Domestic subsidiary was allowed to join parent's consolidated return late

Plain-English summary

A parent corporation owned a foreign subsidiary that in turn owned a domestic subsidiary. After another group acquired the parent, advisers failed to identify that the foreign subsidiary held U.S. property. The domestic subsidiary therefore filed separately because its ownership through a controlled foreign corporation meant it was not then treated as affiliated with the parent. The IRS later granted the foreign subsidiary extra time to elect disregarded-entity status, which would make the domestic subsidiary affiliated with the parent for the earlier short year. The parent represented that, had the facts been known, it would have made that entity election and the domestic subsidiary would have joined its consolidated return. The IRS treated the failure to join as a mistake and deemed the domestic subsidiary to have filed Form 1122, allowing the group to file consolidated for the short year.

Ruling snapshot

• Question: May a domestic subsidiary join the parent's earlier consolidated return after late entity-classification relief makes it a member of the affiliated group?
• Outcome: Approved
• Key authorities: IRC §§ 1501, 1502, 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

Release Number: 202540028 Third Party Communication: None
Release Date: 10/3/2025 Date of Communication: N/A
UIL Code: 1502.00-00

In Re:

Person To Contact:

Telephone Number:

Date:
July 9, 2025

Legend:

Parent =
Parent 2 =
Common Parent =

Sub 1 =
Sub 2 =

Accounting Firm 1 =
Accounting Firm 2 =
Accounting Firm 3 =

Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 =
Date 7 =
Date 8 =
Date 9 =

Dear :

This letter responds to a letter dated Date 1, submitted on behalf of Parent and Sub 2
(together, the “Parent Affiliated Group” for purposes of this letter and to the extent these
entities meet the definition provided by I.R.C. § 1504(a)), requesting that the Commissioner
make a determination regarding the failure of Parent and Sub 2 to have timely joined in
filing a consolidated federal income tax return 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 Date 2
to Date 3 (the “requested relief”). The information provided in that request is summarized
below.

Determination Letter Under Treasury Regulation 1.1502-75

SUMMARY OF FACTS

Prior to Date 3, Parent wholly owned Sub 1, a controlled foreign corporation. In turn, Sub 1
wholly owned Sub 2, a domestic corporation.

On Date 3, Parent 2 acquired Parent directly and Sub 1 and Sub 2 indirectly as part of an
agreement and plan for merger. As a result of the acquisition, Parent filed a Form 1120,
U.S. Corporation Income Tax Return, for the taxable year ending Date 3. Thereafter,
Parent joined in the making of a consolidated filing with a consolidated group containing
Parent 2 and Common Parent for a short period ending on Date 4. Because Sub 2 was
wholly owned by Sub 1, a CFC, Sub 2 was not affiliated with Parent. Sub 2 filed a
standalone Form 1120 for the taxable year ending Date 4.

As part of the Date 3 acquisition of Parent, Common Parent, its tax preparer, Accounting
Firm 1, and financial statement auditor, Accounting Firm 2, for the taxable years ending
on Date 4 and Date 5, inadvertently failed to identify and inform Common Parent or Parent
2 that Sub 1, a CFC, possessed investments in US property prior to Date 4.

In Date 6, Common Parent's tax advisor discovered that Sub 1 held investments in US
property. Thereafter, Parent 1 filed a Private Letter Ruling request to the Office of Associate
Chief Counsel dated Date 7, requesting an extension of time to file an election under Treas.
Reg. § 301.7701-3(c) to be treated as a disregarded entity separate from Parent for federal
tax purposes effective Date 8. On Date 9, the Office of Associate Chief Counsel granted
Sub 1's request, providing it with 120 days to file a Form 8832, Entity Classification
Election.

REPRESENTATIONS

Parent makes the following representations in support of the requested relief: (1) had Sub 1
or Common Parent known of Sub 1’s investment in US property as a result of the
acquisition prior to the filing of the consolidated group return for the taxable year ended
Date 4, Sub 1 would have filed an election to be classified as a disregarded entity and (2)
because such a classification would have made Sub 2 affiliated with Parent under the
definition of Internal Revenue Code § 1504, Parent and Sub 2 would have timely elected to
become a consolidated group for the period ending on Date 3.

Parent and Sub 2 also represent in support that no return for the taxable year in which the
Consents and the inclusion of Sub 2 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 district director or is being considered by an appeals
office or a federal court. Additionally, the granting of the requested relief will not result in the
Parent's 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 for taxable year
ended on Date 3 was properly filed including Sub 2.

LAW

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Determination Letter Under Treasury Regulation 1.1502-75

Internal Revenue Code § 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.

Internal Revenue Code § 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 at least 80% of the stock, by vote and value, in at least one of the other includible
corporations, and (ii) one or more of the other includible corporations directly owns at least
80% of the stock, by vote and value, in each of the other includible corporations except the
common Parent.

Treasury Regulation § 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 that 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.

Treasury Regulation § 1.1502-75(b)(1) provides that "The 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."

Treasury Regulation § 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.

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Determination Letter Under Treasury Regulation 1.1502-75

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.

Treasury Regulation § 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.

Treasury Regulation § 1.1502-75(h)(2) provides, in relevant part, that when

[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.

Revenue Procedure 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. Section 1.03 of
Rev. Proc. 2014-24 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.

DETERMINATION

Based solely on the information submitted and the representations made in the letter
dated Date 1, it is determined that Treas. Reg. § 1.1502-75(b)(3) can be applied in this
case. Accordingly, Sub 2 shall be treated as if it had filed a Form 1122 in the
manner specified in Treas. Reg. § 1.1502-75(h)(2), and the Parent Affiliated Group shall be
treated as satisfying the requirements for filing a consolidated return for the taxable year
ending Date 3.

CAVEATS

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Determination Letter Under Treasury Regulation 1.1502-75

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal 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 taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party.

PROCEDURAL MATTERS

This determination letter is directed only to the taxpayer who requested it. Internal Revenue
Code § 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 US 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,

Acting Director of Field Operations (WCPA – West)

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