Rev. Rul. 67-189

In view of the decision of the Tax Court of the United States in Erwin Properties, Inc. v. Commissioner of Internal Revenue , 43 T.C. 888 (1965), acquiescence page 2 this Bulletin, the Internal Revenue Service has reconsidered the position taken in Revenue Ruling 57-602, C.B. 1957-2, 611, which revoked Revenue Ruling 55-566, C.B. 1955-2, 580.

Revenue Ruling 57-602 required a subsidiary corporation to annualize its income pursuant to section 443(b) of the Internal Revenue Code of 1954 in filing the short-period separate return when it elected as a member of an affiliated group to make a consolidated return which its parent corporation under section 1501 of the Code. Revenue Ruling 55-566 did not require such annualization.

The Erwin Properties, Inc. case involved a situation wherein a corporation reporting its income on a calendar year basis became a member of an affiliated group of corporations on May 1, 1959. The corporation joined the group in the filing of a consolidated return under section 1501 of the Code for the taxable year ended April 30, 1960. It had filed a separate short-period return for the period January 1 to April 30, 1959.

The sole question presented was whether the taxpayer corporation was required under section 443(b) of the Code to annualize its income for the short period, January 1, 1959, to April 30, 1959.

Section 443(b) of the Code was intended to provide for the annualization of income in the case of a return for a short period `by reason of' a change in the annual accounting period. Senate Report No. 1622, 83d Congress, at page 299.

The court concluded in the Erwin Properties, Inc. case that section 443(b) of the Code was inapplicable since the separate return therein was not made `by reason of' a change in the corporation's accounting period but was instead the result of a taxpayer complying with the requirement of section 1.1502-13A(g) of the Income Tax Regulations in effect for the taxable year in question. That regulation provides that the income of a new member of an affiliated group must be included in the consolidated return from the time the new member becomes affiliated, and its income for the portion of the taxable year not included in the consolidated return must be included in a separate return.

The Service agrees with the position taken by the court in the above case. Moreover, the provisions of section 1.1502-13A(g) of the regulations have been continued in section 1.1502-76(b)(2) of the regulations which are effective for taxable years beginning after December 31, 1965.

Accordingly, where a corporation becomes a member of an affiliated group of corporations and the corporation joins the group in the filing of a consolidated return under section 1501 of the Code, the corporation is not required under section 443(b) of the Code to annualize its income for the period prior to affiliation which is required to be reported on a separate short-period return.

Revenue Ruling 57-602, C.B. 1957-2, 611, is revoked.