IRS treats a subsidiary as having consented to a consolidated return despite a missing Form 1122

Plain-English summary

A corporate parent and its wholly owned subsidiary wanted to be treated as filing a consolidated federal income tax return, but the parent had mistakenly treated the subsidiary as a disregarded entity. As a result, the parent reported all of the subsidiary's income and deductions on its own Form 1120 but never filed the paperwork that formally signs a subsidiary onto a consolidated return: a Form 1122 (consent), a Form 851 (affiliations schedule), or the checked "consolidated return" box. Because the group did not qualify for the automatic fix in Rev. Proc. 2014-24, it asked a Director to make a determination under Treasury Regulation § 1.1502-75(b). The IRS looked at the facts (all of the subsidiary's items were included, the subsidiary never filed a separate return) and determined under § 1.1502-75(b)(2) that the subsidiary is treated as if it had filed a Form 1122, so it is deemed to have joined the consolidated return. This matters because it lets the group keep its intended consolidated filing instead of being forced onto separate returns because of a missing form.

Ruling snapshot

• Question: Should a subsidiary that never filed Form 1122 be treated as having consented to and joined the parent's consolidated return?
• Outcome: Approved (subsidiary treated under Treas. Reg. § 1.1502-75(b)(2) as having filed Form 1122)
• Key authorities: IRC § 1501; § 1504(a); Treas. Reg. § 1.1502-75(a)(1), (b)(1), (b)(2), (b)(3), (h)(2); Rev. Proc. 2014-24

Full text (IRS public release)

Internal Revenue Service                     Department of the Treasury
                                             Washington, DC 20224
Index Numbers 1501.00-00, 1502.75-00

Number: 202234012                            Third Party Communication: None
Release Date: 8/26/2022                      Date of Communication: Not Applicable

UIL: 1501.00-00, 1502.75-00                  Person to Contact:
                                             *** ID No. ***
                                             Telephone:
                                             ***
                                             Date: May 26, 2022

Legend
Taxpayer 1 (Parent) = ***
Taxpayer 2 (Subsidiary) = ***
Parent CFC 1 = ***
Parent CFC 2 = ***
Parent CFC 3 = ***

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

Parent CFC 4 = ***
Parent CFC 5 = ***
Subsidiary CFC 1 = ***
Subsidiary CFC 2 = ***
Subsidiary CFC 3 = ***
Subsidiary CFC 4 = ***
State 1 = ***
Country 1 = ***
Date 1 = ***
Date 2 = ***
Date 3 = ***
Date 4 = ***
Date 5 = ***
Date 6 = ***
Date 7 = ***

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

Date 8 = ***
Date 9 = ***
Date 10 = ***
Date 11 = ***

Dear ***:

This letter responds to the letters dated Date 1 and Date 2 submitted on behalf of Parent and
Subsidiary (the "affiliated group" for purposes of this letter and to the extent these entities meet
the definition provided by Section 1504(a)), requesting that the Commissioner make a
determination regarding the failure of Parent's wholly-owned Subsidiary 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.

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.

SUMMARY OF FACTS

Subsidiary was incorporated as a wholly-owned limited liability company organized under the
laws of State 1 on Date 4 for the purpose of effectuating the acquisition of Subsidiary CFC 2 and
its two subsidiaries, Subsidiary CFC 3 and Subsidiary CFC 4. Subsidiary CFC 1 was
incorporated under the laws of Country 1 on Date 5. Parent CFC 1, Parent CFC 2, Parent CFC 3,
Parent CFC 4, and Parent CFC 5 are also wholly-owned subsidiaries of the Parent. Parent has
been the sole and controlling shareholder of Subsidiary for the entire time that Subsidiary has
been in existence.

On Date 6, Parent contributed all of the shares of Subsidiary CFC 1 to Subsidiary. Subsequently,
on Date 6, Subsidiary CFC 1 acquired Subsidiary CFC 2.

On Date 7, Subsidiary filed Form 8832, Entity Classification Election, electing to be classified as
an association taxable as a C corporation for U.S. federal tax purposes effective as of Date 4.

On Date 8, the Service notified Subsidiary that its entity classification election was accepted and
that it would be classified as a C corporation for U.S. federal tax purposes effective as of Date 4.

On Date 9, Parent filed a Form 1120 for the taxable year ended Date 3 as a stand-alone
corporation. Subsidiary did not file a Form 1120 for the taxable year ended Date 3 as a stand-
alone corporation. Parent erroneously treated Subsidiary as a disregarded entity for U.S. federal

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

tax purposes. Parent fully reflected the activities of Subsidiary including all items of income,
gain, deductions, loss, and credit of Subsidiary, which relate solely to its ownership of Subsidiary
CFC 1, Subsidiary CFC 2, Subsidiary CFC 3, and Subsidiary CFC 4, on its Form 1120 for the
taxable year ended Date 3, although Parent did not include the separate schedules and statements
required. Parent has consistently treated Subsidiary for financial and operational purposes as a
holding company, and Subsidiary has not engaged in any operations.

Parent and Subsidiary did not satisfy the requirements for filing a consolidated return when
Parent filed its U.S. income tax return for the taxable year ended Date 3. In particular, Parent did
not attach a Form 851, Affiliations Schedule, did not attach a Form 1122, Authorization and
Consent of Subsidiary to Be Included in a Consolidated Income Tax Return, and Parent did not
check the "consolidated return" box on the face of the return. Subsidiary was not specifically
identified or referenced on Parent's return.

Subsidiary has not filed a separate stand-alone U.S. federal income tax return for any taxable
year.

At the time the affiliated group filed the request letter dated Date 1, and at the time additional
information was provided on Date 2, the identical issue was not under examination or in
litigation.

REPRESENTATION
Parent represents that its U.S. income tax return for its taxable year ended Date 3 and all
subsequent years contained all of items of income, gain, deductions, loss, and credit of
Subsidiary.

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 —

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

(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 paragraphs (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 (in part) 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 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 tax year; and

(iii) Whether or not the member was included in the affiliations schedule, Form 851."

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

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. § 1.1502-75(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 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 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 Subsidiary 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 Subsidiary as if it had filed such 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.

Parent's Forms 1120 for taxable years prior to the taxable year ended Date 11 failed to reference
Subsidiary on the Form 851 or reference it in any other way. Nonetheless, all items of income,

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

gain, deductions, loss, and credit of Subsidiary have been included in Parent's Forms 1120.
Subsidiary never filed a separate return.

Accordingly, based solely on facts and representations submitted in the letters dated Date 1 and
Date 2, the Service shall treat Subsidiary as if it had filed a Form 1122 for the taxable year ended
Date 3 for purposes of Treas. Reg. § 1.1502-75(h)(2) and thus joined in the making of a
consolidated return by the affiliated group, notwithstanding that it 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 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,

Acting Director, Field Operations (North Atlantic)

cc: ***

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