Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 57-3

1957-1 C.B. 290

Sec. 1502

IRS Headnote

Deactivation of an affiliated company and an increase in the activities of another affiliated company, occurring during a taxable year in the case of two members of an affiliated group of corporations which filed consolidated income tax returns for prior years, do not constitute good cause, within the meaning of section 1.1502-11(a)(3) of the Income Tax Regulations, for granting to the affiliated group permission to file separate returns for such year in lieu of a consolidated return.

Full Text

Rev. Rul. 57-3

Advice has been requested whether the circumstances described below, involving members of an affiliated group of corporations which filed consolidated Federal income tax returns for calendar years prior to 1955, constitute good cause for granting to the affiliated group permission to file separate returns for the calendar year 1955.

M corporation is the parent corporation of an affiliated group which includes, among others, two corporations engaged in extracting and refining metal ore. The ore reserves of one of those two subsidiary corporations were exhausted in December, 1953, and the last sales of refined metal occurred early in 1954. Thereafter, the subsidiary became inactive, although it remained in existence. The second of the two ore extracting subsidiaries, which had been developing its mine since 1950, began producing from its mine in November, 1954. Regular sales of the refined metal therefrom began in 1955. The other subsidiaries in the affiliated group are engaged in the transportation of mine employees, operating company stores for employees, and the sale of the producing companies' mineral products. The taxable year 1955 reflected for the first time the full effect of the cessation of production by one of the producing subsidiaries and the beginning of sales in 1955 by the other producing subsidiary. The affiliated group filed consolidated returns for calendar years 1951 to 1954, inclusive.

Section 1.1502-11 of the Income Tax Regulations provides, in part, as follows:

(a) Consolidated returns required for subsequent years .-If a consolidated return is made under section 1502 for any taxable year, a consolidated return must be made for each subsequent taxable year during which the affiliated group remains in existence unless (1) a corporation (other than a corporation created or organized, directly or indirectly, by a member of the group) has become a member of the group during such subsequent taxable year, or (2) subsequent to the exercise of the election to make consolidated returns, Subtitle A of the Code to the extent applicable to corporations, or the regulations under section 1502 which have been consented to, have been amended and any such amendment is of a character which makes substantially less advantageous to affiliated groups as a class the continued filing of consolidated returns, regardless of the effective date of such amendment, or (3) the Commissioner, prior to the time of making the return, upon application made by the common parent corporation and for good cause shown, grants permission to change. For the purpose of (2), above, the expiration of a provision shall be considered as an amendment to the Code made on the date of such expiration.

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(c) When affiliated group remains in existence .-For the purpose of the regulations under section 1502, an affiliated group shall be considered as remaining in existence if the common parent corporation remains as a common parent and at least on subsidiary remains affiliated with it, whether or not such subsidiary was a member of the group at the time the group was formed and whether or not one or more corporations have been subsidiaries or have ceased to be subsidiaries at any time after the group was formed.

In this instance, a corporation did not become a member of the affiliated group during the taxable year 1955 within the intent of section 1.1502-11(a)(1) merely because the subsidiary which was a member of the affiliated group in prior years, when it was in the process of developing its mining properties, went into active production in 1955. No change in membership of the affiliated group took place in the taxable year 1955. With respect to changes in membership of an affiliated group which do occur, subsection (c) of section 1.1502-11, does not conflict with subsection (a) of that section, since subsection (c) merely sets forth the various situations under which an affiliated group shall be considered as remaining in existence, and it is not to be construed as determining whether a consolidated return may or must be filed.

Events, activities, economic conditions, etc., affecting individual members of an affiliated group are not considered material insofar as the inter-relationship of the members of the group is concerned. Such circumstances, including the shifting from a consolidated return basis to a separate return basis, in order to achieve temporary tax reductions or advantages, would not be considered `good cause.' Thus, for Federal income tax purposes, the fact that a subsidiary may be liquidated or becomes inactive and other subsidiaries remain affiliated with the common parent corporation has no effect upon the affiliated group, or upon its requirement or right to file a consolidated return.

Accordingly, it is held that the deactivation of an affiliated company and an increase in the activities of another affiliated company, occurring during a taxable year in the case of two members of an affiliated group of corporations which filed consolidated income tax returns for prior taxable years, do not constitute good cause, within the meaning of section 1.1502-11(a)(3) of the Income Tax Regulations, for granting to the affiliated group permission to file separate returns for such year in lieu of a consolidated return.