Deconsolidated corporations may file their own consolidated return

Plain-English summary

A parent corporation filed a consolidated return that included a subsidiary group for an entire tax year even though ownership had fallen below the required affiliation threshold during that year. The improperly included corporations themselves formed another affiliated group. The IRS allowed that group to file its own consolidated return for the period after deconsolidation and imposed the normal continuing consolidated-return requirement for later years while the group remained in existence. Federal income tax previously paid by the former parent would be allocated between the two groups according to their respective taxable incomes. The former parent also had to amend its return to remove the separated group's income, gain, deductions, losses, and credits for the post-deconsolidation period. The relevant assessment periods remained open.

Ruling snapshot

• Question: May corporations improperly included in a former parent's consolidated return file a separate consolidated return for their own affiliated group?
• Outcome: Approved, with tax allocation and amended-return requirements.
• Key authorities: Treas. Reg. §§ 1.1502-75(a)(2), 1.1502-75(f)(1), and 1.1502-75(f)(2); IRC § 6501(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202121004 [Third Party Communication:
Release Date: 5/28/2021 Date of Communication: Month DD, YYYY]
Index Number: 1502.00-00, 1502.75-00
Person To Contact:
-------------------------------- -----------------------, ID No. -----------------
------------------------------------------- Telephone Number:
------------------------------ -------------------
------------------------------- Refer Reply To:
CC:CORP:B04
PLR-119954-20
Date:
March 3, 2021

Legend

Parent = ----------------------------

Taxpayer = --------------------------------

Date 1 = --------------------------

Date 2 = ------------------

Date 3 = --------------------------

Date 4 = ------------------

Dear ---------------:

This letter responds to a letter dated September 9, 2020, requesting the consent of the
Commissioner to file a consolidated return under §1.1502-75(f)(1) of the Income Tax
Regulations. The material information submitted is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.
PLR-119954-20 2

                                     FACTS

For the tax year ending Date 1, Parent, as the common parent of an affiliated group of
corporations (which included Taxpayer and the affiliated subsidiaries of Taxpayer), filed
a consolidated return for federal income tax purposes.

On Date 2, Taxpayer and the affiliated subsidiaries of Taxpayer deconsolidated from the
Parent consolidated group. Notwithstanding that, as of the end of the day on Date 2,
the affiliation between Parent, Taxpayer, and the affiliated subsidiaries of Taxpayer had
been broken, the return filed for the Parent consolidated group for the tax year ending
Date 3 included the items of income, gain, deduction, loss, and credit of Taxpayer and
the affiliated subsidiaries of Taxpayer for the entire tax year ending Date 3.

Subsequently, it was discovered that from Date 4 onward Parent had not owned the
requisite ownership percentage of Taxpayer stock needed for Taxpayer and the
affiliated subsidiaries of Taxpayer to be included in a consolidated return with Parent as
the common parent.

Generally, if a consolidated return improperly includes the income of one or more
corporations which were not members of the affiliated group, then, pursuant to §1.1502-
75(f)(1), the income tax liability of such corporations for the improperly included period
is to be determined on the basis of separate returns. However, also pursuant to
§1.1502-75(f)(1), if the improperly included corporations constitute another affiliated
group, then, upon application and approval, the income of such corporations may be
reported on the basis of a consolidated return. Taxpayer has requested approval for the
making of a consolidated return for Taxpayer and the affiliated subsidiaries of Taxpayer
for the period Date 4 through Date 3.

The period of limitations on assessment under section 6501(a) has not expired for
Parent, Taxpayer, or any of the affiliated subsidiaries of Taxpayer for the tax year
ending Date 3 or for any later tax year.

                                    RULINGS

Based on the facts submitted and the representations made, we rule as follows:

(1) Taxpayer and the affiliated subsidiaries of Taxpayer (the “Taxpayer Group”) are
permitted to file a consolidated federal income tax return for the tax year beginning Date
4 and ending Date 3. Section 1.1502-75(f)(1). The Taxpayer Group has a continuing
consolidated return filing requirement pursuant to §1.1502-75(a)(2) for subsequent tax
years in which the Taxpayer Group remains in existence.

(2) Provided that pursuant to ruling (1), above, the Taxpayer Group files a consolidated
federal income tax return for the tax year beginning Date 4 and ending Date 3, the
amount of federal income taxes Parent previously paid on a consolidated return basis
PLR-119954-20 3

for the tax year ending Date 3 is to be allocated between the Parent consolidated group
and the Taxpayer Group based upon the respective taxable incomes of the groups.
Section 1.1502-75(f)(2).

(3) Parent must amend its consolidated federal income tax return for the tax year ending
Date 3 to remove the items of income, gain, deduction, loss, and credit attributable to
the Taxpayer Group for the time period beginning Date 4 and ending Date 3.

                                                CAVEAT

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

                                    PROCEDURAL MATTERS

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this 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 return that provides the date and control number of the
letter ruling.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                                  Sincerely,


                                                   Thomas I. Russell______________
                                                  Thomas I. Russell
                                                  Chief, Branch 1
                                                  Office of Associate Chief Counsel (Corporate)

cc: ---------------

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