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Consolidated Returns

This article reveals accounting period changes affecting CFCs and corporations exiting a consolidated group.

January 2008
by Jane Rohrs/The Tax Adviser

In Rev. Proc. 2007-64, the Service has modified the scope provision set forth in Rev. Proc. 2006-45 for corporations that exit a consolidated group and request consent to change their annual accounting periods. Rev. Proc. 2007-64 also modifies the terms and conditions relating to recordkeeping and book conformity for controlled foreign corporations (CFCs) that have a majority U.S. shareholder year (as defined in Sec. 898(c)(3)) and that change to a one-month deferral year under Sec. 898(c)(2) or a 52- or 53-week tax year that references a one-month deferral year.

Corporation Exiting a Consolidated Group

Rev. Proc. 2007-64 modifies the scope of Rev. Proc. 2006-45 to clarify that any corporation leaving a consolidated group is excluded from the automatic change procedures under Rev. Proc. 2006-45 during the consolidated group’s tax year (without regard to a change in the consolidated group’s accounting period) in which the corporation ceases to be a member of the consolidated group. The consolidated group’s tax year is determined regardless of a change in the group’s annual accounting period. A corporation that ceases to be a consolidated group member must continue to use the consolidated group’s annual accounting period, unless it receives approval under Rev. Proc. 2002-39 to change its annual accounting period (or is required to change it on joining another consolidated group). If a corporation ceases to be a consolidated group member during the group’s first effective year, it is not a member of the consolidated group for purposes of the group’s change in accounting period.

Example: On March 31, 2006, ABC Corp. ceases to be a member of a consolidated group that has a tax year ending November 30. ABC is not eligible to change its annual accounting period under the automatic consent procedures of Rev. Proc. 2006-45 to a tax year beginning before December 1, 2006.

Accordingly, although the exiting corporation’s tax year may close on leaving the consolidated group, the corporation’s tax year does not change. The exiting corporation generally takes with it the tax year of the consolidated group of which it was a member. The rules for a tax year change are then applied with respect to such year.

CFCs

Rev. Proc. 2007-64 modifies Rev. Proc. 2006-45 to provide that the terms and conditions requiring a taxpayer to keep its books and records (including financial statements and reports to creditors) on the requested tax year do not apply in the case of a CFC that has a majority U.S. shareholder year (as defined in Sec. 898(c)(3)) and is changing to a one-month deferral year described in Sec. 898(c)(2) or to a 52- or 53-week tax year that references such one-month deferral. Previously, this condition precluded otherwise eligible CFCs from automatic consent to make a one-month deferral election or to change to a 52- or 53-week year referencing the one-month deferral. Under Rev. Proc. 2007-64, the CFC is still required to close its books and records as of the last day of the first effective year, and every year thereafter to close its books and records on the last day of the requested tax year. The CFC also is required to compute its income, earnings, and profits for U.S. tax purposes on the basis of the requested tax year.

Rev. Proc. 2007-64 is effective for changes in annual accounting periods for which the first effective year ends on, or after, October 18, 2006.

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Jane Rohrs, CPA, Washington, DC is a contributing writer of The Tax Adviser. Her views as expressed in this article do not necessarily reflect the views of the AICPA or The Tax Adviser.