(5) Consolidated investment credit carryover. The consolidated investment credit carryover which may be added, subject to the limitation contained in subparagraph (2) of this paragraph, to the amount allowable to the group as a credit under section 38 for any taxable year shall be:

(i) The consolidated unused credits, if any, for the five preceding taxable years to the extent that the consolidated unused credit for any such preceding taxable year is not attributable to a corporation making a separate return or joining in a consolidated return filed by another affiliated group for the taxable year and was not allowed as a credit under section 38 for a preceding or intervening taxable year, and

(ii) With respect to unused credits of a corporation arising in unused credit years for which such corporation filed a separate return or joined in a consolidated return filed by another affiliated group, but subject to the limitation prescribed by subparagraph (7) of this paragraph, such unused credits, if any, for the five preceding taxable years to the extent that the unused credit for any such preceding taxable year was not allowed as a credit under section 38 for a preceding or intervening taxable year.

(6) Consolidated investment credit carryback. The consolidated investment credit carryback which may be added, subject to the limitation contained in subparagraph (2) of this paragraph, to the amount allowable to the group as a credit under section 38 for any taxable year shall be:

(i) The amount of the consolidated unused credit, if any, for the first succeeding taxable year (to the extent not attributable to a corporation making a separate return or joining in a consolidated return filed by another affiliated group for the taxable year), reduced to the extent such consolidated unused credit was allowed as a credit under section 38 for the first two preceding taxable years.

(ii) The amount of the consolidated unused credit, if any, for the second succeeding taxable year (to the extent not attributable to a corporation making a separate return or joining in a consolidated return filed by another

affiliated group for the taxable year), reduced to the extent such consolidated unused credit was allowed as a credit under section 38 for the first preceding taxable year,

(iii) The amount of the consolidated unused credit, if any, for the third succeeding taxable year (to the extent not attributable to a corporation making a separate return or joining in a consolidated return filed by another affiliated group for the taxable year), and

(iv) With respect to an unused credit of a corporation arising in an unused credit year for which such corporation filed a separate return or joined in a consolidated return filed by another affiliated group, but subject to the limitation prescribed by subparagraph (7) of this paragraph:

(a) The amount of the unused credit, if any, of such corporation for the first succeeding taxable year, reduced to the extent such unused credit was allowed as a credit under section 38 for the first two preceding taxable years,

(b) The amount of the unused credit, if any, of such corporation for the second succeeding taxable year, reduced to the extent such unused credit was allowed as a credit under section 38 for the first preceding taxable year, and

(c) The amount of the unused credit, if any, of such corporation for the third succeeding taxable year.

(7) Limitation on investment credit carryover and carryback from separate return years. (i) For any taxable year, the amount included in the consolidated investment credit carryover of the group, under subparagraph (5)(ii) of this paragraph, and in the consolidated investment credit carryback of the group, under subparagraphs (6)(iv) (a), (b), and (c) of this paragraph, shall not exceed the limitation determined under subdivision (ii) of this subparagraph.

(ii) For purposes of subdivision (i) of this subparagraph, the limitation for any taxable year shall be an amount equal to the amount by which the portion of the consolidated limitation based on amount of tax for such taxable year attributable to the corporation which filed a separate return, or

joined in the filing of a consolidated return by another affiliated group, in a preceding or succeeding taxable year exceeds the sum of:

(a) The credit earned (as defined in paragraph (a)(1) of this section) of such corporation for the taxable year, and

(b) The unused credits of such corporation (or attributable to such corporation) which may be carried to the taxable year arising in unused credit years prior to the particular unused credit year.

(iii) For purposes of subdivision (ii) of this subparagraph, the portion of the consolidated limitation based on amount of tax attributable to a corporation shall be the sum of:

(a) So much of the consolidated liability for tax attributable to such corporation as does not exceed $25,000 divided by the number of corporations in such affiliated group (as defined in section 46(a)(5)), and

(b) 25 percent of so much of the consolidated liability for tax attributable to such corporation as exceeds $25,000 divided by the number of corporations in such affiliated group (as defined in section 46(a)(5)).

(iv) For purposes of subdivision (iii) of this subparagraph, the consolidated liability for tax attributable to a corporation is the consolidated liability for tax for the taxable year multiplied by the ratio which:

(a) The taxable income, if any, of such corporation, bears to

(b) The aggregate of the taxable incomes of the several members of the affiliated income.

group having taxable

For purposes of the preceding sentence, taxable income of a corporation means the taxable income of such corporation included in the computation of consolidated taxable income for the taxable year decreased by its deductions under sections 181, 243, 244, 245, 247, and 922 (and in the case of a member of an affiliated group to which the consolidated section 175 deduction is applicable, the section 175 deduction), increased by its separate net capital gain, and increased or decreased, as the case may be, with respect to its separate gains or losses from involuntary conversions subject

to the provisions of section 1231, and from sales or exchanges of property subject to the provisions of section 1231.

(8) Consolidated unused credit attributable to each of the several members-(i) In general. If an affiliated group filing a consolidated return has a "consolidated unused credit" for a taxable year and if there are included as members of such group one or more corporations which made separate returns, or joined in a consolidated return filed by another affiliated group, for any of the three preceding or five (or six in the case of a section 181 deduction) succeeding taxable years, the portion of such consolidated unused credit for such consolidated unused credit year attributable to such corporations severally shall be determined, such portion in the case of any such corporation being determined under the provisions of subdivisions (ii) and (iii) of this subparagraph.

(ii) Carryback. In the case of a carryback of a consolidated unused credit to a taxable year for which the corporation made a separate return or joined in a consolidated return filed by another affiliated group, the portion of such consolidated unused credit for the consolidated unused credit year attributable to such corporation shall be an amount equal to the amount of such consolidated unused credit multiplied by the ratio which:

(a) The credit earned (as defined in paragraph (a)(1) of this section) of such corporation for the consolidated unused credit year, bears to

(b) The consolidated credit earned (as defined in paragraph (a)(1) of this section) for such consolidated unused credit year.

(iii) Carryover. In the case of a carryover of a consolidated unused credit to (or a section 181 deduction for) a taxable year for which the corporation makes a separate return or joins in a consolidated return filed by another affiliated group, the portion of such consolidated unused credit for the consolidated unused credit year attributable to such corporation shall be an amount equal to the amount of such consolidated unused credit multiplied by the ratio which:

(a) The portion of the consolidated credit earned with respect to any section 38 property placed in service in the consolidated unused credit year and owned by such corporation (whether or not placed in service by such corporation) at the close of the last day with respect to which the taxable income of such corporation is included in the consolidated return, bears to

(b) The consolidated credit earned for such consolidated unused credit year.

(9) Consolidated unused credit before or after consolidated return period. (i) The consolidated unused credit of an affiliated group filing a consolidated return shall be used in computing the consolidated investment credit carryover or carryback to (or section 181 deduction for) a subsequent (or preceding) taxable year of the group notwithstanding that one or more members of the group in the consolidated unused credit year make separate returns (or join in a consolidated return made by another affiliated group) for such subsequent (or preceding) taxable year, but only to the extent that such consolidated unused credit is not attributable (as determined under subparagraph (8) of this paragraph) to the several corporations making separate returns (or joining in a consolidated return made by another affiliated group) for such subsequent (or preceding) taxable year.

(ii) The portion of such consolidated unused credit attributable to the several corporations making separate returns (or joining in a consolidated return made by another affiliated group) for a subsequent (or preceding) taxable year (reduced to the extent allowed as a credit under section 38 for a prior taxable year) shall be used by such corporations severally as investment credit carryovers (or carrybacks) to such separate returns or such consolidated returns of another affiliated group or as section 181 deductions on such separate returns (or such consolidated return of another affiliated group).

(10) Rules with respect to unused credits under section 381. (i) If, in the computation of the consolidated investment credit carryover, there is in

cluded an amount with respect to an unused credit of a corporation, arising in a taxable year for which it filed a separate return or for which such corporation joined in a consolidated return filed by another affiliated group, which is a transferor or distributor of assets within the meaning of section 381(a) to a member of the affiliated group, the amount included in the consolidated investment credit carryover with respect to such transferor or distributor shall not exceed the limitation contained in subparagraph (7) of this paragraph determined with reference to the acquiring corporation. The computation shall be made as described in subparagraph (7) of this paragraph as though the acquiring corporation had an unused credit in a year for which it filed a separate return or for which such acquiring corporation had joined in a consolidated return filed by another affiliated group.

(ii) If, in addition to the amount described in subdivision (i) of this subparagraph, there is included an amount with respect to an unused credit of the acquiring corporation in a year for which it filed a separate return or for which it joined in a consolidated return filed by another affiliated group, the unused credits of both the acquiring corporation and the transferor or distributor corporation which may be taken into account as unused credits in determining the consolidated investment credit carryover may not exceed the limitation, determined with reference to the acquiring corporation, computed in a manner described in subparagraph (7) of this paragraph.

(iii) For purposes of subdivisions (i) and (ii) of this subparagraph, if the transferor or distributor corporation was a member of another affiliated group which filed a consolidated return, the amount of the consolidated unused credit of such affiliated group, if any, attributable to such transferor or distributor, shall be treated as the unused credit of such corporation.

(c) Early dispositions, etc., of section 38 property (1) Dispositions of section 38 property during and after consolidated return period. Except as pro

vided in subparagraph (2) of this paragraph:

(i) If property placed in service in a consolidated return period is disposed of or otherwise ceases to be section 38 property, or becomes public utility property, with respect to any corporation during any taxable year (whether consolidated or separate), the provisions of section 47(a) (1) or (2), as the case may be, shall apply (whether such property was placed in service by such corporation or was received by such corporation in an intercompany transaction to which subparagraph (2)(i) of this paragraph applied) and the increase in tax, if any, shall be added to the tax liability of such group or such corporation, as the case may be.

(ii) If property placed in service in a separate return year is disposed of or ceases to be section 38 property, or becomes public utility property, with respect to any corporation during a taxable year for which such corporation joins in the filing of a consolidated return, the provisions of section 47(a) (1) or (2), as the case may be, shall apply and the increase in tax, if any, shall be added to the tax liability of such group.

(2) Exceptions. (i) For purposes of sections 46(c) and 47(a)(1), a transfer of section 38 property from one member of an affiliated group to another member of such group in an intercompany transaction during a consolidated return period shall not be treated as a disposition or cessation. The preceding sentence shall not apply to a transfer of section 38 property unless such property was placed in service by a member of the group in a consolidated return period of such group.

(ii) If, in any taxable year, section 38 property placed in service during a consolidated return period is disposed of by one member of an affiliated group to another member of such group which is an organization to which section 593 applies or a cooperative organization described in section 1381(a), the tax under Chapter 1 of the Code for such taxable year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section 38 for all prior

years which would

taxable result solely from treating such property, for purposes of determining qualified investment, as placed in service by such organization to which section 593 applies or such cooperative organization described in section 1381(a), as the case may be, but with due regard to the use of the property before such transfer. The consolidated investment credit carrybacks and carryovers shall be adjusted under the principles of section 47(a)(3) by reason of such change in use.

(Sec. 1502, 68A Stat. 367; 26 U.S.C. 1502)

§ 1.1503-1 Computation and payment of tax.

(a) General rule. In any case in which a consolidated return is filed or required to be filed, the tax shall be determined, computed, assessed, collected, and adjusted in accordance with the regulations prescribed under section 1502 promulgated prior to the last date prescribed by law for the filing of such return.

(b) Limitation. If the affiliated group includes one or more Western Hemisphere trade corporations (as defined in section 921) or one or more regulated public utilities (as defined in section 1503 (c)), the increase in tax described in section 1503 (a) shall be applied in a manner provided in the regulations under section 1502.

[T.D. 6500, 25 FR 12105, Nov. 26, 1960, as amended by T.D. 7244, 37 FR 28897, Dec. 30, 1972]

(1) Any corporation transfers, on or after January 1, 1951, and before June 13, 1963, all or part of its property (other than money) to a transferee corporation,

(2) Any corporation transfers, directly or indirectly, after June 12, 1963, all or part of its property (other than money) to a transferee corporation, or (3) Five or fewer individuals are in control of a corporation and one or more of them transfer, directly or indirectly, after June 12, 1963, property (other than money) to a transferee corporation, and the transferee was created for the purpose of acquiring such property or was not actively engaged in business at the time of such acquisition, and if after such transfer the transferor or transferors are in control of the transferee during any part of the taxable year of the transferee, then for such taxable year of the transferee the Secretary or his delegate may disallow the surtax exemption defined in section 11(d) or the accumulated earnings credit of $150,000 ($100,000 in the case of taxable years beginning before January 1, 1975) provided in paragraph (2) or (3) of section 535(c), unless the transferee establishes by the clear preponderance of the evidence that the securing of such exemption or credit was not a major purpose of the transfer.

(b) Purpose of section 1551. The purpose of section 1551 is to prevent avoidance or evasion of the surtax imposed by section 11(c) or of the accumulated earnings tax imposed by section 531. It is not intended, however, that section 1551 be interpreted as delimiting or abrogating any principle of law established by judicial decision, or any existing provisions of the Code, such as sections 269 and 482, which have the effect of preventing the avoidance or evasion of income taxes. Such principles of law and such provisions of the Code, including section 1551, are not mutually exclusive, and in appropriate cases they may operate together or they may operate separately.

(c) Application of section 269(b) to cases covered by section 1551. The provisions of section 269(b) and the authority of the district director thereunder, to the extent not inconsistent

with the provisions of section 1551, are applicable to cases covered by section 1551. Pursuant to the authority provided in section 269(b) the district director may allow to the transferee any part of a surtax exemption or accumulated earnings credit for a taxable year for which such exemption or credit would otherwise be disallowed under section 1551(a); or he may apportion such exemption or credit among the corporations involved. For example, corporation A transfers on January 1, 1955, all of its property to corporations B and C in exchange for all of the stock of such corporations. Immediately thereafter, corporation A is dissolved and its stockholders become the sole stockholders of corporations B and C. Assuming that corporations B and C are unable to establish by the clear preponderance of the evidence that the securing of the surtax exemption defined in section 11(d) or the accumulated earnings credit provided in section 535, or both, was not a major purpose of the transfer, the district director is authorized under sections 1551(c) and 269(b) to allow one such exemption and credit and to apportion such exemption and credit between corporations B and C.

(d) Actively engaged in business. For purposes of this section, a corporation maintaining an office for the purpose of preserving its corporate existence is not considered to be "actively engaged in business" even though such corporation may be deemed to be "doing business" for other purposes. Similarly, for purposes of this section, a corporation engaged in winding up its affairs, prior to an acquisition to which section 1551 is applicable, is not considered to be "actively engaged in busi