Final Regs Provide Rules on Payment of Tax Refunds to Insolvent Banks

 [4830-01]

 ACTION: Final Regulations.

 SUMMARY: This document contains final regulations providing for the payment of certain income tax refunds to a statutory or court-appointed fiduciary of an insolvent financial institution that was a member of a consolidated group in the year to which the refund claim or application for tentative carryback adjustment relates. These regulations reflect changes to the Internal Revenue Code made by the Technical and Miscellaneous Revenue Act of 1988.

 DATES: These regulations are effective January 30, 1992, and apply to refunds and tentative carryback adjustments paid after December 30, 1991.

 FOR FURTHER INFORMATION CONTACT: Rose L. Williams, (202) 622-7550 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On December 30, 1991, temporary and proposed regulations under section 6402(i) of the Internal Revenue Code of 1986 (Code) were filed. See T.D. 8387, 56 FR 67487 [1992-6 I.R.B. 4], and CO-98-88, 56 FR 67553 [1992-6 I.R.B. 12]. An explanation of the proposed and temporary regulations was provided in the preamble to the temporary regulations.

 Written comments on the proposed regulations were received, and a public hearing was held on March 24, 1992. After consideration of the written comments and the statements made at the public hearing, the proposed regulations are modified and adopted by this Treasury Decision. No comments were received regarding the expansion of these regulations to insolvent corporations not included in the regulations.

COMMENTS ON SPECIFIC PROVISIONS

1. TIMING OF NOTICE TO THE COMMON PARENT

 Under the regulations, the fiduciary must send copies of any filings with the Internal Revenue Service (Form 56-F, loss year return, claim for refund, or otherwise) to the common parent before filing with the Service. See section 301.6402-7T(d)(2), (e)(1)(v), and (e)(3)(iv). One comment suggested that the fiduciary be required to send the copies of any filings to the common parent within a specified time period, and that the Service be required to notify the common parent of a refund payment before it is paid to the fiduciary.

 This suggestion is not adopted because the filing requirements under the regulations adequately protect the interests of the common parent by requiring the fiduciary to provide the common parent with copies of all documents before they are filed with the Service. In any event, the regulations do not determine ownership of refunds and payment of a refund does not foreclose the common parent from pursuing its claims.

2. NON-FORM 56-F NOTICE TO THE COMMON PARENT

 To satisfy its notice requirements, the fiduciary generally must file a Form 56-F, Notice Concerning Fiduciary Relationship of Financial Institution, with the Service. However, the Service may accept notice in any other manner. Section 301.6402-7T(d)(2)(i) requires the fiduciary to send a copy of the Form 56-F notice to the common parent, but it does not require the fiduciary to send a copy of any other form of notice to the common parent.

 In response to a comment, the regulations have been modified to require the fiduciary to notify the common parent in all cases.

3. FILING REQUIREMENTS OF THE FIDUCIARY

 a. Duplicate filings

 Section 301.6402-7T(e) permits the fiduciary to file a loss year consolidated return and a claim for refund even though the common parent may make similar filings. Several comments suggested that the common parent, as the sole agent of a consolidated group, be the only person permitted to make filings on behalf of a consolidated group. It was further suggested that the Service would then provide the fiduciary with a copy of any filings made by the common parent and would mediate any disputes between the common parent and the fiduciary.

 This suggestion is not adopted because the procedures could result in lengthy delays in the refund process and the fiduciary would have no relief if the common parent fails to make any filings.

 b. Loss year return

 Section 301.6402-7T(e) permits the fiduciary to file a loss year consolidated return whether or not the fiduciary is also filing a claim for refund. Because section 6402(i) provides only for the payment of a refund to the fiduciary, the final regulations provide that the fiduciary may file a loss year return only in conjunction with the filing of a claim for refund.

4. ELECTION TO WAIVE CARRYBACK

 Section 301.6402-7T(e)(5) provides that an election under section 172(b)(3) of the Code to forego the entire carryback period for a consolidated net operating loss is not effective with respect to the portion of the loss attributable to a financial institution and permits the fiduciary to make a separate election on behalf of the institution. One comment suggested that each member be permitted to make a separate election under section 172(b)(3) with respect to the portion of the consolidated net operating loss attributable to the member.

 The suggestion is being considered as part of recently proposed revisions to the consolidated return rules for losses. See CO-78-90, 56 FR 4228 [1991-1 C.B. 757].

5. ABSORPTION OF NET OPERATING LOSSES

 a. Excess loss accounts

 Section 301.6402-7T(g)(2)(iii) gives losses of the insolvent financial institution priority over losses of other members of the consolidated group arising in taxable years ending on the same date. However, the priority of absorption is otherwise subject to the general rules of section 172 and section 1.1502-21(b), as well as limitations under the Code and regulations (e.g., section 382).

 Comments argued that the priority of institution losses is inequitable if it causes an excess loss account in the stock of the institution that would not have resulted without the priority. Insolvency of a financial institution may be a disposition event under section 1.1502-19(b) that results in the excess loss account being included in consolidated taxable income. The comments argue that, because the group does not benefit from the institution's losses (because the refund is paid to the fiduciary), the excess loss account should not be included in consolidated taxable income.

 A principal purpose of excess loss accounts is to recapture the group's use of a subsidiary's losses to the extent they exceed the group's investment in the subsidiary's stock. The Treasury Department and the Service believe that an excess loss account resulting from the absorption of a subsidiary's losses is necessary, regardless of which member benefits from the losses, to reflect single entity treatment of the group by preventing the losses from being duplicated in the subsidiary stock.

 The regulations do not determine ownership of the refund and therefore the equities are unaffected. The common parent may seek to recover all or part of the refund under principles of state law. See, e.g., In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262 (9th Cir. 1973), cert. denied, 412 U.S. 919 (1973); Jump v. Manchester Life & Casualty Management Corp., 438 F. Supp. 185 (E.D. Mo. 1977), aff'd, 579 F.2d 449 (8th Cir. 1978); United States v. Bass Financial Corp., No. 83 C 706 (N.D. Ill. April 20, 1984).

 b. Separate return limitation year principles

 Comments suggested that an institution's refund be limited to the tax relating to the institution's income in the carryback year (determined under separate return limitation year principles). The comments argued that the income history of each member of a consolidated group is a valuable attribute that should not be eliminated by the institution's losses if the refund is to be paid to the fiduciary.

 Section 6402(i) of the Code authorizes payment of refunds to a fiduciary to the extent the Secretary determines the refund is attributable to losses or credits of an insolvent corporation. The legislative history indicates that access to the refund should be consistent with the purposes of the consolidated return provisions.

 A guiding principle under the regulations is that an institution remains a member of the loss year group after it is placed in receivership. Therefore, its income or loss continues to be taken into account in determining the consolidated net operating loss for the loss year pursuant to section 1.1502-11. Only after calculating the loss year group's consolidated net operating loss is the institution permitted to carry its allocable portion back for purposes of generating a refund. It would be inconsistent with this treatment of the loss year, and consolidated return principles generally, if the income and losses of members were not also combined in the carryback year.

6. INSOLVENT FINANCIAL INSTITUTION SUBGROUP

 Under section 301.6402-7T(h)(2), an insolvent financial institution subgroup includes members of the loss year group that bear the same relationship to the institution as the members of a group bear to their common parent under section 1504(a)(1). One comment suggested limiting the definition to members of the loss year group that are insolvent financial institutions involved in the same receivership proceeding. In most cases, if an institution is placed in receivership, its subsidiaries are also controlled by the fiduciary.

 The suggestion is not adopted because the regulations reasonably reflect the receivership proceedings and the income or loss attributable to the institution.

7. EFFECTIVE DATE

 The temporary regulations apply to refunds and tentative carryback adjustments paid after December 30, 1991. One comment argued that the effective date was retroactive and was unfair to common parents who filed claims for refund before December 31, 1991 that had not yet been paid. The suggestion is not adopted. As discussed above, section 301.6402-7T does not determine the ownership of a refund.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required.

 It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations and, therefore, an initial Regulatory Flexibility Analysis is not required.

 Pursuant to section 7805(f) of the Internal Revenue Code, the temporary regulations and cross-referencing notice of proposed rulemaking were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Rose L. Williams, Office of the Assistant Chief Counsel (Corporate), Internal Revenue Service. Other personnel of the Service and the Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR 1.1502-21 THROUGH 1.1502-100

 Income taxes.

26 CFR part 301

 Administrative practice and procedure, Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Oil pollution, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, and Taxes.

Treasury Decision 8446

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, CFR parts 1 and 301 are amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority citation for part 1 continues to read in part:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1502-21(g) is revised to read as follows:

SECTION 1:1502-21 CONSOLIDATED NET OPERATING LOSS DEDUCTION.

* * * * *

(g) GROUPS THAT INCLUDE INSOLVENT FINANCIAL INSTITUTIONS. For rules applicable to relinquishing the entire carryback period with respect to losses attributable to insolvent financial institutions, see section 301.6402-7 of this chapter.

Par. 3. Section 1.1502-77 (e) is revised to read as follows:

SECTION 1.1502-77 COMMON PARENT AGENT FOR SUBSIDIARIES.

* * * * *

(e) CROSS-REFERENCES -- (1) ALTERNATIVE AGENTS. For rules relating to alternative agents of the group, see section 1.1502-77.

(2) GROUPS THAT INCLUDE INSOLVENT FINANCIAL INSTITUTIONS. For further rules applicable to groups that include insolvent financial institutions, see section 301.6402-7 of this chapter.

Par. 4. Section 1.1502-78 (b)(3) is revised to read as follows:

SECTION 1.1502-78 TENTATIVE CARRYBACK ADJUSTMENTS.

* * * * *

(b) * * *

(3) GROUPS THAT INCLUDE INSOLVENT FINANCIAL INSTITUTIONS. For further rules applicable to groups that include insolvent financial institutions, see section 301.6402-7 of this chapter.

Par. 5. Section 1.6411-4 is revised to read as follows:

SECTION 1.6411-4 CONSOLIDATED GROUPS.

For further rules applicable to consolidated groups, see section 1.1502-78. For further rules applicable to consolidated groups that include insolvent financial institutions, see section 301.6402-7 of this chapter.

PART 301 -- PROCEDURE AND ADMINISTRATION

Par. 6. The authority citation for part 301 is amended by adding the following citation:

Authority: 26 U.S.C. 7805 * * * section 301.6402-7 also issued under 26 U.S.C. 6402(i) and 6411(c) * * *

Par. 7. Section 301.6402-7T is redesignated as section 301.6402-7 and is amended as follows:

1. The section heading is revised as set forth below.

2. Paragraph (d)(2)(i) is revised as set forth below.

3. The first sentence of paragraph (e)(1) is revised as set forth below.

4. A new second sentence is added to paragraph (e)(3) as set forth below.

SECTION 301.6402-7 CLAIMS FOR REFUND AND APPLICATIONS FOR TENTATIVE CARRYBACK ADJUSTMENTS INVOLVING CONSOLIDATED GROUPS THAT INCLUDE INSOLVENT FINANCIAL INSTITUTIONS.

* * * * *

(d) * * *

(2) * * *

(i) FORM 56-F. The fiduciary must send a copy of the Form 56-F filed with the Internal Revenue Service Center or any other notice provided to the Service under paragraph (d)(1) of this section to the common parent of the loss year group (if any) and the common parent of all carryback year groups (if different from the loss year group).

* * * * *

(e) * * *

(1) * * * If the fiduciary accepts a claim for refund filed by the common parent, the fiduciary may claim a refund under this section by filing a copy of the common parent's claim for refund. * * *

* * * * *

(3) * * * A loss year return can only be filed by the fiduciary in conjunction with the filing of a claim for refund under paragraph (e)(1). * * *

* * * * *