Rev. Rul. 75-54

Advice has been requested concerning the treatment for Federal income purposes of a consolidated unused investment credit under the circumstances described below.

P is the common parent of an affiliated group consisting of several corporations that includes S1 and S2. S1 was incorporated on January 2, 1973, as a wholly-owned subsidiary of P, and S2 was incorporated on April 20, 1973, as a wholly-owned subsidiary of P. Prior to 1973 P and the other members of the group filed separate Federal income tax returns. For 1973 the affiliated group filed a consolidated Federal income tax return resulting in an unused consolidated investment credit earned in 1973. A portion of the unused investment credit was attributable to S1 and S2.

The specific question is whether the portion of the consolidated unused investment credit attributable to S1 and S2 for 1973 may be carried back to P or to other members of P's group that were in existence prior to 1973.

Section 46(b) of the Internal Revenue Code of 1954 provides, in part, that an investment credit carryback shall be to each of the 3 taxable years preceding the unused credit year.

The tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group is determined by section 1502 of the Code and regulations thereunder. The investment credit allowed by section 38 for a consolidated return year is determined in accordance with section 1.1502-3 of the Income Tax Regulations. Carryovers and carrybacks of consolidated unused investment credits to separate return years are governed by section 1.1502-79(c).

Section 1.1502-79(c)(1) of the regulations provides, in part, that if a consolidated unused investment credit can be carried to a separate return year of a corporation (or could have been so carried if such corporation were in existence) which was a member of the group in the year in which such unused credit arose, then the portion of such consolidated unused credit attributable to such corporation shall be apportioned to such corporation under the principles of sections 1.1502-79(a)(1) and (2) and shall be an investment credit carryover or carryback to such separate return year.

Section 1.1502-79(a)(2) of the regulations provides that a consolidated net operating loss attributable to a group member not in existence in a carryback year shall be included in the consolidated net operating loss carrybacks to the equivalent consolidated return year of the group, provided that such member was a member of the group immediately after its organization. If such equivalent year is a separate return year, then the carryback shall be made to the separate return year. If the loss member of the group was not a member of the group immediately after its organization, the portion of the loss attributable to such member must be apportioned to it and may not be carried back by any other member of the group. Section 1.1502-79(a)(1).

Rev. Rul. 74-610, 1974-2 C.B. 288, holds that a consolidated net operating loss attributable to S2, a wholly-owned subsidiary of S1, may be carried back to S1's separate income tax return but may not be carried back to the parent of S1's separate income tax return since the assets and operations that generated S2's portion of the consolidated net operating loss were formerly owned by S1. But for the formation of S2 the loss sustained by S2 in 1973 would have been sustained by S1 and could have been carried back by S1 to its separate return years.

See also example (1) of section 1.1502-79(a)(4) of the regulations and Rev. Rul. 69-623, 1969-2 C.B. 171, which hold that the portion of a consolidated net operating loss attributable to a subsidiary formed by its parent, which owns all the subsidiary's stock, may be carried back to the parent's separate return year, when the subsidiary was not in existence in the prior year.

Section 1.1502-79(c) of the regulations permits a consolidated unused investment credit attributable to a member that was not in existence in the carryback year to be included in the consolidated investment credit carryback to such year provided that such member was a member of the group immediately after its organization. If a separate return instead of a consolidated return was filed for the equivalent carryback year, the unused credit attributable to a wholly-owned subsidiary may be carried back and included in the separate return of its parent corporation as provided in Rev. Rul. 69-623 and in example (1) of section 1.1502-79(a)(4) of the regulations.

Accordingly, subject to the limitations contained in section 46 of the Code and section 1.1502-3 of the regulations, it is held that the 1973 consolidated unused investment credit attributable to S1 and S2 may be carried back to P's separate return years.