Nonlife insurance subsidiary treated as joining the consolidated return

Plain-English summary

A parent corporation acquired a nonlife insurance subsidiary (Sub 1) and, when it filed
the initial consolidated return for its affiliated group, left Sub 1 out: Sub 1's income
and other items were not included, no Form 1122 (the subsidiary's consent to be included)
was filed for it, and it was omitted from the Form 851 affiliations schedule. Instead Sub
1 filed a separate return, because of a mistake of law about whether a nonlife insurance
company could be included in a consolidated return. As a result, the requirements for a
valid consolidated return for that year were not met. The group could not use the
automatic relief in Rev. Proc. 2014-24, so it asked for a determination under Treas. Reg.
§ 1.1502-75(b)(3), which lets the IRS treat a member that failed to join as if it had
filed Form 1122 when the failure was due to a mistake of law or fact, or to inadvertence.
The IRS determined that provision applies here and treated Sub 1 as if it had filed Form
1122 and joined the parent's consolidated return beginning with the year at issue and all
later years. Both the parent and Sub 1 must amend their returns accordingly.

Ruling snapshot

• Question: May a nonlife insurance subsidiary that filed separately and never submitted Form 1122 be treated as joining the parent's consolidated return?
• Outcome: Approved, with amended returns required
• Key authorities: IRC §§ 1501 and 1504(a); Treas. Reg. § 1.1502-75; Rev. Proc. 2014-24

Full text (IRS public release)

Internal Revenue Service
Large Business & International
Western Compliance Practice Area

Department of the Treasury
Washington, DC 20224

Number: 202229039

UIL Code: 1501.00-00, 1502.75-00

Third Party Communication: None
Date of Communication: N/A

Person To Contact:

Telephone Number:

Date:
April 27, 2022

Legend:

Taxpayer 1 (Parent) = *
Taxpayer 2 (Sub 1) =
Taxpayer 3 (Sub 2) =
Taxpayer 4 (Sub 3) =
Taxpayer 5 (Sub 4) =
Taxpayer 6 (Sub 5) =
Taxpayer 7 (Sub 6) =
Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 = ***

Dear ****,

Determination Letter Under Treasury Regulation 1.1502-75

This letter responds to the letters dated Date 1 and Date 2 submitted on behalf of Parent
and each of Sub 1, Sub 2, Sub 3, Sub 4, Sub 5, and Sub 6 (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 Sub 1 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 ending
Date 3 and for all taxable years ending thereafter.

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

Parent acquired Sub 1, a nonlife insurance corporation organized under the laws of the
State of **** on Date 4. Since the acquisition, Parent has been the sole shareholder, and
in sole control of Sub 1.

On Date 5, a date subsequent to Date 4, Parent timely filed an initial consolidated return
for the taxable year ending Date 3. Parent filed this return on behalf of its affiliated
group, including Sub 2, Sub 3, Sub 4, Sub 5, and Sub 6. However, Sub 1's items of
income, gain, deduction, loss, and credit were not included in this return, nor was a
Form 1122 ("Authorization and Consent of Subsidiary Corporation to be Included in a
Consolidated Income Tax Return") included in this return for Sub 1, and Sub 1 was not
included in the Form 851 ("Affiliations Schedule") attached to this return. Instead, due
to a mistake of law concerning the inclusion of a nonlife insurance corporation in a
consolidated return, a separate return was filed for Sub 1 for the taxable year ending
Date 6. As a result of this mistake, the requirements for filing a valid consolidated return
for the taxable year ending Date 3 were not satisfied.

REPRESENTATIONS
Parent, on behalf of its affiliate group, makes the following representations:

1. No return for the taxable year in which the consent and the inclusion of Sub 1 in
   Parent's consolidated return should have been made (or any taxable years that
   would have been affected by such failures had they been timely made) is being
   examined by a Director, or is being considered by an appeals office or a federal
   court;

2. The granting of the relief will not result in the Parent consolidated group having a
   lower tax liability in the aggregate for all years to which the relief applies than it
   would have had if the consolidated return year was properly filed including Sub 1;

3. The affiliated group has not used hindsight to request relief;

4. No specific facts have changed since the due date for filing a valid consolidated
   return for the taxable year ending Date 3 that make the inclusion of Sub 1 in the
   consolidated return for the affiliated group more advantageous to the affiliated
   group than if Sub 1 had been so included; and the amount of tax liability reported
   as owing on Parent's consolidated return for its taxable year ending Date 3 was
   not less than what the tax liability on Parent's consolidated return would have
   been had Sub 1 been included in such return.

LAW

Internal Revenue Code ("IRC") § 1501 provides 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)(1) and (2) define the term "affiliated group" as 1 or more chains of
includible corporations connected through stock ownership with a common parent
corporation which is an includible corporation, but only if-

(i) The common parent directly owns stock with at least 80 percent of the total voting
power and 80 percent of the total value of at least 1 of the other includible corporation,
and

(ii) Stock with at least 80 percent of the total voting power and 80 percent of the total
value of each of the includible corporations (except the common parent) is directly
owned by 1 or more of the other includible corporations

Treas. Reg. § 1.1502-75(a)(1) provides 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 ... 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."

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 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."

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 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, 2014-13 I.R.B. 879, 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 Sub 1 as having filed Form 1122 and thus as
having joined in the making of a consolidated return by the affiliated group for the
taxable year ending Date 3. However, the Service may act on behalf of the
Commissioner to treat Sub 1 as if it had filed such Form 1122 and joined in the making
of a consolidated return with and by Parent (and with and by the affiliate group)
beginning with the taxable year ending Date 3 and for all taxable years ending
thereafter 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)(3) can be
applied in this case. Accordingly, Sub 1 shall be treated as it if had filed a Form 1122
for purposes of Treas. Reg. § 1.1502-75(h)(2) and thus joined in the making of a
consolidated return by the Parent affiliated group beginning with the taxable year ending
Date 3, notwithstanding that it failed to actually file Form 1122. Both the Parent and
Sub 1 shall amend their respective returns accordingly, for their respective years ended
on Date 3, Date 6, and any subsequent returns filed by the Parent as necessary.
(Treas. Reg. § 1.1502-75(b)(3)).

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,

By:

Title: Acting Director, Field Operations -

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