The IRS announced on March 10 safe harbor procedures for subsidiaries failing to file forms consenting to be treated as part of a consolidated group.
In Rev. Proc. 2014-24, 2014-13 I.R.B. 1, the IRS addressed the issue of subsidiaries in an affiliated group that fail to file Form 1122, "Authorization and Consent of Subsidiary Corporation to Be Included in a Consolidated Income Tax Return." The IRS will treat one or more subsidiaries as members of an affiliated group and as if they had timely filed Form 1122, if the subsidiary and the consolidated group meet certain requirements within the revenue procedure.
Generally, an affiliated group that does 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, as long as each subsidiary consents to be included in the consolidated return. A subsidiary is deemed to consent to be included in the affiliated group by filing Form 1122. However, even if the subsidiary fails to file Form 1122, the IRS can consider certain facts and circumstances, and deem the subsidiary as consenting.
Under Rev. Proc. 2014-24, a subsidiary that meets the safe harbor requirements receives an automatic determination by the IRS under Treas. Reg. Section 1.1502-75(b). To meet the automatic determination, four requirements must be met. First, the affiliated group must have filed in a timely way what purports to a consolidated return for the taxable year, either (a) including Form 851, "Affiliations Schedule" with the consolidated return; or (b) providing clear, unequivocal indication on the return that the return was intended as a consolidated return.
Second, the nonfiling subsidiary that failed to file the Form 1122 must not be prevented from joining the affiliated group's consolidated return by any applicable rule of law other than its failure to file Form 1122.
Third, the nonfiling subsidiary must not have filed a separate return for any period of time included in the consolidated return, or any subsequent taxable year, other than (a) a separate return for a period in which the nonfiling subsidiary's income and deductions were not properly includible in the affiliated group's consolidated return, or (b) a partnership return, where all the income and deductions were included on the consolidated return as part of the income and deductions of partners — all of which were members of the affiliated group.
Fourth, one of three conditions must be met. For the first two conditions, the subsidiary's failure to include Form 1122 must have been due to a mistake of law or fact, or inadvertence.
1. The first condition provides that the affiliated group believed that the nonfiling subsidiary was a member of the affiliated group, and that the subsidiary's income and deductions were included in the affiliated group.
2. The second condition provides that all of the nonfiling subsidiary's income and deductions were included on the consolidated return as part of the income and deductions of another member of the group.
3. The third condition provides the affiliated group believed the nonfiling subsidiary was taxable as a partnership, provided that the income and deductions of the subsidiary were included as part of the income and deductions of its partners.
A subsidiary and affiliated group meeting the first three factors and any of the three conditions within the fourth factor is eligible for an automatic determination by the IRS. This will allow the IRS to treat the nonfiling subsidiary as part of the affiliated group. In that case, the nonfiling subsidiary and the affiliated group do not have to proactively do anything. The revenue procedure is effective March 24, 2014.
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