202035012: Two subsidiaries left off a parent's consolidated return by mistake can be added by amended return

Plain-English summary

A corporate group elected to file a consolidated tax return, but two lower-tier subsidiaries (Sub 2 and Sub 3) were accidentally left out: their consent forms (Form 1122) weren't filed with the parent's return, they weren't listed on the parent's affiliations schedule, and they mistakenly filed their own separate consolidated return instead. Two different accounting firms handled the returns and neither flagged that the subs had to join the parent group. The group asked the IRS to fix this. The IRS agreed. Automatic relief under Rev. Proc. 2014-24 wasn't available, but under Treas. Reg. § 1.1502-75(b)(3) the IRS can treat a member as having consented if the parent shows the omission was due to a mistake of law or fact, or inadvertence. Because the group clearly intended to consolidate (the parent owned the required 80% chain and everyone thought they were filing consolidated), the failure was inadvertent. The group may amend its returns to include Sub 2 and Sub 3 as if they had timely filed Form 1122.

Ruling snapshot

• Question: May a parent add two inadvertently omitted subsidiaries to its consolidated return by amendment under Treas. Reg. § 1.1502-75(b)(3)?
• Outcome: Approved (relief granted; amended returns allowed treating the subs as consenting members)
• Key authorities: IRC §§ 1501, 1504(a); Treas. Reg. § 1.1502-75(a), (b)(1)-(3), (h)(2); Rev. Proc. 2014-24

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202035012
Release Date: 8/28/2020 Third Party Communication: None
Date of Communication: Not Applicable

                                 Person To Contact:

Index Numbers1501.00-00,1502.00-00 , ID No
Telephone:
1502.98-03
Refer Reply To:
LB&I ACDDI:PMO, IR 1135
Date:
JUNE 2, 2020

Legend

Taxpayer =

Parent =

Sub 1 =

Sub 2 =

Sub 3 =

Business A =

Partnership =

Accounting Firm 1 =

Accounting Firm 2 =

Year =
2

Date 1 =

Date 2 =

Date 3 =

Date 4 =

Date 5 =

Date 6 =

x =

Dear :

This letter responds to a letter dated Date 1, submitted on behalf of Taxpayer,
requesting that the Commissioner make a determination regarding the failure of two of
its indirectly wholly owned subsidiaries, Sub 2 and Sub 3, to join in the filing of a
consolidated U.S. income tax return, as required by Section 1.1502-75(a)(1) of the
Regulations, for the tax year ended Date 2 (the “Requested Relief”). The information
provided in that request is summarized below.

The determination contained in this letter is based upon facts and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the material
submitted in support of the request for this determination letter.

                                SUMMARY OF FACTS

During the relevant periods, Parent, Sub 1, Sub 2, and Sub 3 (collectively, the “Parent
Group”), owned and operated Business A. Parent owned 100 percent of the stock of
Sub 1; Sub 1 owned 100 percent of the stock of Sub 2; and Sub 2 owned 100 percent of
the stock of Sub 3. Each of Parent, Sub 1 and Sub 2 were holding companies, with no
material operations. Sub 3 operates Business A.

In Year, the following series of transactions occurred:

(i)    On Date 3, Parent was formed on behalf of Partnership.

(ii)   On Date 3, Parent formed Sub 1 to acquire all the stock of Sub 2.

(iii) On Date 4, pursuant to a stock purchase agreement dated Date 5, Partnership
      and its co-investors contributed cash to Parent in exchange for Parent’s stock.
      Simultaneously, x former Sub 2 shareholders contributed cash and a portion of
      their stock in Sub 2 to Parent.
                                     3

(iv) On Date 4, Parent contributed the aforementioned cash and stock of Sub 2 to
Sub 1.

(v) On Date 4, Sub 1 borrowed additional cash and acquired all the remaining stock
of Sub 2 for cash.

For the tax year ended Date 2, Parent and Sub 1 elected to file a consolidated return.
The Parent consolidated return for the tax year ended Date 2 included Form 851
(Affiliations Schedule), reflecting only Sub 1 as Parent’s wholly owned subsidiary, and
the Form 1122 (Authorization and Consent of Subsidiary Corporation to be Included in a
Consolidated Income Tax Return) with respect to Sub 1. The Form 1122 (Authorization
and Consent of Subsidiary Corporation to be Included in a Consolidated Income Tax
Return) for Sub 2 and Sub 3 (the “Consents”) were not included in the Parent
consolidated tax return for the tax year ended on Date 2.

For the tax years ended Date 2 and Date 6, Sub 2 and Sub 3 filed consolidated returns
separate from Parent’s consolidated returns. These consolidated returns included Form
851 (Affiliations Schedule), reflecting only Sub 3 as Sub 2’s wholly-owned subsidiary.

                              REPRESENTATIONS

The following representations are made in support of the Requested Relief:

   (a) No return for the taxable year in which the Consents and the inclusion of Sub
       2 and Sub 3 in Parent’s consolidated return should have been made (or any
       taxable years that would have been affected by such failures had they been
       timely made) is being examined by a district director, or is being considered
       by an appeals office or a federal court; and

   (b) The granting of the Request Relief will not result in the Parent consolidated
       group having a lower tax liability in the aggregate for all years to which the
       relief applies than it would have had if the consolidated return for Year was
       properly filed including Sub 2 and Sub 3.

                                         LAW

IRC § 1501 provides that "An affiliated group of corporations shall . . . have the privilege
of making a consolidated return with respect to the income tax imposed by chapter 1 for
the taxable year in lieu of separate returns. The making of a consolidated return shall be
upon the condition that all corporations which at any time during the taxable year have
been members of the affiliated group consent to all the consolidated return regulations
prescribed under section 1502 prior to the last day prescribed by law for the filing of
such return. The making of a consolidated return shall be considered as such consent."

IRC § 1504(a)(1) and (2) define the term "affiliated group" as "1 or more chains of
includible corporations connected through stock ownership with a common parent
corporation which is an includible corporation, but only if -
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(i) The common parent directly owns stock with at least 80 percent of the total voting
power and 80 percent of the total value of at least 1 other includible corporation, and

(ii) Stock with at least 80 percent of the total voting power and 80 percent of the total
value of each of the includible corporations is directly owned by 1 or more of the other
includible corporations."

Treas. Reg. § 1.1502-75(a)(1) provides that "A group which did not file a consolidated
return for the immediately preceding taxable year may file a consolidated return in lieu
of separate returns for the taxable year, provided that each corporation that has been a
member during any part of the taxable year for which the consolidated return is to be
filed consents (in the manner provided in paragraph (b) of this section) to the
regulations under section 1502."

Treas. Reg. § 1.1502-75(b)(1) provides that "The consent of a corporation shall be
made by the corporation joining in the making of the consolidated return for such year.
A corporation shall be deemed to have joined in the making of a consolidated return if it
files a Form 1122 in the manner specified in paragraph (h)(2) of this section."

Treas. Reg. § 1.1502-75(b)(2) provides that "If a member of the group fails to file Form
1122, the Commissioner may under the facts and circumstances determine that such
member has joined in the making of a consolidated return by such group. The following
circumstances, among others, will be taken into account in making this determination:
(i) Whether or not the income and deductions of the member were included in the
consolidated return; (ii) Whether or not a separate return was filed by the member for
that taxable year; and (iii) Whether or not the member was included in the affiliations
schedule, Form 851. If the Commissioner determines that the member has joined in the
making of the consolidated return, such member shall be treated as if it had filed a Form
1122 for such year for purposes of paragraph (h)(2) of this section."

Treas. Reg. § 1.1502-75(b)(3) provides that "If any member has failed to join in the
making of a consolidated return under either subparagraph (1) or (2) of this paragraph,
then the tax liability of each member of the group shall be determined on the basis of
separate returns unless the common parent corporation establishes to the satisfaction
of the Commissioner that the failure of such member to join in the making of the
consolidated return was due to a mistake of law or fact, or to inadvertence. In such
case, such member shall be treated as if it had filed a Form 1122 for such year for
purposes of paragraph (h)(2) of this section, and thus joined in the making of the
consolidated return for such year."

Treas. Reg. § 1.1502-75(h)(2) provides that "If a group wishes to file a consolidated
return for a taxable year, then a Form 1122 ("Authorization and Consent of Subsidiary
Corporation to be Included in a Consolidated Income Tax Return") must be executed by
each subsidiary…For taxable years beginning after December 31, 2002, the group must
attach either executed Forms 1122 or unsigned copies of the completed Forms 1122 to
the consolidated return…Form 1122 is not required for a taxable year if a consolidated
5

return was filed (or was required to be filed) by the group for the immediately preceding
taxable year."

Rev. Proc. 2014-24 allows an affiliated group that satisfies certain requirements to
obtain an automatic determination to treat a subsidiary member of the affiliated group as
if it filed a Form 1122, even though it failed to do so.

In this case, the Parent Group does not satisfy the requirements of Revenue Procedure
2014-24 necessary to obtain automatic relief to treat Sub 2 and Sub 3 as if they filed
Form 1122 for the tax year ended Date 2. However, the IRS may act on behalf of the
Commissioner to treat Sub 2 and Sub 3 as if they had filed Forms 1122 and joined in
the filing of the Parent consolidated return under the provisions of Treas. Reg. § 1.1502-
75(b)(2) or (3). Treas. Reg. § 1.1502-75(b)(2) does not apply in this case, because: (i)
the income and deductions of Sub 2 and Sub 3 were not included in the Parent
consolidated return; (ii) Sub 2 and Sub 3 filed separate consolidated returns for the tax
years ended Date 2 and Date 6; and (iii) Sub 2 and Sub 3 were not included in the
Parent’s Form 851 affiliations schedule for Parent’s consolidated returns ended Date 2
and Date 6. In order to obtain relief under Treas. Reg. § 1.1502-75(b)(3), Sub 2 and
Sub 3's failure to join in the making of the consolidated return must have been due to a
mistake of law or fact, or to inadvertence.

                               DETERMINATION

It is our position that Treas. Reg. § 1.1502-75(b)(3) applies in this case, and an
amended return to include Sub 2 and Sub 3 as members of the Parent consolidated
return for the tax years ended Date 2 and Date 6 should be allowed.

The fact that the consolidated return for Parent and Sub 1 for Year included Form 1122
(Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated
Income Tax Return) for Sub 1 and included Sub 1 in the Form 851 (Affiliation Schedule)
indicate that Parent intended to file a consolidated return under Section 1501 for the tax
year ended Date 2. In addition, the fact that the consolidated return for Sub 2 and Sub
3 for the tax year ended Date 2 included Sub 3 on Form 851 (Affiliation Schedule)
indicates that Sub 2 and Sub 3 intended to file a consolidated return under Section 1501
for the tax year ended Date 2. Parent did not include Sub 2 and Sub 3 in the
consolidated return due to an inadvertent error. Treas. Reg. § 1.1502-75(a)(1) allows
the Parent Group to file a consolidated return in lieu of separate returns for the tax year
ended Date 2, provided that each corporation which was a member of the Parent
affiliated group at any time during Date 2 tax year joins in the filing of the Parent
consolidated return. The Taxpayer indicated that at the time of the preparation of the
relevant Date 2 U.S. federal income tax returns by Accounting Firm 1 for Parent and
Sub 1 and the preparation of relevant Date 2 U.S. federal income tax returns by
Accounting Firm 2 for Sub 2 and Sub 3, neither return preparer identified to Parent the
requirement to file the Consents with the Parent Group return and the requirement that
Sub 2 and Sub 3 be included in the Parent consolidated return ended on Date 2.
Therefore, the Consents were not obtained, and Sub 2 and Sub 3 were not included in
the Parent consolidated return for the years ending Date 2 and Date 6.
6

It is our opinion that the common Parent corporation has satisfactorily established that
the failure of Sub 2 and Sub 3 to join in the making of the consolidated return for the tax
year ended Date 2 was due to a mistake of law or fact, or inadvertence. Since Parent
intended to exercise its privilege of filing a consolidated return for the Parent Group, and
Parent directly owned at least 80 percent of the total voting power and 80 percent of the
total value of Sub 1, which owned at least the 80 percent of the total voting power and
80 percent of the total value of Sub 2, which in turn owned at least 80 percent of the
total voting power and 80 percent of the total value of Sub 3, then Sub 2 and Sub 3
were required to join in the filing of the consolidated return in order to obtain the benefits
of consolidation and should be treated as if they had filed Form 1122 for the tax year
ended Date 2 per Treas. Reg. § 1.1502-75(b)(3).

Based solely on the information submitted and the representations set forth above, we
conclude that pursuant to Treas. Reg. § 1.1502-75(b)(3), the Taxpayer is allowed to
amend its consolidated returns for the tax years ended Date 2 and Date 6, in order to
include Sub 2 and Sub 3 as members of the consolidated return as if Sub 2 and Sub 3
had timely filed Form 1122, and therefore joined in the making of a consolidated return.

                                     CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this letter or about the tax treatment of any condition existing at the time
of, or effects resulting from, any transaction or item that is not specifically covered by
the above determination.

The determination contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party.

                            PROCEDURAL MATTERS

This determination letter is directed only to the taxpayers who requested it.
Section 6110(k)(3) provides that it may not be used or cited as precedent.

This office will associate a copy of this determination letter with the taxpayer's federal
income tax returns for the years ended Date 2 and Date 6.

A copy of this determination letter must be attached to any income tax return to which it
is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
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requirement by attaching a statement to their returns that provides the date and control
number of the determination letter.

                                     Sincerely,


                                     By: