Rev. Rul. 56-271

Advice has been requested whether an affiliated group of corporations which had filed consolidated income tax returns may elect, under the circumstances described below, to file separate income tax returns.

In April, 1955, O corporation, a subsidiary corporation and a member of an affiliated group of corporations which filed a consolidated income tax return for all the fiscal year ended September 30, 1954, purchased for cash all the stock of P corporation. P was not a corporation created or organized, directly or indirectly, by a member of the affiliated group. Acquisition of control of P by O was motivated by a business purposes, as evidence by the fact that certain production contracts entered into by O were to be completed in 1955, and it was considered necessary to find a business activity to take the place of the production being terminated. On June 30, 1955, the property of P was distributed to O in complete liquidation under the provisions of section 334(b)(2) of the Internal Revenue Code of 1954.

Section 1.1502-11 of Income Tax Regulations provides, in part, as follows:

(a) CONSOLIDATED RETURNS REQUIRED FOR SUBSEQUENT YEARS.-If a consolidated return is made under section 1502 for any taxable year, a consolidated return must be made for each subsequent taxable year during which the affiliated group remains in existence unless (1) a corporation (other than a corporation created or organized, directly or indirectly, by a member of the group) has become a member of the group during such subsequent taxable year, * * *.

Under the facts, it is evident that the acquisition of the stock and the liquidation of the acquired corporation were for bona fide business purposes and were not for the principal purpose of acquiring the right of a new election to file separate returns.

Accordingly, it is held that where a member of an affiliated group of corporations which filed a consolidated income tax return for 1954, purchased in 1955, all the stock of another corporation which was not organized `directly or indirectly' by any member of the affiliated group, and subsequently receives the assets of the acquired corporation in a complete liquidation thereof, the acquired corporation becomes a member of the affiliated group within the meaning of section 1.1502-11(a)(1) of the Income Tax Regulations, during the period of its existence, provided the new corporation was acquired for a business purpose, not for the principal purpose of acquiring the right of a new election to file separate returns. Under such circumstances the members of the affiliated group may elect to file separate returns.