IRS SPELLS OUT DECONSOLIDATION PROCEDURES.

Rev. Proc. 91-11

SECTION 1. PURPOSE

01 This revenue procedure grants permission to discontinue filing consolidated returns to the consolidated groups specified in section 3.01 below. To obtain permission, (a) a consolidated group must file an application with the National Office before July 1, 1991, and (b) each member of the group must enter into a closing agreement. Permission to discontinue filing consolidated returns will be effective for the taxable year that includes November 19, 1990. Thus, the group's final consolidated return year will be the taxable year immediately preceding the taxable year that includes November 19, 1990.

02 Permission to discontinue filing consolidated returns may be granted, on a case-by-case basis, to those consolidated groups specified in section 3.02 below.

SEC. 2. BACKGROUND

01 Section 1.1502-75(a)(2) of the Income Tax Regulations provides that a group that filed (or was required to file) a consolidated return for the immediately preceding taxable year is required to file a consolidated return for the taxable year unless it has received permission to discontinue filing consolidated returns.

02 Under section 1.1502-75(c)(2)(i) of the regulations, the Commissioner, in his discretion, may grant all groups permission to discontinue filing consolidated returns if an amendment to the Code or regulations could have a substantial adverse effect on the filing of consolidated returns by substantially all groups, relative to the filing of separate returns. Ordinarily, the permission to discontinue applies with respect to the taxable year of each group that includes the effective date of the amendment.

03 The Commissioner has determined that the amendments reflected in section 1.337(d)-2T and proposed section 1.1502-20 of the regulations could have a substantial adverse effect on the filing of consolidated returns by substantially all groups relative to the filing of separate returns. The amendments reflected in section 1.337(d)-2T and proposed section 1.1502-20 generally apply to dispositions or deconsolidations after November 18, 1990.

04 With respect to corporations that cease to be members of consolidated groups, sections 1502 and 1504 of the Internal Revenue Code authorize the Secretary to determine the tax liability of the corporations after the period of consolidation and to determine whether the corporations may thereafter be included in a consolidated group. The Commissioner has determined that it is generally appropriate to prohibit the members of a consolidated group electing to discontinue filing consolidated returns under this revenue procedure from joining in a consolidated return for 60 consecutive months immediately following the beginning of the taxable year that includes November 19, 1990 (the "60-month period").

05 This revenue procedure provides the exclusive means for obtaining permission to discontinue filing consolidated returns by reason of the application of section 1.337(d)-2T or proposed section 1.1502-20 of the regulations for the taxable year that includes November 19, 1990, or any subsequent year.

SEC. 3. SCOPE

01 This revenue procedure generally applies to any consolidated group that filed (or was required to file) a consolidated tax return for the taxable year preceding the taxable year that includes November 19, 1990.

02 This revenue procedure does not apply to any consolidated group that is subject to section 1.1502-75T(a) and (b) of the regulations for the taxable year that includes November 19, 1990. However, permission to discontinue filing consolidated returns may be granted to those consolidated groups on a case-by-case basis, subject to conditions similar to those contained in this revenue procedure and to special requirements to ensure proper application of section 338(h)(10) of the Code.

03 For purposes of this revenue procedure:

1. The definitions contained in the regulations under section 1502 of the Code and in sections 1.337(d)-1 and 1.337(d)-2T of the regulations apply.

2. The term "electing consolidated group" means the consolidated group that has elected to discontinue filing consolidated returns pursuant to this revenue procedure.

3. The term "former member" means any corporation that would have been a member of an electing consolidated group, at any time after November 18, 1990, and before the date the closing agreement described in section 4 below is executed, if the electing consolidated group had not elected to discontinue filing consolidated returns.

4. The term "successor" means a person that, during the 60- month period, acquires any material asset of a former member if that person's basis in the asset is determined in whole or in part, directly or indirectly, by reference to the former member's basis in the asset.

5. Unless the context otherwise requires, any reference to "former member" includes any successor to the former member.

6. The term "new group" means an affiliated group that, during the 60-month period, includes at least one former member and less than all of whose members are former members of the same electing consolidated group.

7. The term "material asset" means an asset (or group of assets) that is material to either the person acquiring the asset or the person disposing of the asset.

SEC. 4. PROCEDURAL REQUIREMENTS

01 APPLICATIONS.

1. A consolidated group that wishes to elect to discontinue filing consolidated returns pursuant to this revenue procedure must file an application with the National Office. The application must be sent to the Internal Revenue Service, Associate Chief Counsel (Technical), Attention CC:CORP:T, P.0. Box 7604, Ben Franklin Station, Washington, DC 20044. See Rev. Proc. 90-17, 1990-1 C.B. 479, for information regarding the payment of a user fee. An electing consolidated group will be required to pay only a single user fee.

2. Any application to elect to discontinue filing consolidated returns pursuant to this revenue procedure must be filed before July 1, 1991.

3. Each application under this revenue procedure must be captioned "Application to Discontinue Filing Consolidated Returns Pursuant to Rev. Proc. 91-11".

02 CLOSING AGREEMENT REQUIRED.

1. Each former member of an electing consolidated group must enter into a closing agreement with the National Office. The National Office will provide a standard form closing agreement. The closing agreement will include the terms listed in section 4.03 below and any other provisions the National Office determines to be necessary to carry out the purposes of this revenue procedure.

2. The closing agreements will be entered into under the authority of section 7121 of the Code and pursuant to section 2.01 of Rev. Proc. 91-1, 1991-1 I.R.B. 9, 12.

3. The Service may, in its sole discretion, waive the requirement that every former member enter into a closing agreement for a member that ceases to be a member of the electing consolidated group after the beginning of the taxable year that includes November 19, 1990, and before January 19, 1991. For this purpose, a former member that leaves the group after January 18, 1991 pursuant to a binding contract in effect on January 18, 1991 and at all times thereafter until the former member leaves the group will be treated as having left the group on January 18, 1991.

03 REQUIREMENTS OF CLOSING AGREEMENT. The closing agreement required by section 4.02 above will include:

1. A schedule of (a) the name, address, and employer identification number of each former member and (b) the location of all the District Offices that will have examination jurisdiction over the separate returns that will be filed by each former member after the electing consolidated group has elected to discontinue filing consolidated returns.

2. A penalties of perjury statement, as described in section 8.01(10) of Rev. Proc. 91-1.

3. An agreement to extend the statute of limitations applicable to:

(a) years for which consolidated returns were filed by the electing consolidated group and for which the statute of limitations has not expired on the date this closing agreement is executed and

(b) years for which returns are filed during the 60- month period.

Under this agreement, the periods of limitation provided in sections 6501 and 6502 of the Code on the making of an assessment and the collection by levy or proceeding in court, with respect to any deficiency (including interest and additions to tax) with respect to the above years, shall not expire prior to the end of two years following the later of (a) the end of the 60-month period or (b) the date any notice required by section 4.034 below is received by the Service. Such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection. This agreement extends a statute of limitations as provided above but will never shorten the otherwise applicable statute of limitations.

4. An agreement to notify the Service if during the 60- month period:

a. Any person, who is not a former member, becomes a successor to the former member.

b. The former member becomes a member of a new group.

c. The former member, while a member of a new group, acquires (in any manner, directly or indirectly) any stock or any material asset of any other member (including a new member) of the new group.

d. The new group of which the former member is a member has a new common parent (as defined in section 4.035c below).

5. An agreement:

a. To cause any person (other than a former member) that becomes a successor to the former member to enter into a supplemental closing agreement, as provided in section 4.04 below, prior to the acquisition by the successor of the asset(s) of the former member.

b. To cause any corporation (if it is not a former member) that becomes the common parent of a new group (new common parent) after the date the former member becomes a member of such group to enter into a supplemental closing agreement, as provided in section 4.04 below, prior to the former member becoming a member of the new group.

c. To cause the new common parent (if it is not a former member) of a new group to enter into a supplemental closing agreement, as provided in section 4.04 below, prior to becoming the new common parent of the new group.

6. An agreement either

a. to advise any person:

i. acquiring, directly or indirectly, any equity interest in the former member or

ii. that would be required to enter into a supplemental closing agreement (e.g., by becoming a successor to the former member)

that the former member is a former member within the meaning of Rev. Proc. 91-11 prior to the time that the person acquires such equity interest or is required to enter into a supplemental closing agreement, or

b. to permit the Service to publish a notice in the Internal Revenue Bulletin stating that the former member is a former member within the meaning of Rev. Proc. 91-11.

7. An agreement to be bound by section 5 below.

04 SUPPLEMENTAL CLOSING AGREEMENT. Under section 4.035 above, each successor, common parent or new common parent of a new group must enter into a supplemental closing agreement that satisfies the requirements of sections 4.031(b) through 4.037 above as if the successor, common parent or new common parent were the former member.

05 NOTICES.

1. Any notice required by section 4.034 above must (a) be sent to the National Office at the address specified in section 4.011 above; (b) be captioned "Information Submitted Pursuant to Rev. Proc. 91-11"; and (c) include a copy of the closing agreement or supplemental closing agreement.

2. Any notice required by section 4.034a above must (a) include the name, address, and employer identification number of the successor; (b) describe the transaction by which the successor will acquire the asset(s) of the former member; (c) be sent to the appropriate District Director; and (d) be filed prior to the acquisition by the successor of the asset(s) of the former member.

3. Any notice required by section 4.034b, c, or d above must (a) include the name, address, and employer identification number of the common parent of the new group and state whether the new group files a consolidated return; (b) describe the transaction by which the former member became a member of the new group or by which the new common parent became the common parent of the new group; (c) if any member of the new group joined in (or was required to join) a consolidated return for the taxable year immediately preceding the taxable year in which the former member became a member of the new group (including a consolidated return of the new group), identify such member(s) (by name, address and, employer identification number) and specify the ownership structure of the group; (d) identify by name, address, and employer identification number any member of the new group that is a former member; (e) include the information required by section 5.02 of Rev. Proc. 90-53, 1990- 42 I.R.B. 13; and (f) be filed before 60 days after the former member (or new common parent) (i) became a member of the new group (or became the new common parent) or (ii) acquired the stock or assets of the other member of the group (whichever is applicable).

SEC. 5. EFFECTS OF ELECTING TO DISCONTINUE

01 IN GENERAL. Except as provided in this section 5, each former member of an electing consolidated group must file separate returns during the 60-month period.

02 ABILITY TO JOIN CONSOLIDATED RETURN. 1. If, during the 60- month period, a former member becomes a member of a new group, the former member may not join in any consolidated return filed by the new group during the 60-month period unless the Service permits, or requires, the former member to join. See sections 5.03 and 5.04 below. Further, if the new group is permitted, or required, to file consolidated returns during the 60-month period without the former member, for purposes of applying the consolidated return regulations, the former member must be treated as not being an includible corporation.

2. If the former member is the common parent of the new group, the new group must treat the former member as an includible corporation. Because the former member generally may not join in the filing of a consolidated return during the 60-month period, the new group may not file consolidated returns during the 60-month period unless the Service permits, or requires, the former member to join.

3. If the former member is a subsidiary of the new group, the former member must be treated as not being an includible corporation during the 60-month period (unless the Service permits, or requires, the former member to be treated as an includible corporation) for purposes of determining whether the common parent of the new group may file consolidated returns with any other member(s) of the new group. For purposes of determining whether any other subsidiary of the new group may join in a consolidated return (other than one filed by the common parent of the new group) during the 60-month period, the former member must be treated as an includible corporation.

4. For example, assume P is the common parent of an affiliated group that has a single chain of wholly owned subsidiaries: S1, S2, S3, and S4. If the former member merges into S2, P may elect to file consolidated returns with S1. If the P group files consolidated returns, S2, S3, and S4 generally may not join in the P group consolidated returns because S2 is generally treated as not being an includible corporation for purposes of determining which corporations may join in those returns. However, if the Service requires S2 to join in the P group consolidated returns, S3 and S4 must also join in those returns. See sections 5.03 and 5.04 below. If the Service does not permit, or require, S2 to join in the P group consolidated returns, S3 and S4 may not file consolidated returns.

03 PERMISSION TO FILE CONSOLIDATED RETURNS. 1. If the new group wishes to file consolidated returns with the former member during the 60-month period, it must obtain permission from the National Office. Requests for rulings granting such permission will be subject to all applicable procedures and requirements in effect at the time of the request. In the request for the ruling, the new group must include the information required by section 5.02 of Rev. Proc. 90-53.

2. The Service will act on the request within 6 months after the date it is received unless the new group agrees to extend the time. If the Service does not act on the request within 6 months (plus any extensions) the former member may not join in any consolidated returns filed by the new group during the 60-month period.

04 REQUIREMENT TO JOIN CONSOLIDATED RETURNS. 1. The Service, in its sole discretion, may require the former member to join in any consolidated returns filed by the new group by notifying the new group and the former member in writing.

2. The Service will make any such determination within 6 months after receiving any notification described in section 4.034 above. If the Service requests any information it deems necessary to make that determination, the running of this period will be suspended until the information is received. If the Service does not notify the new group and the former member within the 6 month period, the former member may not join in any consolidated returns filed by the new group during the 60-month period. A separate 6 month period will apply to each notification described in section 4.034 above.

05 EFFECT OF DISCONTINUING.

1. The members of an electing consolidated group are subject to all the consequences that apply when a group discontinues filing consolidated returns, including section 1.337(d)-1 of the regulations. See e.g., section 1.1502- 19(b)(2)(vi) (inclusion of excess loss account with respect to stock of another member).

2. Each member of an electing consolidated group will be treated as having ceased to be a member of the group on the last day of the taxable year immediately preceding the taxable year that includes November 19, 1990. See sections 1.1502-13 and 1.1502-13T of the regulations.

3. The electing consolidated group must file an amended return for the taxable year immediately preceding the taxable year that includes November 19, 1990. This amended return must be captioned "Final Consolidated Return of a Group that Discontinued Filing Consolidated Returns Pursuant to Rev. Proc. 91-11". The former common parent is agent for purposes of filing this amended return. See section 1.1502-77(a) of the regulations.

06 DISCRETION TO MAKE APPROPRIATE ADJUSTMENTS. If the information provided in a closing agreement (or supplemental closing agreement) is incorrect or if a former member or common parent fails to comply with the closing agreement (or supplemental closing agreement), the Service may revoke the permission to discontinue filing consolidated returns granted pursuant to this revenue procedure at any time or make such other adjustments as may be appropriate (including disallowing any loss realized on the disposition of a former member). Any revocation may, in the sole discretion of the Service, be effective beginning with the taxable year that includes November 19, 1990 (i.e., the first taxable year for which permission to discontinue was granted).

07 AFFILIATION. Except as provided in section 5.02 above for purposes of applying the consolidated return regulations, the determination of whether any former member is a member of an affiliated group within the meaning of section 1504 of the Code is not affected by this revenue procedure.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective on the date proposed section 1.1502-20 of the regulations is superseded by final regulations.

DRAFTING INFORMATION

The principal author of this revenue procedure is David Kessler of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue procedure, contact David Kessler at (202) 566-3226 (not a toll-free call).