Subsidiary deemed to join consolidated returns despite missing forms

Plain-English summary

A holding company and its wholly owned subsidiary intended to report their federal income taxes on a consolidated basis. Their accounting firm prepared standalone returns for the holding company that included all of the subsidiary's operations, but did not file Form 1122, Form 851, or the other entries needed to formally elect consolidated treatment. The subsidiary did not file separate returns, and the combined tax reported was never less than the total liability the companies would have owed on separate returns. A later due-diligence review discovered the procedural problem, and the companies requested a determination under Treasury Regulation section 1.1502-75. The IRS treated the subsidiary as if it had filed Form 1122 and joined the consolidated returns for the initial short year and later years. It relied on the inclusion of the subsidiary's income and deductions, the absence of a separate return, and the apparent inadvertence of the paperwork failure.

Ruling snapshot

• Question: May a subsidiary be treated as joining consolidated returns when its activity was reported by the parent but Form 1122 and Form 851 were not filed?
• Outcome: Approved
• Key authorities: IRC §§ 1501 and 1504(a); Treas. Reg. § 1.1502-75(b)(2), (b)(3), and (h)(2); Rev. Proc. 2014-24

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Release Number: 202348014 Third Party Communication: None
Release Date: 12/1/2023 Date of Communication: Not Applicable

UIL: 01502.00-.00

Person to Contact:

Telephone:

Refer Reply To:
LB&I Eastern Compliance

Date:
September 6, 2023

Dear

This letter responds to the letter, received , submitted on behalf of
(“Holdco”) and (“Intermediate”) (together, the
“affiliated group” for purposes of this letter and to the extent these entities meet the definition
provided by Section 1504(a) of the Internal Revenue Code), requesting that the Commissioner
make a determination regarding the failure of Holdco’s wholly-owned subsidiary, Intermediate,
to have consented to the filing of a consolidated return with Holdco pursuant to, and in the
manner provided by, Treasury Regulation sections 1.1502-75(a)(1), 1.1502-75(b)(1) and 1.1502-

75(h)(2) for the taxable year ended .

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

Holdco and Intermediate were both formed under law on , with

the purpose of acquiring (“Asset”). The Purchase Agreement provided that
Intermediate would purchase all the membership interests of Holdco, the then and current owner
of Asset. Holdco is a holding company with no operations or assets other than its investment in
Intermediate. Holdco has maintained sole control and been the sole shareholder for the entire

term of Intermediate's existence.

Holdco hired (“Accounting Firm”) as its certified public

accountants to prepare and file its federal income tax returns after the closing of the acquisition
of Asset. Asset utilized Accounting Firm prior to the transaction and decided to continue the
relationship post-acquisition. According to Holdco’s POA (“the POA”), Holdco provided

Accounting Firm with all the information necessary to prepare its federal income tax return,
including the Purchase Agreement and certain contribution agreements between members of the
affiliated group.

Per the POA, Holdco believed that review of the transaction documents by Accounting
Firm would have provided adequate detail to determine Holdco's post-acquisition legal
organizational structure and federal income tax filing requirements.

If Holdco had intended to file a consolidated return with Intermediate, Holdco should
have included Form 1122, signed by a representative of Intermediate granting consent to join in a
consolidated group with Holdco, an indication of a consolidated filing on Page 1 of the Form
1120, and a Form 851, Affiliations Schedule. However, this was not done, nor, per the
information provided by the POA, was the need for this brought to the attention of Holdco.

For the initial short tax period ending and all subsequent calendar
years Holdco filed a standalone Form 1120, U.S. Corporation Income Tax Return, that reported
the operations of Intermediate and its subsidiaries. Intermediate did not file a separate return for
the period ending , or for any subsequent tax years. The amount of U.S.
income taxes reported as owing on Holdco's U.S. income tax return for its tax period ending
, and for all its subsequent tax years was never less than what the total U.S.
income tax liability of Holdco and Intermediate would have been had each of them filed separate

U.S. income tax returns.

The CFO, who served in the role for both Holdco and Intermediate, did not have in-depth
knowledge of consolidated filing regulations. The CFO signed the returns without fully
understanding the procedural irregularity of the filing, in part because the return contained all the
activities of Intermediate, and Holdco was solely a holding company.

At the request of Holdco's majority shareholder, (“Analyst”) was engaged
to analyze and provide due diligence services to Holdco and its subsidiaries. Analyst was not
involved in the formation of Holdco and its subsidiaries or the preparation of its returns. Analyst
discovered the missed election while performing its due diligence procedures.

During the due diligence process, Analyst reviewed the Purchase Agreement and
discovered that Intermediate, which was still in existence, had not properly filed consolidated
income tax returns as the direct or indirect owner of the operating disregarded entities. Analyst
recognized that Intermediate's existence impacted Holdco's tax returns. Once the missed filing of
a consolidated group's return was discovered, Analyst advised Holdco to file this request for a
determination letter under Treas. Reg. §§ 1.1502-75(b)(2) or 1.1502-75(b)(3) regarding Holdco's
missed consolidated group's election and the subsidiary's consent in joining consolidated Forms
1120 filing for tax years 2017 and all subsequent years.

To support this request for relief, the affiliated group attached declarations from:

(1) , in his dual capacity as Chief Financial Officer for both Holdco and
Intermediate, and

(2) , Partner, Analyst.

Determination Requested

Based on the above facts, Holdco requested that the Commissioner determine under
§1.1502-75(b)(2) or §1.1502-75(b)(3) of the Treasury Regulations that Intermediate has joined in
the filing of Holdco's consolidated income tax returns for the period ending on , and for all tax years ending thereafter. Holdco and Intermediate will conform with any
additional or amended filings that might be required as a condition for the requested
determination.

Law

The Internal Revenue Code (“I.R.C.”) § 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 I.R.C. § 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.”

I.R.C. § 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 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.”

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 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.

Analysis
Holdco and its wholly owned subsidiary, Intermediate, were eligible to file consolidated

federal income tax returns for the tax period ending on , and every tax year
thereafter. The income and deductions of Intermediate were included in the timely-filed federal
income tax returns of Holdco for the tax period ending on , and all
subsequent tax years. However, Form 1122 and related entries were not filed with Holdco’s
initial Form 1120 for tax year ending . The failure of Intermediate to join
Holdco's consolidated return appears to be inadvertent and lacks an obvious tax planning

purpose.

It was Holdco's and Intermediate's intention to have their incomes reported and federal
income tax liabilities satisfied on a combined basis, and even though they did not file the proper
documentation, it was essentially what occurred. Holdco included all items of Intermediate's
income, gain, loss, deduction, and credit on its income tax returns and paid all federal income
taxes on such income. Thus, Holdco and Intermediate had filed what virtually amounted to a
consolidated federal tax return for the tax period ending and all subsequent
tax years.

Thus, while neither the Holdco nor Intermediate complied with Treas. Reg. § 1.1502-
75(b)(1), it would be consistent with the regulation for the Commissioner to determine, pursuant
to subsection (b)(2) or subsection (b)(3), that Intermediate has consented to join in the making of
the consolidated return based on the facts and circumstances of the case.

Per Treas. Reg. § 1.1502-75(b)(2), the making a facts and circumstances determination
regarding the consent of a member, the Commissioner will generally take into account (1)
whether or not the income and deductions of the member were included in the consolidated
return; (2) whether or not a separate return was filed by the member for that taxable year; and (3)
whether or not the member was included in the affiliations schedule, Form 851. None of the
factors here weigh against granting the determination.

Treas. Reg. § 1.1502-75(b)(3) permits the Commissioner to find that a Form 1122 was
filed if the common parent corporation establishes that the failure of the affiliated group to join
in the consolidated return was due to a mistake of fact or to inadvertence. Here, due to
inadvertence, Accounting Firm failed to properly include Intermediate in the consolidated filing.
Even though Holdco did not formally file Form 1122, its inclusion of Intermediate's income and
deductions on its tax returns constructively amounted to a consolidated return. Therefore, if the

5

representation of the POA is accurate, the improper filing of the consolidated return paperwork
appears to be inadvertent.

DETERMINATION

Based on the information submitted and the representations made in the letter received
, we have determined that Treas. Reg. § 1.1502-75(b)(2) can be applied in this

case.

In this case, Holdco and Intermediate failed to file Form 1122. It is our opinion that
Treas. Reg. § 1.1502-75(b)(2) applies in this case because of the following circumstances: (i)
The income and deductions of Holdco and Intermediate were included in Holdco’s return,
and (ii) Intermediate did not file a separate return for the tax year.

Intermediate was not included on a Form 851 affiliation schedule, because no Form 851
was filed with the Holdco affiliated group return. However, the Service has granted relief under
Treas. Reg. § 1.1502-75(b)(2) in similar previous situations where a subsidiary was not included
on Form 851.

Accordingly, based solely on facts and representations submitted in the letter received
, the Service shall treat Subsidiary as if it had filed a Form 1122 for the taxable

years ended and subsequent years for purposes of Treas. Reg. § 1.1502-
75(h)(2) and thus joined in the making of a consolidated return by the affiliate group,

notwithstanding that it failed to actually file Form 1122.

In the alternative, relief could be granted under Treas. Reg. § 1.1502-75(b)(3), which
allows for relief in the case of inadvertence or mistake. As the failure to properly file paperwork
for consolidated returns was likely inadvertent, relief could be granted under Treas. Reg.

§ 1.1502-75(b)(3). In this case, since a determination is being made under Treas. Reg. § 1.1502-
75(b)(2) there is no need to make a determination under Treas. Reg. § 1.1502-75(b)(3); however,
the Service agrees that the facts also support a conclusion that the failure of the subsidiaries to
join in the making of the consolidated return was due to a mistake of law or fact, or to
inadvertence as the taxpayers representative stated in their determination letter request, “the
failure was due to a mistake of fact or to inadvertence.”

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. I.R.C. § 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 Holdco’s U.S. income
tax returns. A copy of this determination letter should be kept by Holdco in its 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:

Khin M Chow

Title: Director, Field Operations North Central
Section 6110(k)(3) of the Internal Revenue Code

This document may not be used or cited as precedent.