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promulgate regulations that create agency relationships
between corporations that never were part of the affil-
iated group, yet this is precisely what the Secretary
purports to have done in Treas. Reg. section 1.1502-
77(c)(2). The regulation thus is inconsistent with the
"plain language of the statute" and cannot be valid.
Section 1.1502-77(c)(2), Income Tax Regs., is a legislative
regulation that was promulgated under section 150233 and that
appears in the portion of the regulations under that section
entitled "Administrative Provisions and Other Rules". As a
legislative regulation, section 1.1502-77(c)(2), Income Tax
Regs., must be upheld unless it is arbitrary, capricious, or
manifestly contrary to section 1502. Chevron U.S.A., Inc. v.
Natural Resources Defense Council Inc., 467 U.S. 837, 844 (1984).
Regulations substantially the same as section 1.1502-
77(c)(2), Income Tax Regs., were first issued as article 17(a)(2)
of Regulations 7534 under the authority of section 141(b) of the
33 Section 1502 provides:
The Secretary shall prescribe such regulations as he
may deem necessary in order that the tax liability of any
affiliated group of corporations making a consolidated
return and of each corporation in the group, both during
and after the period of affiliation, may be returned,
determined, computed, assessed, collected, and adjusted,
in such manner as clearly to reflect the income tax lia-
bility and the various factors necessary for the determi-
nation of such liability, and in order to prevent avoid-
ance of such tax liability.
34 Art. 17(a)(2) of Regulations 75 provided:
(a) Effect of Waiver given by Parent.
Any consent given by the parent corporation * * *
extending the time within which an assessment may be made
(continued...)
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