[Code of Federal Regulations]
[Title 26, Volume 12]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1502-75]
[Page 451-460]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.1502-75 Filing of consolidated returns.
(a) Privilege of filing consolidated returns--(1) Exercise of
privilege for first consolidated return year. 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. If a group wishes to exercise its
privilege of filing a consolidated return, such consolidated return must
be filed not later
[[Page 452]]
than the last day prescribed by law (including extensions of time) for
the filing of the common parent's return. Such consolidated return may
not be withdrawn after such last day (but the group may change the basis
of its return at any time prior to such last day).
(2) Continued filing requirement. A group which filed (or was
required to file) a consolidated return for the immediately preceding
taxable year is required to file a consolidated return for the taxable
year unless it has an election to discontinue filing consolidated
returns under paragraph (c) of this section.
(b) How consent for first consolidated year exercised--(1) General
rule. 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 in the making of such return for such year if it files a
Form 1122 in the manner specified in paragraph (h)(2) of this section.
(2) Consent under facts and circumstances. 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.
(3) Failure to consent due to mistake. 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.
(c) Election to discontinue filing consolidated returns--(1) Good
cause--(i) In general. Notwithstanding that a consolidated return is
required for a taxable year, the Commissioner, upon application by the
common parent, may for good cause shown grant permission to a group to
discontinue filing consolidated returns. Any such application shall be
made to the Commissioner of Internal Revenue, Washington, DC 20224, and
shall be made not later than the 90th day before the due date for the
filing of the consolidated return (including extensions of time). In
addition, if an amendment of the Code, or other law affecting the
computation of tax liability, is enacted and the enactment is effective
for a taxable year ending before or within 90 days after the date of
enactment, then application for such a taxable year may be made not
later than the 180th day after the date of enactment, and if the
application is approved the permission to discontinue filing
consolidated returns will apply to such taxable year notwithstanding
that a consolidated return has already been filed for such year.
(ii) Substantial adverse change in law affecting tax liability.
Ordinarily, the Commissioner will grant a group permission to
discontinue filing consolidated returns if the net result of all
amendments to the Code or regulations with effective dates commencing
within the taxable year has a substantial adverse effect on the
consolidated tax liability of the group for such year relative to what
the aggregate tax liability would be if the members of the group filed
separate returns for such year. Thus, for example, assume P and S filed
a consolidated return for the
[[Page 453]]
calendar year 1966 and that the provisions of the Code have been amended
by a bill which was enacted by Congress in 1966, but which is first
effective for taxable years beginning on or after January 1, 1967.
Assume further that P makes a timely application to discontinue filing
consolidated returns. In order to determine whether the amendments have
a substantial adverse effect on the consolidated tax liability for 1967,
relative to what the aggregate tax liability would be if the members of
the group filed separate returns for 1967, the difference between the
tax liability of the group computed on a consolidated basis and taking
into account the changes in the law effective for 1967 and the aggregate
tax liability of the members of the group computed as if each such
member filed separate returns for such year (also taking into account
such changes) shall be compared with the difference between the tax
liability of such group for 1967 computed on a consolidated basis
without regard to the changes in the law effective in such year and the
aggregate tax liability of the members of the group computed as if
separate returns had been filed by such members for such year without
regard to the changes in the law effective in such year.
(iii) Other factors. In addition, the Commissioner will take into
account other factors in determining whether good cause exists for
granting permission to discontinue filing consolidated returns beginning
with the taxable year, including:
(a) Changes in law or circumstances, including changes which do not
affect Federal income tax liability,
(b) Changes in law which are first effective in the taxable year and
which result in a substantial reduction in the consolidated net
operating loss (or consolidated unused investment credit) for such year
relative to what the aggregate net operating losses (or investment
credits) would be if the members of the group filed separate returns for
such year, and
(c) Changes in the Code or regulations which are effective prior to
the taxable year but which first have a substantial adverse effect on
the filing of a consolidated return relative to the filing of separate
returns by members of the group in such year.
(2) Discretion of Commissioner to grant blanket permission--(i)
Permission to all groups. The Commissioner, in his discretion, may grant
all groups permission to discontinue filing consolidated returns if any
provision of the Code or regulations has been amended and such amendment
is of the type which could have a substantial adverse effect on the
filing of consolidated returns by substantially all groups, relative to
the filing of separate returns. Ordinarily, the permission to
discontinue shall apply with respect to the taxable year of each group
which includes the effective date of such an amendment.
(ii) Permission to a class of groups. The Commissioner, in his
discretion, may grant a particular class of groups permission to
discontinue filing consolidated returns if any provision of the Code or
regulations has been amended and such amendment is of the type which
could have a substantial adverse effect on the filing of consolidated
returns by substantially all such groups relative to the filing of
separate returns. Ordinarily, the permission to discontinue shall apply
with respect to the taxable year of each group within the class which
includes the effective date of such an amendment.
(3) Time and manner for exercising election. If, under subparagraph
(1) or (2) of this paragraph, a group has an election to discontinue
filing consolidated returns for any taxable year and such group wishes
to exercise such election, then the common parent must file a separate
return for such year on or before the last day prescribed by law
(including extensions of time) for the filing of the consolidated return
for such year. See section 6081 (relating to extensions of time for
filing returns).
(d) When group remains in existence--(1) General rule. A group
remains in existence for a tax year if the common parent remains as the
common parent and at least one subsidiary that was affiliated with it at
the end of the prior year remains affiliated with it at the beginning of
the year, whether or not one or more corporations have ceased to be
subsidiaries at any time after the group was formed. Thus, for example,
[[Page 454]]
assume that individual A forms corporation P. P acquires 100 percent of
the stock of corporation S on January 1, 1965, and P and S file a
consolidated return for the calendar year 1965. On May 1, 1966, P
acquires 100 percent of the stock of S-1, and on July 1, 1966, P sells
the stock of S. The group (consisting originally of P and S) remains in
existence in 1966 since P has remained as the common parent and at least
one subsidiary (now S-1) remains affiliated with it.
(2) Common parent no longer in existence--(i) Mere change in
identity. For purposes of this paragraph, the common parent corporation
shall remain as the common parent irrespective of a mere change in
identity, form, or place of organization of such common parent
corporation (see section 368(a)(1)(F)).
(ii) Transfer of assets to subsidiary. The group shall be considered
as remaining in existence notwithstanding that the common parent is no
longer in existence if the members of the affiliated group succeed to
and become the owners of substantially all of the assets of such former
parent and there remains one or more chains of includible corporations
connected through stock ownership with a common parent corporation which
is an includible corporation and which was a member of the group prior
to the date such former parent ceases to exist. For purposes of applying
paragraph (f)(2)(i) of Sec. 1.1502-1 to separate return years ending on
or before the date on which the former parent ceases to exist, such
former parent, and not the new common parent, shall be considered to be
the corporation described in such paragraph.
(iii) Taxable years. If a transfer of assets described in
subdivision (ii) of this subparagraph is an acquisition to which section
381(a) applies and if the group files a consolidated return for the
taxable year in which the acquisition occurs, then for purposes of
section 381:
(a) The former common parent shall not close its taxable year merely
because of the acquisition, and all taxable years of such former parent
ending on or before the date of acquisition shall be treated as taxable
years of the acquiring corporation, and
(b) The corporation acquiring the assets shall close its taxable
year as of the date of acquisition, and all taxable years of such
corporation ending on or before the date of acquisition shall be treated
as taxable years of the transferor corporation.
(iv) Exception. With respect to acquisitions occurring before
January 1, 1971, subdivision (iii) of this subparagraph shall not apply
if the group, in its income tax return, treats the taxable year of the
former common parent as having closed as of the date of acquisition.
(3) Reverse acquisitions--(i) In general. If a corporation
(hereinafter referred to as the ``first corporation'') or any member of
a group of which the first corporation is the common parent acquires
after October 1, 1965:
(a) Stock of another corporation (hereinafter referred to as the
second corporation), and as a result the second corporation becomes (or
would become but for the application of this subparagraph) a member of a
group of which the first corporation is the common parent, or
(b) Substantially all the assets of the second corporation,
in exchange (in whole or in part) for stock of the first corporation,
and the stockholders (immediately before the acquisition) of the second
corporation, as a result of owning stock of the second corporation, own
(immediately after the acquisition) more than 50 percent of the fair
market value of the outstanding stock of the first corporation, then any
group of which the first corporation was the common parent immediately
before the acquisition shall cease to exist as of the date of
acquisition, and any group of which the second corporation was the
common parent immediately before the acquisition shall be treated as
remaining in existence (with the first corporation becoming the common
parent of the group). Thus, assume that corporations P and S comprised
group PS (P being the common parent), that P was merged into corporation
T (the common parent of a group composed of T and corporation U), and
that the shareholders of P immediately before the merger, as a result of
owning stock in P, own 90 percent of the fair market
[[Page 455]]
value of T's stock immediately after the merger. The group of which P
was the common parent is treated as continuing in existence with T and U
being added as members of the group, and T taking the place of P as the
common parent.
For purposes of determining under (a) of this subdivision whether the
second corporation becomes (or would become) a member of the group of
which the first corporation is the common parent, and for purposes of
determining whether the former stockholders of the second corporation
own more than 50 percent of the outstanding stock of the first
corporation, there shall be taken into account any acquisitions or
redemptions of the stock of either corporation which are pursuant to a
plan of acquisition described in (a) or (b) of this subdivision.
(ii) Prior ownership of stock. For purposes of subdivision (i) of
this subparagraph, if the first corporation, and any members of a group
of which the first corporation is the common parent, have continuously
owned for a period of at least 5 years ending on the date of the
acquisition an aggregate of at least 25 percent of the fair market value
of the outstanding stock of the second corporation, then the first
corporation (and any subsidiary which owns stock of the second
corporation immediately before the acquisition) shall, as a result of
owning such stock, be treated as owning (immediately after the
acquisition) a percentage of the fair market value of the first
corporation's outstanding stock which bears the same ratio to (a) the
percentage of the fair market value of all the stock of the second
corporation owned immediately before the acquisition by the first
corporation and its subsidiaries as (b) the fair market value of the
total outstanding stock of the second corporation immediately before the
acquisition bears to (c) the sum of (1) the fair market value,
immediately before the acquisition, of the total outstanding stock of
the first corporation, and (2) the fair market value, immediately before
the acquisition, of the total outstanding stock of the second
corporation (other than any such stock owned by the first corporation
and any of its subsidiaries). For example, assume that corporation P
owns stock in corporation T having a fair market value of $100,000, that
P acquires the remaining stock of T from individuals in exchange for
stock of P, that immediately before the acquisition the total
outstanding stock of T had a fair market value of $150,000, and that
immediately before the acquisition the total outstanding stock of P had
a fair market value of $200,000. Assuming P owned at least 25 percent of
the fair market value of T's stock for 5 years, then for purposes of
this subparagraph, P is treated as owning (immediately after the
acquisition) 40 percent of the fair market value of its own outstanding
stock, determined as follows:
[$150,000/($200,000+$50,000)]x662/3%=40%.
Thus, if the former individual stockholders of T own, immediately after
the acquisition more than 10 percent of the fair market value of the
outstanding stock of P as a result of owning stock of T, the group of
which T was the common parent is treated as continuing in existence with
P as the common parent, and the group of which P was the common parent
before the acquisition ceases to exist.
(iii) Election. The provisions of subdivision (ii) of this
subparagraph shall not apply to any acquisition occurring in a taxable
year ending after October 7, 1969, unless the first corporation elects
to have such subdivision apply. The election shall be made by means of a
statement, signed by any officer who is duly authorized to act on behalf
of the first corporation, stating that the corporation elects to have
the provisions of Sec. 1.1502-75(d)(3)(ii) apply and identifying the
acquisition to which such provisions will apply. The statement shall be
filed, on or before the due date (including extensions of time) of the
return for the group's first consolidated return year ending after the
date of the acquisition, with the internal revenue officer with whom
such return is required to be filed.
(iv) Transfer of assets to subsidiary. This subparagraph shall not
apply to a transaction to which subparagraph (2)(ii) of this paragraph
applies.
(v) Taxable years. If, in a transaction described in subdivision (i)
of this subparagraph, the first corporation files a
[[Page 456]]
consolidated return for the first taxable year ending after the date of
acquisition, then:
(a) The first corporation, and each corporation which, immediately
before the acquisition, is a member of the group of which the first
corporation is the common parent, shall close its taxable year as of the
date of acquisition, and each such corporation shall, immediately after
the acquisition, change to the taxable year of the second corporation,
and
(b) If the acquisition is a transaction described in section
381(a)(2), then for purposes of section 381:
(1) All taxable years ending on or before the date of acquisition,
of the first corporation and each corporation which, immediately before
the acquisition, is a member of the group of which the first corporation
is the common parent, shall be treated as taxable years of the
transferor corporation, and
(2) The second corporation shall not close its taxable year merely
because of such acquisition, and all taxable years ending on or before
the date of acquisition, of the second corporation and each corporation
which, immediately before the acquisition, is a member of any group of
which the second corporation is the common parent, shall be treated as
taxable years of the acquiring corporation.
(vi) Exception. With respect to acquisitions occurring before April
17, 1968, subdivision (v) of this subparagraph shall not apply if the
parties to the transaction, in their income tax returns, treat
subdivision (i) as not affecting the closing of taxable years or the
operation of section 381.
(4) [Reserved]
(5) Coordination with section 833--(i) Election to continue old
group. If, solely by reason of the enactment of section 833 (relating to
certain Blue Cross or Blue Shield organizations and certain other health
insurers), an organization to which section 833 applies (a ``section 833
organization'') became the new common parent of an old group on January
1, 1987, the old group may elect to continue in existence with that
section 833 organization as its new common parent, provided all the old
groups having the same section 833 organization as their new common
parent elect to continue in existence. To revoke this election, see
paragraph (d)(5)(x) of this section. To file as a new group, see
paragraph (d)(5)(v) of this section.
(ii) Old group. For purposes of this paragraph (d)(5), an old group
is a group which, for its last taxable year ending in 1986, either filed
a consolidated return or was eligible to (but did not) file a
consolidated return.
(iii) Manner of electing to continue--(A) Deemed election. If all
the members of all the old groups having the same section 833
organization as their new common parent are included for the first
taxable year beginning after December 31, 1986, on the same consolidated
(or amended consolidated) return and a Form 1122 was not filed, the old
groups are deemed to have elected under paragraph (d)(5)(i) of this
section to continue in existence.
(B) Delayed election. If a deemed election to continue in existence
was not made under paragraph (d)(5)(iii)(A) of this section, all the
members of all the old groups having the same section 833 organization
as their new common parent may make a delayed election under paragraph
(d)(5)(i) of this section to continue in existence by:
(1) Filing an appropriate consolidated (or amended consolidated)
return or returns for each taxable year beginning after December 31,
1986, (notwithstanding Sec. 1.1502-75(a)(1)) on or before January 3,
1991, and
(2) On the top of any such return prominently affixing a statement
containing the following declaration: ``THIS RETURN'' (or, if
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO
CONTINUE UNDER Sec. 1.1502-75T(d)(5)(iii)(B)''. A delayed election to
continue in existence automatically revokes a deemed election to file as
a new group which was made under paragraph (d)(5)(vi) of this section.
(iv) Effects of election to continue in existence. If an old group
or groups elect to continue in existence under paragraph (d)(5)(i) of
this section, the following rules apply:
(A) Taxable years. Each member that filed returns other than on a
calendar year basis shall close its taxable year on December 31, 1986,
and change to a
[[Page 457]]
calendar year beginning on January 1, 1987. See section 843 and Sec.
1.1502-76(a)(1).
(B) Carryovers from separate return limitation years. For purposes
of applying the separate return limitation year rules to carryovers from
taxable years beginning before 1987 to taxable years beginning after
1986, the following rules apply:
(1) Any taxable year beginning before 1987 of a corporation that was
not a member of an old group (including a section 833 organization) will
be treated as a separate return limitation year;
(2) Any taxable year beginning before 1987 of a corporation that was
a member of an old group that, without regard to this section and the
enactment of section 833, was a separate return limitation year will
continue to be treated as a separate return limitation year;
(3) Any taxable year beginning before 1987 of a member of an old
group (other than a separate return limitation year described in
paragraph (d)(5)(iv)(B)(2) of this section) will not be treated as a
separate return limitation year with respect to any corporation that was
a member of such group for each day of that taxable year; and
(4) Any taxable year beginning before 1987 of a member of an old
group will be treated as a separate return limitation year with respect
to any corporation that was not a member of such group for each day of
that taxable year (e.g., a corporation that was not a member of an old
group, including a section 833 organization, or a corporation that was a
member of another old group).
(C) Five-year rules for life-nonlife groups. Any life-nonlife
election under section 1504(c)(2) in effect for an old group remains in
effect. Any old group which was eligible to make a life-nonlife election
will remain eligible to make the election. For purposes of section
1503(c), a nonlife member is treated as ineligible under Sec. 1.1502-
47(d)(13) with respect to a life member, unless both were members of the
same affiliated group (determined without regard to the exclusions in
section 1504(b) (1) and (2)) for five taxable years immediately
preceding the taxable year in which the loss arose. See paragraph
(d)(5)(ix) of this section for a tacking rule.
(v) Election to file as a new group. If, solely by reason of the
enactment of section 833, a section 833 organization became the new
common parent of an old group on January 1, 1987, the application of the
five-year prohibition on reconsolidation in section 1504(a)(3)(A) to the
old group is waived and the old group together with the new section 833
organization common parent may elect to file as a new group provided
that all includible corporations elect to file a consolidated (or
amended consolidated) return as a new group for the first taxable year
beginning after December 31, 1986. To revoke this election, see
paragraph (d)(5)(x) of this section.
(vi) Manner of electing to file as a new group--(A) Deemed election.
The old group or groups and the section 833 organization are deemed to
have elected under paragraph (d)(5)(v) of this section to file as a new
group by filing, for the first taxable year beginning after December 31,
1986, a Form 1122 and a consolidated (or amended consolidated) tax
return.
(B) Delayed election. If a deemed election to file as a new group
was not made pursuant to paragraph (d)(5)(vi)(A) of this section, the
old group or groups and the section 833 organization may make a delayed
election under paragraph (d)(5)(v) of this section to file as a new
group by
(1) Filing an appropriate consolidated (or amended consolidated)
return or returns for each taxable year beginning after December 31,
1986 (notwithstanding Sec. 1.1502-75(a)(1)) on or before January 3,
1991, and
(2) On the top of any such return prominently affixing a statement
containing the following declaration: ``THIS RETURN'' (or, if
applicable, ``AMENDED RETURN'') ``REFLECTS A DELAYED ELECTION TO FILE AS
A NEW GROUP UNDER Sec. 1.1502-75T (d)(5)(vi)(B)''. A delayed election
to file as a new group automatically revokes any deemed election to
continue in existence which was made under paragraph (d)(5)(iii) of this
section.
(vii) Effects of election to file as a new group. If an old group or
groups elect to file as a new group under paragraph
[[Page 458]]
(d)(5)(v) of this section, the following rules apply:
(A) Termination. Each old group is treated as if it terminated on
January 1, 1987, and the termination is not treated as resulting from
the acquisition by a nonmember of all of the stock of the common parent.
(B) Taxable years. Each member that filed returns other than on a
calendar year basis shall close its taxable year on December 31, 1986,
and change to a calendar year beginning on January 1, 1987. See section
843 and Sec. 1.1502-76(a)(1).
(C) Separate return limitation year and life-nonlife groups. For
purposes of Sec. 1.1502-1(f), sections 1503(c) and 1504(c), and Sec.
1.1502-47, the group is treated as coming into existence as a new group
on January 1, 1987. Thus, for example, paragraphs (d)(5)(iv) (B) and (C)
of this section do not apply.
(viii) Earnings and profits. All distributions after January 1, 1987
by a corporation, whether or not such corporation was a member of an old
group, to an existing Blue Cross or Blue Shield organization (as defined
in section 833(c)(2)) out of earnings and profits accumulated before
1987 are deemed made out of earnings and profits accumulated in pre-
affiliation years. See Sec. 1.1502-32(h)(5).
(ix) Five-year tacking rules for certain life-nonlife groups. For
purposes of applying Sec. 1.1502-47(d) (5) and (12) to any taxable year
ending after 1986 to a corporation, whether or not the corporation was a
member of an old group,
(A) The determination of whether the corporation was in existence
and a member or tentatively treated as a member of a group, for taxable
years ending before 1987, is made without regard to the exclusions under
section 1504(b) (1) and (2) of any section 833 organization or life
insurance company (as the case may be) and
(B) A section 833 organization is not treated as having a change in
tax character solely by reason of the loss of its tax-exempt status due
to the enactment of section 833.
This paragraph (d)(5)(ix) does not apply if an election to file as a new
group under paragraph (d)(5)(v) of this section is made.
(x) Time to revoke elections made before September 5, 1990. An
election by an old group to continue in existence or to file as a new
group that was made (or deemed made) before September 5, 1990, may be
revoked by filing an appropriate return (or returns) on or before
January 3, 1991. For purposes of this paragraph (d)(5)(x), appropriate
returns include separate returns filed by each member of the group or
consolidated returns filed in accordance with a delayed election either
under paragraph (d)(5)(iii)(B) or (vi)(B) of this section.
(xi) Examples. The following examples illustrate this paragraph
(d)(5). In these examples, each corporation uses the calendar year as
its taxable year.
Example 1. B is a section 833 organization. For several years, B has
owned all of the outstanding stock of X, Y, and Z. X has owned all the
outstanding stock of X1 throughout X1's existence
and Y has owned all of the outstanding stock of Y1 throughout
Y1's existence. For 1986 X and X1 filed a
consolidated federal income tax return but Y and Y1 filed
separate returns. Under paragraph (d)(5)(ii) of this section, X and
X1 and Y and Y1 each constitute an old group
because they either filed a consolidated return or were eligible to file
a consolidated return for 1986. The X and Y groups may elect under
paragraph (d)(5)(i) of this section to continue in existence. If they
elect to continue, under paragraph (d)(5)(iv)(B) of this section, the
separate return limitation year rules apply as follows: any taxable year
of B or Z beginning before 1987 is treated as a separate return
limitation year with respect to each other and to all other members of
the group; any taxable year of X or X1 beginning before 1987
is treated as a separate return limitation year with respect to B, Z, Y
and Y1, but not with respect to each other; and any taxable
year of Y or Y1 beginning before 1987 is treated as a
separate return limitation year with respect to B, Z, X and
X1, but not with respect to each other.
Example 2. The facts are the same as in Example 1 except that B is
owned by C, another section 833 organization. If the X and Y groups
elect to continue, the results are the same as in Example 1, except
that, under paragraph (d)(5)(iv)(B)(1) of this section, for purposes of
applying the separate return limitation year rules, any taxable year of
C beginning before 1987 is also treated as a separate return limitation
year with respect to all other members of the group.
Example 3. The facts are the same as in Example 1 except that Y
purchased Y1 on January 1, 1985. If the X and Y groups elect
to continue, the results are the same as in Example 1, except that,
under paragraph
[[Page 459]]
(d)(5)(iv)(B)(2) of this section, for purposes of applying the separate
return limitation year rules, any taxable year of Y1
beginning before 1985 is treated as a separate return limitation year
with respect to Y as well as with respect to all other members of the
group.
Example 4. B, a section 833 organization, has owned all the stock of
X since November 1984. X has owned all the stock of L, a life insurance
company, throughout L's existence. In 1986, X and L properly filed a
life-nonlife consolidated return. Under paragraph (d)(5)(i) of this
section, the X group elects to continue in existence. Under paragraph
(d)(5)(iv)(C) of this section, the life-nonlife election will remain in
effect. However, losses of B which arise before 1990 cannot be used to
offset the income of L. See section 1503(c)(2) and Sec. 1.1502-
47(d)(13) and paragraph (d)(5)(iv)(C) of this section. Under paragraph
(d)(5)(iv)(B) of this section, the separate return limitation year rules
apply as follows: any taxable year of B beginning before 1987 is treated
as a separate return limitation year with respect to all other members
of the group; and any taxable year of X or L beginning before 1987 is
treated as a separate return limitation year with respect to B, but not
with respect to each other.
Example 5. The facts are the same as Example 4 except that, on
January 1, 1984, B formed L1, a life insurance company. Under
paragraph (d)(5)(ix) of this section and section 1504(c), the first year
L1 is eligible to join in B's life-nonlife election is 1989.
Example 6. The facts are the same as in Example 4 except that B and
the X group elect under paragraph (d)(5)(v) of this section to file as a
new group. The X group will be considered to have terminated under Sec.
1.1502-75(d)(1) on December 31, 1986. X and L are each separately
subject to the separate return limitation year rules of Sec. 1.1502-
1(f). The first year L and L1 are eligible to join the new
group in a life-nonlife election is 1992 (five years after the new group
is formed). See section 1504(c)(2) and paragraphs (d)(5)(vii)(C) and
(ix) of this section.
The provisions contained in this Treasury decision are needed to
immediately amend the consolidated return regulations in response to
changes made by section 1012 of the Tax Reform Act of 1986. It is
therefore found impracticable and contrary to the public interest to
issue this Treasury decision with notice and public procedure under
section 553(b) of title 5 of the United States Code or subject to the
effective date limitations of section 553(d) of title 5, United States
Code.
(e) Failure to include subsidiary. If a consolidated return is
required for the taxable year under the provisions of paragraph (a)(2)
of this section, the tax liability of all members of the group for such
year shall be computed on a consolidated basis even though:
(1) Separate returns are filed by one or more members of the group,
or
(2) There has been a failure to include in the consolidated return
the income of any member of the group.
If subparagraph (1) of this paragraph applies, the amounts assessed or
paid upon the basis of separate returns shall be considered as having
been assessed or paid upon the basis of a consolidated return.
(f) Inclusion of one or more corporations not members of the group--
(1) Method of determining tax liability. If a consolidated return
includes the income of a corporation which was not a member of the group
at any time during the consolidated return year, the tax liability of
such corporation will be determined upon the basis of a separate return
(or a consolidated return of another group, if paragraph (a)(2) or
(b)(3) of this section applies), and the consolidated return will be
considered as including only the income of the corporations which were
members of the group during that taxable year. If a consolidated return
includes the income of two or more corporations which were not members
of the group but which constitute another group, the tax liability of
such corporations will be computed in the same manner as if separate
returns had been made by such corporations unless the Commissioner upon
application approves the making of a consolidated return for the other
group or unless under paragraph (a)(2) of this section a consolidated
return is required for the other group.
(2) Allocation of tax liability. In any case in which amounts have
been assessed and paid upon the basis of a consolidated return and the
tax liability of one or more of the corporations included in the
consolidated return is to be computed in the manner described in
subparagraph (1) of this paragraph, the amounts so paid shall be
allocated between the group composed of the corporations properly
included in the consolidated return and each of the corporations the tax
liability of which is to be computed on a separate basis (or on the
basis of a consolidated return of
[[Page 460]]
another group) in such manner as the corporations which were included in
the consolidated return may, subject to the approval of the
Commissioner, agree upon or in the absence of an agreement upon the
method used in allocating the tax liability of the members of the group
under the provisions of section 1552(a).
(g) Computing periods of limitation--(1) Income incorrectly included
in consolidated return. If:
(i) A consolidated return is filed by a group for the taxable year,
and
(ii) The tax liability of a corporation whose income is included in
such return must be computed on the basis of a separate return (or on
the basis of a consolidated return with another group), then for the
purpose of computing any period of limitation with respect to such
separate return (or such other consolidated return), the filing of such
consolidated return by the group shall be considered as the making of a
return by such corporation.
(2) Income incorrectly included in separate returns. If a
consolidated return is required for the taxable year under the
provisions of paragraph (a)(2) of this section, the filing of separate
returns by the members of the group for such year shall not be
considered as the making of a return for the purpose of computing any
period of limitation with respect to such consolidated return unless
there is attached to each such separate return a statement setting
forth:
(i) The most recent taxable year of the member for which its income
was included in a consolidated return, and
(ii) The reasons for the group's belief that a consolidated return
is not required for the taxable year.
(h) Method of filing return and forms--(1) Consolidated return made
by common parent corporation. The consolidated return shall be made on
Form 1120 for the group by the common parent corporation. The
consolidated return, with Form 851 (affiliations schedule) attached,
shall be filed with the district director with whom the common parent
would have filed a separate return.
(2) [Reserved]. For further guidance, see Sec. 1.1502-75T(h)(2).
(3) Persons qualified to execute returns and forms. Each return or
form required to be made or prepared by a corporation must be executed
by the person authorized under section 6062 to execute returns of
separate corporations.
(i) [Reserved]
(j) Statements and schedules for subsidiaries. The statement of
gross income and deductions and the schedules required by the
instructions on the return shall be prepared and filed in columnar form
so that the details of the items of gross income, deductions, and
credits for each member may be readily audited. Such statements and
schedules shall include in columnar form a reconciliation of surplus for
each corporation, and a reconciliation of consolidated surplus.
Consolidated balance sheets as of the beginning and close of the taxable
year of the group, taken from the books of the members, shall accompany
the consolidated return and shall be prepared in a form similar to that
required for reconciliation of surplus.
(k) Cross-reference. See Sec. 1.338(h)(10)-1(d)(7) for special
rules regarding filing consolidated returns when a section 338(h)(10)
election is made for a target acquired from a selling consolidated
group.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7016, 34 FR
15556, Oct. 7, 1969; T.D. 7024, 35 FR 2774, Feb. 10, 1970; T.D. 7244, 37
FR 28897, Dec. 30, 1972; T.D. 7246, 38 FR 766, Jan. 4, 1973; T.D. 8438,
57 FR 44333, Sept. 25, 1992; T.D. 8515, 59 FR 2984, Jan. 20, 1994; T.D.
8560, 59 FR 41675, 41700, Aug. 15, 1994; T.D. 8858, 65 FR 1237, Jan. 7,
2000; 66 FR 9929, Feb. 13, 2001; T.D. 9100, 68 FR 70707, Dec. 19, 2003]