Rev. Rul. 72-212

Advice has been requested whether, under the circumstances described below, the tax imposed under section 1562(b) of the Internal Revenue Code of 1954 applies.

X corporation, Y corporation, and Z corporation are the three members of a controlled group of corporations all of whose stock is owned by a trust. Each of the corporations consented to the election of the group to have each member file its Federal income tax return for the year 1969 without regard to section 1561 of the Code as provided by section 1562 of the Code. For 1969, Z had no taxable income, and X and Y each had taxable income and paid the 6 percent additional tax imposed by section 1562(b) of the Code. Y incurred a net operating loss for the year 1970 and had a net operating loss carryback to the year 1969 that completely eliminated its taxable income for 1969. Thus, X was the only member of the controlled group of corporations that had taxable income for 1969.

The question presented is whether the tax imposed by section 1562(b) of the Code applies when an event occurs subsequent to the taxable year (that is, a net operating loss that is a net operating loss carryback deduction for the taxable year) that eliminates the taxable income of the year for all but one member of the group for which the section 1562(b) tax is imposed.

Section 1561 of the Code permits, in effect, only one surtax exemption for a controlled group. Section 1562 of the Code provides an elective exception to that rule and permits additional surtax exemptions for members of the group, but imposes a six percent tax on so much of each member's taxable income that does not exceed its surtax exemption for the year.

Section 1562(b)(1)(A) of the Code and the regulations thereunder provide that the additional tax imposed by section 1562(b) of the Code shall not apply to a corporation for any taxable year that such corporation is the only component member that has taxable income for that year. In such circumstances, one surtax exemption is allowable to the group without the additional tax.

Except for the provisions of section 1562(b)(3) of the Code and the regulations thereunder, none of which are applicable to the instant case, the term "taxable income" is given no different meaning in section 1562(b) of the Code and the regulations thereunder than it has in section 63(a) of the Code. Section 63(a) of the Code provides that the term "taxable income" means gross income, minus the deductions allowed by chapter 1 of the Code. A net operating loss deduction for carryovers or carrybacks is an allowable deduction under chapter 1 of the Code for the taxable year.

Accordingly, the tax imposed by section 1562(b) of the Code is the amount determined by giving consideration to all events that determine the taxable income for the taxable year for all members of the group whether the events occur during or after the taxable year. Thus, in the instant case, since after redetermination of the taxable income of each member of the component group, the one surtax exemption allowable to the group is allowable to X, the only member of the group that has taxable income for the year 1969, the additional tax imposed by section 1562(b) of the Code does not apply. Furthermore, any refund or credit of the tax imposed by section 1562(b) of the Code attributable to a net operating loss carryback is subject to the conditions and limitations of subtitle F of the Code.