On March 10, the IRS released Revenue Procedure 2014-24, establishing the rules for when the IRS will automatically determine that a subsidiary corporation that had failed to file a properly and timely executed Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return, will nonetheless be included in the affiliated group.1
Treas. Reg. Section 1.1502-75(a)(1) provides that an affiliated group of corporations that did not file a consolidated return for the immediately preceding taxable year may file a consolidated return if each corporation that joins the return consents by including a signed Form 1122 in the parent’s return. A principle advantage of filing a consolidated return is that the income and loss earned by each member can be offset in consolidation. If proper consent by way of Form 1122 is not provided and the member is included in a consolidated return, the IRS has the right to redetermine the tax liability of the member corporations on a separate company basis and typically creating a federal income tax exposure.
Requesting a properly executed Form 1122 while performing buy-side due diligence on a consolidated group is common practice. When a target corporation cannot produce properly executed Form 1122(s), the target in the past would request a private letter ruling seeking relief from IRS chief counsel to cure the defect.2
In 2013, the IRS Chief Counsel announced that it would no longer provide private letter rulings granting Form 1122 relief in order to conserve IRS resources. Taxpayers only relief was through determination letters issued by the IRS district office with exam jurisdiction over the affiliated group, pursuant to Revenue Procedure 2014-1. Many practitioners complained about the switch as the local IRS offices didn’t have the background to efficiently handle the requests. In response, the IRS issued Revenue Procedure 2014-24 listing the criteria under which the IRS will treat one or more subsidiary members of an affiliated group as if the subsidiary(s) had filed a Form 1122.
To qualify for relief under Revenue Procedure 2014-24, the following conditions must be met:
The affiliated group timely filed what purported to be a consolidated return for the period, including Form 8513
The non-filing subsidiary was not prevented from joining in the filing of the consolidated return by any applicable rule of law
A separate return generally was not filed by the non-filing subsidiary for any period of time included in the consolidated return, or any subsequent period, and
The failure to include the Form 1122 was due to a mistake of law or fact, or to inadvertence and the affiliate group included the non-filing subsidiary’s income and deductions in the consolidated return.
An affiliated group that satisfies these requirements will automatically be granted consolidated return status, even if the subsidiary failed to actually file a properly and timely executed Form 1122.4 If an affiliated group cannot satisfy these requirements, taxpayers can still request a determination letter to provide relief.
While the Revenue Procedure is a welcome relief to a common due diligence issue, taxpayers that qualify for the relief should consider documenting how they meet the requirements of the revenue procedure in their respective files to have it available should the IRS ever raise the issue.
1 2014-13 IRB. The Rev. Proc. is generally effective March 24, 2014 (i.e., the date when it will appear in the Internal Revenue Bulletin).
2 See, e.g., PLR 201329006 (July 19, 2013).
3 Of note, including a corporation on Form 7004 extension would not meet the criteria of this requirement.
4 This automatic determination is available regardless of whether the return of the common parent of the affiliated group is under examination.