New consolidated return regulations;

              ^Te J^ew Goi\solidated
cI^eturn cj^egulatioqs
by Bernard M. Mulvey
In an effort to simplify and clarify the tortuous pro­visions
of the old regulations governing the filing of
consolidated returns, the Treasury has issued new final
regulations which concomitantly include a number of
important substantive innovations. These provisions
apply to all taxable years beginning after December 31,
1965. However, taxpayers required to file consolidated
returns for years beginning after 1965 have been
granted automatic permission to file separate returns
for the first year to which the new regulations apply,
if they so desire. Thus, the importance of the changes
cannot be overemphasized, either for those groups
already filing consolidated returns or for those groups
which may be contemplating doing so in the future. In
this article, the first of two, the author will highlight
some of the more significant aspects of the new regula­tions,
including in his discussion some suggestions for
possible tax planning.
Intercompany Transactions
A radical change in the revised regulations1 concerns
the treatment of intercompany transactions. An inter­company
transaction is defined as a transaction occur­ring
during a consolidated return year between
corporations which are members of the same group
immediately after such transaction. While this definition
appears to be all-embracing, the regulations specifically
exclude from their purview such items as distributions
with respect to stock between members of the affiliated
group, or contributions to capital on which no gain is
realized. For example: dividend distributions, redemp­tions
and liquidations would not constitute intercom­pany
transactions.
To fully understand the impact of the new provisions,
we need to distinguish between two types of intercom­pany
transactions: 1) "deferred intercompany transac­tions,"
and 2) all other types of intercompany
transactions. The term "deferred intercompany trans­action"
is defined as the sale or exchange of property,
the performance of services, or any other payment by
one affiliated corporation to another during a consoli­dated
return year, where the amount of the expenditure
is required to be capitalized (e.g., a builder's fee, or
interest which is included in the basis of property). On
24 THE QUARTERLY