Two subsidiaries omitted from a consolidated return by mistake of law may be folded back in

Plain-English summary

A holding company that elected to be taxed as a corporation filed a consolidated federal income tax return for its group. All members of an affiliated group must be included in a consolidated return, but the return preparer mistakenly believed inclusion was optional, so two subsidiaries were left out and instead filed their own separate returns. After discovering the error, the company asked the IRS (LB&I's Western Compliance Practice Area) for a determination under Treasury Regulation § 1.1502-75(b)(3). That rule lets an omitted member be treated as if it had filed the required consent (Form 1122), and thus as having joined the consolidated return, if the parent shows the omission was due to a mistake of law or fact, or to inadvertence. The IRS concluded the omission was a mistake of law, that the request was not one of the situations barred by Rev. Proc. 2022-1 § 6.14, and granted the requested rulings, allowing the company to file an amended consolidated return that includes the two subsidiaries. This matters because it lets a group fix an inadvertent filing error and get the consolidated treatment it was entitled to.

Ruling snapshot

• Question: May two subsidiaries omitted from a consolidated return because of the preparer's mistake of law be treated as having joined the consolidated return under Treas. Reg. § 1.1502-75(b)(3)?
• Outcome: approved (omission was a mistake of law; requested rulings granted, amended consolidated return allowed)
• Key authorities: Treas. Reg. §§ 1.1502-75(b)(3), (h)(2), 1.1502-76(b); IRC § 1504(a); Rev. Proc. 2022-1 § 6.14

Full text (IRS public release)

Internal Revenue Service
Large Business & International

Western Compliance Practice Area

Number: 202310014
Release Date: 3/10/2023

In Re: Holding Company

UIL: 1502.00-00

Legend:

Predecessor Entity =
Holding Company =
Date 1 =

Date 2 =

Business 1 =

Date 3 =

Date 4 =

Sub 1 =

Sub 2 =

Sub 3 =

Sub 4 =

Sub 5 =

Sub 6 =

Department of the Treasury

Washington, DC 20224

Third Party Communication:

Date of Communication:

Person To Contact:

Telephone Number:

Date:
12-13-2022

Determination Letter Under Treasury Regulation 1.1502-75
2

Sub 7 =

Sub 8 =

Sub 9 =

Date 5 =

Sub 10 =

Date 6 =

Sub 11 =

Date 8 =

Date 9 =

Date 10 =

Date 11 =

Date 12 =

Return Preparer =
Accounting Firm =

Dear Taxpayer:

Predecessor Entity was formed on Date 1. On Date 2, it changed its name to Holding
Company. Holding Company's subsidiaries are in the business of Business 1.

Effective Date 3, Holding Company "checked the box" to become a corporation. Date
4, Holding Company owned 100% of the membership interests in two LLCs:

(i) Sub 1, which in turn owned 100% of the membership interests in a
disregarded entity, Sub 2, which in turn owned 100% of the membership
interests in Sub 3.

(ii) Sub 4, which in turn owned 100% of the membership interests in three
LLCs:

(a) Sub 5

(b) Sub 6, which in turn owned 100% of the membership interests Sub 7;
and

(c) Sub 8, which in turn owned 100% of the membership interests in Sub
9.


Determination Letter Under Treasury Regulation 1.1502-75
3

On Date 5, Holding Company acquired 100% of the membership interests in Sub 10.
The latter company was dissolved on Date 6. All other entities continue to be owned as
described above. The corporations named above also owned a variety of other entity
interests, directly or through disregarded entities. These are not material to this request,
as the affiliated group does not own stock in these entities meeting IRC 1504(a). For
example, Sub 10, is taxed as a corporation, but 37.5% of its membership interests are
held by parties unrelated to Holding Company.

On Date 7, Holding Company timely filed Form 1120 for its initial short tax

year Date 3 through Date 8. This was a consolidated return. It included Form 851,
"Affiliation Schedule," identifying the following seven subsidiary corporations. These
seven subsidiaries also provided Form 1122, "Authorization and Consent of Subsidiary
Corporation To Be Included in a Consolidated Income Tax Return".

Sub 10
Sub 5
Sub 7
Sub 9
Sub 4
Sub 6
Sub 8

On Date 9, Sub 1 timely filed its initial Form 1120, as a separate return, for the period
beginning Date 3 (i.e. the effective date of its check-the-box election) and ending Date
8.

On Date 10, Sub 3 timely filed Form 1120, as a separate return, for the period
beginning Date 11 and ending Date 8. The returns described above were signed by
Return Preparer, a principal at Accounting Firm. According to the declaration of
Return Preparer, the returns were prepared by herself and by other employees of her
accounting firm.

According to Return Preparer, the decision to file separate returns for Sub 1 and Sub 3
was made in the belief that, under the laws as applied to these facts, Holding
Company could file a consolidated return that did not include all members in its
affiliated group, and that Sub 1 and Sub 3 could instead file separate returns. According
to Return Preparer, immediately after discovering the mistake, this determination
request was prepared to correct the omission.

ISSUES


Determination Letter Under Treasury Regulation 1.1502-75
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Taxpayer's determination letter request includes requests for the following rulings:

(1) Holding Company has established to the satisfaction of the Commissioner that
because of a mistake of law Sub 1 and Sub 3 were omitted from its consolidated
federal income tax return.

(2) Sub 1 and Sub 3 shall be treated as if they had filed a Form 1122 for the taxable
year ended Date 8 for purposes of section 1.1502-75(h)(2), and thus joined in the
making of the consolidated return for such year. (Treas. Reg. 1.1502-75(b)(3)).

(3) Holding Company will file an amended consolidated income tax return for the year
ended Date 8 to include the income and deductions of Sub 1 and Sub 3 (Treas. Reg.
1.1502-76(b)(1)).

(4) Sub 3 will file an amended separate tax return for the period Date 11 to Date 4. It
will be included in the consolidated return of Holding Company beginning Date 3 to
Date 8.


Determination Letter Under Treasury Regulation 1.1502-75
5

ANALYSIS
Treas. Reg. § 1.1502-75(b)(3) states:

If any member has failed to join the 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 facts, 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 regarding filing Form 1122
for the first year a group wishes to file a consolidated return, and thus joined in
the making of the consolidated return for such year.

If the taxpayer can show Sub 1 and Sub 3 were omitted because of a mistake of law,
then -75(b)(3) would allow the taxpayer to treat these subsidiaries as though they had
filed a Form 1122 for the taxable year ended Date 8, of purposes of section 1.1502-
75(h)(2) and would allow the taxpayer to file an amended return to include the
subsidiaries on the amended consolidated return.

The facts of this case are similar to the facts of PLR 201726015. In that PLR, the
parent corporation filed a consolidated return that included Subsidiary 2 but did not
include Subsidiary 1, which instead filed a separate return. "The Taxpayer states that
'at the time of the preparation of the relevant returns, the return preparer mistakenly
believed that the inclusion of Subsidiary 1 in the Consolidated Return was voluntary, not
mandatory." This statement is substantially similar to the statement provided by Return
Preparer that "those persons acted in the belief that, under the law as applied to these
facts, Holding Company could file a consolidated return which did not include all the
members in its affiliated group, and that the two omitted members, Sub 1 and Sub 3,
could instead file separate returns."'

Before the Service can conclude whether to issue the determination letter, however, the
request for a determination letter cannot fall into one of the circumstances under which
determination letters are not issued by a Director under Section 6.14 of Revenue
Procedure 2022-1. Specifically, a Director will not issue a determination letter if—

(1) the taxpayer has directed a similar inquiry to an Associate office;

(2) the same issue, involving the same taxpayer or a related party, is pending in
a case in litigation or before Appeals;

(3) the request involves an industry-wide problem;

' Determination Letter Request p. 13.


Determination Letter Under Treasury Regulation 1.1502-75
6

(4) the specific employment tax question at issue in the request has been, or is
being, considered by the Central Office of the Social Security Administration or
the Board for the same taxpayer or a related party; or

(5) the request is for a determination of constructive sales price under § 4216(b)
or § 4218(c), which deal with special provisions applicable to the manufacturers
excise tax. The Associate Chief Counsel (Passthroughs and Special Industries)
will, in certain circumstances, issue letter rulings in this area. See section 5.13 of
this revenue procedure.

It is Counsel's understanding that none of the above circumstances exist. Even if the
originally filed consolidated return and separate returns are currently under examination,
the issue of whether the -75(b)(3) regulations should apply is not part of that
examination.

CONCLUSION

As a result of the mistake of law on the part of the return preparer and because the
subject of the determination letter request is not prohibited under Revenue Procedure
2022-1, Section 6.14, the -75(b)(3) regulations allow for the taxpayer's above
referenced ruling requests.

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.


Determination Letter Under Treasury Regulation 1.1502-75
7

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: Peter C.  Digitally signed by Peter C. Rock

Title: Director, Field Operations - WCPA

Section 6110(k)(3) of the Internal Revenue Code
This document may not be used or cited as precedent.