PLR 1042019: IRS permits corrective consolidated-return filings after an affiliation break

Plain-English summary

The IRS considered a request to file a consolidated return after an ownership transaction caused a parent and subsidiary to fall below the required affiliation threshold. The parent had filed returns that improperly included the subsidiary group for part of one year and for two later years. The IRS permitted the taxpayer group to file a consolidated return for the specified period and required allocation of previously paid federal income taxes between the parent group and taxpayer group based on their respective taxable incomes. The parent had to amend the affected return to remove the taxpayer group and file separate returns for the later years. The ruling was based on the submitted facts and representations and expressed no opinion on other tax consequences.

Ruling snapshot

• Question: May an affiliated group file corrective consolidated returns after the parent no longer owned the required voting power of a subsidiary?
• Outcome: Approved
• Key authorities: IRC § 6501(a); Treas. Reg. § 1.1502-75(f)(1), (f)(2), and (a)(2); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201042019 Third Party Communication: None
Release Date: 10/22/2010 Date of Communication: Not Applicable
Index Number: 1502.75-00
Person To Contact:
---------------------- ------------------------, ID No. -------------
----------------------------- Telephone Number:
---------------------------------------- ---------------------
---------------------------------- Refer Reply To:
---------------------------------- CC:CORP:B04
PLR-120888-10
Date:
July 12, 2010

Legend

Parent = -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-----------------------

Taxpayer = -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-----------------------

Sub 1 = -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-----------------------

Sub 2 = -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-----------------------

Date 1 = ---------------

Date 2 = ---------------

Date 3 = ---------------

Date 4 = -------------------

Date 5 = -------------------

Date 6 = ------------------
PLR-120888-10 2

Year 1 = -------

Year 2 = -------

Year 3 = -------

Year 4 = -------

Dear ----------:

   This letter responds to a letter dated May 14, 2010, requesting the consent of the

Commissioner to file a consolidated return under § 1.1502-75(f)(1) of the Income Tax
Regulations. Additional information was received in letters dated June 9, 2010, June
14, 2010, and June 28, 2010. The material information submitted in the request and the
later correspondence is summarized below.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of
the material submitted in support of the request for rulings, it is subject to verification on
examination.

                                        Facts

    Parent is a corporation incorporated on Date 1, Year 1. On Date 2, Year 1, all of

the outstanding stock of Parent was issued to a group of investors (the “Investors”).
Also on Date 2, Year 1, all of the common stock of Taxpayer, another newly formed
corporation, was issued to Parent and all of the preferred stock of Taxpayer was issued
to the Investors. The common stock possessed at least 80% of the voting power and at
least 80% of the value of all of the outstanding Taxpayer stock. Parent and Taxpayer
are each includible corporations within the meaning of § 1504(b). Also on Date 2, Year
1, Taxpayer acquired 100% of the stock of Sub 1, an includible corporation and
common parent of a consolidated group, in a reverse subsidiary cash merger,
terminating the Sub 1 consolidated group. Thus, on Date 3, Year 1, Sub 1 and its
includible direct and indirect subsidiaries became members of the Parent affiliated
group. Both Parent and Taxpayer are pure holding companies.

   On Date 4, Year 1, Sub 1 acquired all the outstanding stock of Sub 2, an

includible corporation and common parent of a consolidated group, in a reverse
subsidiary cash merger, terminating the Sub 2 consolidated group (the “Sub 2
Acquisition”). In order to fund the Sub 2 Acquisition, on Date 4, Year 1, a series of cash
contributions were made to Parent and Taxpayer. The Investors contributed cash to
PLR-120888-10 3

Parent in exchange for additional Parent common stock and to Taxpayer in exchange
for additional Taxpayer preferred stock. Parent also contributed cash to Taxpayer.
However, Parent did not receive additional Taxpayer common stock in exchange for its
contribution. As a result of Taxpayer’s failure to issue additional common stock to
Parent, after the Sub 2 Acquisition, Parent had less than 80% of the voting power of
Taxpayer stock, breaking affiliation between Parent and Taxpayer.

   Parent filed a consolidated return for the tax year ending Date 6, Year 1, and for

the Year 2 and Year 3 tax years. Notwithstanding that as of the end of the day on Date
4, Year 1, affiliation between Parent and Taxpayer was broken, the return filed for the
Parent consolidated group for the tax year ending Date 6, Year 1 included the income of
Taxpayer and its direct and indirect subsidiaries (including Sub 1 and its subsidiaries
and Sub 2 and its subsidiaries) for the period from Date 5, Year 1 through Date 6, Year

1. Similarly, the return filed by Parent for the Year 2 and Year 3 tax years were filed as
   consolidated returns, notwithstanding that Parent had no includible subsidiaries at any
   time during those years. Several years later, Parent discovered that from Date 5, Year
   1, onward, Parent had not owned the requisite voting power of Taxpayer needed for
   Taxpayer and its direct and indirect subsidiaries to be included in the consolidated
   return for the Parent Group.

   Generally, if a consolidated return improperly includes the income of one or more
   

   corporations which were not members of the affiliated group then, pursuant to § 1.1502-
   75(f)(1), the income tax liability of such corporations for the improperly included period
   is to be determined on the basis of separate returns. However, also pursuant to
   § 1.1502-75(f)(1), if the improperly included corporations constitute another affiliated
   group, then, upon application and approval, the income of such corporations may be
   reported on the basis of a consolidated return. Taxpayer has requested approval for the
   making of a consolidated return for Taxpayer and its direct and indirect includible
   subsidiaries for the period Date 5, Year 1 through Date 6, Year 1 and associated
   rulings.

   The period of limitations on assessment under § 6501(a) has not expired for
   Parent, Taxpayer, or any of Taxpayer’s affiliated subsidiaries for the Year 1 tax year or
   for any later tax year.

                                    Rulings
   

Based on the facts submitted and the representations made, we rule as follows:

1) Taxpayer and Taxpayer’s affiliated subsidiaries (the “Taxpayer Group”) are
permitted to file a consolidated federal income tax return for the tax year beginning
Date 5, Year 1, and ending Date 6, Year 1. Section 1.1502-75(f)(1). The Taxpayer
Group has a continuing consolidated return filing requirement pursuant to § 1.1502-
75(a)(2) for later tax years in which the Taxpayer Group remains in existence.
PLR-120888-10 4

2) Provided that pursuant to ruling 1, above, the Taxpayer Group files a consolidated
federal income tax return for the tax year beginning Date 5, Year 1, and ending Date
6, Year 1, the amount of federal income taxes Parent previously paid on a
consolidated return basis for the tax year ending Date 6, Year 1, is to be allocated
between the Parent Group and Taxpayer Group based upon the respective taxable
incomes of the groups. Section 1.1502-75(f)(2). The amount of federal income
taxes (including estimated taxes for Year 4) Parent previously paid on a
consolidated return basis for the tax years beginning with Year 2 are to be allocated
for each year between Parent and the Taxpayer Group based upon the respective
taxable incomes of Parent and the Taxpayer Group. Section 1.1502-75(f)(2).

3) Parent must amend its consolidated federal income tax return for the tax year ending
Date 6, Year 1, to remove the income, gain, deduction, loss, and credit attributable
to the Taxpayer Group for the time period beginning Date 5, Year 1, and ending
Date 6, Year 1. In addition, Parent must modify its federal income tax returns as
filed for Year 2 and Year 3 to file a separate return.

                                    Caveats

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

                              Procedural Matters

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

   A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.
PLR-120888-10 5

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                   Sincerely,


                                   ____________________________________
                                   Ken Cohen
                                   Senior Technician Reviewer, Branch 3
                                   Office of Associate Chief Counsel (Corporate)

cc: