In a private letter ruling, IRS has confirmed that a parent corporation and its three subsidiaries filed a consolidated return even though it was later discovered that each sub failed to file a Form 1122 (Authorization and Consent of Subsidiary Corporation to Be Included in a Consolidated Return).
Facts. Before Date 1, various individual shareholders owned all of the stock in Sub 1, Sub 2, and Sub 3. On Date 1, Parent was incorporated as a State A corporation, and the individual shareholders contributed all of the outstanding stock of the Subs to Parent in exchange for Parent stock. The Date 1 transaction did not constitute a reverse acquisition under Reg. § 1.1502-75(d)(3).
Parent retained Accounting Firm to prepare its tax return for the short tax year ending on Date 2. Parent informed Accounting Firm that Parent and the Subs intended to file a consolidated income tax return. The return for the tax year ending on Date 2 was timely filed and included the items of income and deduction for Parent and each of the Subs for the entire short tax year. The return also included a Form 851 (Affiliations Schedule) that identified each of the Subs as subsidiaries that were joining in the making of the consolidated return with Parent.
On Date 3, it was discovered that a Form 1122 for each of the Subs was not filed with Parent’s tax return for the tax year ending on Date 2. The statute of limitations under Code Sec. 6501(a) has not expired with respect to the return; however, the return is currently under examination.
Parent made the following representations:
- Except for the failure to timely file Forms 1122, Parent and each Sub were eligible to join in the filing of a consolidated Federal income tax return for the tax year ending Date 2.
- The Subs were included on the Form 851 attached to the return.
- The income and deductions of each of the Subs for the short tax year ending Date 2 were included in the return filed by Parent as the parent of the consolidated group.
- Neither Parent nor any of the Subs filed a separate return for the tax year ending Date 2.
Background. An affiliated group of corporations that did not file a consolidated return for the immediately preceding tax year may file a consolidated return in lieu of separate returns for the tax year, provided that each corporation which has been a member during any part of the tax year for which the consolidated return is to be filed consents, in the manner provided in Reg. § 1.1502-75(b), to the regs under Code Sec. 1502 . (Reg. § 1.1502-75(a)(1)) If a group wishes to exercise its privilege of filing a consolidated return, it must be filed not later than the last day prescribed by law (including extensions) for the filing of the common parent’s return.
The consent of a corporation to file a consolidated return is made by the corporation joining in the making of the consolidated return for the year. A subsidiary is deemed to have joined in the making of a consolidated return for the year if it files a Form 1122 in the manner specified in Reg. § 1.1502-75(h)(2). (Reg. § 1.1502-75(b)(1)) Under Reg. § 1.1502-75(h)(2), for a group to file a consolidated return, a Form 1122 must be executed by each subsidiary. Form 1122 is not required for a tax year if a consolidated return was filed (or was required to be filed) by the group for the immediately preceding year.
If a member of the group fails to file Form 1122, IRS may under the facts and circumstances determine that such member has joined in the making of a consolidated return by such group. (Reg. § 1.1502-75(b)(2)) Factors IRS will take into account in making this determination include:
- Whether the income and deductions of the member were included in the consolidated return for such tax year;
- Whether a separate return was filed by the member for that tax year; and
- Whether the member was included in the affiliations schedule, Form 851 for such tax year.
Favorable ruling. Based on the information submitted and representations made, IRS ruled under Reg. § 1.1502-75(b)(2) that each of the Subs is treated, under Reg. § 1.1502-75(h)(2), as if it had filed a Form 1122 with the Federal income tax return Parent filed for the short tax year ending on Date 2. IRS expressed no opinion concerning the tax consequences of any other aspect of any transaction or item discussed or referenced in the ruling, or about the tax treatment of any condition existing at the time of, or effects resulting from, any transaction or item that is not specifically covered by the ruling. Also, IRS noted that it had not verified any of the material submitted in support of the request for rulings, but that such material is subject to verification on examination.
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