Rev. Proc. 90-39

Rev. Proc. 90-39

SECTION 1. PURPOSE

.01 This revenue procedure provides a means for an affiliated group of corporations filing a consolidated federal income tax return to obtain consent, without filing an advance ruling request, to elect or to change its method of allocating the consolidated federal income tax liability to members of the affiliated group for purposes of determining the earnings and profits of each member of the affiliated group.

.02 If an affiliated group qualifies to use this revenue procedure, then this revenue procedure is the exclusive procedure available for obtaining consent to elect or change its method of allocating the consolidated federal income tax liability.

SEC. 2. BACKGROUND

.01 Section 1552(a) of the Internal Revenue Code and section 1.1552-1(a) of the Income Tax Regulations provide four methods for allocating an affiliated group's consolidated federal income tax liability to members of the group (the "basic methods"). Three of these methods (described in section 1552(a)(1), (2), and (3) and section 1.1552-1(a)(1), (2), and (3), respectively) provide specific allocation formulas. The fourth method (described in section 1552(a)(4) and section 1.1552-1(a)(4)) allows the affiliated group to determine its own allocation formula with the prior approval of the Commissioner.

.02 For use in conjunction with one of the four basic methods, three additional allocation methods are described in section 1.1502-33(d)(2) of the regulations (the "complementary methods"). These additional methods allow the affiliated group to compensate a member for its losses that are availed of by profitable members of the affiliated group. Two of these methods (described in section 1.1502-33(d)(2)(i) and (ii)) provide specific formulas. The third method (described in section 1.1502-33(d)(2)(iii)) allows the affiliated group to determine its own formula with the prior approval of the Commissioner.

.03 Section 1552(a) of the Code states that, pursuant to regulations prescribed by the Secretary, the earnings and profits of each member of an affiliated group required to be included in a consolidated return for the group filed for a taxable year shall be determined by allocating the tax liability of the group for the taxable year among the members of the group in accordance with whichever of the following methods the group elects in its first consolidated return filed for the taxable year:

(1) The tax liability shall be apportioned among the members of the group in accordance with the ratio which that portion of the consolidated taxable income attributable to each member of the group having taxable income bears to the consolidated taxable income;

(2) The tax liability of the group shall be allocated to the several members of the group on the basis of the percentage of the total tax which the tax of each member, if computed on a separate return, would bear to the total amount of the taxes for all members of the group so computed;

(3) The tax liability of the group (excluding the tax increases arising from the consolidation) shall be allocated on the basis of the contribution of each member of the group to the consolidated taxable income of the group. Any tax increases arising from the consolidation shall be distributed to the several members in direct proportion to the reduction in tax liability resulting to the members from the filing of the consolidated return as measured by the difference between their tax liabilities determined on a separate return basis and their tax liabilities based on their contributions to the consolidated taxable income; or

(4) The tax liability of the group shall be allocated in accordance with any other method selected by the group with the approval of the Commissioner.

.04 Section 1552(b) of the Code provides that if an allocation method is not elected in the first consolidated return, the tax liability shall be allocated among the several members of the group pursuant to the method prescribed in section 1552(a)(1).

.05 Section 1.1552-1(c)(1) of the regulations provides that an election to use one of the methods described in section 1.1552-1(a)(1), (2), or (3) (which correspond to the methods described in section 1552(a)(1), (2), and (3) of the Code, respectively) shall be made by attaching a statement to the first consolidated return of the group stating which method is elected. In the event that the group desires to allocate its tax liability in accordance with any other method pursuant to section 1.1552-1(a)(4) (and section 1552(a)(4) of the Code), approval of the method by the Commissioner must be obtained prior to its use. An election, once made, is irrevocable and is binding on the group with respect to the year for which it is made and for all future years for which a consolidated return is filed or required to be filed, unless the Commissioner authorizes a change to another method prior to the time prescribed by law for filing the return for the year in which the change is to be effective.

.06 Section 1.1502-33(d)(1) of the regulations provides that, for the purpose of determining the earnings and profits of each member of a group for a consolidated return year, the tax liability of the group for the year may be allocated among the members in accordance with one of the methods prescribed in section 1.1502-33(d)(2)-(i), (ii), or (iii), if an election is made in accordance with section 1.1502-33(d)(3).

.07 Section 1.1502-33(d)(2)(i) of the regulations provides that the tax liability of the group, as determined under section 1.1552-1(b)(1), shall be allocated to the members in accordance with section 1.1552-1(a)(1), (2), or (3), whichever is applicable, but--

(a) The amount of the tax liability allocated to any member for a taxable year shall not exceed the excess of (1) the total of the tax liabilities of the member on a separate return basis for all taxable years to which the election of this method applies, and for which the member joined in the filing of a consolidated return of the group (including the current taxable year), computed as if it had actually filed separate returns for all such years, over (2) the total of the portions of the tax liability of the group allocated to the member for all previous taxable years to which the election under this paragraph applies; and

(b) The amount of any excess tax liability that would be allocated to a member of a group but for section 1.1502-33(d)(2)(i)(a) of the regulations shall be apportioned among the other members in direct proportion to, but limited to, the reduction in tax liability resulting to those other members. The reduction for any member shall be the excess, if any, of (1) the total of its tax liabilities on a separate return basis for all taxable years to which the election under this paragraph applies, and for which the member joined in the filing of a consolidated return of such group (including the current taxable year), computed as if it had actually filed separate returns for all such years, over (2) the total of the portions of the tax liability of the group allocated to the member for all taxable years to which the election under this paragraph applies (including for the current taxable year only the amount allocated under section 1.1552-1(a)(1), (2), or (3)). If any excess tax liability remains after being apportioned among members with a reduction in tax liability to the extent of the reduction, as provided in section 1.1502-33(d)(2)(i)(b), the remaining amount shall, notwithstanding section 1.1502-33(d)(2)(i)(a), be allocated to the members in accordance with section 1.1552-1(a)(1), (2), or (3), whichever is applicable.

.08 Section 1.1502-33(d)(2)(ii) of the regulations provides that:

(a) The tax liability of the group, as determined under section 1.1552-1(b)(1) of the regulations, shall be allocated to the members in accordance with section 1.1552-1(a)(1), (2), or (3), whichever is applicable;

(b) An additional amount shall be allocated to each member equal to a fixed percentage (which does not exceed 100 percent) of the excess, if any, of (1) the separate return tax liability of such member for the taxable year (computed as provided in section 1.1552-1(a)(2)(ii) of the regulations), over (2) the tax liability allocated to the member in accordance with section 1.1502-33(d)(2)(ii)(a); and

(c) The total of any additional amounts allocated pursuant to section 1.1502-33(d)(2)(ii)(b) (including amounts allocated as a result of a carryback) shall be credited to the earnings and profits of those members which had items of income, deductions, or credits to which the total is attributable pursuant to a consistent method which fairly reflects those items of income, deductions, or credits, and which is substantiated by specific records maintained by the group for such purpose.

.09 Section 1.1502-33(d)(2)(iii) of the regulations provides that allocations of tax liability to the members may be made in accordance with any other method approved by the Commissioner. A condition of the approval is that the group maintains specific records to substantiate its computations pursuant to the method.

.10 Section 1.1502-33(d)(3)(i) of the regulations provides that in the event a group desires to allocate its tax liability in accordance with a method provided in section 1.1502-33(d)(2)(i) or (ii), an election to that effect shall be made by attaching a statement to the consolidated return for the first consolidated return year of the group. The statement shall indicate which method is elected and which method under section 1.1552-1(a)(1), (2), or (3) is elected in conjunction with the election under section 1.1502-33(d)(3)(i). In addition, if the method elected is the method provided in section 1.1502-33(d)(2)(ii), the statement shall indicate the percentage used pursuant to section 1.1502-33(d)(2)(ii)(b). In the event the group desires to allocate its tax liability in accordance with a method pursuant to section 1.1502-33(d)(2)(iii), approval of that method by the Commissioner must be obtained prior to its use. An election once made is irrevocable and is binding on the group with respect to the year for which it is made and for all future consolidated return years of the group, unless the Commissioner authorizes a change to another method prior to the time prescribed by law for filing the return for the year in which the change is to be effective.

.11 Section 1.1502-33(d)(3)(ii) of the regulations provides that if a group does not make an election under section 1.1502-33(d)(3)(i) for the first consolidated return year of the group, the group may not thereafter make an election without the approval of the Commissioner.

SEC. 3. SCOPE

.01 Except as provided in section 3.02, this revenue procedure applies to any affiliated group filing consolidated returns that desires to elect or to change its method of allocating the consolidated federal income tax liability to members of the group.

.02 This revenue procedure does not apply to an affiliated group that:

(1) is filing its first consolidated return;

(2) is requesting an allocation of consolidated federal income tax liability under a basic method described in section 1.1552-1(a)(4) of the regulations or under a complementary method described in section 1.1502-33(d)(2)(iii);

(3) has changed its basic method (not including adoption of the method in the first consolidated return) within the five preceding taxable years; or

(4) has changed its complementary method (not including adoption of the method in the first consolidated return) within the five preceding taxable years.

.03 If this revenue procedure does not apply to an affiliated group by reason of section 3.02(2), (3), or (4) of this revenue procedure, the group needs the Commissioner's consent to elect or to change its method of allocating the consolidated federal income tax liability to members of the group. Such a group must file a request with the Commissioner as required by sections 1.1502-33(d)(3)(i) and (ii) and 1.1552-1(c)(1) of the regulations.

SEC. 4. MANNER OF EFFECTING THE ELECTION OR CHANGE

.01 In order to obtain the consent of the Commissioner under this revenue procedure, the common parent of the group must attach a statement to its consolidated federal income tax return (filed on a timely basis, taking into account any extensions). The statement must contain the following information and representations:

(1) The name of the common parent corporation of the affiliated group, its Employer Identification Number (EIN) and its address, the name and EIN of all the members of the affiliated group, and the district office that has jurisdiction over the consolidated return;

(2) A complete description of the present method of allocating the consolidated federal income tax liability. If the present method is not the method that was used for the first filing of a consolidated return, the statement must indicate the date permission to change the affiliated group's allocation method was granted and the taxable year for which the change was effective. If the affiliated group previously used this revenue procedure to elect or to change its method of allocating the consolidated federal income tax liability, a copy of the earlier statement under this section 4.01, including the date such statement was filed and the taxable year of the consolidated return with which it was filed, must be attached to this statement;

(3) A complete description of the affiliated group's proposed method of allocating the consolidated federal income tax liability. If the method described in section 1.1502-33(d)(2)(ii) of the regulations is to be employed, the fixed percentage must be stated; and

(4) A representation that adoption of the proposed method of allocation will not change the taxable status of distributions made during the year of change or in any foreseeable future year to shareholders who are not members of the affiliated group.

.02 The statement must be signed under penalties of perjury by a duly authorized officer of the common parent of the affiliated group. See section 1.1502-77 of the regulations.

SEC. 5. CONSENT

In accordance with sections 1.1552-1(c)(1) and 1.1502-33(d)(3)(i) of the regulations, consent is hereby granted to an affiliated group within the scope of this revenue procedure:

(1) To change its method of allocating the consolidated federal income tax liability to one of the basic methods described in section 1.1552-1(a)(1), (2), or (3) of the regulations; and/or

(2) To elect or change to a complementary method described in section 1.1502-33(d)(2)(i) or (ii) of the regulations for use in conjunction with a basic method described in section 1.1552-1(a)(1), (2), or (3). This consent is granted for the consolidated return year for which the statement described in section 4 of this revenue procedure is attached to a timely filed federal consolidated income tax return. See section 6 regarding compliance with the conditions of this revenue procedure.

SEC. 6. COMPLIANCE WITH CONDITIONS

An affiliated group that takes the desired action without complying with all the conditions of this revenue procedure has initiated the desired action without obtaining the permission of the Commissioner that is required by sections 1.1502-33(d)(3)(i) and (ii) and 1.1552-1(c)(1) of the regulations.

SEC. 7. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, ATTN: CC:CORP:02, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

SEC. 8. EFFECTIVE DATE

This revenue procedure is effective for all consolidated returns timely filed (including extensions) after July 23, 1990, the date of publication of this revenue procedure in the Internal Revenue Bulletin.

¹ As corrected by Rev. Proc. 90-39A, page 367, this Bulletin.