Tax News

CCH (cch.taxgroup.com) reports:

The IRS has finalized regulations for including insurance companies in a life-nonlife consolidated return, adopting the group's tax year, and electing to ratably allocate tax items between short tax years. The final regulations adopt, without modification, proposed and temporary regulations that eliminate the separation condition requirement from a life insurance company's five-year affiliation requirement (T.D. 9258, TAXDAY, 2006/04/25, I.1); and proposed and temporary regulations that simplify the process for adopting the group's tax year and for electing to allocate items between short tax years (T.D. 9264, TAXDAY, 2006/05/30, I.4).
Separation Condition
In general, a newly-formed life insurance company must be affiliated with a group for five tax years before it joins in filing a consolidated return (Code Sec. 1504(c)). A tacking rule, however, provides that if an existing member of a group transfers property to a new member of the group, the new member may apply the period during which the transferring corporation was affiliated with the group toward the five-year threshold if five conditions are satisfied. The final regulations remove one of these conditions, the "separation condition," which applies when both the transferor and the new corporation are life insurance companies. The separation condition was intended to prevent the companies from using the separation to reduce taxable income under a three-phase taxing system that was substantially eliminated in 1984. Thus, the separation condition is no longer necessary.
Tax Year
Before 1981, insurance companies generally had to use a calendar tax year. Since all members of a consolidated group had to use the tax year of the common parent, this meant that a fiscal-year group had to change its tax year to a calendar year if the group included an insurance company. In 1981, Code Sec. 843 was amended to allow an insurance company that joined in the filing of a consolidated return to adopt the fiscal year of the common parent. The final regulations provide that the consolidated group must use the common parent's tax year.
Allocation Between Short Tax Years
One tax year ends, and a new tax year begins, whenever an S corporation joins or leaves a consolidated group. Returns for these short tax years must be filed as if the S corporation ceased to exist upon joining the group, or first came into existence upon leaving the group. Tax items can generally be ratably allocated between the short tax years, if the S corporation is not required to change its accounting period or its accounting method as a result of its change in status, and if an irrevocable ratable allocation election is made. The final regulations provide the rules for making this election via a separate statement on or with the returns that include the items for the years ending and beginning with the S corporation's change in status.
Effective Dates
The final regulations removing the separation condition apply to original consolidated returns due (without extensions) after July 20, 2007. The temporary regulations apply to original consolidated returns due (without extensions) after April 25, 2006, and on or before July 20, 2007. The final regulations governing tax years and the election statement apply to original consolidated income tax returns due (without extensions) after July 20, 2007. The temporary regulations governing tax years apply to original consolidated income tax returns due (without extensions) after April 25, 2006, and on or before July 20, 2007. The temporary regulations governing the election statement apply to original consolidated income tax returns due after May 30, 2006, and on or before July 20, 2007.
T.D. 9342, 2007FED ¶47,049
Other References:
Code Sec. 1502
CCH Reference - 2007FED ¶33,185C
CCH Reference - 2007FED ¶33,193
CCH Reference - 2007FED ¶33,197
Tax Research Consultant
CCH Reference - TRC CONSOL: 7,106
CCH Reference - TRC CONSOL: 15,054
CCH Reference - TRC CONSOL: 15,104.10