IRS treats four subsidiaries as joining consolidated returns

Plain-English summary

A parent corporation included all income, deductions, assets, and liabilities of four wholly owned subsidiaries in its federal returns but did not properly identify the subsidiaries, attach Forms 851 or 1122, or mark the returns as consolidated. None of the subsidiaries filed separate returns. The affiliated group did not qualify for the automatic relief procedure that treats a subsidiary as having filed Form 1122. Based on the facts and representations, the IRS instead applied the facts-and-circumstances rule in Treasury Regulation Section 1.1502-75(b)(2). It determined that each subsidiary would be treated as if it had filed Form 1122 for its relevant first consolidated year and therefore had joined in the group's consolidated return.

Ruling snapshot

• Question: Could four subsidiaries be treated as having consented to consolidated returns despite missing Forms 1122 and related filing steps?
• Outcome: Approved.
• Key authorities: IRC §§ 1501 and 1504; Treas. Reg. § 1.1502-75; Rev. Proc. 2014-24

Full text (IRS public release)

Internal Revenue Service

Number: 202130016
Release Date: 7/30/2021

Index Numbers 1501.00-00, 1502.75-00

Legend
Taxpayer 1 (Parent) = [redacted]

Taxpayer 2 (Sub 1) = [redacted]

Taxpayer 3 (Sub 2) = [redacted]

Taxpayer 4 (Sub 3) = [redacted]

Taxpayer 5 (Sub 4) = [redacted]

Department of the Treasury
Washington, DC 20224

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact: [redacted], ID No. [redacted]
Telephone: [redacted]

Refer Reply To: [redacted]

Date:
May 3, 2021

Page 1 of 7

Determination Letter Under Treas. Reg. § 1.1502-75(b)

Date1= [redacted]
Date2= [redacted]
Date3= [redacted]
Date4= [redacted]
Date 5 = [redacted]
Date 6 = [redacted]
Date 7 = [redacted]
Date 8 = [redacted]
Date 9 = [redacted]
Date 10 = [redacted]
Date11= [redacted]
Date12 = [redacted]
Date13= [redacted]
Date14= [redacted]
Date15= [redacted]
Date 16 = [redacted]

Dear [redacted]:

This letter responds to letters dated Date 1 and Date 2 submitted on behalf of Parent,
Sub 1, Sub 2, Sub 3, and Sub 4 (the “affiliated group” for purposes of this letter and to
the extent these entities meet the definition provided by IRC § 1504(a)), requesting that
the Commissioner make a determination regarding: (1) the failure of Parent's wholly-
owned subsidiary Sub 1 to have consented to the filing of a consolidated return with
Parent pursuant to, and in the manner provided by, Treas. Reg. §§ 1.1502-75(a)(1),
1.1502-75(b)(1) and 1.1502-75(h)(2) for the taxable year ended Date 3; (2) the failure of
Parent's wholly-owned subsidiary Sub 2 to have consented to the filing of a
consolidated return with Parent pursuant to, and in the manner provided by, Treas. Reg.
§§ 1.1502-75(a)(1), 1.1502-75(b)(1) and 1.1502-75(h)(2) for the taxable year ended
Date 4; (3) the failure of Parent's wholly-owned subsidiary Sub 3 to have consented to
the filing of a consolidated return with Parent pursuant to, and in the manner provided
by, Treas. Reg. §§ 1.1502-75(a)(1), 1.1502-75(b)(1) and 1.1502-75(h)(2) for the taxable
year ended Date 5; and (4) the failure of Parent's wholly-owned subsidiary Sub 4 to
have consented to the filing of a consolidated return with Parent pursuant to, and in the
manner provided by, Treas. Reg. §§ 1.1502-75(a)(1), 1.1502-75(b)(1) and 1.1502-
75(h)(2) for the taxable year ended Date 5.

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

Page 2 of 7

Determination Letter Under Treas. Reg. § 1.1502-75(b)

SUMMARY OF FACTS

Sub 1 was incorporated as a wholly-owned subsidiary of Parent on Date 6, Sub 2 was
incorporated as a wholly-owned subsidiary of Parent on Date 7, Sub 3 was incorporated
as a wholly-owned subsidiary of Parent on Date 8, and Sub 4 was incorporated as a
wholly-owned subsidiary of Parent on Date 9. For the entire time that Sub 1, Sub 2,
Sub 3, and Sub 4 have been in existence, Parent has been the sole shareholder, and in
sole control of each of them.

Parent and these subsidiaries did not satisfy the requirements for filing consolidated
returns when Parent filed its U.S. income tax returns for the taxable years ended
Date 3, Date 4, or Date 5. In particular, Parent did not attach a Form 851, Affiliations
Schedule, it did not attach a Form 1122, Authorization and Consent of Subsidiary To Be
Included in a Consolidated Income Tax Return, for the relevant year a subsidiary
intended to consent to join in the making of a consolidated return, and it did not check
the “consolidated return” box on the face of any such return. Sub 1, Sub 2, Sub 3, and
Sub 4 were not specifically identified or referenced on any such return.¹

Sub 1, Sub 2, Sub 3, and Sub 4 have never filed a separate U.S. income tax return for
any taxable year.

At the time the affiliated group filed the request letters dated Date 1 and Date 2, the
identical issue was not under examination or consideration or in litigation.

REPRESENTATIONS

Parent represents that its U.S. income tax returns for its taxable year ended Date 3 and
all subsequent years contained all of the income, deductions, assets and liabilities of
Sub 1. Parent represents that its U.S. income tax returns for its taxable year ended
Date 4 and all subsequent years contained all of the income, deductions, assets and
liabilities of Sub 2. Parent also represents that its U.S. income tax returns for its taxable
year ended Date 5 and all subsequent years contained all of the income, deductions,
assets and liabilities of Sub 3 and Sub 4.

¹ Parent's U.S. income tax return for its taxable year ended Date 10 included Form 851, Affiliations
Schedule, had the “consolidated return” box on page 1 checked, and specifically identified and referenced
Sub 1, Sub 2, Sub 3 and Sub 4.

Page 3 of 7

Determination Letter Under Treas. Reg. § 1.1502-75(b)

LAW

Internal Revenue Code (IRC) § 1501 provides, in part, 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) defines the term “affiliated group” as follows:

(a) Affiliated group defined
For purposes of this subtitle -

(1) In general
The term “affiliated group” means -

(A) 1 or more chains of includible corporations connected through stock
ownership with a common parent corporation which is an includible
corporation, but only if -

(B) (i) the common parent owns directly stock meeting the
requirements of paragraph (2) in at least 1 of the other includible
corporations, and

(ii) stock meeting the requirements of paragraph (2) in each of the
includible corporations (except the common parent) is owned directly by 1
or more of the other includible corporations.

(2) 80-percent voting and value test
The ownership of stock of any corporation meets the requirements of this
paragraph if it -
(A) possesses at least 80 percent of the total voting power of the stock
of such corporation, and
(B) has a value equal to at least 80 percent of the total value of the
stock of such corporation.

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 which 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 referred to in
paragraph (a)(1) of this section shall be made by such corporation joining in the making
of the consolidated return for such year. A corporation shall be deemed to have joined

Page 4 of 7

Determination Letter Under Treas. Reg. § 1.1502-75(b)

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 tax 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 Treas. Reg. § 1502-75(h)(2).

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, under the provisions of paragraph (a)(1)
of this section, 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
return was filed (or was required to be filed) by the group for the immediately preceding
taxable year.”

Rev. Proc. 2014-24, 2014-13 I.R.B. 879, 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. Rev. Proc.
2014-24, Section 1.03 provides that if an affiliated group cannot satisfy such

Page 5 of 7

Determination Letter Under Treas. Reg. § 1.1502-75(b)

requirements, a determination by the Commissioner under Treas. Reg. § 1.1502-75(b)
is available only pursuant to a determination letter issued by a Director.

In this case, the affiliated group does not satisfy the requirements to obtain automatic
relief under Rev. Proc. 2014-24 to treat Sub 1, Sub 2, Sub 3 or Sub 4 as having filed
Form 1122 and thus as having joined in the making of a consolidated return by the
affiliated group. However, the Service may act on behalf of the Commissioner to treat
Sub 1, Sub 2, Sub 3 and Sub 4 as if each had filed Form 1122 for purposes of Treas.
Reg. § 1.1502-75(h)(2) under the provisions of Treas. Reg. §§ 1.1502-75(b)(2) or (3).

DETERMINATION

Based on the information submitted and the representations made in the letters dated
Date 1 and Date 2, we have determined that Treas. Reg. § 1.1502-75(b)(2) can be
applied in this case. Accordingly, Sub 1, Sub 2, Sub 3, and Sub 4 shall each be treated
as if each had filed a Form 1122 for purposes of Treas. Reg. § 1.1502-75(h)(2), as
follows:

• Sub 1 shall be treated as if it had filed a Form 1122 for the taxable year ended
Date 3;

• Sub 2 shall be treated as if it had filed a Form 1122 for the taxable year ended
Date 4;

• Sub 3 shall be treated as if it had filed a Form 1122 for the taxable year ended
Date 5; and

• Sub 4 shall be treated as if it had filed a Form 1122 for the taxable year ended
Date 5.

Parent's Forms 1120 for taxable years prior to the taxable year ended Date 10 failed to
reference Sub 1, Sub 2, Sub 3, or Sub 4 on the Form 851 or reference them in any
other way. Nonetheless, all income and deductions of Sub 1, Sub 2, Sub 3, and Sub 4
have been included in Parent's Forms 1120. None of these subsidiaries ever filed
separate returns. Accordingly, based solely on facts and representations submitted in
the letters dated Date 1 and Date 2, the Service shall treat each subsidiary as if it had
filed a Form 1122 as described in the preceding paragraph, and thus joined in the
making of a consolidated return by the affiliated group, notwithstanding that they failed
to actually file Form 1122.

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
U.S. 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

Page 6 of 7

Determination Letter Under Treas. Reg. § 1.1502-75(b)

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 taxpayers and accompanied by a penalty of perjury declaration
executed by an appropriate party.

PROCEDURAL MATTERS

This determination is directed only to the taxpayers who requested it. IRC § 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 Parent's U.S.
income tax returns. A copy of this determination letter should be kept in the Parent's
permanent records.

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
requirement by attaching a statement to their returns that provides the date and control
number of the determination letter.

Sincerely,

By: [illegible signature]

Title: Director Field Operations (Mid-Atlantic)

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