United States: IRS Rules That Corporation Is Not A Successor Corporation For Purposes Of Filing A Consolidated Tax Return

In Private Letter Ruling (PLR) 201214020, the IRS ruled that under Section 1504(a)(3), a spun-off corporation (Controlled) was not a "successor" to a distributing corporation (Distributing).

In general, Section 1504(a)(3) provides that if a corporation included in a consolidated return filed by an affiliated group ceases to be a member of the group, the corporation (or its successor) may not be included in any consolidated return filed by the group (or by another group with the same common parent) before the 61st month beginning after its first taxable year in which it ceased to be a member of such group. Thus, a departing group member is generally prohibited from rejoining such a group or a group with the same common parent for a period of five years. In certain circumstances, administrative relief from this provision is available through IRS revenue procedures or through requesting a private letter ruling.

In the facts of PLR 201214020, which are incorporated by reference to the taxpayer's facts in a prior ruling (PLR 200932018), Distributing distributed all of Controlled's stock to Distributing's shareholders under sections 368(a)(1)(D) and 355. Controlled then merged with and into a real estate investment trust (REIT) (Corporation X) in a Section 368(a)(1)(A) reorganization. Corporation X's status as a REIT was subsequently revoked. As a REIT, Corporations X was not eligible to join a consolidated group. Once Corporation X's REIT status ended, however, it became eligible to join a consolidated return filing.

The IRS held in PLR 201214020 that Controlled was not a successor to Distributing. Thus, Corporation X was eligible as a common parent to file a consolidated return with its includible corporate subsidiaries. Interestingly, Corporation X (a successor to Controlled) was not attempting to rejoin the still-existing Distributing group. Instead, Corporation X appears to have been concerned that Controlled (and thus Corporation X) might be a successor to Distributing, which could invoke the five-year prohibition rule, because Corporation X might be viewed as a successor common parent, thereby triggering Section 1504(a)(3). The IRS ruled that this was not the case and that Corporation X could elect to file a consolidated return with its subsidiaries.

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