1.1502-47—Consolidated returns by life- nonlife groups.
(a) Scope—
(1) In general.
Under section 1504(b)(2), insurance companies that are taxed under section 802 or 821 (relating respectively to life insurance companies and to certain mutual insurance companies) are not treated as includible corporations for purposes of determining under section 1504(a) the existence of an affiliated group and the composition of its membership. Section 1504(c)(2) provides an election whereby certain life insurance companies and mutual insurance companies may be treated as includible corporations, and thus members, of a group composed of other includible corporations. This section provides regulations for the making of this election and for the determination of an electing group's composition and its consolidated tax liability.
(2) General method of consolidation—
(i) Subgroup method.
The regulations adopt a subgroup method to determine consolidated taxable income. One subgroup is the group's nonlife companies (including those taxable under section 821 ). The other subgroup is the group's life insurance companies. Initially, the nonlife subgroup computes nonlife consolidated taxable income and the life subgroup computes consolidated partial life insurance company taxable income. A subgroup's income may in effect be reduced by a loss of the other subgroup. The life subgroup losses consist of consolidated loss from operations and life consolidated net capital loss. The nonlife subgroup losses consist of nonlife consolidated net operating loss and nonlife consolidated net capital loss. Consolidated taxable income is therefore defined in pertinent part as the sum of nonlife consolidated taxable income and consolidated partial life insurance company taxable income reduced by life subgroup losses or nonlife subgroup losses.
(ii) Subgroup loss.
A subgroup loss does not actually affect the computation of nonlife consolidated taxable income or consolidated partial life insurance company taxable income. It merely constitutes a bottom-line adjustment in reaching consolidated taxable income. Furthermore, one subgroup's loss must first be carried back against income of the same subgroup before it may be used as a setoff against the second subgroup income in the taxable year the loss arose. (See section 1503(c)(1) ). The carryback of the losses from one subgroup may not be used to offset income of the other subgroup in the year to which the loss is to be carried. This carryback of the first subgroup's loss may “bump” the second subgroup's loss that in effect previously reduced the income of the first subgroup. The second subgroup's loss that is bumped in appropriate cases may in effect reduce a succeeding year's income of the second or first subgroup. This approach gives the group the tax savings of the use of losses but the bumping rule assures that insofar as possible life deductions will be matched against life income and nonlife deductions against nonlife income.
(iii) Carryover of subgroup loss.
A subgroup's loss may be used in a succeeding year, but in any particular succeeding year the loss must be used to reduce the income of the same subgroup before it may be used as a setoff against the other subgroup's income.
(3) Authority.
This section is prescribed under the authority of sections 1502, 1503(c), 1504(c)(2), and 7805(b).
(4) Other provisions.
The provisions of §§ 1.1502-1 through 1.1502-80 apply unless this section provides otherwise. Further, unless otherwise indicated in this section, a term used in this section has the same meaning as in sections 801-844.
(b) Effective dates—
(1) General rule.
This section is effective for taxable years for which the due date (without extensions) for filing returns is after March 14, 1983, except as provided in paragraph (b)(2) of this section.
(2) Tacking rule effective dates—
(i) In general.
Paragraph (d)(12)(v) of this section applies to any original consolidated Federal income tax return due (without extensions) after July 20, 2007.
(ii) Prior law.
For original consolidated Federal income tax returns due (without extensions) after April 25, 2006, and on or before July 20, 2007, see § 1.1502-47T as contained in 26 CFR part 1 in effect on April 1, 2007. For original consolidated Federal income tax returns due (without extensions) on or before April 25, 2006, see § 1.1502-47 as contained in 26 CFR part 1 in effect on April 1, 2006.
(c) Cross references.
The following table provides cross references for some of the definitions and operating rules that are relevant in making the election and determining the group's composition and its tax liability:
Item and Paragraph
General definitions(d).
Eligible corporation (Five-year rules)(d)(12).
Election(e).
Consolidated taxable income(g).
Nonlife consolidated taxable income(h).
Consolidated partial life insurance company taxable income(j).
Nonlife subgroup losses(m).
Life subgroup losses(n).
Alternative tax(o).
(1) Life insurance company.
The term “life company” means a life insurance company as defined in section 801. Section 801 applies to each company separately.
(2) Mutual insurance company.
The term “mutual company” means a mutual insurance company taxable under section 821(a)(1).
(3) Life insurance company taxable income.
The term “life insurance company taxable income” is referred to as LICTI. The terms “TII”, “GO”, and “LO” refer, respectively, to taxable investment income ( section 804 ), gain from operations ( section 809 ), and loss from operations ( section 812 ). The term “consolidated partial LICTI” refers to consolidated LICTI without section 802(b)(3).
(4) Group.
The term “group” means an affiliated group of corporations (as defined in section 1504(a) ). Unless otherwise indicated in this section, a group's composition is determined without section 1504(b)(2).
(5) Member.
The term “member” means a corporation (including the common parent) that is an includible corporation in the group. A life company or mutual company is tentatively treated as a member for any taxable year for purposes of determining if it is an eligible corporation under paragraph (d)(12) of this section and therefore if it is an includible corporation under section 1504(c)(2). If such a company is eligible and includible (under section 1504(c)(2) ), it will actually be treated as a member of the group.
(8) Life subgroup.
A life subgroup is composed of those members that are life members. If the group has only one life member, it constitutes a life subgroup.
(9) Nonlife subgroup.
A nonlife subgroup is composed of those members that are nonlife members. If the group has only one nonlife member, it constitutes a nonlife subgroup.
(10) Separate return year.
The term “separate return year” means a taxable year of a corporation for which it files a separate return or for which it joins in the filing of a consolidated return by another group. For purposes of this subparagraph (10), the term “group” is defined with regard to section 1504(b)(2) for years in which an election under section 1504(c)(2) is not in effect. Thus, a separate return year includes a taxable year for which that election is not in effect.
(11) Separate return limitation year.
Section 1.1502-1(f)(2) provides exceptions to the definition of the term “separate return limitation year”. For purposes of applying those exceptions to this section, for taxable years ending after December 31, 1980, the term “group” is defined without regard to section 1504(b)(2) and the definition in this subparagraph (11) applies separately to the nonlife subgroup in determining nonlife consolidated taxable income under paragraph (h) of this section and to the life subgroup in determining consolidated partial LICTI under paragraph (j) of this section. Paragraph (m)(3)(ix) of this section defines the term “separate return limitation year” for purposes of determining whether the losses of one subgroup may be used against the income of the other subgroup.
(12) Eligible corporations—
(i) In general.
A corporation is an eligible corporation for a taxable year of a group only if, throughout every day of the base period the corporation:
(A)
Was in existence and a member of the group determined without the exclusions in section 1504(b)(2) (see paragraphs (d)(12) (iii) through (vi) of this section),
(D)
Did not undergo disproportionate asset acquisitions (see paragraph (d)(12)(viii) of this section).
(ii) Base period.
The base period consists of the common parent's five taxable years immediately preceding the group's taxable year for which the consolidated return and the determination of eligibility are made. Eligibility is determined for each consolidated return year beginning with the first year for which the election under section 1504(c)(2) is effective.
(iii) In existence.
Except as provided in paragraphs (d)(12) (v) and (vi) of this section, a corporation organized after the base period begins is not eligible even though it is a member of the group immediately after its organization. For purposes of this subdivision (iii), a corporation that was a party to a reorganization described in section 368(a)(1)(F) shall be treated as the same entity both before and after the reorganization.
(iv) Membership period.
Except as provided in paragraphs (d)(12) (v) and (vi) of this section, a corporation must have been a member of the group throughout the base period to be eligible. Thus, an ineligible corporation includes one whose stock was acquired from outside the group at any time during the base period or one which was a member of a different group (whether by application of reverse acquisition rules in § 1.1502-75(d)(3) or otherwise) at any time during the base period. For purposes of this subdivision (iv), the common parent of a group is treated as constituting a group (and hence is a member) during any period when it was not a member of an affiliated group within the meaning of section 1504(a) (applied without section 1504(b)(2) ).
(v) Tacking rule.
The period during which an old corporation is in existence and a member of the group engaged in active business is included in (or tacks onto) the period for the new corporation if the following four conditions listed in this paragraph (d)(12)(v) are met. For purposes of this paragraph (d)(12)(v), a new corporation is a corporation (whether or not newly organized) during the period its eligibility depends upon the tacking rule. The four conditions are as follows—
(A)
The first condition is that, at any time, 80 percent or more of the new corporation's assets it acquired (other than in the ordinary course of its trade or business) were acquired from the old corporation in one or more transactions described in section 351(a) or 381(a). This asset test is applied by using the fair market values of assets on the date they were acquired and without regard to liabilities. Assets acquired in the ordinary course of business will be excluded from total assets only if they were acquired after the new corporation became a member of the group (determined without section 1504(b)(2) ). In addition, assets that the old corporation acquired from outside the group in transactions not conducted in the ordinary course of its trade or business are not included in the 80 percent (but are included in total assets) if the old corporation acquired those assets within five calendar years before the date of their transfer to the new corporation.
(B)
The second condition is that at the end of the taxable year during which the first condition is first met, the old corporation and the new corporation must both have the same tax character. For purposes of this paragraph (d)(12), a corporation's tax character is the section under which it would be taxed (i.e., sections 11, 802, 821, or 831) if it filed a separate return. If the old corporation is not in existence (or adopts a plan of complete liquidation) at the end of that taxable year, this paragraph (d)(12)(v)(B) will apply to the old corporation's taxable year immediately preceding the beginning of the taxable year during which the first condition is first met.
(C)
The third condition is that, at the end of the taxable year during which the first condition is first met, the new corporation does not undergo a disproportionate asset acquisition under paragraph (d)(12)(viii) of this section.
(D)
The fourth condition is that, if there is more than one old corporation, the first two conditions apply to all of the corporations. Thus, the second condition (tax character) must be met by all of the old corporations transferring assets taken into account in meeting the test in paragraph (d)(12)(v)(A) of this section.
(vi) Old group remaining in existence.
If the common parent of a group (or a new common parent) became the common parent in a transaction described in § 1.1502-75 (d)(2) or (d)(3) where a group remained in existence, then paragraph (d)(12) (ii) through (iv) of this section apply by treating that common parent as if it were also the previous common parent of the group that remains in existence. If this paragraph (d)(12)(vi) applies to a transaction, the tacking rule in paragraph (d)(12)(v) of this section does not apply to the transaction.
(vii) Change in tax character.
A corporation must not experience during the base period a change in tax character (as defined in paragraph (d)(12)(v)(B) of this section) if the change is attributable to an acquisition of assets from outside the group in transactions not conducted in the ordinary course of its trade or business. However, if a new corporation relies on the tacking rules in paragraph (d)(12)(v) of this section, this paragraph (d)(12)(vii) shall apply during the base period and the current consolidated return year and even if the change in tax character is attributable to an asset acquisition from within the group.
(viii) Disproportionate asset acquisition.
To be eligible, a corporation must not undergo during the base period disproportionate asset acquisitions which are attributable to an acquisition (or a series of acquisitions) of assets from outside the group in transactions not conducted in the ordinary course of its trade or business (special acquisition). Whether special acquisitions are disproportionate is determined at the end of each base period. Whether an acquisition results in a disproportionate asset acquisition depends on all of the facts and circumstances including the following factors and rules:
(A)
One factor is the portion of the insurance reserves (i.e., total reserves in section 801 (c)) of the acquiring company at the end of the base period which is attributable to special acquisitions.
(B)
A second factor is the portion of the fair market value of the assets (without reduction for liabilities) of the acquiring company at the end of the base period that is attributable to special acquisitions.
(C)
A third factor is the portion of the premiums generated during the last taxable year of the base period which are attributable to special acquisitions.
(D)
A corporation will not experience a disproportionate asset acquisition unless 75 percent of one factor (whether or not listed in this subdivision (viii)) is attributable to special acquisitions.
(E)
Money or other property contributed to a corporation by a shareholder that is not a member of the group (without section 1504(b)(2)) is not a special acquisition.
(F)
If a new corporation relies on the tacking rules in paragraph (d)(12)(v) of this section, this subdivision (viii) applies to that corporation during a consolidated return year. Thus, if at any time during a consolidated return year, a new corporation undergoes a disproportionate asset acquisition, the corporation becomes ineligible at that time.
(13) Ineligible corporation.
A corporation that is not an eligible corporation is ineligible. If a life company or mutual company is ineligible, it is not treated under section 1504(c)(2) as an includible corporation. Losses of a nonlife member arising in years when it is ineligible may not be used under section 1503(c)(2) and paragraph (m) of this section to set off the income of a life member. If a life or mutual company is ineligible and is the common parent of the group (without section 1504(b)(2) ), the election under section 1504(c)(2) may not be made.
(14) Illustrations.
The following examples illustrate this paragraph (d). In each example, L indicates a life company, another letter indicates a nonlife company, and each corporation uses the calendar year as its taxable year.
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(e) Election—
(1) In general.
The election under section 1504(c)(2) may not be made if the group's common parent is an ineligible life company or an ineligible mutual company. The election under section 1504(c)(2) may only be made by the common parent of the group (as defined in section 1504(c)(2) without the exclusions in section 1504(b)(2) ). For example, assume that P owns all of the stock of L1, an eligible life company, which owns the stock of S1. Assume further that P also owns the stock of L2, an ineligible life member, which (for more than five years) has owned the stock of a nonlife company, S2. Only P may make the election and, if it does so, P, L1, and S1 may file a consolidated return under this section. L2 may not make the election under section 1504(c)(2) and may not file a consolidated return with S2.
(2) How election is made—
(i) General rule.
The election under section 1504(c)(2) is generally made by the group's common parent in the same manner (and it has the same effect) as the election to file a consolidated return is made under § 1.1502-75 (a) and (b) for a group which did not file a consolidated return for the immediately preceding taxable year. The procedure for making the election under section 1504(c)(2) is the same whether or not a consolidated return was filed by the life members or the nonlife members for the immediately preceding taxable year.
(ii) Special rule.
Notwithstanding the general rule, however, if the nonlife members in the group filed a consolidated return for the immediately preceding taxable year and had executed and filed a Form 1122 that is effective for the preceding year, then such members will be treated as if they filed a Form 1122 when they join in the filing of a consolidated return under section 1504(c)(2) and they will be deemed to consent to the regulations under this section. However, an affiliation schedule (Form 851) must be filed by the group and the life members must execute a Form 1122 in the manner prescribed in § 1.1502-75(h)(2).
(3) Irrevocability.
Except as provided in § 1.1502-75(c) and paragraph (e)(4) of this section, the election under section 1504(c)(2) is irrevocable.
(4) Permission to discontinue—
(i) General rule.
A “ section 1504(c)(2) group” with a common parent that has made the election to file a consolidated return under section 1504(c)(2) in a previous taxable year is granted permission to elect (under § 1.1502-75(c)(2)(ii)) to discontinue filing such a consolidated return for that group's first taxable year for which the regulations under this section are effective. This election to discontinue shall be exercised in the time and manner prescribed in § 1.1502-75(c)(3), except that the group's common parent shall exercise this election to discontinue (and the other members of the section 1504(c)(2) group must comply with this election) by filing appropriate returns. For purposes of this paragraph (e)(4), an appropriate return is either a separate return or a consolidated return that is filed by newly exercising the privilege under § 1.1502-75(a)(1).
(ii) Types of groups.
(A)
A “ section 1504(c)(2) group” is an affiliated group which files or filed a consolidated return pursuant to an election under section 1504(c)(2).
(B)
A “limited group” is an affiliated group (determined without section 1504(c)(2)) having at least one member which was a member of a section 1504(c)(2) group on the date that the section 1504(c)(2) group elected to discontinue under paragraph (e)(4)(i) of this section.
(iii) Effect on restoration rules.
If a group ceases to file a consolidated return or terminates or if a member leaves the group, certain items of income, gain, or loss on transactions between members are taken into account under §§ 1.1502-13, 1.1502-18, and 1.1502-19 (“restoration rules”). For purposes of applying these restoration rules solely by reason of an election under paragraph (e)(4)(i) or (e)(4)(v)(A) of this section to discontinue filing consolidated returns as a section 1504(c)(2) group, the following rules apply:
(A)
The section 1504(c)(2) group shall not be considered to terminate and no member of that group shall be treated as ceasing to be a member.
(B)
Members of that section 1504(c)(2) group that are included in the consolidated return of a limited group for the first taxable year for which the discontinuance is effective shall be considered to be filing a consolidated return as a continuation of the section 1504(c)(2) group. However, a corporation that is not a member of a particular limited group for that taxable year is considered to have a separate return year (and, for purposes of § 1.1502-19(c), not to be a member of a group filing a consolidated return) with respect to that limited group's members.
(iv) Illustrations.
The following examples illustrate paragraph (e)(4)(i)-(iii) of this section. In these examples, L indicates a life company and another letter indicates a nonlife company. All corporations use the calendar year as the taxable year. For all taxable years involved, P owns all the stock of L1 and of S, L1 owns all the stock of L2, L2 owns all the stock of L3, and S owns all the stock of L4. For 1981, P makes the life-nonlife election of section 1504(c)(2) and L4 is an eligible corporation. For 1982, P makes the election to discontinue filing consolidated returns under section 1504(c)(2) in accordance with the permission granted in this paragraph (e)(4).
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| Intercompany transactions between | § 1.1502-13 |
|---|---|
| P and L1 | Yes. |
| P and S, if they file: | |
| Separate returns | Yes. |
| A consolidated return | No. |
| S and L4 | Yes. |
| L2 and L3, if L1, L2, and L3 file: | |
| Separate returns | Yes. |
| A consolidated return | No. |
(v) Additional rules.
(A)
If a group with a taxable year ending in the month of December, 1982, had made the election under section 1504(c)(2) for a taxable year ending prior to December 1, 1982, and if that group meets the conditions of subdivision (vi) of this paragraph (e)(4), then the common parent may elect to discontinue filing a consolidated return for its taxable year ending in the month of December, 1982 (and other members of the section 1504(c)(2) group must comply with this election) by filing appropriate returns (see paragraph (e)(4)(i) of this section) before September 16, 1983.
(B)
If a group made the election under section 1504(c)(2) for its taxable year ending in the month of December, 1982, and if that group meets the conditions of subdivision (vi) of this paragraph (e)(4), then the common parent may elect to withdraw the section 1504(c)(2) election (and all other members of the group determined without section 1504(b)(2) comply with the election) by filing before September 16, 1983, any returns for the appropriate taxable years that would have been filed had the section 1504(c)(2) election never been made.
(vi)
A group referred to at subdivision (v)(A) or (B) of this (e)(4) meets the conditions of this subdivision (vi) if it—
(A)
filed before March 16, 1983, a return for its taxable year ending in the month of December, 1982, and
(vii) Interest.
For purposes of section 6601(a), interest runs from the original due date (without extensions) for the filing of such returns as are filed pursuant to an election (to discontinue or withdraw as the case may be) under this paragraph (e)(4).
(5) Consent to regulations.
If a group does not discontinue filing a consolidated return under paragraph (e)(4) of this section but continues to file a consolidated return for the group's first taxable year for which the regulations under this section are first effective, the members of the group will be deemed to have consented to the regulations under this section.
(6) Cross reference.
If an election is made under section 1504(c)(2), see § 1.1502-75 (e) and (f) for rules that apply for not including (or including) a member or a nonmember in the consolidated return.
(f) Effect of election.
If the common parent makes the election under section 1504(c)(2), the following rules apply:
(1) Termination of group.
A mere election under section 1504(c)(2) will not cause the creation of a new group or the termination of an affiliated group that files a consolidated return in the immediately preceding taxable year.
(2) Effect of eligibility.
If a life member is eligible after an election under section 1504(c)(2), it may not be included as a member of an affiliated group as defined in section 1504(c)(1).
(3) Eligible and ineligible life companies.
If any life company was a member of an affiliated group of life companies (as defined in section 1504(c)(1)) but is ineligible for a taxable year for which the election under section 1504(c)(2) is effective, that year is not a separate return year merely by reason of the election under section 1504(c)(2) in applying §§ 1.1502-13, 1.1502-18, and 1.1502-19 to transactions occurring in prior consolidated return years of that affiliated group. In addition, if more than one ineligible life member of the group (as defined in section 1504(c)(1)) joined in the filing of a consolidated return in the taxable year immediately preceding the year for which the election under section 1504(c)(2) is effective and, solely as a result of the election, one of the ineligible life members becomes the common parent of such a group ( section 1504(c)(1) ), the group must continue to file a consolidated return. For example, assume that L1 owns all of the stock of S1 and all of the stock of L2. L2 owns the stock of L3. L1, L2, and L3 are life companies and S1 is a nonlife company. Assume further that in 1981, L1, L2, and L3 file a consolidated return but L1 makes the election under section 1504(c)(2) for 1982 and L2 and L3 are ineligible. L2 and L3 must continue to file a consolidated return in 1982. Moreover, L2 could elect in 1982 to file a consolidated return ( section 1504(c)(1)) with L3 even if they did not file a consolidated return in 1981 with L1.