Rev. Rul. 72-184

Advice has been requested concerning the circumstances under which consent will be given by the Commissioner of Internal Revenue for a group of affiliated corporations to file a consolidated Federal income tax return when one or more members are using a 52-53-week taxable year while the remainder of the group uses a taxable year ending on the last day of a calendar month. In addition, advice has been requested concerning the taxable period for the deferral and restoration of gain or loss on deferred intercompany transactions when one or more members are using a 52-53-week taxable year while the remainder uses a taxable year ending on the last day of a calendar month.

P corporation and its wholly owned subsidiary corporation, S-1 and S-2, filed a consolidated Federal income tax return for calendar year 1968. For 1969, P and S-1 elected, pursuant to section 1.441-2(c)(2) of the Income Tax Regulations, to compute their income on the basis of a 52-53-week taxable year ending on the last Saturday in December. Prior to February 13, 1970, request for consent was made to the Commissioner, pursuant to section 1.1502-76(a)(1) of the regulations, regarding the change by P and S-1 to a 52-53-week taxable year.

S-2 is in a business different from that of either P or S-1, which business is not conducive to reporting on a 52-53-week taxable year. S-2, therefore, wants to continue reporting its taxable income on the basis of the calendar year accounting period.

Section 1.441-2(c)(2) of the regulations provides that a taxpayer may change to a 52-53-week taxable year without the permission of the Commissioner if the 52-53-week taxable year ends with reference to the end of the same calendar month as that in which the former year ended.

Section 1.1502-76(a)(1) of the regulations provides that the consolidated return of a group of affiliated corporations 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. That section further provides, however, that the rule of the preceding sentence will, with the advance consent of the Commissioner, be deemed satisfied if the taxable years of all members of the affiliated group end within the same seven day period.

Section 1.1502-12 of the regulations provides, in part, that the separate taxable income of a member of the group shall be computed in accordance with the provisions covering the determination of taxable income of separate members of the group except that transactions between members and transactions with respect to stocks, bonds, or other obligations of members shall be reflected according to the provisions of section 1.1502-13 and section 1.1502-14 of the regulations.

As a general rule, the Commissioner will consent to the use of a 52-53-week taxable year by certain members of an affiliated group, while the remainder of the group remains on a calendar year or fiscal year accounting period, if:

(1) A timely request for consent is made pursuant to section 1.1502-76(a)(1) of the regulations;

(2) The taxable years of all members of the group end within the same 7-day period; and

(3) It is demonstrated that the use of a 52-53-week taxable year by certain members of the affiliated group will clearly reflect the consolidated income of the group. Generally, the consolidated taxable income of the group will be clearly reflected where the members of the group using the 52-53-week year determine depreciation, amortization, state and local franchise and property taxes, vacation pay accruals, and items of a similar nature as though their taxable year consisted of 12 calendar months, in accordance with the principles of section 1.441-2(d) of the regulations.

Section 1.1502-13(c)(1)(i) of the regulations provides that to the extent gain or loss on a deferred intercompany transaction is recognized under the Code for a consolidated return year, such gain or loss shall be deferred by the selling member. In applying section 1.1502-13(c)(1)(i) of the regulations, if a deferred intercompany transaction spans two consolidated return years, generally the gain is deferred for the year in which it would otherwise be recognized by the selling member under its method of accounting because the deferral system operates only when gain would otherwise be recognized by the selling member under its method of accounting.

The general rule of section 1.1502-13(c)(1)(i) of the regulations does not apply, however, when the provisions of section 1.1502-13(c)(1)(ii)(b) of the regulations are applicable. Section 1.1502-13(c)(1)(ii)(b) of the regulations provides that a selling member shall take into account the gain or loss on a deferred intercompany transaction in accordance with the provisions of paragraphs (d), (e), or (f) of that section (dealing with restoration of deferred gains or losses (i) for property subject to depreciation, amortization or depletion; (ii) for installment obligations and sales; and (iii) on dispositions, etc., respectively) notwithstanding that such selling member, under its method of accounting, would not otherwise recognize such gain or loss until a later taxable year.

The above-described provisions of the regulations require the following treatment of deferred intercompany transactions where one or more members of the affiliated group elect to use a 52-53-week accounting period while the remaining members of the group use a taxable year ending on the last day of a calendar month.

(1) Any deferred intercompany transaction between members of the group must be accounted for by the respective members in the same consolidated year even though the use of a 52-53-week taxable year by certain members of the affiliated group may cause a transaction to occur on a day falling in different consolidated return years of the members involved. For this purpose, the taxable year of the selling member shall be used to determine the consolidated return year in which a transaction has occurred.

(2) In a situation where deferred gain or loss must be restored under paragraphs (d), (e), or (f) of section 1.1502-13 of the regulations, the consolidated return year of the member causing such restoration shall control.

(3) In a situation where deferred gain or loss must be restored under paragraphs (d), (e), or (f) of section 1.1502-13 of the regulations in a taxable year, but because of the selling member's period of accounting such gain or loss would not otherwise be recognized until a later taxable year, the selling member nevertheless shall take into account such gain or loss in the consolidated return year of the member causing such restoration.

The foregoing rules with respect to deferred intercompany transactions may be illustrated by the following examples:

Situation (1)

S, a 52-53-week taxpayer, whose taxable year ends January 3, 1971, sells to P, its common parent, a calendar year taxpayer, an item on January 2, 1971. Under S' method of accounting the gain or loss on the sale would be recognized in its taxable year ending January 3, 1971. P and S file a consolidated Federal income tax return for the 1970 taxable year. S will be considered to have had deferred gain or loss on the transaction in its taxable year ending January 3, 1971, which taxable year is a part of the consolidated return year of the group for 1970.

Situation (2)

Assume the same facts as Situation (1) and, in addition, P disposes of the item outside of the affiliated group on January 3, 1971. In this situation, because the consolidated return year of the member causing the restoration shall control, the deferred gain or loss shall be taken into income in the consolidated return of the group filed for 1971.

Situation (3)

S, a 52-53-week taxpayer, whose taxable year ends December 28, 1970, sells to P, its common parent, a calendar year taxpayer, an item on December 29, 1970. Because of S' period of accounting, the gain or loss on the sale would be recognized in its taxable year beginning December 29, 1970, which taxable year is a part of the consolidated return year of the group for 1971. P and S file a consolidated Federal income tax return for the 1970 taxable year. S will be considered not to have had deferred gain or loss on the transaction in its taxable year ending December 28, 1970, which taxable year is a part of the consolidated return year of the group for 1970.

Situation (4)

Assume the same facts as Situation (3) and, in addition, P disposes of the item outside of the group on December 29, 1970. In this situation since the consolidated return year of the member causing the restoration shall control, notwithstanding that because of S' period of accounting S would not otherwise recognize such gain or loss until the consolidated return year 1971, such gain or loss is restored to income for the consolidated return year 1970.