Multiple problems of multiple corporations;

              This article is based on a talk given by Mr. Jensen at the Texas CPA Tax Institute.
Multiple Problems
Multiple Corporations
of
The Revenue Act of 1964 provided important new
rules for the taxation of the income of related corpora­tions.
These provisions resulted from the Treasury De­partment's
desire to tax related corporations as though
they were one economic unit. As a result of the corporate
rate reduction, involving a change in the surtax rate from
22% to 30%, the maximum automatic tax saving for
each separate surtax exemption would have increased
from $5,500 to $7,000 for 1964 and to $6,500 for 1965.
The changes made by Congress with respect to related
corporations prevented this increase in the potential tax
benefit from being available to multiple corporations and
tightened the provisions generally.
The principal changes relating to multiple corporations
made by the Revenue Act of 1964 may be summarized as
follows:
1. The 2% penalty for filing consolidated returns was
eliminated.
2. Members of an affiliated group (parent and sub­sidiaries)
not filing consolidated returns may receive
intercorporate dividends tax free under certain cir­cumstances.
3. Members of a controlled group of corporations are
limited to one surtax exemption unless they elect to
utilize multiple surtax exemptions and pay a penalty
tax.
4. Section 1551, which disallows the surtax exemption
where one corporation has transferred property to a
controlled corporation, was broadened and tight­ened
up.
by Wallace M. Jensen
Limitations on Multiple Corporations Under Prior Law:
Prior to 1964 the statutory provisions available to the
Government as a weapon against the use of multiple cor­porate
surtax exemptions may be summarized as follows:
1. Since 1943, Section 269 has covered the acquisition
of direct or indirect control of a corporation where
the principal purpose is avoidance of tax by securing
the benefit of a multiple exemption. Although it did
not seem to be clearly intended when the statute was
enacted, the Treasury has been supported in apply­ing
Section 269 to the division of a corporation into
two or more corporations for the purpose of obtain­ing
additional surtax exemptions.1
2. Since 1951, Section 1551 has specifically denied the
surtax exemption to the transferee corporation if
property, other than money, was transferred by a
corporation to a controlled corporation unless the
securing of the exemption was not a major purpose
of the transfer.
3. Section 482 gives the Commissioner power to allo­cate
deductions, credits, or allowances between
affiliated corporations and has been used by the In­ternal
Revenue Service to reallocate income be­tween
controlled corporations.
In applying these sections, there has been considerable
difficulty in distinguishing between bona fide business pur­pose
and tax avoidance motive and, as a result, there has
been much controversy and litigation in this area.
22 THE QUARTERLY