IRS ISSUES TEMPORARY AND PROPOSED REGULATIONS UNDER SECTION 1502 TO LIBERALIZE CONSOLIDATED RETURN FILING WITH ALASKA NATIVE CORPORATIONS.

NOTICE OF PROPOSED RULEMAKING

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In the Rules and Regulations portion of this issue of the Federal Register, the Internal Revenue Service is issuing temporary regulations that add new section 1.1502-81T to provide rules relating to certain corporations included in a consolidated return with a Native Corporation established under the Alaska Native Claims Settlement Act. The text of the new section also serves as the comment document for this notice of proposed rulemaking.

PROPOSED EFFECTIVE DATE

The regulations are proposed to apply generally to taxable years beginning after December 31, 1984.

DATE FOR COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Written comments and requests for a public hearing must be delivered or mailed by (May 18, 1987).

ADDRESS: Send comments and requests for a public hearing to: commissioner of Internal Revenue, Attention: CC:LR:T [LR-23-87], Washington, D.C. 20224.

FOR FURTHER INFORMATION CONTACT: Mark S. Jennings of the Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:LR:T) or telephone 202-566-3458 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

Temporary regulations published in the Rules and Regulations portion of this issue of the Federal Register add new temporary regulations section 1.1502-81T to Part 1 of Title 26 of the code of Federal Regulations ("CFR"). The final regulations that are proposed to be based on the new temporary regulations would be added to Part 1 of Title 26 of the CFR. Those final regulations would make clear that the rules provided by section 60(b)(5) of the Tax Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 result in no tax saving, tax benefit, or tax loss to any person, other than the use of the losses and credits of an Alaska Native Corporation and its wholly owned subsidiaries. For the text of the new temporary regulations, see T.C. 8130, published in the Rules and Regulations portion of this issue of the Federal Register. The preamble to the temporary regulations explains the additions to the regulations.

REGULATORY FLEXIBILITY ACT AND EXECUTIVE ORDER 12291

Although this document is a notice of proposed rulemaking that solicits public comment, the Secretary of the Treasury has certified that this rule will not have a significant impact on a substantial number of small entities because the economic and any other secondary or incidental impact flows directly from the underlying statute. A regulatory flexibility analysis is therefore not required under the Regulatory Flexibility Act (5 U.S.C. chapter 6). The Commissioner of Internal Revenue has determined that this proposed rule is not a major rule as defined in Executive Order 12291 and that a Regulatory Impact Analysis is therefore not required.

COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Before these proposed regulations are adopted, consideration will be given to any written comments that are submitted (preferably eight copies) to the Commissioner of Internal Revenue. All comments will be available for public inspection and copying. A public hearing will be held upon written request to the Commissioner by any person who has submitted written comments. If a public hearing is held, notice of the time and place will be published in the Federal Register.

DRAFTING INFORMATION

The principal author of these proposed regulations is Mark S. Jennings of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

Lawrence B. Gibbs

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to certain corporations included in a consolidated return with a Native Corporation established under the Alaska Native Claims Settlement Act. The applicable law was amended by the Tax Reform Act of 1984 and the Tax Reform Act of 1986. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations cross-referenced in the Proposed Rules section of this issue of the Federal Register.

DATE: The regulations are effective for taxable years beginning after December 31, 1984.

FOR FURTHER INFORMATION CONTACT: Mark S. Jennings of the Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:LR:T) or telephone 202-566-3458 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

Section 60(b) of the Tax Reform Act of 1984 (the "1984 Act") (Pub L. No. 98-369; 98 Stat. 948) amended section 1504(a) of the Internal Revenue Code of 1986 ("the Code") to alter the general requirements for affiliation and add an 80 percent equity ownership test. In the case of the affiliation of a corporation with a Native Corporation ("ANC") established under the Alaska Native Claims Settlement Act of 1971 (43 U.S.C. 1601 et seq.), paragraph (5) of section 60(b) delayed the effective date of the changes to the affiliation rules until taxable years beginning in 1992 or a subsequent year.

Section 1804(e)(4) of the Tax Reform Act of 1986 (the "1986 Act") (Pub. L. No. 99-514; 100 Stat. 2085) amended section 60(b)(5) of the 1984 Act to liberalize the requirements for affiliation with an ANC or with a wholly owned subsidiary of an ANC for any taxable year beginning after 1984 and before 1992. Under section 1804(e)(4), affiliation with an ANC or with a wholly owned subsidiary of an ANC is to be determined solely according to the provisions expressly contained in section 1504(a) of the Code as it existed before the amendments of the 1984 Act, without regard to escrow arrangements, redemption rights, or similar provisions. Section 1804(e)(4) additionally provides, in general, that no provision of the Code or principle of law shall deny the benefit or use of losses or credits of an ANC which is the common parent of an affiliated group of corporations (an "ANC group") filing a consolidated return, or of a wholly owned subsidiary of such an ANC, to the group.

The Alaska Native Claims Settlement Act of 1971 established 12 Native regional corporations and more than 150 Native village corporations to manage the land and cash granted to Alaska Natives in satisfaction of their aboriginal land claims. Many of the ANCs have incurred large net operating losses and have earned numerous business tax credits that they will not be able to utilize internally in the foreseeable future. Section 60(b)(5) of the 1984 Act and section 1804(e)(4) of the 1986 Act (the "ANC affiliation rules") were intended to provide special relief to ANCs by allowing the losses and credits of an ANC and its wholly owned subsidiaries to be used on a consolidated return against the income and tax liability of a profitable corporation, and to allow the ANC group to share in the resulting tax benefits. 132 Cong. Rec. S8175-76 (daily ed. June 23, 1986) (statement of Sen. Stevens).

In effect, the ANC affiliation rules generally were intended to allow an ANC to sell its tax losses and credits through the device of artificial affiliation with another corporation or group of corporations. The temporary regulations make clear that the ANC affiliation rules result in no tax saving, tax benefit, or tax loss to any person, other than the use of the losses and credits of an ANC and its wholly owned subsidiaries. In particular, except as approved by the Secretary, no positive adjustment under section 1.1502- 32(b)(1) will be made with respect to the basis of stock of a corporation that is affiliated with a Native Corporation through application of the ANC affiliation rules. In general, such approval by the Secretary shall take into account the economic effect of the investment by the Native Corporation in the corporation with which it is so affiliated.

REGULATORY FLEXIBILITY ACT; EXECUTIVE ORDER 12291

A general notice of proposed rulemaking is not required by 5 U.S.C. 553 for temporary regulations. Accordingly, these temporary regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. chapter 6). The Commissioner of Internal Revenue has determined that this temporary rule is not a major rule as defined in Executive Order 12291 and that a regulatory impact analysis therefore is not required.

DRAFTING INFORMATION

The principal author of these temporary regulations is Mark S. Jennings of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, other personnel of the Internal Revenue Service and the Treasury Department participated in developing the regulations, on matters of both substance and style.

LIST OF SUBJECTS

26 CFR 1.1502-1 - 1.1564-1

Income taxes, Controlled group of corporations, Consolidated returns.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, Part 1 of Title 26 of the Code of Federal Regulations is amended as follows:

Paragraph 1. The authority citation for part 1 is amended by adding the following citation:

Authority: 26 U.S.C. 7805; * * * Section 1.1502-81T also is issued under 26 U.S.C. 1502.

Par. 2. New Section 1.1502-81T is added as follows:

Section 1.1502-81T Alaska Native Corporations.

(a) GENERAL RULE. The application of section 60(b)(5) of the Tax Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 (relating to Native Corporations established under the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.)) is limited to the use on a consolidated return of losses and credits of a Native Corporation, and of a corporation all of whose stock is owned directly by a Native Corporation, during any taxable year (beginning after the effective date of such sections and before 1992), or any part thereof, against the income and tax liability of a corporation affiliated with the Native Corporation. Thus, no other tax saving, tax benefit, or tax loss is intended to result from the application of section 60(b)(5) of the Tax Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986 to any person (whether or not such person is a member of an affiliated group of which a Native Corporation is the common parent). In particular, except as approved by the Secretary, no positive adjustment under section 1.1502- 32(b)(1) will be made with respect to the basis of stock of a corporation that is affiliated with a Native Corporation through application of section 60(b)(5) of the Tax Reform Act of 1984 and section 1804(e)(4) of the Tax Reform Act of 1986.

(b) EFFECTIVE DATES. This section applies to taxable years beginning after December 31, 1984.

There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue this Treasury decision with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.

Lawrence B. Gibbs