Commentators Are Concerned About Consolidated Return Regs' Impact On Personal Holding Company Rules.
Commentators Are Concerned About Consolidated Return Regs' Impact On Personal Holding Company Rules.
- AuthorsCollins, Bryan P.Schneider, Mark
- Institutional AuthorsArthur Andersen
- Cross-ReferenceCO-11-91
- Code Sections
- Subject Area/Tax Topics
- Index Termsconsolidated returnsPHCs
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 95-161
- Tax Analysts Electronic Citation95 TNT 2-30
====== SUMMARY ======
Bryan P. Collins and Mark Schneider of Arthur Andersen, Washington, have asked, on behalf of a client, for confirmation that the exclusion from gross income of intercompany dividends in proposed reg. section 1.1502-13(f)(2) will not change the treatment of those dividends under the personal holding company rules, including the determination under section 542(b) of whether the rules are applied on a consolidated- or separate-entity basis. Collins and Schneider also ask that Rev. Rul. 87-75, 1987-2 C.B. 152, dealing with intercompany dividends and the personal holding company rules, be added to the list of rulings in the consolidated return regs' preamble that have not had their conclusions altered by the regs.
====== FULL TEXT ======
December 22, 1994
The Honorable Margaret Milner Richardson
Commissioner
Internal Revenue Service
CC:DOM:CORP:T:R (CO-11-91)
Room 5228
1111 Constitution Avenue, N.W.
Washington, DC 20224
RE: COMMENTS ON PROPOSED REGULATIONS UNDER SECTION 1502 RELATING
TO TRANSACTIONS BETWEEN MEMBERS OF A CONSOLIDATED GROUP (CO-
11-91)
Dear Ms. Richardson:
We are pleased to submit comments on behalf of one of our clients on the proposed regulations under section 1502 /1/ relating to the taxation of transactions between members of a consolidated group (the "Proposed Regulations"). Our comments relate solely to Prop. Reg. section 1.1502-13(f)(2), which provides that intercompany dividends are excluded from the gross income of the distributee member. We are respectfully requesting a clarification that this provision does not change current law as it relates to personal holding companies, as defined in section 542. Specifically, we are requesting that, when finalized, section 1.1502-13(f)(2) of the Proposed Regulations provide that the exclusion from gross income for intercompany dividends does not affect the treatment of such dividends for purposes of the application of the personal holding company rules, including the determination under Section 542(b) of whether such rules are applied on a consolidated- or separate-entity basis.
BACKGROUND
A personal holding company generally is defined as a corporation that meets certain stock ownership requirements and 60 percent of whose adjusted gross ordinary income (as defined in section 543(b)(2)) is personal holding company income. /2/ Personal holding company income is defined to include dividends, interest, royalties, rents, and similar items. /3/ In the case of an affiliated group filing consolidated returns, the personal holding company rules generally are determined on a consolidated, rather than separate, entity basis. /4/ However, if any member of a consolidated group derives 10 percent or more of its income from sources outside the group (the "10 Percent Test") and 80 percent of such amount is personal holding company income, as defined in section 543(a)(1), the personal holding company rules apply on a separate-entity basis (the "Separate Entity Rules"). Although Treas. Reg. section 1.1502-14(a) currently provides that a dividend distribution from one member of a consolidated group to another member is eliminated, intercompany dividends are taken into account for purposes of applying both the 10 Percent Test and the Separate Entity Rules. /5/
THE PROPOSED REGULATIONS
The Proposed Regulations change the terminology relating to intercompany distributions; Prop. Reg. section 1.1502-13(f)(2)(ii) provides that an intercompany distribution is not included in the gross income of the distributee member rather than stating that the distribution is eliminated. Nevertheless, the preamble to the Proposed Regulations makes clear that this is a mere change in terminology having no substantive effect. The preamble provides in pertinent part that:
Excluding intercompany dividends from gross income is
intended to have the same effect as eliminating them under the
current regulations, but it conforms to the terminology
generally used under the Code. For example, the holdings in
Revenue Ruling 72-230, 1972-1 C.B. 209 (the effect of dividend
elimination on the source of dividends paid for purposes of
section 861(a)(2)) and Revenue Ruling 79-60, 1979-1 C.B. 211
(the effect of dividend elimination on personal holding company
status), and the application of section 1059, are not effected.
/6/
In light of this statement in the preamble, it seems clear that the Proposed Regulations acknowledged that certain provisions of the Code and their corresponding interpretative revenue rulings explicitly provide specific tax consequences for dividends within a consolidated group (i.e., section 542(b)(2) and Revenue Ruling 87- 75). Accordingly, it seems clear there was no intent or, arguably, even the authority, to change current law as it relates to intercompany dividends and the personal holding company rules, including the conclusions reached in Revenue Ruling 87-75. Nevertheless, our client remains concerned that the change in terminology may be interpreted as a substantive change in the rules. For this reason, we ask that, when finalized, sections 1.1502- 13(f)(2)(ii) of the Proposed Regulations be modified to provide that the elimination does not prevent such dividends from being taken into account to the extent necessary under the personal holding company rules. In addition, we would ask that Revenue Ruling 87-75 be added to the list of rulings in the preamble the conclusions of which are not affected by the Proposed Regulations.
Thank you very much for your time and consideration in this matter. If you have any comments or would like to discuss this matter at your convenience, please do not hesitate to contact us. Happy Holidays.
Very truly yours,
Bryan P. Collins
Mark Schneider
Arthur Anderson
Washington, D.C.
Copy to: Mr. Glen A. Kohl
Ms. Judith Dunn
Ms. Mary Heath
Mr. Eric Solomon
Mr. John Broadbent
Ms. Rose Williams
FOOTNOTES
/1/ Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended (the "Code") and to Treasury regulations promulgated thereunder.
/2/ Section 542(a).
/3/ Section 543(a)(1).
/4/ Section 542(b)(3).
/5/ Rev. Rul. 79-60, 1979-1 C.B. 211 (intercompany dividends are included in the distributee corporation's personal holding company income only if the distributor corporation receives a dividends paid deduction for purposes of the Separate Entity Rules); Treas. Reg. section 1.542-4(b)(1) (intercompany dividends within an affiliated group are to be included in gross income for purposes of the 10 Percent Test); and Rev. Rul. 87-75, 1987-2 152 (dividends received by one member of a consolidated group from another taken into account for purposes of the 10 Percent Test).
/6/ 1994-18 I.R.B. 53.
END OF FOOTNOTES
- AuthorsCollins, Bryan P.Schneider, Mark
- Institutional AuthorsArthur Andersen
- Cross-ReferenceCO-11-91
- Code Sections
- Subject Area/Tax Topics
- Index Termsconsolidated returnsPHCs
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 95-161
- Tax Analysts Electronic Citation95 TNT 2-30