Rev. Rul. 74-73

Advice has been requested whether, under the circumstances described below, a combined group of corporations is a continuation of, or the successor to, a parent-subsidiary controlled group.

A parent-subsidiary group, as defined under section 1563(a)(1) of the Internal Revenue Code of 1954, elected for the taxable year ended December 31, 1965, to claim multiple surtax exemptions pursuant to section 1562. This election was terminated in 1968 by the consent of the group in accordance with the provisions of section 1562(c)(1).

As a result of section 401(c) of the Tax Reform Act of 1969, which changed the definition of a "brother-sister controlled group" of corporations under section 1563(a)(2) of the Code, the parent-subsidiary group, by definition, was expanded in relevant part to include certain other corporations.

The definition as expanded includes these additional corporations that had been in existence in the instant case since 1965, owned and controlled by the same persons having stock ownership in the parent corporation. The additional three corporations had not been considered "brother-sister" corporations with the parent prior to the Tax Reform Act of 1969 as the stock of all four corporations was owned by more than one person within the meaning of section 1563(a).

Because of the expansion of the definition of "brother-sister controlled group," the parent-subsidiary group became part of a combined group under section 1563(a)(3).

The specific questions raised are (1) whether the combined group is a continuation of, or a successor to, the parent-subsidiary group, and (2) whether the combined group is precluded by reason of section 1562(d) of the Code from making a multiple surtax election pursuant to sections 1562 and 1564 for the taxable year ended December 31, 1970, since the parent-subsidiary group had terminated its multiple surtax election effective December 31, 1968.

Section 1561 of the Code permits, in effect, only one surtax exemption for a controlled group.

Section 1562 of the Code provides, in part, an elective exception to section 1561 and permits additional surtax exemptions for members of a controlled group.

Section 1562(d) of the Code and section 1.1562-4 of the Income Tax Regulations provide that if an election under section 1562(a)(1) by a controlled group of corporations is terminated for any reason described in section 1562(c), such group (and any successor group as defined under section 1.1562-5(c) of the regulations) shall not be eligible to make an election under section 1562(a) with respect to any December 31 before the sixth December 31 after the December 31 with respect to which such termination was effective.

Section 1.1562-5(a) of the regulations provides the rules for determining when a parent-subsidiary controlled group shall be considered as remaining in existence. There is no provision for the situation where the component members of a parent-subsidiary group become members of a combined group as a result of an amendment to section 1563(a)(2) of the Code. Section 1563(b)(4) of the Code however provides that a corporation may be the component member of only one group. Since the component members of the parent-subsidiary group have become members of a combined group, the parent-subsidiary group which they had formed has ceased to exist. The combined group is the new controlled group.

Under section 1.1562-5(c) of the regulations, the combined group is not a successor to the parent-subsidiary group since there had been no transfer of stock (either by sale, exchange, distribution, contribution to capital or otherwise) involved in the formation of the new combined group.

Accordingly, it is held that the combined group is not a continuation of or a successor to the parent-subsidiary group and, therefore, is not precluded by reason of section 1562(d) of the Code from making an election under sections 1562 and 1564 with respect to the taxable year ended December 31, 1970.