These proposed regulations generally retain the rules, concepts and examples from the existing regulations regarding the agent for a consolidated group. However, the rules, concepts and examples from the existing regulations have been renumbered, restructured and revised to provide greater clarity. Examples in the final regulations also have been modified to reflect the more limited circumstances in which an agent may be selected by the IRS or the former agent. In addition, when these proposed regulations are adopted, the IRS plans to issue contemporaneous guidance in a revenue procedure superseding Rev. Proc. 2002-43, 2002-2 C.B. 99, (see §601.601(d)(2)(ii)(b) of this chapter). Rev. Proc. 2002-43 provides instructions regarding all communications relating to the determination of a substitute agent to act on behalf of a consolidated group. In general, it is anticipated that the instructions in the superseding revenue procedure will update Revenue Procedure 2002-43 to reflect the rules in the adopted regulations.

Under the existing regulations, a common parent that is going out of existence may designate its successor, another member of the group, or a group member’s successor entity as the substitute agent for the group. In practice, the terminating common parent, when it has designated a substitute agent at all, has generally designated its successor rather than another member as the substitute agent.

The proposed regulations provide that the terminating agent’s default successor automatically becomes the agent for the group. The former agent cannot designate an agent if there is a default successor, and the IRS can replace a default successor only in limited circumstances. See §1.1502-77(c)(5). If the agent for the group has no default successor, the agent for the group may designate an entity that was a member of the group for the consolidated return year or a successor of such member. Narrowing the option to designate the agent for the group is consistent with the pattern of choices exhibited by taxpayers under the existing regulations and minimizes the difficulties that arise when a terminating agent fails to designate a substitute. In the rare cases in which an entity serving as agent terminates its existence without having a default successor, the IRS and Treasury Department expect that fact generally will be clear. Accordingly, IRS and taxpayers can readily identify situations in which a new agent must be designated. Furthermore, having the default successor become the substitute agent is the intuitively appropriate choice because it is generally consistent with the handling of tax matters involving non-consolidated entities and non-consolidated taxes.

A default successor must notify the IRS in writing (under procedures prescribed by the IRS) that it is the default successor. Until the IRS receives such notification, any notice of deficiency or other communication mailed to the predecessor agent for the group, even if no longer in existence, is considered as having been properly mailed to the agent for the group, and the IRS is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person (including the default successor) other than the predecessor agent for the group.

In general, §1.1502-77(e) provides that the common parent, as agent for the group, ceases to be the agent for the group if its existence terminates under applicable law, if it becomes an entity disregarded from its owner for Federal tax purposes, or if it becomes an entity that is reclassified as a partnership for Federal tax purposes.

When the existing regulations were adopted in 2002, there was no direct guidance concerning whether the party liable for a disregarded entity’s Federal taxes with respect to periods before it becomes disregarded should be the disregarded entity or its owner. Section 1.1502-77(e) generally precludes the common parent from continuing to serve as the agent for the group if it becomes a disregarded entity or partnership. Subsequent regulatory amendments provided that an entity treated as disregarded from its owner for Federal income tax purposes (whether a single member eligible entity, a Qualified Real Estate Investment Trust Subsidiary or a Qualified Subchapter S Subsidiary) is not disregarded for purposes of its tax liability for taxable periods during which it was not disregarded. See T.D. 9183, 2005-1 C.B. 754 (70 FR 9220) (February 25, 2005), as supplemented in T.D. 9462, 2009-42 I.R.B. 504 (74 FR 46903) (September 14, 2009) and T.D. 9553, 2011-48 I.R.B. 806 (76 FR 66181) (October 26, 2011). Thus, such an entity, rather than its owner, is the party liable for the taxes arising in taxable periods before the entity became disregarded.

These proposed regulations include disregarded entities and partnerships among the entities capable of serving as substitute agents for prior years. Accordingly, the transformation or merger of a common parent into a disregarded entity or partnership after the taxable year of the return generally will result in the disregarded entity or partnership becoming the agent for the group. Because the entity that was formerly a corporation serving as the agent for the group is no longer treated as a corporation for Federal income tax purposes after the change in its classification, it will not be a continuing member of a consolidated group in future periods. Nevertheless, the continuing or successor juridical entity is the agent for the group for prior periods. This result will obtain whether the change in classification is effectuated by a merger under state law, a conversion under state law, or a tax election.

Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 324) (TEFRA) provides that the tax treatment of partnership items shall be determined at the partnership level. These TEFRA provisions are in sections 6221 through 6234. A partner in a TEFRA partnership is subject to the provisions of sections 6221 through 6234. In general, the IRS will deal with the tax matters partner (TMP) regarding specified matters for the partners in a TEFRA partnership.

The existing regulations at §1.1502-77(a)(6)(iii) provide that “[t]he Commissioner generally will deal directly with any member in its capacity as a partner of a [TEFRA] partnership” but also permits the Commissioner to deal with the common parent, as agent for the group, if requested to do so in accordance with the provisions of §301.6223(c)-1(b). This provision was intended to facilitate IRS audits of TEFRA partnerships by permitting the IRS TEFRA audit team to deal with a member-partner without the involvement of the agent for the group. However, these rules have created some confusion, especially with respect to the execution of consents to extend the statute of limitations and settlement agreements in connection with TEFRA audits.

Subject to enumerated exceptions in (f)(2)(iii) (relating to a member’s actions as TMP and the Commissioner’s discretion to deal directly with the member-partner), section 1.1502-77(f)(2)(iii)(A) provides that the agent for the group is the agent for any matter related to a TEFRA partnership in which a member is a partner. Consistent with this general rule, these proposed regulations would delete the provision of the existing regulations that the common parent, as agent for the group, will not act as agent for a member that is a partner in a TEFRA partnership for purposes of executing a settlement agreement under section 6224(c). The proposed regulations also clarify that only the agent for the group can extend the statute of limitations with respect to items other than the items of the TEFRA partnership. Section 1.1502-77(g), Example 11.

The existing regulations at §1.1502-77(d)(1)(i)(A) and (d)(1)(ii) provide that any designation of the substitute agent for the group must be approved by the Commissioner. The IRS is aware of having denied this approval only in the very limited circumstance in which the designation was not made in accordance with the regulations. Because the IRS would deny approval only infrequently, the proposed regulations do not require IRS approval of the designation of an agent for the group by the terminating agent. This proposed change will enhance efficiency and save resources. However, the proposed regulations retain the requirement that a terminating agent must notify the IRS in writing (under procedures prescribed by the IRS) of the designation of the agent for the group so that IRS records will reflect the identity of the agent for the group.

The proposed regulations also provide several limited circumstances in which the IRS may designate or replace the agent for the group, either on its own initiative or at the request of other members. The IRS will not, however, have the ability to replace a domestic default successor under circumstances in which it could not replace the common parent.

Under the existing regulations, a substitute agent is required to be a domestic entity for Federal income tax purposes. However, the existing regulations also provide that the Commissioner may designate another domestic member of the group to act as the agent for the group (a domestic substitute agent) if the common parent is an entity created or organized under the laws of a foreign country and is treated as a domestic corporation by reason of section 7874 (or regulations under that section) or a section 953(d) election (a foreign common parent). This rule recognizes that foreign agents may present unique logistical issues, and provides the Commissioner full discretion to replace a foreign agent should those issues arise.

Although a foreign entity may raise practical difficulties in certain cases, the IRS and Treasury realize that a foreign entity, especially a default successor, may have the best access to information relating to prior consolidated return years. Furthermore, the IRS and Treasury believe that it is important for a consolidated group to have, to the greatest extent practicable, an entity that is authorized to act on its behalf to enable the group to communicate with the IRS and to ensure that the group can timely meet its compliance obligations (for example, file a timely final return if the group terminates). The IRS and Treasury also believe that the interests of the government and taxpayers are best served by a rule that clearly identifies the group’s agent. Balancing special logistical issues and the importance of continual agency, the proposed regulations do not preclude a foreign entity from being the agent for the consolidated group. However, the IRS retains discretion to replace a foreign entity that is an agent for a consolidated group.

These proposed regulations also provide that an entity cannot serve as the agent for the group during any winding up period that follows its dissolution.

The existing regulations predicate agency on the continued existence of the corporation under applicable law. Questions have arisen as to what actions can be performed by a dissolved entity that has a “winding up” period following its dissolution. In many states, a dissolved corporation or entity may continue to perform certain acts after its dissolution to wind up its affairs. The duration of such a winding up period and the scope of the permissible actions vary from jurisdiction to jurisdiction. To resolve questions about whether a dissolved entity may be the agent for the remaining members of the consolidated group during the winding up period, these proposed regulations provide that an entity that has dissolved or otherwise ceased to exist under applicable law can no longer be the agent for the group, irrespective of any winding up period under applicable law.

These proposed regulations include no new mechanism to address situations in which the agent for the group fails to fulfill its duties on behalf of the members of the consolidated group, for example by not filing a return, not requesting a refund, or not cooperating with an examination. Under those circumstances, the members might not be able to accurately file or determine their Federal tax liability or obtain their refunds. The government might have difficulty determining which, if any, member is entitled to a refund, forcing it to interplead all potential claimants in any such refund case.

The IRS and Treasury Department request comments on whether and how to implement a mechanism whereby the subsidiary members can request that the IRS designate another member of the group to be the agent when the common parent or substitute agent does not discharge its obligations as agent. Comments should consider under what circumstances and how this mechanism might be invoked to ensure that it is narrowly applied.

Under the existing regulations, a common parent, as agent for the group, remains the agent for the group for consolidated return years for which it was the common parent of the group. Only a termination of the common parent under applicable law will result in either the successor becoming the default substitute agent or an agent being designated for the group. The proposed regulations do not provide a mechanism for an existing agent to resign and limit the ability of the agent to displace its obligations transactionally by mandating the designation of any default successor. The Treasury Department and the IRS are considering whether, and under what circumstances, the regulations should allow an agent for the group to resign as the agent, and invite comments on this issue.

REGULATIONS APPLICABLE TO TAXABLE YEARS BEGINNING ON OR AFTER JUNE 28, 2002, AND BEFORE [THE DATE FINAL REGULATIONS ARE PUBLISHED IN THE FEDERAL REGISTER]

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(h) Effective/Applicability date—(1) Application—(i) In general. This section applies to taxable years beginning on or after June 28, 2002, and before [the date final regulations are published in the Federal Register].

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Par. 5. New section 1.1502-77 is added to read as follows:

(a) Agent for the group. Except as provided in paragraphs (e) and (f)(2) of this section, one entity (the agent for the group) is the sole agent that is authorized to act in its own name regarding all matters relating to the Federal income tax liability for the consolidated return year for each member of the group and any successor or transferee of a member (and any subsequent successors and transferees thereof). The common parent during the consolidated return year to which the matter relates or such other entity as is provided in paragraph (c) of this section is the agent for the group. Agency for the group is established for each consolidated return year and is not affected by the status or membership of the group in later years. Thus, for as long as it remains in existence under applicable law and is not replaced under paragraph (c)(5)(i)(C) of this section, a corporation or entity that is the agent for the group for a particular consolidated return year remains the agent for the group for that year regardless of whether one or more subsidiaries later cease to be members of the group, whether the group files a consolidated return for any subsequent year, whether the agent for the group ceases to be the agent for the group or a member of the group in any subsequent year, or whether the group continues pursuant to §1.1502-75(d) with a new common parent in any subsequent year.

(b) Definitions. The following definitions apply for purposes of this section only—

(1) Successor. A successor is an individual or entity (including a disregarded entity) that is primarily liable, pursuant to applicable law (including, for example, by operation of a state or Federal merger statute), for the tax liability of a corporation which was a member of the group but is no longer in existence under applicable law. The determination of tax liability is made without regard to §1.1502-1(f)(4) or §1.1502-6(a). (For inclusion of a successor in references to a subsidiary or member, see paragraph (b)(5)(iii) of this section.)

(2) Entity. The term entity includes any corporation, limited liability company or partnership formed under any state, Federal, or foreign jurisdiction. The term entity includes a disregarded entity. The term entity does not include an entity during any winding up period if the entity’s existence has terminated pursuant to the law under which it is organized.

(3) Disregarded entity. The term disregarded entity includes any of the following types of entities disregarded as separate from their owners—

(i) Qualified real estate investment trust subsidiaries (within the meaning of section 856(i)(2));

(ii) Qualified subchapter S subsidiaries (within the meaning of section 1361(b)(3)(B)); and

(iii) Single owner eligible entities (within the meaning of Treas. Reg. §301.7701-3).

(4) Default successor. A successor to the agent for the group is the default successor if it is an entity (whether domestic or foreign) that is the sole successor to the agent for the group. A partnership is treated as a sole successor with primary liability notwithstanding that one or more partners may also be primarily liable by virtue of being partners.

(5) Member or subsidiary. All references to a member or subsidiary for a consolidated return year include—

(i) Each corporation that was a member of the group during any part of such year (except that any reference to a subsidiary does not include the common parent);

(ii) Each corporation whose income was included in the consolidated return for such year, notwithstanding that the tax liability of such corporation should have been computed on the basis of a separate return, or as a member of another consolidated group, under the provisions of §1.1502-75; and

(iii) Except as indicated otherwise, a successor of any of the foregoing corporations.

(c) Identity of the agent for the group—(1) In general. Except as otherwise provided in this section, the common parent or its default successor, if any, is the agent for the group. Any entity that is an agent pursuant to this paragraph (c) acts as agent for the group to the same extent and subject to the same limitations as are applicable to the common parent.

(2) New common parent after a group structure change. If the group continues in existence with a new common parent under the principles of §1.1502-75(d) during a consolidated return year, the common parent at the beginning of the year is the agent for the group through the date of the §1.1502-75(d) transaction, and the new common parent becomes the agent for the group beginning the day after the transaction, at which time the new common parent becomes the agent for the group with respect to the entire consolidated return year (including the period through the date of the transaction) and the former common parent is no longer the agent for that year.

(3) Notification by default successor. A default successor must notify the Commissioner in writing (under procedures prescribed by the Commissioner) that it is the default successor. Until the Commissioner receives such notification—

(i) Any notice of deficiency or other communication mailed to the predecessor agent for the group, even if no longer in existence, is considered as having been properly mailed to the agent for the group; and

(ii) The Commissioner is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person (including the default successor) other than the predecessor agent for the group.

(4) Designation by terminating agent. (i) Prior to the termination of its existence without a default successor, the agent for the group may designate an entity described in paragraph (c)(4)(ii) of this section to act as agent for the group, effective upon its termination.

(ii) The terminating agent for the group may designate as agent for the group, for any consolidated return year for which it is the agent for the group—

(A) Any corporation that was a member of the group during any part of the consolidated return year, or

(B) Any successor of such a corporation or of the agent for the group that is an entity (whether domestic or foreign), including an entity that will become a successor at the time that the agent for the group’s existence terminates.

(iii) The agent for the group must notify the Commissioner in writing (under procedures prescribed by the Commissioner) of the designation and provide an agreement executed by the designated entity acknowledging that it will serve as the agent for the group, and, if the designated entity was not itself a member of the group during the consolidated return year (because the designated entity is a successor of a member of the group for the consolidated return year), a statement by the designated entity acknowledging that it is or will be primarily liable for the tax as a successor of a member.

(iv) If the agent for the group ’s existence terminates without there being a default successor, and it has not designated an entity to act as agent for the group in its place pursuant to this paragraph (c)(4)—

(A) Any notice of deficiency or other communication mailed to the agent for the group, even if no longer in existence, is considered as having been properly mailed to the agent for the group; and

(B) The Commissioner is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person.

(5) Designation by the Commissioner. (i) The Commissioner may, at any time, with or without a request from any member of the group, designate an entity described in paragraph (c)(4)(ii) of this section to act as the agent for the group if—

(A) The agent for the group’s existence terminates without there being a default successor and no designation is made under paragraph (c)(4) of this section;

(B) The Commissioner believes that the agent for the group or its default successor exists but such entity has not responded to the Commissioner’s notices sent to the last known address on file for the entity or any notices left at the usual place of business for such entity; or

(C) The agent for the group is or becomes a foreign entity as a result of any action or transaction (including, for example, a continuance into a foreign jurisdiction).

(ii) The Commissioner will notify the designated entity in writing of its designation, and the designation is effective upon receipt by the designated entity of such notice. The designated entity must give notice of the designation to each member of the group during any part of the consolidated return year, but a failure by the designated entity to notify any such member of the group does not invalidate the designation.

(iii) At the request of any member, the Commissioner may, but is not required to, replace an agent for the group previously designated under this paragraph (c)(5) with another entity described in paragraph (c)(4)(ii) of this section.

(iv) If the Commissioner replaces the agent for the group pursuant to this paragraph (c)(5), the replaced agent for the group ceases to be the agent after the Commissioner designates another agent.

(6) Successors to designated agents. The designation of an agent for the group under paragraph (c)(4) or paragraph (c)(5) of this section includes its default successors, if any.

(7) Purported agent for the group. If any entity files a consolidated return, or takes any other action related to the tax liability for the consolidated return year, purporting to be the agent for the group but is subsequently determined not to have been the agent for the group with respect to the claimed group, that entity is treated, to the extent necessary to avoid prejudice to the Commissioner, as if it were the agent for the group.

(8) Section 338 transactions. Notwithstanding section 338(a)(2), a target corporation for which an election is made under section 338 is not deemed to terminate for purposes of this section.

(d) Examples of matters subject to agency. With respect to any consolidated return year for which it is the agent for the group—

(1) The agent for the group makes any election (or similar choice of a permissible option) that is available to a subsidiary in the computation of its separate taxable income, and any change in an election (or similar choice of a permissible option) previously made by or for a subsidiary, including, for example, a request to change a subsidiary’s method or period of accounting;

(2) All correspondence concerning the income tax liability for the consolidated return year is carried on directly with the agent for the group;

(3) The agent for the group files for all extensions of time, including extensions of time for payment of tax under section 6164, and any extension so filed is considered as having been filed by each member;

(4) The agent for the group gives waivers, gives bonds, and executes closing agreements, offers in compromise, and all other documents, and any waiver or bond so given, or agreement, offer in compromise, or any other document so executed, is considered as having also been given or executed by each member;

(5) The agent for the group files claims for refund, and any refund is made directly to and in the name of the agent for the group and discharges any liability of the Government to any member with respect to such refund;

(6) The agent for the group takes any action on behalf of a member of the group with respect to a foreign corporation including, for example, elections by, and changes to the method of accounting of, a controlled foreign corporation in accordance with §1.964-1(c)(3);

(7) Notices of claim disallowance are mailed only to the agent for the group, and the mailing to the agent for the group is considered as a mailing to each member;

(8) Notices of deficiencies are mailed only to the agent for the group (except as provided in paragraph (f)(3) of this section), and the mailing to the agent for the group is considered as a mailing to each member;

(9) Notices of final partnership administrative adjustment under section 6223 with respect to any partnership in which a member of the group is a partner may be mailed to the agent for the group, and, if so, the mailing to the agent for the group is considered as a mailing to each member that is a partner entitled to receive such notice (for other rules regarding partnership proceedings, see paragraph (f)(2)(iii) of this section);

(10) The agent for the group files petitions and conducts proceedings before the United States Tax Court, and any such petition is considered as also having been filed by each member;

(11) Any assessment of tax may be made in the name of the agent for the group, and an assessment naming the agent for the group is considered as an assessment with respect to each member; and

(12) Notice and demand for payment of taxes is given only to the agent for the group, and such notice and demand is considered as a notice and demand to each member.

(e) Matters reserved to subsidiaries. Except as provided in this paragraph (e) and paragraph (f)(2) of this section, no subsidiary has authority to act for or to represent itself in any matter related to the tax liability for the consolidated return year. The following matters, however, are reserved exclusively to each subsidiary—

(1) The making of the consent required by §1.1502-75(a)(1);

(2) Any action with respect to the subsidiary’s liability for a Federal tax other than the income tax imposed by chapter 1 of the Internal Revenue Code (Code) (including, for example, employment taxes under chapters 21 through 25 of the Code, and miscellaneous excise taxes under chapters 31 through 47 of the Code);

(3) The making of an election under section 936(e); and

(4) The making of an election to be treated as a Domestic International Sales Corporation under §1.992-2.

(f) Dealings with members. (1) Identifying members in notice of a lien. Notwithstanding any other provisions of this section, any notice of a lien, any levy or any other proceeding to collect the amount of any assessment, after the assessment has been made, must name the entity from which such collection is to be made.

(2) Direct dealing with a member—(i) Several liability. The Commissioner may, upon issuing to the agent for the group written notice that expressly invokes the authority of this provision, deal directly with any member of the group with respect to its liability under §1.1502-6 for the consolidated tax of the group, in which event such member has sole authority to act for itself with respect to that liability. However, if the Commissioner believes or has reason to believe that the existence of the agent for the group has terminated, he may, if he deems it advisable, deal directly with any member with respect to that member’s liability under §1.1502-6.

(ii) Information requests. The Commissioner may, upon issuing to the agent for the group written notice, request information relevant to the consolidated tax liability from any member of the group. However, if the Commissioner believes or has reason to believe that the existence of the agent for the group has terminated, he may request such information from any member of the group.

(iii) Members as partners in partnerships subject to the provisions of sections 6221 through 6234.

(A) Except as otherwise provided in this paragraph (f)(2)(iii), the general rule of paragraph (a)(1) of this section applies to make the agent for the group the agent for any subsidiary member that for any part of the consolidated return year is a partner in a partnership subject to the provisions of sections 6221 through 6234 of the Code (as originally enacted by the Tax Equity and Fiscal Responsibility Act of 1982 and subsequently amended) and the accompanying regulations (TEFRA partnership).

(B) Any subsidiary or any disregarded entity owned by a subsidiary that is designated as tax matters partner of a TEFRA partnership will act in its own name and perform its responsibilities under sections 6221 through 6234 and the accompanying regulations without requiring any action by the agent for the group (but see paragraph (d)(9) of this section regarding the mailing of a final partnership administrative adjustment to the agent for the group).

(C) The Commissioner may at any time communicate directly with a subsidiary or a disregarded entity owned by a subsidiary that is a partner in a TEFRA partnership whenever the Commissioner determines that such direct communication will facilitate the conduct of an examination, appeal or settlement with respect to the partnership.

(3) Copy of notice of deficiency to entity that has ceased to be a member of the group. A subsidiary that ceases to be a member of the group during or after a consolidated return year may file a written notice of that fact with the Commissioner and request a copy of any notice of deficiency with respect to the tax for a consolidated return year during which it was a member, or a copy of any notice and demand for payment of such deficiency, or both. Such filing does not limit the scope of the agency of the agent for the group provided for in this section. Any failure by the Commissioner to comply with such request does not limit the subsidiary’s tax liability under §1.1502-6.

(g) Examples. Unless otherwise indicated, all entities are domestic and are calendar year taxpayers. For none of the tax years at issue does the Commissioner exercise the authority under paragraph (f)(2) of this section to deal with any member separately. Any surviving entity in a merger is either a successor as described in paragraph (b)(1) of this section, or a default successor as described in (b)(4) of this section, as the case may be. The following examples illustrate the principles of this section:

Example 1. Disposition of all group members where the agent for the group remains the agent. As of January 1 of Year 1, P, a domestic corporation, is the common parent and agent for the P consolidated group, consisting of P and its two subsidiary corporations, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On December 31 of Year 1, P sells all the stock of S-1 to X. On December 31 of Year 2, P distributes all the stock of S to P’s shareholders. P files a separate return for Year 3. Although the consolidated group terminates after Year 2 and P is no longer the common parent nor the agent for the group in years after Year 2, P remains the agent for the P group for Years 1 and 2. For as long as P remains in existence, P is the agent for the P group under paragraph (a) of this section for Years 1 and 2.

Example 2. Acquisition of the agent for the group by another group where the agent for the group remains the agent. The facts are the same as in Example 1, except on January 1 of Year 3, all of the outstanding stock of P is acquired by Y, a domestic corporation that is the common parent and agent for the group of the Y consolidated group. P thereafter joins in the Y group consolidated return as a member of the Y group. Although P is a member of the Y group in Year 3 and subsequent periods, P remains the agent for the P group for Years 1 and 2. For as long as P remains in existence, P is the agent for the P group under paragraph (a) of this section for Years 1 and 2.

Example 3. Reverse triangular merger of the agent for the group where the agent for the group remains the agent. (i) As of January 1 of Year 1, P, a domestic corporation that is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On March 1 of Year 3, W-1, a domestic subsidiary corporation of W, a domestic corporation, merges into P, in a reverse triangular merger described in section 368(a)(1)(A) and (a)(2)(E). P survives the merger with W-1. The transaction constitutes a reverse acquisition under §1.1502-75(d)(3)(i) because P’s shareholders receive more than 50 percent of W’s stock in exchange for all of P’s stock.

(ii) Because the transaction constitutes a reverse acquisition, the P group is treated as remaining in existence with W as its common parent and agent for the group. Under paragraph (a) of this section, P remains the agent for the P group for Years 1 and 2, even though the P group continues with W as its new common parent pursuant to §1.1502-75(d)(3)(i). Before March 2 of Year 3, P is the agent for the P group for Year 3. Beginning on March 2 of Year 3, W becomes the agent for the P group with respect to all of Year 3 (including the period through March 1) and subsequent consolidated return years. Thus, for as long as P remains in existence, P is the agent for the P group under paragraph (a) of this section for Years 1 and 2.

Example 4. Reverse triangular merger of the agent for the group—subsequent spinoff of agent for the group where the agent for the group remains the agent. The facts are the same as in Example 3, except that on April 1 of Year 4, in a transaction unrelated to the March 1, Year 3 reverse acquisition, P distributes the stock of its subsidiaries S and S-1 to W, and W then distributes the stock of P to the W shareholders. Beginning on March 2 of Year 3, W becomes the agent for the P group with respect to Year 3 (including the period through March 1) and subsequent consolidated return years. Although P is no longer a member of the P group after the Year 4 spinoff, P remains the agent for the P group under paragraph (a) of this section for Years 1 and 2. For as long as P remains in existence, P is the agent for the P group under paragraph (a) of this section for Years 1 and 2.

Example 5. Qualified stock purchase and section 338 election where the agent for the group remains the agent. As of January 1 of Year 1, P, a domestic corporation, is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On March 31 of Year 2, V, a domestic corporation, purchases the stock of P in a qualified stock purchase (within the meaning of section 338(d)(3)), and V makes a timely election pursuant to section 338(g) with respect to P. Although section 338(a)(2) provides that P is treated as a new corporation as of the beginning of the day after the acquisition date for purposes of subtitle A, paragraph (c)(8) of this section provides that P’s existence is not deemed to terminate for purposes of this section notwithstanding the general rule of section 338(a)(2). Therefore, new P remains the agent for the P group for Year 1 and the period ending March 31 of Year 2 (short Year 2) regardless of the election under section 338(g).

Example 6. Change in the agent for the group’s Federal income tax classification to a partnership and the resulting partnership continues as the agent for the group. (i) P, a State M limited liability partnership with two partners, makes an initial entity classification election to be an association taxable as a corporation for Federal income tax purposes. P is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. P files consolidated returns for the P group in Years 1 through 5. On January 1 of Year 6, P elects pursuant to Treas. Reg. §301.7701-3(c) to be treated as a partnership. P remains in existence under applicable law.

(ii) The P group terminates and P is no longer the common parent of a consolidated group after its election to be treated as a partnership for Federal income tax purposes. Because P remains in existence under applicable law, P is the agent for the P group under paragraph (a) of this section for Years 1 through 5. The results would be the same if P merged into a foreign partnership because the foreign partnership would be P’s default successor and agent for the P group for Years 1 through 5. See paragraphs (b)(4) and (c)(1) of this section.

Example 7. Forward triangular merger of agent for the group—successor as default successor. As of January 1 of Year 1, P, a domestic corporation, is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On January 1 of Year 3, P merges with and into Z-1 corporation, a subsidiary of Z corporation, in a forward triangular merger described in section 368(a)(1)(A) and (a)(2)(D). The transaction constitutes a reverse acquisition under §1.1502-75(d)(3)(i) because P’s shareholders receive more than 50 percent of Z’s stock in exchange for all of P’s stock. Z-1, the corporation that survives the merger and the successor of P, is the default successor for the P group for Years 1 and 2. Although Z is the new common parent and agent for the P group (which continues pursuant to §1.1502-75(d)(3)(i)) for years after the merger, P may not designate Z, S or S-1 as the agent for Years 1 or 2 because Z-1 is P’s default successor and the agent for the P group for Years 1 and 2. See paragraphs (b)(4) and (c)(1) of this section.

Example 8. Merger of the agent for the group into a disregarded entity in exchange for stock of owner in a transaction qualifying as a reorganization under section 368(a)(1)(F) where successor is the default successor. (i) As of January 1 of Year 1, P, a domestic corporation, is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. P files a consolidated return for the P group in Year 1. On January 1 of Year 2, the shareholders of P form Y, a State M corporation. On the same date, Y forms Y-1, a State M limited liability company that is a disregarded entity (within the meaning of paragraph (b)(3) of this section) for Federal income tax purposes, and P merges into Y-1. In the merger, the P shareholders receive all of the Y stock. For Federal income tax purposes, Y is treated as succeeding to P in a transaction qualifying under section 368(a)(1)(F), and the P group continues under Treas. Reg. §1.1502-75(d)(2) with Y as the common parent and agent for the group for Year 2.

(ii) In Year 4, the IRS seeks to extend the period of limitations on assessment with respect to Year 1 of the P consolidated group. As a result of the January 1, Year 2 merger, Y-1 is P’s default successor and the agent for the P group for Year 1. See paragraphs (b)(4) and (c)(1) of this section. Therefore, Y-1 is the only party that can sign the extension with respect to the P group for Year 1.

(iii) In Year 5, the IRS seeks to extend the period of limitations on assessment with respect to Year 1 of the P group and Year 2 of the Y group (formerly the P group). Y-1 remains as the default successor to P for Year 1 and therefore is the only party that can sign the extension with respect to the P group for Year 1. Furthermore, because the merger transaction qualified as a reorganization under section 368(a)(1)(F), the P group remains in existence with Y as the common parent. Therefore, Y is the agent for the group for Year 2 and is the only party that can sign the extension with respect to the Y group for that year. See paragraphs (a) and (c)(1) of this section.

Example 9. Designation of agent where there is no default successor. (i) P is a corporation formed under the laws of State X. Fifty percent of its stock is owned at all times by A, an individual, and 50 percent by BCD, a partnership. On January 1 of Year 1, P forms two subsidiary corporations, S and T. P files consolidated returns for the P group beginning in Year 1. On November 30 of Year 3, P dissolves under X law. Under X law, A and BCD are primarily liable for the Federal income tax liability of dissolved corporation P. State X law allows the officers of a dissolved corporation to perform certain actions incident to the winding up of its affairs after its dissolution, including the filing of tax returns.

(ii) Upon its dissolution, there is no default successor to P because there are two successors. Prior to its dissolution on November 30 of Year 3, P may designate an agent for the P group for Years 1 and 2 and the short taxable year ending on November 30 of Year 3, to be effective upon P’s dissolution. P may designate S or T (because they are members of the former group) or BCD (because it is an entity that is a successor to P). P cannot designate A because A is not an entity. The officers of P cannot designate an agent for the P group after P dissolves on November 30 of Year 3, notwithstanding the winding up provisions of State X law. Accordingly, P should designate an agent prior to its dissolution to ensure that there is an agent for the group authorized to file the short Year 3 consolidated return. If P does not designate an agent prior to dissolution, the Commissioner may designate an agent from among S, T or BCD, upon their request or otherwise. If any of S, T, A or BCD realizes that P has dissolved without designating an agent for the group, it should request a designation of an agent by the Commissioner as soon as possible.

Example 10. Fraudulent conveyance of assets. As of January 1 of Year 1, P, a domestic corporation, is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. On March 15 of Year 2, P files a consolidated return that includes the income of S and S-1 for Year 1. On December 1 of Year 2, S-1 transfers assets having a fair market value of $ 100x to U in exchange for $10x. This transfer of assets for less than fair market value constitutes a fraudulent conveyance under applicable state law. On March 1 of Year 5, P executes a waiver extending to December 31 of Year 6 the period of limitations on assessment with respect to the group’s Year 1 consolidated return. On February 1 of Year 6, the Commissioner issues a notice of deficiency to P asserting a deficiency of $ 30x for the P group’s Year 1 consolidated tax liability. P does not file a petition for redetermination in the Tax Court, and the Commissioner makes a timely assessment against the P group. P, S and S-1 are all insolvent and are unable to pay the deficiency. On February 1 of Year 8, the Commissioner sends a notice of transferee liability to U, which does not file a petition in the Tax Court. On August 1 of Year 8, the Commissioner assesses the amount of the P group’s deficiency against U. Under section 6901(c), the Commissioner may assess U’s transferee liability within one year after the expiration of the period of limitations against the transferor S-1. By operation of section 6213(a) and 6503(a), the issuance of the notice of deficiency to P and the expiration of the 90-day period for filing a petition in the Tax Court have the effect of further extending by 150 days the P group’s limitations period on assessment from the previously extended date of December 31 of Year 6 to May 30 of Year 7. Pursuant to paragraph (a) of this section, the waiver executed by P on March 1 of Year 5 to extend the period of limitations on assessment to December 31 of Year 6 and the further extension of the P group’s limitations period to May 30 of Year 7 (by operation of sections 6213(a) and 6503(a)) have the derivative effect of extending the period of limitations on assessment of U’s transferee liability to May 30 of Year 8. By operation of section 6901(f), the issuance of the notice of transferee liability to U and the expiration of the 90-day period for filing a petition in the Tax Court have the effect of further extending the limitations period on assessment of U’s liability as a transferee by 150 days, from May 30 of Year 8 to October 27 of Year 8. Accordingly, the Commissioner may send a notice of transferee liability to U at any time on or before May 30 of Year 8 and assess the unpaid liability against U at any time on or before October 27 of Year 8. The result would be the same even if S-1 ceased to exist before March 1 of Year 5, the date P executed the waiver.

Example 11. Consent to extend the statute of limitations for a partnership where a member of the consolidated group is a partner of such partnership subject to the provisions of sections 6221 through 6234 and the tax matters partner is not a member of the group. (i) P, a domestic corporation, is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. The P group has a November 30 fiscal year end and P files consolidated returns for the P group for the years ending November 30, Year 1 and November 30, Year 2. S-1 is a partner in the PRS partnership which is subject to the provisions of sections 6221 through 6234. PRS has a calendar year end and A, an individual, is the tax matters partner of the PRS partnership. PRS files a partnership return for the year ending December 31, Year 1. On January 10, Year 5, A, as the tax matters partner for the PRS partnership, executes a consent to extend the period for assessment of partnership items of PRS for all partners, and the Service co-executes the consent on the same day for the year ending December 31, Year 1.

(ii) A’s consent to extend the statute of limitations for the partnership items of PRS partnership for the year ending December 31, Year 1, extends the statute of limitations with respect to the partnership items for all members of the P group, including P, S and S-1 for the consolidated return year ending November 30, Year 2. This is because S-1 is a partner in the PRS partnership for which A, the tax matters partner for the PRS partnership, consents to extend the statute of limitations for the year ending December 31, Year 1. However, under paragraph (f)(2)(iii), such agreement with respect to the statute of limitations for the PRS partnership for the year ending December 31, Year 1 does not obviate the need to obtain a consent from P, the agent for the P consolidated group, to extend the statute of limitations for the P consolidated group for the P group’s consolidated return years ending November 30, Year 1 and November 30, Year 2 regarding any items other than partnership items or affected items of the PRS partnership.

Example 12. Contacting subsidiary member in order to facilitate the conduct of an examination, appeal or settlement where a member of the consolidated group is a partner of a partnership subject to the provisions of sections 6221 through 6234. (i) P, a domestic corporation, is the common parent and agent for the P consolidated group consisting of P and its two subsidiary corporations, S and S-1. The P group has a November 30 fiscal year end, and P files consolidated returns for the P group for the years ending November 30, Year 1 and November 30, Year 2. S-1 is a partner in the PRS partnership which is subject to the provisions of sections 6221 through 6234. PRS has a calendar year end and A, an individual, is the tax matters partner of the PRS partnership. PRS files a partnership return for the year ending December 31, Year 1. The Commissioner, on January 10, Year 4, in the course of an examination of the PRS partnership for the year ending December 31, Year 1, seeks to obtain information in the course of that examination in order to resolve the audit.

(ii) Because the direct contact with a subsidiary member of a consolidated group that is a partner in a partnership subject to the provisions under sections 6221 through 6234 may facilitate the conduct of an examination, appeal or settlement, the Commissioner, under paragraph (f)(2)(iii) of this section, may communicate directly with either S-1, P or A regarding the PRS partnership without breaking agency pursuant to paragraph (f)(2)(i) of this section. However, if the Commissioner were instead seeking to execute a settlement agreement with respect to S-1 as a partner with respect to its liability as a partner in PRS partnership, P would need to execute such settlement agreement for all members of the group including the partner subsidiary.

(i) [Reserved]

(j) Cross-reference. For further rules applicable to groups that include insolvent financial institutions, see §301.6402-7 of this chapter.

(k) Effective/applicability date. The rules of this section apply to taxable years ending on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.

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(c) Substantial risk of forfeiture. (1) In general. For purposes of section 83 and the regulations, whether a risk of forfeiture is substantial or not depends upon the facts and circumstances. A substantial risk of forfeiture exists only where rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial. Property is not transferred subject to a substantial risk of forfeiture to the extent that the employer is required to pay the fair market value of a portion of such property to the employee upon the return of such property. The risk that the value of property will decline during a certain period of time does not constitute a substantial risk of forfeiture. A nonlapse restriction, standing by itself, will not result in a substantial risk of forfeiture. Except as set forth in paragraphs (j) and (k) of this section, restrictions on the transfer of property, whether contractual or by operation of applicable law, will not result in a substantial risk of forfeiture. For this purpose, transfer restrictions that will not result in a substantial risk of forfeiture include, but are not limited to, restrictions that if violated, whether by transfer or attempted transfer of the property, would result in the forfeiture of some or all of the property, or liability by the employee for any damages, penalties, fees or other amount.

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(4) * * *

Example 6. On January 3, 2013, Y corporation grants to Q, an officer of Y, a nonstatutory option to purchase Y common stock. Although the option is immediately exercisable, it has no readily ascertainable fair market value when it is granted. Under the option, Q has the right to purchase 100 shares of Y common stock for $10 per share, which is the fair market value of a Y share on the date of grant of the option. On May 1, 2013, Y sells its common stock in an initial public offering. Pursuant to an underwriting agreement entered into in connection with the initial public offering, Q agrees not to sell, otherwise dispose of, or hedge any Y common stock from May 1 through November 1 of 2013 (“the lock-up period”). Q exercises the option and Y shares are transferred to Q on August 15, 2013, during the lock-up period. The underwriting agreement does not impose a substantial risk of forfeiture on the Y shares acquired by Q because the provisions of the agreement do not condition Q’s rights in the shares upon anyone’s future performance (or refraining from performance) of substantial services or on the occurrence of a condition related to the purpose of the transfer of shares to Q. Accordingly, neither section 83(c)(3) nor the imposition of the lock-up period by the underwriting agreement preclude taxation under section 83 when the shares resulting from exercise of the option are transferred to Q.

Example 7. Assume the same facts as in Example 6, except that on May 1, 2013, Y also adopts an insider trading compliance program, under which, as applied to 2013, insiders (such as Q) may trade Y shares only between November 5 and November 30 of that year (“the trading window”). Under the program, if Q trades Y shares outside the trading window without Y’s permission, Y has the right to terminate Q’s employment. However, the exercise of the nonstatutory options outside the trading window for the Y shares is not prohibited under the insider trading compliance program. As of August 15, 2013 (the date Q fully exercises the option), Q is in possession of material nonpublic information concerning Y that would subject him to liability under Rule 10b-5 under the Securities Exchange Act of 1934 if Q sold the Y shares while in possession of such information. Neither the insider trading compliance program nor the potential liability under Rule 10b-5 impose a substantial risk of forfeiture on the Y shares acquired by Q, because the provisions of the program and Rule 10b-5 do not condition Q’s rights in the shares upon anyone’s future performance (or refraining from performance) of substantial services or on the occurrence of a condition related to the purpose of the transfer of shares to Q. Accordingly, none of section 83(c)(3), the imposition of the trading window by the insider trading compliance program and the potential liability under Rule 10b-5 preclude taxation under section 83 when the shares resulting from exercise of the option are transferred to Q.

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(j) * * *

(2) * * *

Example 4. On January 3, 2013, Y corporation grants to Q, an officer of Y, a nonstatutory option to purchase Y common stock. Y stock is traded on an established securities market. Although the option is immediately exercisable, it has no readily ascertainable fair market value when it is granted. Under the option, Q has the right to purchase 100 shares of Y common stock for $10 per share, which is the fair market value of a Y share on the date of grant of the option. The grant of the option is not a transaction exempt from section 16(b) of the Securities Exchange Act of 1934. On August 15, 2013, Y stock is trading at more than $10 per share. On that date, Q fully exercises the option, paying the exercise price in cash, and receives 100 Y shares. Q’s rights in the shares received as a result of the exercise are not conditioned upon the future performance of substantial services. Because no exemption from section 16(b) was available for the January 3, 2013 grant of the option, the section 16(b) liability period expires on July 1, 2013. Accordingly, the section 16(b) liability period expires before the date that Q exercises the option and the Y common stock is transferred to Q. Thus, the shares acquired by Q pursuant to the exercise of the option are not subject to a substantial risk of forfeiture under section 83(c)(3) as a result of section 16(b). As a result, section 83(c)(3) does not preclude taxation under section 83 when the shares acquired pursuant to the August 15, 2013 exercise of the option are transferred to Q. If, instead, Q exercises the nonstatutory option on May 30, 2013 when Y stock is trading at more than $10 per share, the shares acquired are subject to a substantial risk of forfeiture under section 83(c)(3) as a result of section 16(b) through July 1, 2013.

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(l) Effective/applicability date. Paragraphs (j) and (k) of this section apply to property transferred after December 31, 1981. Paragraph (c)(1), Example 6 and 7 of paragraph (c)(4), and Example 4 of paragraph (j)(2) of this section apply to property transferred on or after January 1, 2013.

Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.