Daily Tax Update - September 28, 2009

TREASURY AND THE IRS ISSUE PROPOSED REGULATIONS CLARIFYING WHICH CORPORATIONS ARE INCLUDED IN CONTROLLED GROUP:  Today, Treasury and the IRS issued proposed regulations clarifying that a corporation that satisfies the controlled group rules for stock ownership and qualification is a member of such group, without regard to its status as a component member.

• Section 1563 was originally promulgated to limit the use of the tax benefit items described in Section 1561 by the component members of a controlled group. Since then, other statutory and regulatory provisions have referenced the controlled group rules of section 1563 for other purposes. 
• Section 1563(b) defines which corporations are “component members” and “excluded members” of a controlled group of corporations. For example, tax-exempt entities, foreign corporations, and insurance companies are all defined as excluded members. In an apparent effort to narrow the scope of the controlled group limitations, taxpayers have argued that excluded members are not members of a controlled group generally.
• The proposed regulations reject this argument and provide that section 1563(b) is not taken into account in determining whether a corporation is included in a controlled group of corporations. Accordingly, under the proposed regulations, an excluded member of a controlled group under section 1563(b) is nevertheless a member of the group for purposes of section 1563(a), and a corporation whose stock is held by such an excluded member may be treated as a component member of the controlled group of corporations.
• The proposed regulations would apply to taxable years beginning on or after the date final regulations are published.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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