By Todd B. Reinstein, Esq.
Pepper Hamilton LLP, Washington, D.C.
On March 10, the IRS released Rev. Proc. 2014-24,1 establishing
rules for when the IRS will automatically determine that a
subsidiary corporation that had failed to file a properly and
timely executed Form 1122, Authorization and Consent of
Subsidiary Corporation To Be Included in a Consolidated Income Tax
Return, will nonetheless be included in the affiliated
Regs. §1.1502-75(a)(1) provides that an affiliated group of
corporations that did not file a consolidated return for the
immediately preceding taxable year may file a consolidated return
if each corporation that joins the return consents by including a
signed Form 1122 in the parent's return. A principle advantage of
filing a consolidated return is that the income and loss earned by
each member can be offset in consolidation. If proper consent by
way of Form 1122 is not provided and the member is included in a
consolidated return, the IRS has the right to redetermine the tax
liability of the member corporations on a separate company basis
and typically creating a federal income tax exposure.
Requesting a properly executed Form 1122 while performing
buy-side due diligence on a consolidated group is common practice.
When a target corporation cannot produce properly executed Form
1122(s), the target in the past would request a private letter
ruling seeking relief from IRS chief counsel to cure the defect.2
In 2013, the Chief Counsel's Office announced that it would no
longer provide private letter rulings granting Form 1122 relief in
order to conserve IRS resources. Taxpayers only relief was through
determination letters issued by the IRS district office with exam
jurisdiction over the affiliated group, pursuant to Rev. Proc.
2014-1. Many practitioners complained about the switch as the local
IRS offices didn't have the background to efficiently handle the
requests. In response, the IRS issued Rev. Proc. 2014-24 listing
the criteria under which the IRS will treat one or more subsidiary
members of an affiliated group as if the subsidiary(s) had filed a
To qualify for relief under Rev. Proc. 2014-24, the following
conditions must be met:
1. The affiliated group timely filed what purported to be a
consolidated return for the period, including Form 851,3
2. The non-filing subsidiary was not prevented from joining in
the filing of the consolidated return by any applicable rule of
3. A separate return generally was not filed by the non-filing
subsidiary for any period of time included in the consolidated
return, or any subsequent period, and
4. The failure to include the Form 1122 was due to a mistake of
law or fact, or to inadvertence and the affiliate group included
the non-filing subsidiary's income and deductions in the
An affiliated group that satisfies these requirements will
automatically be granted consolidated return status, even if the
subsidiary failed to actually file a properly and timely executed
Form 1122.4 If an affiliated
group cannot satisfy these requirements, taxpayers can still
request a determination letter to provide relief.
While the revenue procedure is a welcome relief to a common due
diligence issue, taxpayers that qualify for the relief should
consider documenting how they meet the requirements of the revenue
procedure in their respective files to have it available should the
IRS ever raise the issue.
For more information, in the Tax Management Portfolios, see
White, 754 T.M., Consolidated Returns - Elections and Filing,
and in Tax Practice Series, see ¶5310, Consolidated
Copyright © 2014 Pepper Hamilton LLP
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