IRS Proposes Guidance Regarding Reporting Income and Deductions of Corporations That Join or Leave a Consolidated Group

IRS Proposes Guidance Regarding Reporting Income and Deductions of Corporations That Join or Leave a Consolidated Group:   Today the IRS released proposed regulations that provide guidance on the “next day” rule under Treas. Reg. §1.1502-76 to clarify when corporations will be considered to have joined or left a consolidated group.  The proposed regulations generally clarify the period in which a corporation that becomes or ceases to be a member of a consolidated group during a consolidated return year must report certain tax items.  The IRS states that the proposed rules more clearly reflect taxable income and prevent certain post-closing actions from adversely impacting the corporation’s tax return for the period ending on the day of the corporation’s change in status.

The proposed “next day” rule would apply only to extraordinary items (defined in the proposed regulations) that result from transactions that occur on the day of the corporation’s change in status, but after the event causing the change, and that would be taken into account by the corporation on that day.

Among the other changes made by the proposed regulations are the addition of a rule to clarify the application of a special rule for S corporations, which provides a special exception to the “end of the day” rule if an S corporation joins a consolidated group. Further, the proposed regulations provide a rule to “limit the scope of the end of the day rule, the next day rule, the S corporation exception, and the previous day rule to determining the period in which [the corporation] must report certain tax items and determining the treatment of an asset or a tax item for purposes of sections 382(h) and 1374.”  Finally, the proposed regulations provide that short taxable years resulting from intercompany transactions to which Section 381 applies are not taken into account in determining the carryover period for a tax item of the distributor or transferor member in the intercompany Section 381 transaction or for purposes of Section 481(a).

Comments on the proposed rules are due by June 4, 2015.