Part I. Rulings — Internal Revenue Bulletin 2002-29

Section 103.—Interest on State and Local Bonds

The Service solicits public comments on the application of section 142(a)(6) to tax-exempt bonds which finance solid waste recycling facilities. See Notice 2002–51, page 131.

Section 142.—Exempt Facility Bond

The Service solicits public comments on the application of section 142(a)(6), which permits taxexempt bonds to be issued to finance solid waste disposal facilities. See Notice 2002–51, page 131.

Section 401.—Qualified Pension, Profit-Sharing, and Stock Bonus Plans

Will the Service challenge the deductibility of certain contributions actually made during the taxable year in anticipation of section 401(k) deferrals and section 401(m) matching contributions? See Notice 2002–48, page 130.

26 CFR 1.401–1: Qualified pension, profit-sharing, and stock bonus plans. (Also §§ 404, 415, 4972; 1.415–6.)

Rev. Rul. 2002–45

Restorative payments; nondiscrimi- nation; deductions; qualified defined contribution plan . This ruling describes two situations in which certain payments, which are termed “restorative payments” in the ruling, to a qualified defined contribution plan are not treated as contributions for various sections of the Code.

ISSUE

Under the facts described below, are payments to the trust of a defined contribution plan qualified under § 401(a) of the Internal Revenue Code (the Code) treated as contributions for purposes of § 401(a)(4), 401(k)(3), 401(m), 404, 415(c), or 4972?

FACTS

Situation 1 . Employer M maintains Plan X, a defined contribution plan, for

the benefit of M’s employees. The plan is qualified under § 401(a). Employer M caused an unreasonably large portion of the assets of Plan X to be invested in Entity G, a high-risk investment. It is later determined that the investment has become worthless.

A group of participants in Plan X files a suit against Employer M alleging a breach of fiduciary duty in connection with the investment in Entity G. Following the filing of the suit, the parties agree to a settlement pursuant to which Employer M does not admit that a breach of fiduciary duty occurred but makes a payment to Plan X equal to the amount of the losses (including an appropriate adjustment to reflect lost earnings) to Plan X from the investment in Entity G. The settlement also provides that the payment will be allocated among the individual accounts of all of the participants and beneficiaries in proportion to each account’s investment in Entity G over the appropriate period. The court approves the settlement and enters a consent order. Employer M makes the payment to Plan X and the payment is allocated to the appropriate accounts.

Situation 2 . The facts are the same as in Situation 1, except that no lawsuit is filed against Employer M. However, Employer M becomes aware that participants in Plan X are concerned about the investment in Entity G and are considering taking legal action. Employer M also learns that lawsuits alleging fiduciary breach have been filed against other companies by those companies’ employees over losses to their qualified retirement plans due to investment in Entity G. Employer M decides to make the payment to Plan X before a lawsuit is filed, after reasonably determining that it has a reasonable risk of liability for breach of fiduciary duty based on all of the relevant facts and circumstances.

LAW AND ANALYSIS

The provisions of the Code that apply to contributions to qualified defined contribution plans include §§ 401(a)(4), 401(k)(3), 401(m), 404, 415 and 4972. Section 401(a)(4) generally provides that the contributions or benefits provided

under a qualified defined contribution plan may not discriminate in favor of highly compensated employees. Whether contributions under a defined contribution plan are discriminatory is generally determined by comparing the amount of contributions allocated to the accounts of highly compensated employees with the amount of contributions allocated to the accounts of nonhighly compensated employees.

Section 401(k)(3) contains participation and nondiscrimination standards for elective deferrals to qualified cash or deferred arrangements. Section 401(m) contains nondiscrimination tests for matching contributions and employee contributions. Both § 401(k)(3) and § 401(m) provide rules regarding qualified matching contributions and qualified nonelective contributions.

Section 404 generally provides that contributions paid by an employer to or under a plan, if they would otherwise be deductible, are only deductible under § 404, subject to various limitations under § 404(a).

Section 415(c) generally limits the amount of contributions and other additions under a qualified defined contribution plan with respect to a participant for any year.

Section 4972(a) imposes a 10 percent excise tax on the amount of the nondeductible contributions made to any “qualified employer plan,” including a plan qualified under § 401(a) or 403(a).

A payment made to a qualified defined contribution plan is not treated as a contribution to the plan, and accordingly is not subject to the Code provisions described above, if the payment is made to restore losses to the plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and plan participants who are similarly situated are treated similarly with respect to the payment. For purposes of this revenue ruling, these payments are referred to as “restorative payments.”

The determination of whether a payment to a qualified defined contribution plan is treated as a restorative payment,

2002–29 I.R.B. 116 July 22, 2002

plan. Accordingly, the payment is not taken into account under § 401(a)(4) or 415(c) or, if applicable to the plan, § 401(k)(3) or (m). In addition, the restorative payments to Plan X are not subject to the provisions of § 404 or 4972.

HOLDING

The payments to the defined contribution plans qualified under § 401(a) under the facts described in Situation 1 and Situation 2 above are not contributions for purposes of § 401(a)(4), 401(k)(3), 401(m), 404, 415(c), or 4972.

Drafting Information

The principal author of this revenue ruling is Diane S. Bloom of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829– 5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Ms. Bloom may be reached at 1–202–283–9888 (not a toll-free number).

Section 404.—Deduction for Contributions of an Employer to an Employees’ Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan

Whether “restorative payments” to a qualified defined contribution plan are deductible contributions. See Rev. Rul. 2002–45, page 116.

rather than as a contribution, is based on all of the relevant facts and circumstances. As a general rule, payments to a defined contribution plan are restorative payments for purposes of this revenue ruling only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for breach of fiduciary duty. In contrast, payments made to a plan to make up for losses due to market fluctuations and that are not attributable to a fiduciary breach are generally treated as contributions and not as restorative payments. In no case will amounts paid in excess of the amount lost (including appropriate adjustments to reflect lost earnings) be considered restorative payments. Furthermore, payments that result in different treatment for similarly situated plan participants are not restorative payments. The failure to allocate a share of the payment to the account of a fiduciary responsible for the losses does not result in different treatment for similarly situated participants.

Payments to a plan made pursuant to a Department of Labor (DOL) order or court-approved settlement to restore losses to a qualified defined contribution plan on account of a breach of fiduciary duty generally are treated as having been made on account of a reasonable risk of liability. ¹

In no event are payments required under a plan or necessary to comply with a requirement of the Code considered restorative payments, even if the payments are delayed or otherwise made in circumstances under which there has been a breach of fiduciary duty. Thus, for example, while the payment of delinquent elective deferrals or employee contributions is part of an acceptable correction under the VFC Program, such payment is not a restorative payment for purposes of this revenue ruling. Similarly, payments made under the Employee Plans Compliance Resolution System (EPCRS), Rev.

Proc. 2002–47, on page 133, of this Bulletin, or otherwise, to correct qualification failures are generally considered contributions and do not constitute restorative payments for purposes of this revenue ruling. However, the payment of appropriate adjustments to reflect lost earnings required under EPCRS is generally treated in the same manner as a restorative payment.

In Situation 1, the payment by Employer M to restore losses to Plan X on account of the investment in Entity G is made pursuant to a court-approved settlement of the suit filed against it by plan participants and is not in excess of the amount lost (including appropriate adjustments to reflect lost earnings). In Situation 2, the payment by Employer M is made after it reasonably determines, based on all of the relevant facts and circumstances, that it has a reasonable risk of liability for breach of fiduciary duty even though no suit has yet been filed. In reaching this determination, the following facts are taken into account: that Entity G was a high-risk investment, that a large portion of the plan assets had been invested in Entity G, that participants expressed concern about the investment, and that several lawsuits had been filed against other employers alleging fiduciary breach in connection with the investment of plan assets in Entity G.

In both Situation 1 and Situation 2, therefore, the payment is made based on a reasonable determination that there is a reasonable risk of liability for breach of fiduciary duty and to restore losses to the plan. In addition, the payment is allocated among the individual accounts of the participants and beneficiaries in proportion to each account’s investment in Entity G so that similarly situated participants are not treated differently.

In both Situation 1 and Situation 2, the payment is a restorative payment (as defined in this revenue ruling) and, as such, is not a contribution to a qualified

1 Whether a payment is made under the Voluntary Fiduciary Correction (VFC) Program established by the DOL may be taken into account in determining whether there is a reasonable risk of liability. Final rules describing the VFC Program were issued by the DOL on March 28, 2002 (67 Fed. Reg. 15062). The VFC Program is designed to encourage employers to voluntarily comply with Title I of ERISA by correcting certain violations of the law. If an applicant meets the VFC Program criteria it will receive a no action letter from the DOL, pursuant to which the DOL will neither initiate a civil investigation under ERISA regarding the applicant’s responsibility for any transaction described in the letter nor assess a civil penalty under section 502(l) of ERISA on the correction amount paid to the plan or its participants.

July 22, 2002 117 2002–29 I.R.B.

plan made after the end of the plan year. Rev. Rul. 90–105 holds that contributions to a qualified cash or deferred arrangement within the meaning of § 401(k) or to a defined contribution plan as matching contributions within the meaning of § 401(m) are not deductible by the employer for a taxable year, if the contributions are attributable to compensation earned by plan participants after the end of that taxable year. See also Rev. Rul. 76–28 (providing that a contribution made after the close of an employer’s taxable year will be deemed to have been made on account of the preceding taxable year under § 404(a)(6) if, among other conditions, the payment is treated by the plan in the same manner as the plan would treat a payment actually received on the last day of such preceding taxable year of the employer) and Lucky Stores, Inc. v. Commissioner, 153 F.3d 964 (9th Cir. 1998), cert. denied, 526 U.S. 1111 (1999) (indicating, in the context of a defined benefit plan, that the plain meaning of § 404(a)(6) precludes deduction in the preceding taxable year of grace period contributions that are required under collective bargaining agreements for work performed after the end of that preceding taxable year).

The facts in this revenue ruling are the same as the facts in Rev. Rul. 90–105, except for the addition of the plan amendment and the board resolution setting a minimum contribution for the plan year. These factual differences do not change the result. The plan amendment and the board resolution setting a minimum contribution for the plan year establish a liability, prior to the end of M’s taxable year, to make that contribution. However, M’s Post-Year End Service Contributions still are attributable to compensation earned by plan participants after the end of the taxable year. Neither the plan amendment nor the board resolution bear on when that compensation is earned. Thus, for example, the Post-Year End Service Contributions in these circumstances are still on account of that subsequent taxable year rather than on account of M’s 2001 Taxable Year, and so cannot be deemed paid at the end of M’s 2001 Taxable Year under § 404(a)(6). Therefore, the holding of Rev. Rul. 90–105

Deductibility; timing. Contributions made during a grace period to a section 401(k) plan or as matching contributions to a qualified defined contribution plan are not deductible by the employer for a taxable year if the contributions are attributable to compensation earned by plan participants after the end of that taxable year.

Rev. Rul. 2002–46

ISSUE

Whether contributions made during the § 404(a)(6) grace period to a qualified cash or deferred arrangement within the meaning of § 401(k) or to a defined contribution plan as matching contributions within the meaning of § 401(m) are deductible by an employer for a taxable year, if the contributions are designated as satisfying a liability established before the end of that taxable year but are attributable to compensation earned by plan participants after the end of that taxable year.

FACTS

Corporation M maintains Plan X, which consists of a qualified cash or deferred arrangement within the meaning of § 401(k) and which also provides for matching contributions within the meaning of § 401(m). M’s taxable year is the fiscal year ending June 30. Plan X has a calendar plan year. Plan X was amended to provide for M’s Board of Directors to set a minimum contribution for a plan year, to be allocated first toward elective deferrals and matching contributions, with any excess to be allocated to participants as of the end of the plan year in proportion to compensation earned during the plan year. Pursuant to this plan amendment, M’s Board of Directors adopted a resolution on June 15, 2001, setting a minimum contribution of $8,000,000 for the 2001 calendar plan year. By December 31, 2001 (the last day of Plan X’s 2001 calendar plan year), M had contributed $8,000,000 to Plan X in accordance with the terms of the plan. These amounts consisted of (a) $3,800,000 for elective deferrals and matching contributions attributable to compensation earned by plan participants

before the end of M’s taxable year ending June 30, 2001 (Pre-Year End Service Contributions), and (b) $4,200,000 for elective deferrals and matching contributions attributable to compensation earned by plan participants after the end of M’s taxable year ending June 30, 2001 (PostYear End Service Contributions). M made each contribution attributable to compensation earned during each pay period contemporaneously with the issuance of wage payments for the pay period.

M received an extension of time to March 15, 2002, to file the income tax return for its taxable year ending June 30, 2001 (2001 Taxable Year). On the income tax return for its 2001 Taxable Year, which was timely filed on March 1, 2002, M claimed a deduction for the entire $8,000,000 for elective deferrals and matching contributions made to Plan X during Plan X’s 2001 calendar plan year, relating to both Pre-Year End Service Contributions and Post-Year End Service Contributions. The total amount contributed and claimed by M as a deduction did not exceed 15 percent of the total compensation otherwise paid or accrued during M’s 2001 Taxable Year to participants under Plan X (and thus did not exceed the applicable percentage limitation for that year under § 404(a)(3)(A)(i)).

LAW AND ANALYSIS

Section 404(a) provides in relevant part that if contributions are paid to a profit-sharing or stock bonus plan and are otherwise deductible under chapter 1 of the Code, those contributions are deductible under § 404 (subject to certain limitations) in the taxable year of the employer when paid, and are not deductible under any other section of chapter 1 of the Code.

Section 404(a)(6) provides in relevant part that, for this purpose, “a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).”

Rev. Rul. 90–105, 1990–2 C.B. 69, applies § 404(a)(6), as interpreted by Rev. Rul. 76–28, 1976–1 C.B. 106, to a situation involving a contribution to a 401(k)

2002–29 I.R.B. 118 July 22, 2002

between the hours of 8:00 a.m. and 4:00 p.m., Eastern Time, Monday through Friday. Mr. Holland’s telephone number is (202) 283–9699 (not a toll-free call). Mr. Richards’s telephone number is (202) 622–6090 (not a toll-free call).

Section 415.—Limitations on Benefits and Contributions Under Qualified Plans

26 CFR 1.415–6: Limitation for defined contribu- tion plans.

Whether “restorative payments” to a qualified defined contribution plan are annual additions. See Rev. Rul. 2002–45, page 116.

Section 472.—Last-in, First- out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department stores . The May 2002 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, May 31, 2002.

Rev. Rul. 2002–47

The following Department Store Inventory Price Indexes for May 2002 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472– 1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, May 31, 2002.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups - soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

applies to the facts of this revenue ruling, and M’s Post-Year End Service Contributions are not deductible for M’s 2001 Taxable Year.

HOLDING

Grace period contributions to a qualified cash or deferred arrangement within the meaning of § 401(k) or to a defined contribution plan as matching contributions within the meaning of § 401(m) are not deductible by the employer for a taxable year, if the contributions are attributable to compensation earned by plan participants after the end of that taxable year. This holding applies regardless of whether the employer’s liability to make a minimum contribution is fixed before the close of that taxable year.

APPLICATION

A change in a taxpayer’s treatment of contributions to a method consistent with this revenue ruling is a change in method of accounting to which §§ 446 and 481 apply. A taxpayer that wants to change its treatment of contributions to a method consistent with this revenue ruling must follow the automatic change in method of accounting provisions in Rev. Proc. 2002–9, 2002–3 I.R.B. 327 (as modified by Rev. Proc. 2002–19, 2002–13 I.R.B. 696, and as modified and clarified by Announcement 2002–17, 2002–8 I.R.B. 561), with the following modifications: (1) The scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply, provided the taxpayer’s method of accounting for contributions addressed in this revenue ruling is not an issue under consideration for taxable years under examination, within the meaning of section 3.09(1) of Rev. Proc. 2002–9, at the time the Form 3115 is filed with the national office.

(2) To assist the Service in processing changes in method of accounting under this revenue ruling, and to ensure proper handling, section 6.02(4)(a) of Rev. Proc. 2002–9 is modified to require that a Form 3115 filed under this revenue ruling include the statement: “Automatic Change Filed Under Rev. Rul. 2002–46.” This statement should be legibly printed or typed on the appropriate line on any Form 3115 filed under this revenue ruling.

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002–9 is modified and amplified to include in the APPENDIX a change to a method consistent with this revenue ruling.

LISTED TRANSACTIONS

The transaction described in this revenue ruling is substantially similar to the transaction described in Rev. Rul. 90–105, 1990–2 C.B. 69. Under Notice 2000–15, 2000–1 C.B. 826, and Notice 2001–51, 2001–34 I.R.B. 190, transactions that are the same as or substantially similar to transactions described in that notice (including transactions described in Rev. Rul. 90–105) are tax avoidance transactions and are identified as “listed transactions” for purposes of § 1.6011– 4T(b)(2) of the Temporary Income Tax Regulations and § 301.6111–2T(b)(2) of the Temporary Procedure and Administration Regulations. Those provisions impose certain requirements on taxpayers that participate in listed transactions, and on promoters of listed transactions.

ALTERNATIVE RATIONALE IN REV. RUL. 90–105

An alternative rationale in Rev. Rul. 90–105 was based upon language in § 1.404(a)–1(b) of the Income Tax Regulations requiring that contributions be compensation for services actually rendered. As indicated in Notice 2002–48, elsewhere in this bulletin, the Service has concluded upon further consideration that this language is relevant only where the reasonableness of an employee’s compensation is in question, and thus is not an appropriate basis upon which to determine the timing of deductions for the contributions described in Notice 2002– 48, Rev. Rul. 90–105, or this revenue ruling.

DRAFTING INFORMATION

The principal authors of this revenue ruling are James E. Holland, Jr., of the Employee Plans, Tax Exempt and Government Entities Division and John Richards of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact the Employee Plans taxpayer assistance telephone service at 1–877–829–5500 (a toll-free number)

July 22, 2002 119 2002–29 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups May May 2001 2002

Percent Change from May 2001

to May 2002 ¹

Piece Goods ------------------------------------------------------------ 491.2 490.1 -0.2
Domestics and Draperies -------------------------------------------- 598.8 586.9 -2.0
Women’s and Children’s Shoes ------------------------------------ 653.9 647.5 -1.0
Men’s Shoes ----------------------------------------------------------- 889.7 924.6 3.9
Infants’ Wear ----------------------------------------------------------- 625.4 614.9 -1.7
Women’s Underwear ------------------------------------------------- 570.4 542.9 -4.8
Women’s Hosiery ----------------------------------------------------- 352.0 345.4 -1.9
Women’s and Girls’ Accessories ----------------------------------- 553.1 558.0 0.9
Women’s Outerwear and Girls’ Wear ----------------------------- 394.6 386.7 -2.0
Men’s Clothing -------------------------------------------------------- 595.5 597.7 0.4
Men’s Furnishings ---------------------------------------------------- 619.2 602.1 -2.8
Boys’ Clothing and Furnishings ------------------------------------ 497.1 495.5 -0.3
Jewelry ------------------------------------------------------------------ 934.7 901.3 -3.6
Notions ------------------------------------------------------------------ 776.3 797.6 2.7
Toilet Articles and Drugs -------------------------------------------- 947.8 975.0 2.9
Furniture and Bedding ----------------------------------------------- 641.8 626.4 -2.4
Floor Coverings ------------------------------------------------------- 623.7 620.1 -0.6
Housewares ------------------------------------------------------------ 767.1 758.4 -1.1
Major Appliances ----------------------------------------------------- 224.3 220.7 -1.6
Radio and Television ------------------------------------------------- 54.7 50.4 -7.9
Recreation and Education ² ------------------------------------------ 90.2 86.9 -3.7
Home Improvements ² ------------------------------------------------ 125.7 125.4 -0.2
Auto Accessories ² ----------------------------------------------------- 108.9 110.9 1.8

Groups 1 - 15: Soft Goods ------------------------------------------------- 594.0 586.0 -1.3

Groups 16 - 20: Durable Goods ------------------------------------------- 423.0 413.1 -2.3

Groups 21 - 23: Misc. Goods ² --------------------------------------------- 98.6 96.8 -1.8

Store Total ³ ------------------------------------------------------------- 530.8 522.3 -1.6

1 Absence of a minus sign before the percentage change in this column signifies a price increase. 2 Indexes on a January 1986=100 base. 3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

SUMMARY: This document contains final regulations regarding the agent for subsidiaries of an affiliated group that files a consolidated return (agent for the group). The regulations address certain issues concerning the scope of the common parent’s authority, as well as questions concerning the agent for the group when the common parent’s existence terminates. These regulations affect all consolidated groups.

DATES: Effective Date : These regulations are effective June 28, 2002.

DRAFTING INFORMATION

The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622–7718 (not a tollfree call).

Section 1502.—Regulations

26 CFR 1.1502–77: Agent for the group

T.D. 9002

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602

Agent for Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

2002–29 I.R.B. 120 July 22, 2002

Applicability Date : For dates of applicability, see §§ 1.1502–77(h) and 1.1502– 78(f).

FOR FURTHER INFORMATION CONTACT: Gerald B. Fleming, (202) 622– 7770, or George R. Johnson, (202) 622– 7930 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545–1699. Responses to these collections of information are required to obtain a benefit (the approval by the IRS of the common parent’s designation of a substitute agent for the consolidated group or recognition by the IRS of the common parent’s successor as a default substitute agent).

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The estimated annual burden per respondent is 2 hours.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR: MP:FP:S, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On September 26, 2000, a notice of proposed rulemaking (REG–103805–99, 2000–2 C.B. 376) relating to the agent for

the group was published in the Federal Register (65 FR 57755). No public hearing was requested or held. Written comments responding to the notice of proposed rulemaking were received. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury decision.

Explanation and Summary of Comments

These final regulations are substantially the same as the proposed regulations but reflect certain revisions based on various formal and informal comments that were received from the public and from IRS personnel. Many of the revisions are minor changes made to clarify certain aspects of the proposed regulations. Certain of the more significant revisions are discussed below.

The final regulations reflect changes that clarify the examples of matters for which the common parent is the agent. Specifically, the example on elections is expanded to include other similar options that are available to a member in determining its separate taxable income and any changes in such options. The common parent should make any necessary requests related to those options or changes in such options (for example, to request a change in a subsidiary’s method or period of accounting). In addition, an example is added to clarify that the common parent takes any action on behalf of a member of the group with respect to a foreign corporation. Finally, an example is added to clarify that a final partnership administrative adjustment (FPAA) under section 6223 may be sent to the common parent and that the mailing to the common parent will be considered a mailing to each group member that is a partner entitled to receive the FPAA.

In light of statutory changes not reflected in the proposed regulations, the final regulations modify the identification of matters reserved to subsidiaries in paragraph (a)(3) of the proposed regulations. In particular, the reference to a DISC’s change in annual accounting period pursuant to § 1.991–1(b)(3)(ii) has been removed because such a change in accounting period is generally automatic and, in any event, is made by a DISC, which is not an includible corporation pursuant to section 1504(b)(7). In addi

tion, the final regulations add as a specific matter reserved to subsidiaries any action by a subsidiary acting as the tax matters partner under the TEFRA partnership provisions of sections 6221 through 6234 and the accompanying regulations. The provisions requiring that a notice of deficiency or notice and demand for payment name each corporation that was a member of the group for the consolidated return year have been eliminated. The IRS and Treasury have determined that these provisions are inconsistent with the general rule that the common parent is agent for the group with respect to the group’s consolidated tax liability.

The final regulations have added a provision for a default substitute agent for the group under certain circumstances. If the common parent fails to designate a substitute agent before its existence terminates and it has a single successor that is a domestic corporation, that successor becomes the default substitute agent. Although the Commissioner’s approval is not required, any such default substitute agent is advised to provide written notification to the IRS in accordance with procedures established by the Commissioner. Until notification is received, the Commissioner is not required to recognize the successor’s status as default substitute agent and may continue to send communications to the old common parent and the Commissioner is not required to respond to communications (including, for example, a claim for refund) submitted by the successor on behalf of the consolidated group.

Where the Commissioner designates a substitute agent for the group, the proposed regulations provide for the Commissioner and the designated agent to give notice of the designation to all members of the group. The final regulations provide for the Commissioner to give notice to the designated agent, which is responsible for giving notice to the remaining members of the group.

One comment suggested that there should be a mechanism for taxpayers to request that the final regulations apply to taxable years beginning before the date of issuance of the final regulations. Treasury and the IRS recognize that some taxpayers may wish to have the additional flexibility afforded by paragraph (d)(1) of the final regulations allowing the designation

July 22, 2002 121 2002–29 I.R.B.

of a successor of a member (including a successor of the common parent) as the substitute agent for the group. Accordingly, the final regulations permit a common parent to elect to apply paragraph (d)(1) of the final regulations with respect to designations for taxable years beginning before the date of adoption. Once such an election is made, the provisions of paragraph (d)(1) of the final regulations apply to any subsequent designation of a substitute agent for the consolidated return years subject to the election.

Effective Date

The final regulations under § 1.1502– 77 apply to taxable years beginning on or after June 28, 2002. The current rules of §§ 1.1502–77 and 1.1502–77T, which are collectively retained in § 1.1502–77A, continue to apply with respect to taxable years beginning before June 28, 2002.

The final regulations under § 1.1502–78 apply to taxable years to which a loss or credit may be carried back and for which the due date (without extensions) of the original return is after June 28, 2002.

Special Analyses

It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regula

tions will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses, and, moreover, that any burden on taxpayers is minimal. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Drafting Information

The principal authors of these proposed regulations are Gerald B. Fleming and George R. Johnson, Office of the Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - - Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing entries for “1.1502–77(e)” and “1.1502–78(b)” and adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 1.1502–77 also issued under 26 U.S.C. 1502 and 6402(j). Section 1.1502–78 also issued under 26 U.S.C. 1502, 6402(j), and 6411(c).

- Section 1.1502–77A also issued under 26 U.S.C. 1502 and 6402(j). - - Par. 2. Section 1.338–1 is amended by adding a sentence at the end of paragraph (b)(2)(vii) to read as follows:

§ 1.338–1 General principles; status of old target and new target.

(b) - - (2) - - (vii) - - - See also, for example, § 1.1502–77(e)(4), providing that an election under section 338 does not result in a deemed termination of target’s existence for purposes of the rules applicable to the agent for a consolidated group.

Par. 3. In § 1.1502–6, paragraph (b) is amended by removing the language “district director” and adding “Commissioner” in each place it appears.

Par. 4. Immediately following § 1. 1502–41A, an undesignated center heading is added to read as follows:

REGULATIONS APPLICABLE TO TAXABLE YEARS BEGINNING BEFORE JUNE 28, 2002

Par. 5. Section 1.1502–77 is redesignated as § 1.1502–77A, transferred immediately after the undesignated center heading “REGULATIONS APPLICABLE TO TAXABLE YEARS BEGINNING BEFORE JUNE 28, 2002” and amended as follows:

The section heading is revised.
In the list below, for each paragraph indicated in the left column, remove the language in the middle column and add the language in the right column:

Paragraph Remove Add (a), last sentence district director Commissioner

Commissioner

(b), first sentence

district director with whom the consolidated return is filed

(b), first sentence such district director the Commissioner (b), second sentence such district director the Commissioner (c) district director Commissioner

Commissioner

(d), first sentence

district director with whom the consolidated return is filed

(d), first sentence such district director the Commissioner (d), second sentence district director Commissioner (d), second sentence (each place it such district director the Commissioner appears)

(d), third sentence (each place it appears) such district director the Commissioner

such district director the Commissioner

2002–29 I.R.B. 122 July 22, 2002

Paragraph (e) is removed and reserved.
Paragraphs (f) and (g) are added. The revision and additions read as follows:

§ 1.1502–77A Common parent agent for subsidiaries applicable for consolidated return years beginning before June 28, 2002.

- - - (f) Cross-reference . For further rules applicable to groups that include insolvent financial institutions, see § 301. 6402–7 of this chapter. (g) Effective date . This section applies to taxable years beginning before June 28, 2002, except paragraph (e) of this section applies to statutory notices and waivers of the statute of limitations for taxable years for which the due date (without extensions) of the consolidated return is after September 7, 1988, and which begin before June 28, 2002.

Par. 6. New § 1.1502–77 is added to read as follows:

§ 1.1502–77 Agent for the group.

(a) Scope of agency —(1) In general (i) Common parent . Except as provided in paragraphs (a)(3) and (6) of this section, the common parent (or a substitute agent described in paragraph (a)(1)(ii) of this section) for a consolidated return year is the sole agent (agent for the group) that is authorized to act in its own name with respect to all matters relating to the tax liability for that consolidated return year, for—

(A) Each member in the group; and (B) Any successor (see paragraph (a)(1)(iii) of this section) of a member.

(ii) Substitute agents . For purposes of this section, any corporation designated as a substitute agent pursuant to paragraph (d) of this section to replace the common parent or a previously designated substitute agent acts as agent for the group to the same extent and subject to the same limitations as are applicable to the common parent, and any reference in this section to the common parent includes any such substitute agent.

(iii) Successor . For purposes of this section only, the term successor means an individual or entity (including a disregarded entity) that is primarily liable, pur

suant to applicable law (including, for example, by operation of a state or Federal merger statute), for the tax liability of a member of the group. Such determination is made without regard to § 1.1502– 1(f)(4) or 1.1502–6(a). (For inclusion of a successor in references to a subsidiary or member, see paragraph (c)(2) of this section.)

(iv) Disregarded entity . If a subsidiary of a group becomes, or its successor is or becomes, a disregarded entity for Federal tax purposes, the common parent continues to serve as the agent with respect to that subsidiary’s tax liability under § 1.1502–6 for consolidated return years during which it was included in the group, even though the entity generally is not treated as a person separate from its owner for Federal tax purposes.

(v) Transferee liability . For purposes of assessing, paying and collecting transferee liability, any exercise of or reliance on the common parent’s agency authority pursuant to this section is binding on a transferee (or subsequent transferees) of a member, regardless of whether the member’s existence terminates prior to such exercise or reliance.

(vi) Purported common parent . If any corporation files a consolidated return purporting to be the common parent of a consolidated group but is subsequently determined not to have been the common parent of the claimed group, that corporation is treated, to the extent necessary to avoid prejudice to the Commissioner, as if it were the common parent.

(2) Examples of matters subject to agency . With respect to any consolidated return year for which it is the common parent—

(i) The common parent makes any election (or similar choice of a permissible option) that is available to a subsidiary in the computation of its separate taxable income, and any change in an election (or similar choice of a permissible option) previously made by or for a subsidiary, including, for example, a request to change a subsidiary’s method or period of accounting;

(ii) All correspondence concerning the income tax liability for the consolidated return year is carried on directly with the common parent;

(iii) The common parent files for all extensions of time, including extensions

of time for payment of tax under section 6164, and any extension so filed is considered as having been filed by each member;

(iv) The common parent gives waivers, gives bonds, and executes closing agreements, offers in compromise, and all other documents, and any waiver or bond so given, or agreement, offer in compromise, or any other document so executed, is considered as having also been given or executed by each member;

(v) The common parent files claims for refund, and any refund is made directly to and in the name of the common parent and discharges any liability of the Government to any member with respect to such refund;

(vi) The common parent takes any action on behalf of a member of the group with respect to a foreign corporation, for example, elections by, and changes to the method of accounting of, a controlled foreign corporation in accordance with § 1.964–1(c)(3);

(vii) Notices of claim disallowance are mailed only to the common parent, and the mailing to the common parent is considered as a mailing to each member;

(viii) Notices of deficiencies are mailed only to the common parent (except as provided in paragraph (b) of this section), and the mailing to the common parent is considered as a mailing to each member;

(ix) Notices of final partnership administrative adjustment under section 6223 with respect to any partnership in which a member of the group is a partner may be mailed to the common parent, and, if so, the mailing to the common parent is considered as a mailing to each member that is a partner entitled to receive such notice (for other rules regarding partnership proceedings, see paragraphs (a)(3)(v) and (a)(6)(iii) of this section);

(x) The common parent files petitions and conducts proceedings before the United States Tax Court, and any such petition is considered as also having been filed by each member;

(xi) Any assessment of tax may be made in the name of the common parent, and an assessment naming the common parent is considered as an assessment with respect to each member; and

July 22, 2002 123 2002–29 I.R.B.

(xii) Notice and demand for payment of taxes is given only to the common parent, and such notice and demand is considered as a notice and demand to each member.

(3) Matters reserved to subsidiaries . Except as provided in this paragraph (a)(3) and paragraph (a)(6) of this section, no subsidiary has authority to act for or to represent itself in any matter related to the tax liability for the consolidated return year. The following matters, however, are reserved exclusively to each subsidiary—

(i) The making of the consent required by § 1.1502–75(a)(1);

(ii) Any action with respect to the subsidiary’s liability for a federal tax other than the income tax imposed by chapter 1 of the Internal Revenue Code (including, for example, employment taxes under chapters 21 through 25 of the Internal Revenue Code, and miscellaneous excise taxes under chapters 31 through 47 of the Internal Revenue Code);

(iii) The making of an election under section 936(e);

(iv) The making of an election to be treated as a DISC under § 1.992–2; and

(v) Any actions by a subsidiary acting as tax matters partner under sections 6221 through 6234 and the accompanying regulations (but see paragraph (a)(2)(ix) of this section regarding the mailing of a final partnership administrative adjustment to the common parent).

(4) Term of agency —(i) In general . Except as provided in paragraph (a)(4)(iii) of this section, the common parent for the consolidated return year remains the agent for the group with respect to that year until the common parent’s existence terminates, regardless of whether one or more subsidiaries in that year cease to be members of the group, whether the group files a consolidated return for any subsequent year, whether the common parent ceases to be the common parent or a member of the group in any subsequent year, or whether the group continues pursuant to § 1.1502– 75(d) with a new common parent in any subsequent year.

(ii) Replacement of substitute agent designated by Commissioner . If the Commissioner replaces a previously designated substitute agent pursuant to paragraph (d)(3)(ii) of this section, the replaced substitute agent ceases to be the

agent after the Commissioner designates another substitute agent.

(iii) New common parent after a group structure change . If the group continues in existence with a new common parent pursuant to § 1.1502–75(d) during a consolidated return year, the common parent at the beginning of the year is the agent for the group through the date of the § 1.1502–75(d) transaction, and the new common parent becomes the agent for the group beginning the day after the transaction, at which time it becomes the agent for the group with respect to the entire consolidated return year (including the period through the date of the transaction) and the former common parent is no longer the agent for that year.

(5) Identifying members in notice of a lien . Notwithstanding any other provisions of this paragraph (a), any notice of a lien, any levy or any other proceeding to collect the amount of any assessment, after the assessment has been made, must name the entity from which such collection is to be made.

(6) Direct dealing with a member —(i) Several liability . The Commissioner may, upon issuing to the common parent written notice that expressly invokes the authority of this provision, deal directly with any member of the group with respect to its liability under § 1.1502–6 for the consolidated tax of the group, in which event such member has sole authority to act for itself with respect to that liability. However, if the Commissioner believes or has reason to believe that the existence of the common parent has terminated, he may, if he deems it advisable, deal directly with any member with respect to that member’s liability under § 1.1502–6 without giving the notice required by this provision.

(ii) Information requests . The Commissioner may, upon informing the common parent, request information relevant to the consolidated tax liability from any member of the group. However, if the Commissioner believes or has reason to believe that the existence of the common parent has terminated, he may request such information from any member of the group without informing the common parent.

(iii) Members as partners in partner- ships . The Commissioner generally will deal directly with any member in its

capacity as a partner of a partnership that is subject to the provisions of sections 6221 through 6234 and the accompanying regulations (but see paragraph (a)(2)(ix) of this section regarding the mailing of a final partnership administrative adjustment to the common parent). However, if requested to do so in accordance with the provisions of § 301.6223(c)–1(b) of this chapter, the Commissioner may deal with the common parent as agent for such member on any matter related to the partnership, except in regards to a settlement under section 6224(c) and except to the extent the member acts as tax matters partner of the partnership.

(b) Copy of notice of deficiency to entity that has ceased to be a member of the group . An entity that ceases to be a member of the group during or after a consolidated return year may file a written notice of that fact with the Commissioner and request a copy of any notice of deficiency with respect to the tax for a consolidated return year during which the entity was a member, or a copy of any notice and demand for payment of such deficiency, or both. Such filing does not limit the scope of the agency of the common parent provided for in paragraph (a) of this section. Any failure by the Commissioner to comply with such request does not limit an entity’s tax liability under § 1.1502–6. For purposes of this paragraph (b), references to an entity include a successor of such entity.

(c) References to member or subsid- iary . For purposes of this section, all references to a member or subsidiary for a consolidated return year include—

(1) Each corporation that was a member of the group during any part of such year (except that any reference to a subsidiary does not include the common parent);

(2) Except as indicated otherwise, a successor (as defined in paragraph (a)(1)(iii) of this section) of any corporation described in paragraph (c)(1) of this section; and

(3) Each corporation whose income was included in the consolidated return for such year, notwithstanding that the tax liability of such corporation should have been computed on the basis of a separate return, or as a member of another consolidated group, under the provisions of § 1.1502–75.

2002–29 I.R.B. 124 July 22, 2002

(d) Termination of common parent (1) Designation of substitute agent by common parent . (i) If the common parent’s existence terminates, it may designate a substitute agent for the group and notify the Commissioner, as provided in this paragraph (d)(1).

(A) Subject to the Commissioner’s approval under paragraph (d)(1)(ii) of this section, before the common parent’s existence terminates, the common parent may designate, for each consolidated return year for which it is the common parent and for which the period of limitations either for assessment, for collection after assessment, or for claiming a credit or refund has not expired, one of the following to act as substitute agent in its place—

( 1 ) Any corporation that was a member of the group during any part of the consolidated return year and, except as provided in paragraph (e)(3)(ii) of this section, has not subsequently been disregarded as an entity separate from its owner or reclassified as a partnership for Federal tax purposes; or

( 2 ) Any successor (as defined in paragraph (a)(1)(iii) of this section) of such a corporation or of the common parent that is a domestic corporation (and, except as provided in paragraph (e)(3)(ii) of this section, is not disregarded as an entity separate from its owner or classified as a partnership for Federal tax purposes), including a corporation that will become a successor at the time that the common parent’s existence terminates.

(B) The common parent must notify the Commissioner in writing (under procedures prescribed by the Commissioner) of the designation and provide the following—

( 1 ) An agreement executed by the designated corporation agreeing to serve as the group’s substitute agent; and

( 2 ) If the designated corporation was not itself a member of the group during the consolidated return year (because the designated corporation is a successor of a member of the group for the consolidated return year), a statement by the designated corporation acknowledging that it is or will be primarily liable for the consolidated tax as a successor of a member.

(ii) A designation under paragraph (d)(1)(i)(A) of this section does not apply unless and until it is approved by the

Commissioner. The Commissioner’s approval of such a designation is not effective before the existence of the common parent terminates.

(2) Default substitute agent . If the common parent fails to designate a substitute agent for the group before its existence terminates and if the common parent has a single successor that is a domestic corporation, such successor becomes the substitute agent for the group upon termination of the common parent’s existence. However, see paragraph (d)(4) of this section regarding the consequences of the successor’s failure to notify the Commissioner of its status as default substitute agent in accordance with procedures established by the Commissioner.

(3) Designation by the Commissioner . (i) In the event the common parent’s existence terminates and no designation is made and approved under paragraph (d)(1) of this section and the Commissioner believes or has reason to believe that there is no successor of the common parent that satisfies the requirements of paragraph (d)(2) of this section (or the Commissioner believes or has reason to believe there is such a successor but has no last known address on file for such successor), the Commissioner may, at any time, with or without a request from any member of the group, designate a corporation described in paragraph (d)(1)(i)(A) of this section to act as the substitute agent. The Commissioner will notify the designated substitute agent in writing of its designation, and the designation is effective upon receipt by the designated substitute agent of such notice. The designated substitute agent must give notice of the designation to each corporation that was a member of the group during any part of the consolidated return year, but a failure by the designated substitute agent to notify any such member of the group does not invalidate the designation.

(ii) At the request of any member, the Commissioner may, but is not required to, replace a substitute agent previously designated under paragraph (d)(3)(i) of this section with another corporation described in paragraph (d)(1)(i)(A) of this section.

(4) Absence of designation or notifica- tion of default substitute agent . Until a designation of a substitute agent for the group under paragraph (d)(1) of this sec

tion has become effective, the Commissioner has received notification in accordance with procedures established by the Commissioner that a successor qualifying under paragraph (d)(2) of this section has become the substitute agent by default, or the Commissioner has designated a substitute agent under paragraph (d)(3) of this section—

(i) Any notice of deficiency or other communication mailed to the common parent, even if no longer in existence, is considered as having been properly mailed to the agent for the group; and

(ii) The Commissioner is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person other than the common parent (including a successor of the common parent qualifying as a default substitute agent under paragraph (d)(2) of this section).

(e) Termination of a corporation’s existence —(1) In general . For purposes of paragraphs (a)(1)(v), (a)(4)(i), and (d) of this section, the existence of a corporation is deemed to terminate if—

(i) Its existence terminates under applicable law; or

(ii) Except as provided in paragraph (e)(3) of this section, it becomes, for Federal tax purposes, either—

(A) An entity that is disregarded as an entity separate from its owner; or

(B) An entity that is reclassified as a partnership.

(2) Purported agency . If the existence of the agent for the group terminates under circumstances described in paragraph (e)(1)(ii) of this section, until the Commissioner has approved the designation of a substitute agent for the group pursuant to paragraph (d)(1) of this section or the Commissioner designates a substitute agent and notifies the designated substitute agent pursuant to paragraph (d)(3) of this section, any posttermination action by that purported agent on behalf of the group has the same effect, to the extent necessary to avoid prejudice to the Commissioner, as if the agent’s corporate existence had not terminated.

(3) Exceptions where no eligible cor- poration exists . (i) For purposes of the common parent’s term as agent under paragraph (a)(4)(i) of this section and the

July 22, 2002 125 2002–29 I.R.B.

term as agent of the substitute agent designated under paragraph (d) of this section, if a corporation either becomes disregarded as an entity separate from its owner or is reclassified as a partnership for Federal tax purposes, its existence is not deemed to terminate if the effect of such termination would be that no corporation remains eligible to serve as the substitute agent for the group’s consolidated return year.

(ii) Similarly, for purposes of paragraph (d) of this section, an entity that is either disregarded as an entity separate from its owner or reclassified as a partnership for Federal tax purposes is not precluded from designation as a substitute agent merely because of such classification if the effect of the inability to make such designation would be that no corporation remains eligible to serve as the substitute agent for the group’s consolidated return year.

(iii) Any entity described in paragraphs (e)(3)(i) or (ii) of this section that remains or becomes the agent for the group is treated as a corporation for purposes of this section.

(4) Exception for section 338 transac- tions . Notwithstanding section 338(a)(2), a target corporation for which an election is made under section 338 is not deemed to terminate for purposes of this section.

(f) Examples . The following examples illustrate the principles of this section. Unless otherwise indicated, each example addresses the question of which corporation is the proper party to execute a consent to waive the statute of limitations for Years 1 and 2 or the more general question of which corporation may be designated as a substitute agent for the group for Years 1 and 2. In each example, as of January 1 of Year 1, the P group consists of P and its two subsidiaries, S and S–1. P, as the common parent of the P group, files consolidated returns for the P group in Years 1 and 2. On January 1 of Year 1, domestic corporations S–2, U, V, W, W–1, X, Y, Z and Z–1 are not related to P or the members of the P group. All corporations are calendar year taxpayers. For none of the tax years at issue does the Commissioner exercise the authority under paragraph (a)(6) of this section to deal with any member separately. Any surviving corporation in a merger is a successor as described in paragraph

(a)(1)(iii) of this section. Any notification to the Commissioner of the designation of the P group’s substitute agent also contains a statement signed on behalf of the designated agent that it agrees to act as the group’s substitute agent and, in the case of a successor, that it is primarily liable as a successor of a member. The examples are as follows:

Example 1 . Disposition of all group members . On December 31 of Year 1, P sells all the stock of S–1 to X. On December 31 of Year 2, P distributes all the stock of S to P’s shareholders. P files a separate return for Year 3. Although P is no longer a common parent after Year 2, P remains the agent for the P group for Years 1 and 2. For as long as P remains in existence, only P may execute a waiver of the period of limitations on assessment on behalf of the group for Years 1 and 2.

Example 2 . Acquisition of common parent by another group . The facts are the same as in Example 1, except on January 1 of Year 3, all of the outstanding stock of P is acquired by Y. P thereafter joins in the Y group consolidated return as a member of Y group. Although P is a member of Y group in Year 3, P remains the agent for the P group for Years 1 and 2. For as long as P remains in existence, only P may execute a waiver of the period of limitations on assessment on behalf of the P group for Years 1 and 2. Example 3 . Merger of common parent designation of remaining member as substitute agent . On December 31 of Year 1, P sells all the stock of S–1 to X. On July 1 of Year 2, P acquires all the stock of S–2. On November 30 of Year 2, P distributes all the stock of S to P’s shareholders. On January 1 of Year 3, P merges into Y corporation. Just before the merger, P notifies the Commissioner in writing of the planned merger and of its designation of S as the substitute agent for the P group for Years 1 and 2. S is the only member that P can designate as the substitute agent for both Years 1 and 2 because it is the only subsidiary that was a member of the P group during part of both years. Although S–2 is the only remaining subsidiary of the P group when P merges into Y, S–2 was a member of the P group only in Year 2. For that reason, S–2 cannot be the substitute agent for the P group for Year 1. Alternatively, P could designate a different substitute agent for each year, selecting S or S–1 as the substitute agent for Year 1, and S or S–2 as the substitute agent for Year 2. P could also designate its successor Y as the substitute agent for both Years 1 and 2.

Example 4 . Forward triangular merger of com- mon parent . On January 1 of Year 3, P merges with and into Z–1, a subsidiary of Z, in a forward triangular merger described in section 368(a)(1)(A) and (a)(2)(D). The transaction constitutes a reverse acquisition under § 1.1502–75(d)(3)(i) because P’s shareholders receive more than 50% of Z’s stock in exchange for all of P’s stock. Just before the merger, P notifies the Commissioner in writing of the planned merger and its designation of Z–1, the corporation that will survive the planned merger, as the substitute agent of the P group for Years 1 and 2. Because Z–1 will be P’s successor (within the meaning of paragraph (a)(1) of this section) after the planned merger, P may designate Z–1 as the substi

tute agent for the P group for Years 1 and 2, pursuant to paragraph (d)(1) of this section. Alternatively, P could have designated S or S–1 as the substitute agent for the P group for Years 1 and 2. Although Z is the new common parent of the P group, which continues pursuant to § 1.1502–75(d)(3)(i), P may not designate Z as the substitute agent for Years 1 and 2 because Z was not a member of the group during any part of Years 1 or 2 and is not a successor of P or any other member of P group.

Example 5 . Reverse triangular merger of com- mon parent . On March 1 of Year 3, W–1, a subsidiary of W, merges into P, in a reverse triangular merger described in section 368(a)(1)(A) and (a)(2)(E). P survives the merger with W–1. The transaction constitutes a reverse acquisition under § 1.1502–75(d)(3)(i) because P’s shareholders receive more than 50% of W’s stock in exchange for all of P’s stock. Under paragraph (a) of this section, P remains the agent for the P group for Years 1 and 2, even though the P group continues with W as its new common parent pursuant to § 1.1502– 75(d)(3)(i). Because the transaction constitutes a reverse acquisition, the P group is treated as remaining in existence with W as its common parent. Before March 2 of Year 3, P is the agent for the P group for Year 3. Beginning on March 2 of Year 3, W becomes the agent for the P group with respect to all of Year 3 (including the period through March 1) and subsequent consolidated return years. For as long as P remains in existence, P remains the agent of the P group under paragraph (a) of this section for Years 1 and 2, and therefore only P may execute a waiver of the period of limitations on assessment on behalf of the P group for Years 1 and 2.

Example 6 . Reverse triangular merger of com- mon parent - subsequent spinoff of common parent . The facts are the same as in Example 5, except that on April 1 of Year 4, in a transaction unrelated to the Year 3 reverse acquisition, P distributes the stock of its subsidiaries S and S–1 to W, and W then distributes the stock of P to the W shareholders. Beginning on March 2 of Year 3, W becomes the agent for the P group with respect to Year 3 (including the period through March 1) and subsequent consolidated return years. Although P is no longer a member of the P group after the Year 4 spinoff, P remains the agent for the P group under paragraph (a) of this section for Years 1 and 2. Thus, for as long as P remains in existence, only P may execute a waiver of the period of limitations on assessment on behalf of the P group for Years 1 and 2.

Example 7 . Qualified stock purchase and section 338 election . On March 31 of Year 2, V purchases the stock of P in a qualified stock purchase (within the meaning of section 338(d)(3)), and V makes a timely election pursuant to section 338(g) with respect to P. Although section 338(a)(2) provides that P is treated as a new corporation as of the beginning of the day after the acquisition date for purposes of subtitle A, paragraph (e)(4) of this section provides that P’s existence is not deemed to terminate for purposes of this section notwithstanding the general rule of section 338(a)(2). Therefore, the election under section 338(g) does not result in a termination of P under paragraph (e) of this section, and new P remains the agent of the P group for Year 1 and the period ending March 31 of Year 2 (short Year 2). For as long as new P remains in existence, only new P may execute a waiver of the period of

2002–29 I.R.B. 126 July 22, 2002

limitations on assessment on behalf of the P group for Year 1 and short Year 2.

Example 8 . Fraudulent conveyance of assets . On March 15 of Year 2, P files a consolidated return that includes the income of S and S–1 for Year 1. On December 1 of Year 2, S–1 transfers assets having a fair market value of $100x to U in exchange for $10x. This transfer of assets for less than fair market value constitutes a fraudulent conveyance under applicable state law. On March 1 of Year 5, P executes a waiver extending to December 31 of Year 6 the period of limitations on assessment with respect to the group’s Year 1 consolidated return. On February 1 of Year 6, the Commissioner issues a notice of deficiency to P asserting a deficiency of $30x for the P group’s Year 1 consolidated tax liability. P does not file a petition for redetermination in the Tax Court, and the Commissioner makes a timely assessment against the P group. P, S and S–1 are all insolvent and are unable to pay the deficiency. On February 1 of Year 8, the Commissioner sends a notice of transferee liability to U, which does not file a petition in the Tax Court. On August 1 of Year 8, the Commissioner assesses the amount of the P group’s deficiency against U. Under section 6901(c), the Commissioner may assess U’s transferee liability within one year after the expiration of the period of limitations against the transferor S–1. By operation of section 6213(a) and 6503(a), the issuance of the notice of deficiency to P and the expiration of the 90-day period for filing a petition in the Tax Court have the effect of further extending by 150 days the P group’s limitations period on assessment from the previously extended date of December 31 of Year 6 to May 30 of Year 7. Pursuant to paragraph (a)(1)(v) of this section, the waiver executed by P on March 1 of Year 5 to extend the period of limitations on assessment to December 31 of Year 6 and the further extension of the P group’s limitations period to May 30 of Year 7 (by operation of sections 6213(a) and 6503(a)) have the derivative effect of extending the period of limitations on assessment of U’s transferee liability to May 30 of Year 8. By operation of section 6901(f), the issuance of the notice of transferee liability to U and the expiration of the 90-day period for filing a petition in the Tax Court have the effect of further extending the limitations period on assessment of U’s liability as a transferee by 150 days, from May 30 of Year 8 to October 27 of Year 8. Accordingly, the Commissioner may send a notice of transferee liability to U at any time on or before May 30 of Year 8 and assess the unpaid liability against U at any time on or before October 27 of Year 8. The result would be the same even if S–1 ceased to exist before March 1 of Year 5, the date P executed the waiver.

(g) Cross-reference . For further rules applicable to groups that include insolvent financial institutions, see § 301.6402–7 of this chapter.

(h) Effective date —(1) Application (i) In general . This section applies with respect to taxable years beginning on or after June 28, 2002.

(ii) Election to apply for prior taxable years . Notwithstanding paragraphs (h)(1)(i) and (h)(2) of this section, the common parent may elect to apply para

graph (d)(1) of this section in lieu of § 1.1502–77A(d) in designating a substitute agent for taxable years beginning before June 28, 2002. The common parent makes such an election by expressly referring to the election under this paragraph (h)(1)(ii) in notifying the Commissioner of the designation of the substitute agent. Once made, such election applies to any subsequent designation of a substitute agent for the consolidated return year(s) subject to the election.

(2) Prior law . For taxable years beginning before June 28, 2002, see § 1.1502– 77A.

§ 1.1502–77T(a) [Redesignated as § 1.1502–77A(e) and Amended]

Par. 7. Section 1.1502–77T(a) is redesignated as § 1.1502–77A(e) and is amended by removing the language “district director” and adding “Commissioner” in each place it appears.

§ 1.1502–77T [Removed]

Par. 8. Section 1.1502–77T is removed.

Par. 9. Section 1.1502–78 is amended as follows:

Paragraph (a) is revised.
Paragraph (b)(1) is amended by adding the language “for the carryback year (or agent designated under § 1.1502– 77(d) for the carryback year)” at the end of the first sentence.
Paragraph (b)(2) is amended by removing the language “6213(b)(2)” and adding “6213(b)(3)” in its place.
In paragraph (c), the last sentence of Example (1) is amended by adding the language “for the carryback year” after “parent.”
In paragraph (c), the last sentence of Example (2) is amended by removing the language “S–1” and adding “P” in its place.
In paragraph (c) Example (3), the seventh sentence is amended by removing the language “Z must” and adding “X must” in its place.
In paragraph (c) Example (3), the last sentence is amended by removing the language “6213(b)(2)” and adding “6213(b)(3)” in its place.
Paragraph (e)(2)(v) is removed.
Paragraph (f) is added.

The revision and addition read as follows:

§ 1.1502–78 Tentative carryback adjustments .

(a) General rule . If a group has a consolidated net operating loss, a consolidated net capital loss, or a consolidated unused business credit for any taxable year, then any application under section 6411 for a tentative carryback adjustment of the taxes for a consolidated return year or years preceding such year shall be made by the common parent corporation for the carryback year (or substitute agent designated under § 1.1502–77(d) for the carryback year) to the extent such loss or unused business credit is not apportioned to a corporation for a separate return year pursuant to § 1.1502–21(b), 1.1502– 22(b), or 1.1502–79(c). In the case of the portion of a consolidated net operating loss or consolidated net capital loss or consolidated unused business credit to which the preceding sentence does not apply and that is to be carried back to a corporation that was not a member of a consolidated group in the carryback year, the corporation to which such loss or credit is attributable shall make any application under section 6411. In the case of a net capital loss or net operating loss or unused business credit arising in a separate return year that may be carried back to a consolidated return year, after taking into account the application of § 1.1502– 21(b)(3)(ii)(B) with respect to any net operating loss arising in another consolidated group, the common parent for the carryback year (or substitute agent designated under § 1.1502–77(d) for the carryback year) shall make any application under section 6411.

(f) Effective date —(1) In general . This section applies to taxable years to which a loss or credit may be carried back and for which the due date (without extensions) of the original return is after June 28, 2002, except that the provisions of paragraph (e)(2) apply for applications by new members of consolidated groups for tentative carryback adjustments resulting from net operating losses, net capital losses, or unused business credits arising

July 22, 2002 127 2002–29 I.R.B.

Authority: 26 U.S.C. 7805. Par. 12. Section 602.101, paragraph (b) is amended by adding an entry in numerical order to the table to read as follows:

§ 602.101 OMB Control numbers .

(b) - -

in separate return years of new members that begin on or after January 1, 2001.

(2) Prior law . For taxable years to which a loss or credit may be carried back and for which the due date (without extensions) of the original return is on or before June 28, 2002, see § 1.1502–78 in effect prior to June 28, 2002, as contained in 26 CFR part 1 revised April 1, 2002.

Par. 10. Immediately before § 1.1502– 79A, an undesignated center heading is added to read as follows:

REGULATIONS APPLICABLE TO TAXABLE YEARS BEFORE JANUARY 1, 1997

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 11. The authority citation for part 602 continues to read as follows:

CFR part or section where Current OMB identified and described control No.

- - - 1.1502–77................................................................................................................................................................. 1545–1699

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue .

Section 6103.—Confidentiality and Disclosure of Returns and Return Information

26 CFR 301.6103(j)(5)–1: Disclosures of return information to officers and employees of the Depart- ment of Agriculture for certain statistical purposes and related activities.

T.D. 9001

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Disclosure of Return Information to Officers and Employees of the Department of Agriculture for Certain Statistical Purposes and Related Activities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This contains a final regulation relating to return information to be disclosed to the Department of Agriculture (Department) for use in conducting the Census of Agriculture. The regulation provides for the disclosure of an additional item of return information to the Department. The regulation provides

guidance to IRS personnel responsible for disclosing the return information.

DATES: Effective Date : This final regulation is effective June 19, 2002.

Applicability Date : For dates of applicability of this final regulation, see § 301.6103(j)(5)–1(d).

FOR FURTHER INFORMATION CONTACT: Joseph Conley, 202–622–4580 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Under section 6103(j)(5) of the Internal Revenue Code (Code), upon written request from the Secretary of Agriculture, the Secretary of the Treasury shall furnish such returns or return information as prescribed by Treasury regulation to officers and employees of the Department whose official duties require access to such returns or return information for the purpose of, but only to the extent necessary in, structuring, preparing, and conducting the Census of Agriculture pursuant to the Census of Agriculture Act of 1997. Currently, § 301.6103(j)(5)–1 provides an itemized description of the return information authorized to be disclosed for this purpose. By letter dated May 8, 2001, the Secretary of Agriculture requested that the Treasury Regulations be amended to authorize the disclosure of an additional item of return information, the taxpayer’s

Approved May 20, 2002.

Pamela F. Olson, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June 27, 2002, 8:45 a.m., and published in the issue of the Federal Register for June 28, 2002, 67 F.R. 43538)

Section 4972.—Tax on Nondeductible Contributions to Qualified Employer Plans

Whether “restorative payments” to a qualified defined contribution plan are contributions. See Rev. Rul. 2002–45, page 116.

Section 6045.—Returns of Brokers

26 CFR 1.6045–1(c)(3)(ii): Excepted sales.

Information Reporting on Form 1099–B. Exception from reporting on Form 1099–B in connection with certain stock option transactions, under specified conditions. See Rev. Proc. 2002–50, page 173.

2002–29 I.R.B. 128 July 22, 2002

telephone number contained on Form 1040/Schedule F. This document adopts a final regulation that authorizes IRS personnel to disclose the additional item of return information that has been requested by the Secretary of Agriculture.

Explanation of Provisions

This final regulation will permit the IRS to disclose to the Department, for its use in structuring, preparing, and conducting the Census of Agriculture, an additional item of return information, the taxpayer’s telephone number provided on the Form 1040/Schedule F. According to the Department, the disclosure of this additional item of return information will improve the efficiency of the Department’s list-building operations by reducing the potential for duplication in the Census of Agriculture. After receiving information from the IRS, the Department attempts to link such information to other records held by or available to the Department, doing so where possible on the basis of names, social security numbers or employer identification numbers, and addresses. The Department intends to use taxpayer telephone numbers to match records that cannot be matched otherwise or to determine that questionable links between records, such as those based merely on name and address information, constitute or do not constitute definite matches. By means of the matching process, the Department avoids duplicate contacts and furthers its classification of farms for Census of Agriculture purposes. The IRS will provide taxpayer telephone numbers to the Department under this final regulation with the understanding that the Department will only use them for such purpose, and that it will not use the information to telephone taxpayers.

Special Analyses

Section 553 of the Administrative Procedure Act (5 U.S.C. chapter 5) requires that a notice of proposed rulemaking be published in the Federal Register and, after such notice, that the Federal agency that issued the notice give interested persons an opportunity to participate in the rulemaking through submission of written comments, with or without opportunity for oral presentation. These requirements are subject to certain exceptions, including when the agency for good cause finds that notice and public comment are impracticable, unnecessary, or contrary to the public interest. Because the final regulation merely amends a preexisting regulation (§ 301.6103(j)(5)–1) to add a single item of information to a list of such items, it is determined that the notice and public-comment procedure required by 5 U.S.C. 553 is unnecessary in this case pursuant to the exception in 5 U.S.C. 553(b)(3)(B). For the same reason, a delayed effective date is not required pursuant to 5 U.S.C. 553(d)(3)

It has also been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Because no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) do not apply. Pursuant to section 7805(f) of the Code, this regulation was submitted to the Chief Counsel of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of this temporary regulation is Joseph Conley, Office of Associate Chief Counsel (Procedure & Administration), Disclosure and Privacy Law Division.

- - - -

Approved June 10, 2002.

Pamela F. Olson, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June 18, 2002, 8:45 a.m., and published in the issue of the Federal Register for June 19, 2002, 67 F.R. 41621)

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301 - PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 301.6103(j)(5)–1 also issued under 26 U.S.C. 6103(j)(5); - - Par. 2. Section 301.6103(j)(5)–1 is amended by adding paragraph (b)(2)(xiv) to read as follows:

§ 301.6103(j)(5)–1 Disclosures of return information to officers and employees of the Department of Agriculture for certain statistical purposes and related activities.

- - - (b) - - (2) - - (xiv) Taxpayer telephone number.

(d) Effective dates . This section is applicable on July 31, 2001, except paragraph (b)(2)(xiv) which is applicable on June 19, 2002.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue .

July 22, 2002 129 2002–29 I.R.B.