to apportionment of unused dividend carryover, section 1.1502-31A(b)(14) of the regulations relating to apportionment of consolidated charitable deduction, and section 1.1502-31A(b)(16) of the regulations relating to apportionment of consolidated section 175 deduction.

Accordingly, for the purpose of section 1.1502-31A(a)(15) of the regulations, the `portion of the consolidated taxable income attributable to those members of the affiliated group which are Western Hemisphere trade corporations' in an amount which bears the same ratio to the consolidated taxable income (computed without regard to the section 922 deduction), 20 x dollars, which the sum of the taxable incomes of the Western Hemisphere trade corporations, having taxable incomes, 25 x dollars, bears to the aggregate of the taxable incomes of all members of the group having taxable incomes, 25 x dollars. Therefore, under the facts in this case, the consolidated section 922 deduction for the year 1965 would be determined by multiplying the fraction specified in section 922(2) of the Code by 20 x dollars, the consolidated taxable income before the consolidated section 922 deduction.