SERVICE RULES THAT NEW JOBS CREDIT, LIKE INVESTMENT CREDIT, IS SUBJECT TO SRLY RULES.

Index Nos.: 1502.79-00

July 29, 1983

Whether under section 1502 of the Internal Revenue Code, a carryback of the "new jobs credit" earned by an affiliated group filing a consolidated return must be apportioned pursuant to section 1.1502 - 79 of the Income Tax Regulations, to limit a member's new job credit use, when such member had not been a member of the group and had filed a separate tax return.

FACTS:

Corp A was formed on August 6, 1971 and thereafter filed federal income tax returns using a fiscal year ended March 31. On September 10, 1971, Corp A acquired Corp B. Thereafter, Corp A and Corp B filed consolidated federal income tax returns from that point to the present. On March 31, 1976, Corp A acquired all of the outstanding stock of Corp C in a reorganization under section 368(a)(1)(B) of the Code. Corp C was incorporated on August 8, 1974 and filed its first federal income tax return using a taxable year ended July 31. Corp C filed a second return for the period from August 1, 1975 until its acquisition on March 31, 1976. After its acquisition Corp C properly consented to be included in the consolidated return filed by Corp A and subsidiaries. Corp A and subsidiaries also properly changed their accounting period to a calendar year end.

On May 25, 1977 Corp B formed a new subsidiary under the name of Corp D. Immediately thereafter, Corp D purchased the assets of an ongoing corporation. Subsequently, Corp D changed its name to Corp E. Corp E (Corp D in 1977) was included in the consolidated returns filed by Corp A and subsidiaries.

Corp A's consolidated returns for the years ended December 31, 1977 and December 31, 1978 reflected the new jobs credits attributable to each member of the group as follows:

   Year      Total    Corp A   Corp B     Corp C      Corp E (Corp D)

In 1979 the consolidated operations for Corp A and its subsidiaries resulted in a $665,981 net operating loss (NOL). Corp A carried back this NOL under section 172(b) of the Code to entirely offset income of the three preceding years, (i.e. short period 4/1/76 to 12/31/76, and calendar years ending December 31, 1977 and December 31, 1978) via Forms 1139. As a result of the NOL carrybacks, the new jobs credits which had been previously applied were freed for carryback.

The consolidated new jobs credit of $43,788 and $78,203 earned in 1977 and 1978, respectively, now freed by the 1979 NOL carryback, were carried back by the taxpayer to consolidated fiscal years ended March 31, 1975 and March 31, 1976. This was prior to Corp C and Corp E joining the affiliated group. Only $26,108 of the new jobs credit earned in 1977 was applied in the fiscal year ended March 31, 1975. The balance of the $17,680 became a carryforward to the fiscal year ended March 31, 1976. The entire new jobs credit earned in 1978, plus the above carryforward were applied in fiscal year ended March 31, 1976.

The examining agent has proposed that any carryback of consolidated new jobs credit to a separate return year of a corporation which was a member of the group in the year in which such unused credit arose must be apportioned in the same manner as are investment credits under section 1.1502 - 79(c) of the regulations. The agent states that while no consolidated return regulations have been published to deal with the new jobs credit it can only be presumed the credits will be computed subject to the separate return limitation year rules and will be apportioned for use in separate return years under the principles of section 1.1502 - 79.

The taxpayer does not specifically disagree with the examining agent's computations. However, the taxpayer states the question of law is whether section 1.1502 - 79 of the regulations should be expanded to include jobs tax credit. The regulations presently deal with five items in specific detail. There is no mention of jobs tax credit anywhere in the regulations. The jobs tax credit became law on May 23, 1977. The Internal Revenue Service since that date has written extensive regulations on the application of those sections. It has not, at any time during the 4 year period, addressed any change in the consolidated regulations mentioned above.

The taxpayer argues that the new jobs credit is unlike the investment tax credit under section 1.1502 - 79 due to the fact that there is a specific reduction in the amount of salaries and wages deductible or actually paid. These salaries and wages were paid to employees during the consolidated taxable years, and the adjustments to the deductible salaries and wages were made in the consolidated tax returns, not in any separate year tax return.

LAW AND ANALYSIS:

Section 44B of the Code provides, at the election of the taxpayer, a credit against taxable income for the employment of certain new employees. Section 51 provides a method for computing the amount of such credit. Section 53(b) provides for a three year carryback of the unused credit.

Section 1502 of the Code provides that the Secretary shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income tax liability and various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability.

Section 1.1502 - 79(a)(1) of the regulations provides that if a consolidated net operating loss can be carried under the principles of section 172(b) and section 1.1502 - 21(b) to a separate return year of a corporation (or could have been so carried if such corporation were in existence) which was a member in the year in which such loss arose, then the portion of such consolidated net operating loss attributable to such corporation shall be apportioned to such corporation and shall be a net operating loss carryover or carryback to such separate return year. Accordingly, such portion shall not be included in the consolidated net operating loss carryovers or carrybacks to the equivalent consolidated return year.

Section 1.1502 - 79(a)(2) of the regulations provides that notwithstanding section 1.1502 - 79(a)(1), the portion of a consolidated net operating loss attributable to a member shall not be apportioned to a prior separate return year for which such member was not in existence and shall be included in the consolidated net operating loss carrybacks to the equivalent return year of the group (or if such equivalent year is a separate return year, then to such separate return year), provided that such member was a member of the group immediately after its organization.

Section 1.1502 - 80 of the regulations provides that the Code, or other law, shall be applicable to the group to the extent the regulations do not exclude its application.

In Gottesman & Company, Inc. v. Commissioner, 77 T.C. 1149 (1981), taxpayer was the parent corporation of a group filing consolidated returns for the years in issue. The Commissioner determined that accumulated taxable income for purposes of the accumulated earnings tax under section 531, of the Code, should be computed on a consolidated basis. In 1966, the Secretary promulgated a new set of consolidated return regulations which superceded the existing regulations. The Commissioner asserted that these regulations dealt with the manner in which the accumulated earnings tax was to be imposed on an affiliated group of corporations filing consolidated returns. The court held however, that the 1966 consolidated return regulations failed to provide such affiliated groups with sufficient guidance as to how accumulated taxable income is to be computed for purposes of applying the accumulated earnings tax. Accordingly, the taxpayer was not liable for the accumulated earnings tax based upon accumulated taxable income determined on a consolidated basis.

The ability to file a consolidated federal income tax return is a privilege granted by section 1502 of the Code. But for section 1502, corporate taxpayers would be required to file separate federal income tax returns. In order to exercise the privilege of filing a consolidated return, the affected taxpayers must consent to use the consolidated provisions and once this consent is given by an eligible group of corporations both the taxpayer and the government are bound by the consolidated provisions.

As sometimes happens, the consolidated regulations do not cover a particular transaction. In such a case section 1.1502 - 80 of the regulations provides that the Code, or other law, applies to the group to the extent the regulations do not exclude its application. Thus, if the regulations do not mandate a consolidated treatment section 1.1502 - 80 of the regulations requires that corporations filing consolidated returns are to be treated as separate entities, unless it would be reasonable to apply consolidated principles.

Because the regulations and the Code are silent as to the proper treatment of the new jobs credit carryback in relation to the SRLY rules, it would appear to be appropriate to apply consolidated principles if such the application of these principles is consistent with the single economic entity theory underlying consolidated returns. From our analysis, it appears that the application of the SRLY rules of section 1.1502 - 79 in the instant case would be consistent with the single economic entity theory. Moreover, we cannot foresee any unjust result or additional burden befalling the taxpayer by the Service adopting this position.

It should be noted that the new jobs credit provided for in section 44B of the Code was added to the Code under Public Law 95 - 30 section202(a) and is effective for tax years after December 31, 1976. However, the separate return year rules of section 1.1502 - 79 have been part of the regulations since 1966. The fact section 1.1502 - 79 has not been amended to specifically cover the subsequently enacted credit should not be interpreted to mean that said regulation does not apply when the principle underlying the regulation is equally applicable to the credit at issue.

In summary, although not specifically provided for in the regulations, we think that the agent was correct in asserting that the new jobs credit is subject to the SRLY rules of section 1.1502 - 79(a). Our position is based on the intent underlying the consolidated return regulations viewed in light of the treatment afforded other similar credits such as the investment tax credit. The rationale and holding in Gottesman, supra, is not applicable here because such case dealt with a penalty tax and not a credit against taxable income.

CONCLUSION:

Based on the above, we are of the opinion that a carryback of the new jobs credit earned by an affiliated group filing a consolidated return must be apportioned under section 1.1502 - 79(a) of the regulations to limit a member's new job credit use, when such subsidiary had not been a member of the group and had filed its own separate tax return.

Pursuant to section 6110(c)(1) of the Code, names, addresses and taxpayer identification numbers are required to be deleted from the copy of this technical advice memorandum that will be made open to public inspection.

A copy of the technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. WD 83-1484-47.0