Corporations that are directly or through intervening chains of corporations owned 80% or more by a common parent corporation can file a consolidated income tax return. There are many benefits to such returns, including offsets of income and losses from the various subsidiaries, the elimination of immediate tax consequences for transactions between members, and the ability to make distributions without adverse tax consequences within the group.
For a corporation to make a consolidated return, it usually must either join on a timely filed return itself or file a Form 1122. Oftentimes, a subsidiary corporation will be left off a consolidated return. Sometimes this is an oversight. Other times an entity may be thought to be a partnership or a disregarded entity, but turns out to be a corporation for income tax purposes.
Until now, the IRS could determine to allow such corporations to join the consolidated return lately, based on a fact and circumstances analysis, using factors delineated in Treas. Regs. §1.1502-75(b)(2).
So as to provide more certainty and to make it easier to address excluded subsidiaries, the IRS has now issued a Revenue Procedure that provides a safe harbor when the IRS will allow an excluded subsidiary to join a previously filed consolidated return. The conditions are designed to cover many of the typical circumstances when a subsidiary is left off due to mere error or omission.
To use the Revenue procedures, all of the following 3 conditions must be met:
A. The group timely filed what purported to be a consolidated return, either (a) including Form 851 with the return, or (b) providing some other clear and unequivocal indication on the return that it was intended as a consolidated return, such as checking the appropriate box at the top of the tax return;
B. The non-filing subsidiary was not prevented from joining in the filing of the consolidated return by any applicable rule of law, other than the failure to file Form 1122; and
C. A separate return was not filed by the non-filing subsidiary for any period of time included in the consolidated return, or any subsequent tax year, other than (a) a separate return for a period in which the non-filing subsidiary's income and deductions were not properly includible in the affiliated group's consolidated return, or (b) a partnership return, all the income and deductions of which were included on the consolidated return as part of the income and deductions of the partners, all of which were members of the affiliated group.
Also, one of the following 3 conditions must be met:
1. The nonjoinder was due to a mistake of law or fact, or to inadvertence, provided that the affiliated group believed that the non-filing subsidiary was a member of the affiliated group for the tax year and included the non-filing subsidiary's income and deductions in the consolidated return as if the non-filing subsidiary was a member of the affiliated group;
2 The nonjoinder was due to a mistake of law or fact, or to inadvertence, provided that all of the non-filing subsidiary's income and deductions were included on the consolidated return as part of the income and deductions of another member of the group (such a the group believed the subsidiary was a disregarded entity or had formally ceased to exist pursuant to a merger or liquidation into another member of the group); or
3. The nonjoinder was because the affiliated group believed that the subsidiary was taxable as a partnership and all of the non-filing subsidiary's income and deductions were included on the consolidated return as part of the income and deductions of its partners.
The procedure applies even if the error was not detected until an audit occurs. If the above criteria are not met, the group can seek inclusion via a determination letter from a Director if no audit is pending on the issue.
Rev Proc 2014-24, 2014-13 IRB