Federal Tax

Consolidated Returns — Elections and Filing (Portfolio 754)

  • This Portfolio analyzes the eligibility requirements and scope of the consolidated return regulations, and it discusses the advantages and disadvantages of filing consolidated returns.

Description

Bloomberg Tax Portfolio, Consolidated Returns — Elections and Filing, No. 754, analyzes the eligibility requirements and the scope of the consolidated return regulations.

Generally, affiliated groups may elect to file consolidated returns in lieu of separate returns. Affiliated groups are groups of “includible corporations” which are connected through stock ownership with a common parent which is an includible corporation. Includible corporations consist of most domestic corporations and certain foreign corporations. Entities that cannot file consolidated returns include: (1) tax-exempt corporations; (2) regulated investment companies; and (3) real estate investment trusts. If a group elects to file consolidated returns, it computes a single tax based on the incomes of all corporations in the group after numerous adjustments and eliminations. Thus, filing consolidated returns may substantially affect the group’s overall tax liability since losses of one member may be used to offset income or gains of another member. However, before deciding to file consolidated returns, the group must consider the effect of the consolidated return rules upon each member and upon the group as a whole. Among other things, the group should consider: (1) whether it is eligible to file a consolidated return; (2) how the tax liability of filing a consolidated return compares to separate filings; and (3) the effect an election to file consolidated returns will have on future years.

This Portfolio discusses the advantages and disadvantages of filing consolidated returns. It also analyzes: (1) the administrative rules for electing and filing consolidated returns; (2) the eligibility requirements that must be met in order to file a consolidated return; and (3) the computation of estimated tax payments if consolidated returns are filed.

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Table of Contents

DETAILED ANALYSIS — 

I. Overview

    A. Critical Concepts Regarding Consolidated Returns

    B. Applicable Regulations

        1. Current Regulations

        2. Pre-1995

    C. Format of the Consolidated Return Statutes and Regulations

        1. Statutory Provisions

        2. Regulatory Provisions

            a. Administrative Provisions

            b. Computation of Separate Taxable Incomes of Members of the Group

                (1) Intercompany Transactions

                (2) Built-In Deductions

                (3) Method of Accounting

                (4) Excess Losses and Investment Adjustment

                (5) Member Stock Basis

                (6) Member Earnings and Profits

                (7) Limitations on Member Stock Losses

            c. Computation of Consolidated Items

            d. Special Rules

                (1) Attribute Reduction

                (2) Stock Ownership Rules

                (3) At-Risk Limitation

                (4) Corporate Equity Reduction Transactions (CERT) Limitation

                (5) Section 382

            e. Tax Computation Rules

            f. Special Taxes and Taxpayers

            g. Effective Date Limitations on Regulations

    D. Power and Validity of Legislative Regulations

        1. Definition of Legislative Regulations and Delegation of Authority

        2. Regulations vs. Code

    E. Underlying Theory of a Consolidated Return

    F. Historical Background

II. Eligibility to File a Consolidated Return

    A. Introduction

    B. Determining the Existence and Composition of the Affiliated Group

        1. Statutory Definition of Affiliated Group

        2. Includible Corporations

            a. Domestic Corporations

                (1) Tax-Exempt Corporations

                (2) Life Insurance Companies Subject to Tax Under §801

                (3) Corporations Electing the Possessions Tax Credit

                (4) Regulated Investment Companies and Real Estate Investment Trusts

                (5) DISCs (Current and Former)

                (6) S Corporations

            b. Foreign Corporations

                (1) General Rule

                (2) Exception for Certain Canadian and Mexican Corporations

                (3) Exception for Inverted Corporations

                (4) Exception for Electing Foreign Life Insurance Corporations

                (5) Treatment of Stapled Corporations

            c. Change in Includible Corporation Status

        3. Required Affiliation

            a. Overview

            b. Stock Considered in Affiliation

                (1) Treatment of Options, Warrants, Convertible Obligations, and Similar Instruments

                    (a) Options

                    (b) Measurement Dates

                    (c) Elimination of a Substantial Amount of Federal Income Tax Liability

                    (d) Reasonable Certainty of Option Exercise

                (2) Treatment of Nominal Debt Instruments Under §385 and Common Law

                (3) Certain Preferred Stock

            c. Direct Ownership Requirement

            d. Section 1504(a)(2) Ownership Test

                (1) Voting Power Test

                (2) Stock Value Test

            e. Impact of Intragroup Stock Transfers

        4. Historical Background

    C. Inclusion of Affiliated Group Members in Consolidated Group

        1. Group Expansion From Special Valuation Considerations

        2. Group Contraction From Prior Deconsolidation

            a. General Proscription on Reconsolidation

            b. Exception for Certain Deconsolidations

            c. IRS Waiver of §1504(a)(3)(A)

        3. Group Contraction for Transitory Members

        4. Group Contraction for Anti-Abuse Reasons

III. Advantages of Filing Consolidated Returns

    A. Basic Advantages

        1. Offset Privilege

        2. Intercorporate Dividends

        3. Intercorporate Profits

        4. Increase in Basis of Stock of a Subsidiary

    B. Other Significant Advantages

        1. Credits or Deductions That Depend Upon Income Limitations

        2. Transfers of Property Among Members of the Group

        3. Obtaining U.S. Tax Benefits in Connection with Certain Canadian or Mexican Corporations

        4. Contributions to Profit-Sharing Plans

        5. Estimated Tax Payments

        6. Change of Subsidiary’s Accounting Period

        7. Preservation of Separate Corporation Advantages

        8. Unused Foreign Tax Credit of Some Members

        9. Deferral of Reporting of Intercompany Items of Income

        10. Deferral of Gain on Dividend Distributions Out of Other Than Earnings and Profits

        11. Aggregation of Stock Ownership

        12. Avoidance of Personal Holding Company Classification

        13. Avoidance of Corporate Equity Reduction Transactions (CERT) Limitations

        14. Avoidance of §385 Equity Recharacterization

IV. Disadvantages of Filing Consolidated Returns

    A. Unified Loss Rule

    B. Compliance With Consolidated Return Regulations

    C. Other Disadvantages

        1. Permanent Nature of Election

        2. Consistent Accounting Period

        3. Effect of Short Taxable Year on Loss Carryovers

        4. Section 1231 Gains and Losses

        5. Credits and Deductions Subject to Limitations

        6. Bad Debts

        7. Unrealized Intercompany Losses

        8. Reduction of Basis of Stock of a Subsidiary

        9. Excess Losses

        10. Minority Shareholders

        11. Application of Corporate Equity Reduction Transactions (CERT) Limitations

        12. Application of §385 Equity Recharacterization

V. Electing to File Consolidated Returns

    A. Election to File Consolidated Returns

        1. Election Is a Privilege

        2. Time Within Which Election Must Be Exercised

        3. Manner by Which Election Must Be Made

            a. Consent — Overview

            b. Affirmative Consent to the Regulations

            c. Deemed Consent to the Regulations — Missing Form 1122

            d. Deemed Consent to the Regulations — Additional Infirmities

    B. Failure to Make the Election to File Consolidated Returns

        1. Relief Under Reg. §1.1502-75(b)

        2. Relief Under Reg. §301.9100-1 and §301.9100-3

    C. Continuing Effect of Consolidated Return Election

        1. Election Is Permanent

        2. Election to Terminate Consolidated Return Election

            a. Elements of “Good Cause”

            b. Application for Discontinuance

            c. Blanket Permission to File Separate Returns

VI. Administrative Rules Relating to Filing Consolidated Returns, Membership Errors, and Consolidated Group Agency

    A. Filing a Consolidated Return

        1. Manner of Making Returns, Forms, Signatures, and Related Technical Requirements

            a. Consents

            b. Affiliations Schedule

        2. Automatic Extension of Time to File Consolidated Returns

        3. Persons Qualified to Execute Returns and Forms

    B. Erroneous Inclusions and Exclusions of Members

        1. Filing of Separate Returns

        2. Filing of Consolidated Return

    C. Agency of Parent Corporation for All Members of Group

        1. Introduction — Regulatory Iterations

        2. Single Entity as Agent

        3. Agent Identity

        4. Agent Status Period

            a. Structural Events

            b. Procedural Events

        5. Scope of Agency

            a. Matters Controlled by Agent

            b. Matters Reserved for Subsidiary Members

VII. Consolidated Group and Member Continuance: Changes in Affiliated Group Composition

    A. Continuation of Consolidated Group: General Rule

    B. Change in or Elimination of Common Parent

        1. Exception: Mere Change in Identity

        2. Exception: Downstream Transfer

            a. Generally

            b. Administrative Expansion

        3. Exception: Reverse Acquisition

            a. Background

            b. Qualification as Reverse Acquisition

    C. Joining and Departing of Subsidiaries

        1. Includible Corporation Acquired by Group

        2. Includible Corporation Departs From Group

        3. Separate Return Due Dates

            a. Generally

            b. Statute of Limitations

    D. Consequences of Group Termination

TABLE OF WORKSHEETS

Brian Peabody
Brian Peabody
Principal
Ernst & Young LLP
George-White-2016
George White
Adjunct Professor (deceased)
George Washington University
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