The IRS announced that it will permit an affiliated group of corporations that did not file the required Form 1122, Authorization and Consent of Subsidiary Corporation to Be Included in a Consolidated Income Tax Return, for all of its subsidiaries, to be treated as if its subsidiaries had filed Form 1122 (Rev. Proc. 2014-24).
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 that has been a member of the group during any part of the year for which the consolidated return is to be filed consents by filing Form 1122. If a group wishes to exercise this privilege, a consolidated return must be filed not later than the last day prescribed by law (including extensions of time) for the filing of the common parent’s tax return. The consolidated return may not be withdrawn after that last day, but it may be withdrawn before that day.
Under the new procedure, if an affiliated group satisfies its requirements, the IRS will determine that a subsidiary that failed to file Form 1122 is treated as if it filed it and therefore joined in the affiliated group’s consolidated return. The affiliated group must have timely filed what purported to be a consolidated return for the tax year and either included Form 851, Affiliations Schedule, with the affiliated group’s return or provided other clear, unequivocal indication that the return was intended as a consolidated return, for example, by checking the appropriate box in Item A at the top of the tax return. In addition, the subsidiary that did not file Form 1122 cannot have been prevented by law from filing a consolidated return with the group, and the subsidiary cannot have filed a separate return for that period.
To qualify for the automatic treatment, one of the following prerequisites must be met:
- The nonfiling of Form 1122 was due to a mistake of law or fact, or to inadvertence, and the affiliated group believed that the nonfiling subsidiary was a member of the affiliated group for the tax year and included the nonfiling subsidiary’s income and deductions in the return.
- The nonfiling was due to a mistake of law or fact, or to inadvertence, and all of the nonfiling subsidiary’s income and deductions were included in the return as part of the income and deductions of another member of the group, because, for example, the affiliated group believed that the nonfiling subsidiary was a disregarded entity or had formally ceased after a merger or liquidation into another group member.
- The nonfiling was because the affiliated group believed that the nonfiling subsidiary was taxable as a partnership, and all of the nonfiling subsidiary’s income and deductions were included on the consolidated return as part of the income and deductions of its partners.
If a consolidated group meets the requirements of this revenue procedure, it is the exclusive means by which the IRS will determine under Regs. Sec. 1.1502-75(b) that a subsidiary will be treated as if it filed Form 1122, notwithstanding the fact that the subsidiary did not actually file Form 1122. This automatic determination is available even if the common parent’s return is under examination. Consolidated groups that do not meet these requirements must file for a determination letter issued by an IRS director (and not a letter ruling) under Rev. Proc. 2014-1, which necessitates paying a user fee.
The new automatic procedure is effective March 24, 2014.
Sally P. Schreiber (
) is a JofA senior editor.