Rev. Rul. 70-378

Advice has been requested whether, under the circumstances described below, the taxable income for a short period is required, pursuant to section 443(b) of the Internal Revenue Code of 1954, to be annualized.

The taxpayer became a member of an affiliated group of corporations on January 1, 1966. The affiliated group of includible corporations was connected through stock ownership as provided in section 1504 of the Code. The taxpayer continued to file its separate Federal income tax returns using a fiscal year ending on June 30, while the common parent of the group used a calendar year in filing its separate returns.

The parent company made a timely election to file a consolidated tax return for the group for the taxable year ended on December 31, 1969. The taxpayer joined in the making of a consolidated return for that year, but had previously filed a timely separate return for its fiscal year ended June 30, 1969. It therefore, filed an amended return for the short period from July 1, 1968 to December 31, 1968, the period that was not includible in the consolidated return of the group.

Section 1.1502-76(a)(1) of the Income Tax Regulations provides that the consolidated return of a group must be filed on the basis of the common parent's taxable year, and each subsidiary must adopt the common parent's annual accounting period for the first consolidated return year for which the subsidiary's income is includible in the consolidated return.

Section 1.1502-76(b)(1) of the regulations provides, in general, that the income of each subsidiary, for the portion of the common parent's taxable year that it was a member of the group, shall be included in the consolidated return of the group.

Section 1.1502-76(b)(2) of the regulations provides, in part, that if the consolidated return of a group properly includes the income of a corporation for only a portion of such corporation's taxable year, then the income for the portion of such taxable year not included in the consolidated return must be included in a separate return.

Section 1.1502-76(c)(2) of the regulations provides, in part, that if the return for a subsidiary's complete taxable year is filed and the group later files a consolidated return, such subsidiary must file an amended return for that portion of such subsidiary's taxable year that is not included in the consolidated return.

Section 443(b) of the Code provides, in part, that if a return is made under paragraph (1) of subsection (a) (relating to change of annual accounting period), the taxable income for the short period shall be placed on an annual basis.

Revenue Ruling 67-189, C.B. 1967-1, 255 holds, based on Erwin Properties, Inc. v. Commissioner, 43 T.C. 888 (1965), acquiescence, C.B. 1967-2, 2, that 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 that is required to be reported on a separate short period return. In that situation, the subsidiary corporation was merely conforming to the requirements of section 1.1502-13A(g) of the Regulations then in effect (Section 1502-76(b)(2) of the regulations that are effective for taxable years beginning after December 31, 1965), and was not making a change of its annual accounting period within the meaning of section 443(a)(1) of the Code.

Similarly, in the instant case, the taxpayer, in filing an amended return for the portion of its taxable year that was not includible in the consolidated return of the group, merely conformed to the requirements of section 1.1502-76(c)(2) of the regulations and was not making a change of its annual accounting period within the meaning of section 443(a)(1) of the Code.

Accordingly, the taxpayer in the instant case is not required, pursuant to section 443(b) of the Code, to annualize its taxable income for the short period, July 1, 1968 to December 31, 1968.