IRS RULES THAT FIVE-YEAR WAITING PERIOD FOR RECONSOLIDATION DOES NOT APPLY TO SOME REORGS.

Rev. Rul. 91-70

ISSUE

Does section 1504(a)(3) of the Internal Revenue Code prevent corporations from joining in the filing of a consolidated return in the situations described below?

FACTS

SITUATION 1. V was the common parent of a consolidated group that included V and W. X was the common parent of a consolidated group that included X and Y. V acquired all the assets of X, including the Y stock held by X, in a reorganization described in section 368(a)(1)(A) of the Code. The acquisition was not a reverse acquisition as described in section 1.1502-75(d)(3) of the Income Tax Regulations because immediately after the acquisition, the former X shareholders, as a result of having owned stock in X, did not own more than 50 percent of the fair market value of the outstanding stock of V.

SITUATION 2. She facts are the same as in Situation 1, except that the acquisition qualified as a reverse acquisition under section 1.1502-75(d)(3) of the regulations because immediately after the acquisition, the former X shareholders, as a result of having owned stock in X, owned more than 50 percent of the fair market value of the outstanding stock of V.

LAW AND ANALYSIS

Section 1504(a)(3)(A) of the Code provides that if a corporation is included (or required to be included) in a consolidated return filed by an affiliated group and then ceases to be a member of the affiliated group, that corporation (and any successor of the corporation) may not be included in any consolidated return filed by the affiliated group (or by another affiliated group with the same common parent or a successor of the common parent), before the 61st month beginning after its first taxable year in which it ceased to be a member of the affiliated group.

Section 1504(a)(3)(A) was added to the Code in 1984 as an anti- abuse provision. H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1, 833, 1984-3 C.B. (Vol. 2) 1, 87. Section 1504(a)(3)(B) of the Code was also added to authorize a waiver of the application of section 1504(a)(3)(A) to any corporation for any period subject to such conditions as the Secretary may prescribe.

Section 1.1502-75(d)(1) of the regulations generally provides that a consolidated group is considered as remaining in existence if the common parent corporation remains as the common parent and at least one subsidiary remains affiliated with it.

Section 1.1502-75(d)(3)(i) of the regulations provides a special rule for "reverse acquisitions." Section 1.1502-75(d)(3)(i) provides that if:

(1) a corporation (the first corporation) or any member of a group of which the first corporation is the common parent (the terminating group), acquires

(a) stock of another corporation (the second corporation), and as a result the second corporation becomes (or would become but for the application of section 1.1502-75(d)(3)(i)) a member of a group of which the first corporation is the common parent, or

(b) substantially all of the assets of the second corporation, in exchange (in whole or in part) for stock of the first corporation, and

(2) the stockholders (immediately before the acquisition) of the second corporation, own (immediately after the acquisition) more than 50 percent of the fair market value of the outstanding stock of the first corporation, the terminating group ceases to exist as of the date of acquisition, and any group of which the second corporation was the common parent immediately before the acquisition is treated as remaining in existence with the first corporation becoming the common parent of the group.

Congress did not intend that section 1504(a)(3) of the Code would prevent members of a consolidated group that terminates under section 1.1502-75(d)(1) of the regulations from becoming members of the acquiring corporation's consolidated group (the acquiring group), if they were acquired as a result of the acquisition of the assets of the common parent of the terminating group by a nonmember corporation in a reorganization described in section 368(a)(1)(A), (C), or (D) (but only if the requirements of section 354(b)(1)(A) and (B) are met). See H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 833, 834, 1984-3 C.B. (Vol. 2) 87, 88. Thus, if the acquiring group has an election to file consolidated returns in effect, any corporation that was a member of the terminating group must be included in the consolidated return filed by the acquiring group.

Similarly, section 1504(a)(3) of the Code does not prevent members of a consolidated group that terminated as a result of a reverse acquisition described in section 1.1502-75(d) (3) of the regulations from being included in the consolidated return filed by the group that remains in existence pursuant to section 1.1502- 75(d)(3) (the continuing group). Thus, if the continuing group has an election to file consolidated returns in effect, any corporation that was a member of the terminating group must be included in the consolidated return filed by the continuing group.

In SITUATION 1, as a result of the acquisition by V of the assets of X in a reorganization described in section 368(a)(1)(A) of the Code, the X consolidated group ceased to exist under section 1.1502-75(d)(1) of the regulations. Notwithstanding that the X group ceased to exist, section 1504(a)(3) does not prevent the members of the X group from joining in the consolidated return filed by the V group. Thus, Y must be included in the consolidated return filed by the V group.

In SITUATION 2, as a result of the reverse acquisition by V of the assets of X in a reorganization described in section 368(a)(1)(A) of the Code, the V consolidated group ceased to exist pursuant to section 1.1502-75(d)(3) of the regulations. The X group continued to exist with V as its common parent. Notwithstanding that the V group ceased to exist, section 1504(a) (3) of the Code does not prevent the members of the V group from joining in the consolidated return filed by the X group. Thus, V and W must be included in the consolidated return filed by the X group.

HOLDING

In SITUATION 1, section 1504(a)(3) of the Code does not prevent members of the terminating group from joining in the consolidated return filed by the acquiring group. The members of the terminating group must be included in the consolidated return filed by the acquiring group.

In SITUATION 2, section 1504(a)(3) of the Code does not prevent members of the terminating group from joining in the consolidated return filed by the continuing group. The members of the terminating group must be included in the consolidated return filed by the continuing group.

DRAFTING INFORMATION

The principal author of this revenue ruling is Sharon J. Bomgardner of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling contact Ms. Bomgardner on (202) 566-3226 (not a toll-free call).