Two subsidiaries treated as having joined a consolidated return despite missing their Forms 1122

Plain-English summary

A parent corporation files a single consolidated tax return covering its group of subsidiaries. To join that return, each subsidiary normally files a Form 1122 consenting to be included. Here, after a series of acquisitions and mergers, the group mistakenly believed two acquired subsidiaries did not need to be separately reflected, so the consolidated return left out their Forms 1122, omitted them from the affiliations schedule (Form 851), and skipped some of their income for a short period. The group asked the IRS to treat the two subsidiaries as if they had properly joined the consolidated return. Because the group did not qualify for automatic relief under Rev. Proc. 2014-24, it needed a determination letter. The IRS found the failure was due to a mistake of law or fact, or inadvertence, and under Treas. Reg. § 1.1502-75(b)(3) treated the two subsidiaries as if they filed Forms 1122 and joined the consolidated return from that year forward.

Ruling snapshot

• Question: May two subsidiaries be treated as having joined the group's consolidated return even though they never filed Forms 1122?
• Outcome: Approved; the subsidiaries are treated as if they filed Forms 1122 and joined the consolidated return
• Key authorities: IRC §§ 1501, 1504; Treas. Reg. § 1.1502-75(b); Rev. Proc. 2014-24

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, DC 20224

LARGE BUSINESS AND
INTERNATIONAL Division

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Release Number: 202428009 Third Party Communication: None
Release Date: 7/12/2024 Date of Communication: Not Applicable

Person to Contact:
Index Numbers 1501.00-00, 1502.75-00 *** ID No. ***

Telephone:

Date: April 19, 2024

Legend

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

Date 1 = ***
Date 2 = ***
Date 3 = ***
Date 4 = ***
Date 5 = ***
Date 6 = ***
Date 7 = ***
Date 8 = ***
Date 9 = ***
Date 10 = ***
Date 11 = ***
Dear ***:

This letter responds to letters dated Date 1 and Date 2 submitted on behalf of Parent,
Sub 1, Sub 2, Sub 3, and Sub 4 (collectively, the “Parent Group,” with respect to the
years of Sub 1’s, Sub 2’s, Sub 3’s, and Sub 4’s existence), requesting that the
Commissioner make a determination regarding the following: (1) The failure of Parent’s
wholly owned subsidiary Sub 3 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 tax year ended Date 3; (2) the failure of
Parent's wholly owned subsidiary Sub 4 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 tax year ended Date 3.

The determination contained in this letter is based upon facts and representations
submitted by the Parent Group and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the material
submitted in support of the request for this determination letter.

SUMMARY OF FACTS

Parent was incorporated on Date 4, and Sub 1 and Sub 2 were incorporated as wholly
owned subsidiaries of Parent on Date 4. For the entire time that Sub 1 and Sub 2 have
been in existence, Parent has been the sole shareholder, and in sole control, of each of
Sub 1 and Sub 2. Sub 3 and Sub 4 were formed as limited liability companies and made
an initial entity classification election on Date 5 to be treated as associations taxable as
corporations for U.S. federal income tax purposes. On Date 6, Sub 2 purchased from
unrelated persons the stock of Sub 3 and Sub 4. On Date 8, Sub 3 merged with and into
Sub 4, with Sub 4 surviving. On Date 10, Sub 4 elected to be disregarded as a separate
entity, effective on Date 11. Since Date 6, Parent has been the sole shareholder, and in
sole control, of each of Sub 3 and Sub 4.

Following these transaction steps, Parent Group mistakenly believed that Sub 3 and
Sub 4 became members of the consolidated group on Date 8, that Sub 4 immediately
and subsequently liquidated into Sub 2, and that the activity of Sub 3 and Sub 4 should
be included in Sub 2 starting from the day following completion of all transaction steps.

Accordingly, Parent Group’s consolidated return for the tax year ended Date 3: (1) Did
not include items of income, gain, deductions, or loss for either Sub 3 or Sub 4 for the
period of Date 7 through Date 8, and (2) did not include Forms 1122, Authorization and
Consent of Subsidiary Corporation to be Included in a Consolidated Tax Return, for Sub
3 and Sub 4. In addition, Form 851, Affiliations Schedule, did not reflect Sub 3 and Sub
4.

Parent Group’s consolidated return for the tax year ended Date 3 did, however, include
Sub 1 and Sub 2 on its Form 851 Affiliations Schedule and Forms 1122 Authorization
and Consent of Subsidiary for Sub 1 and Sub 2. Additionally, the “consolidated return”
box on the face of the return was checked.

Sub 1 and Sub 2 have never filed a separate U.S. income tax return for any tax year.
Sub 3 and Sub 4 filed separate returns from their formation on Date 5, including short
year, final returns for the period beginning Date 9 and ending Date 6, and did not file
separate returns thereafter.

Parent Group’s consolidated return for the tax year ended Date 3 contained all the
income, deductions, assets, and liabilities of Sub 1 and Sub 2. Parent’s consolidated
return for the tax year ended Date 3 further contained all the income, deductions,
assets, and liabilities of Sub 3 and Sub 4 for the period between Date 11 and Date 3.

To the best knowledge of both the Parent Group and its representative, the issue
discussed in this determination letter is not included in an earlier return of the Parent
Group and the same or similar issue was not previously ruled on or requested, or is
currently pending.

LAW

Internal Revenue Code (“IRC”) § 1501 provides (in part) that “[a]n 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 corporations,
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 is directly owned by 1 or more of the other
includible corporations.

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 “[t]he consent of a corporation 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 “[i]f 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 paragraph (h)(2) of this section.”

Treas. Reg. § 1.1502-75(b)(3) provides that “[i]f 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 “[i]f 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.

In this case, the Parent Group does not satisfy the requirements of Rev. Proc. 2014-24
necessary to obtain automatic relief to treat Sub 3 and Sub 4 as if they had filed Forms
1122 for the tax year ended Date 3. However, the Service may act on behalf of the
Commissioner to treat Sub 3 and Sub 4 as if they had filed such Form 1122 and joined
in the making of a consolidated return with and by Parent (and with and by the Parent
Group) beginning with the tax year ended Date 3 and for all tax years ended thereafter
under the provisions of Treas. Reg. §§ 1.1502-75(b)(2) or (3).

DETERMINATION

It is our position that Treas. Reg. § 1.1502-75(b)(3) applies in this case, because Parent
has established to the satisfaction of the Commissioner that the failure of Sub 3 and
Sub 4 to join in the making of the consolidated return was due to a mistake of law or
fact, or to inadvertence. Therefore, Sub 3 and Sub 4 will be treated as if they filed
Forms 1122 and joined in the making of a consolidated return with and by Parent (and
with and by the Parent Group) beginning with the tax year ended Date 3 and for all tax
years thereafter.

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 Parent Group as set out in the Summary of Facts and accompanied by
a penalty of perjury declaration executed by an appropriate party.

PROCEDURAL MATTERS

This determination is directed only to the taxpayer that requested it. IRC § 6110(k)(3)
provides that it may not be used or cited as precedent.

A copy of this determination letter should be kept in the Parent Group’s permanent
records and must be attached to any income tax return to which it is relevant.

Sincerely,

Acting Director, Field Operations, Mid-Atlantic

cc: ***