Rev. Rul. 56-34

Advice has been requested whether a chain of includible subsidiary corporations, which were not members of an affiliated group for tax purposes for calendar years beginning prior to January 1, 1954, are considered to have been members of an affiliated group for a period of four months of the calendar year 1954, their common taxable year, by reason of the application of the 80 percent provisions of section 1504(a) of the Internal Revenue Code of 1954; and, if such corporations were members of an affiliated group and a consolidated income tax return is filed by the group for the taxable year 1954, whether the income of each such corporation is required to be included in the consolidated return for such part of the taxable year as it was a member of the affiliated group.

X company is the common parent of an affiliated group of wholly owned corporations which filed consolidated returns for the calendar year 1953 and for all years since 1931 for which such returns were permitted. During most of such period and until April 30, 1954, X company also owned more than 80 percent but less than 95 percent of the stock of 22 other subsidiaries. The 22 subsidiaries in this latter group have always filed separate income tax returns since they did not come within the stock ownership requirements of an affiliated group as provided in section 141(d) of the Internal Revenue Code of 1939. Section 141(d) defines the term `affiliated group' as meaning-

* * * one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation if-

(1) Stock possessing at least 95 per centum of the voting power of all classes of stock and at least 95 per centum of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and

(2) The common parent corporation owns directly stock possessing at least 95 per centum of the voting power of all classes of stock and at least 95 per centum of each class of the nonvoting stock of at least one of the other includible corporations. As used in this subsection, the term `stock' does not include nonvoting stock which is limited and preferred as to dividends.

Section 1501 of the Internal Revenue Code of 1954 provides that in the case of a corporation, which is a member of an affiliated group for a fractional part of the year, the consolidated return, if elected to be filed by the affiliated group, shall include the income of such corporation for such part of the year as it is a member of the affiliated group. Section 1504(a) of the 1954 Code defines an `affiliated group' in the same way as section 141(d) of the 1939 Code, except that the required percentage of ownership has been reduced from 95 percent to 80 percent.

Accordingly, it is held that a chain of includible subsidiary corporations whose stocks were less than 95 percent owned by the parent corporation during the calendar year 1953, and were therefore not members of an affiliated group for tax purposes for that year, but whose stocks were more than 80 percent so owned at the beginning of and for four months of the calendar year 1954, are considered as being members of an affiliated group for four months of the calendar year 1954 under the provisions of section 1504(a) of the 1954 Code. If a consolidated income tax return is filed for 1954, the income of each of the includible corporations, which became a member of the affiliated group during 1954, is required to be included in the consolidated return for such part of the calendar year as it was a member of the affiliated group.