The IRS has issued final regs that modernize the language of rules governing consolidated corporate income tax returns filed by affiliated groups, accompanied by proposed regs to clarify the treatment of certain transfers of between members of the same group. (TD 10018; NPRM REG-134420-10, 12/30/2024)
Consolidated returns.
Affiliated groups are one or more chains of includible corporations connected through stock ownership with a common parent if the requirements of the “80% vote and value test” are met. That is, the stock possesses at least 80% of the total voting power and also equals at least 80% of the total value of the stock of that corporation.
Under Code Sec. 1502, an affiliated group may elect to file a consolidated return provided that all members consent. Consolidated returns are filed on Forms 1120, U.S. Corporation Income Tax Return, with additional required schedules.
Electing to file a consolidated return comes with potential tax advantages, such as the ability to optimize certain credits and deductions and offset a member’s operating losses. However, the election may not make sense for all affiliated groups. Once a group elects to file a consolidated return, the IRS must grant permission to return to separate filings.
Modernized rules.
In August 2023, the IRS issued proposed regs to modernize language and improve clarity of consolidated return rules. The proposed regs reflected statutory changes and withdrew or partially withdrew numerous previously proposed regs and temporary regs going back to 2001.
Generally, the proposed regs eliminate obsolete or outdated provisions, terms, and cross references. Changes under Code Sec. 1563 targeted antiquated or regressive language, such as replacing gender-specific pronouns with gender neutral identifiers and no longer referring to U.S. territories as “possessions.”
Affected provisions were reserved, an approach “intended solely to avoid cascading changes to cross-references throughout the consolidated return regulations, thereby preserving historical citations and reducing potential confusion for taxpayers,” according to the preamble.
The IRS published a correction to the proposed regs in December 2023 to prevent inconsistencies between Code Sec. 1563 and Code Sec. 52 and Code Sec. 414 by making parallel changes throughout.
On December 30, 2024, the IRS finalized the regs with minor clarifications in response to submitted written comments. No public hearing was held nor requested.
One commenter observed that although the proposed regs added the term “consolidated return regulations” to mean regs issued under Code Sec. 1502, some rules issued under the authority of Code Sec. 1502 “were not actually placed under section 1502,” the IRS explained. The definition was adjusted accordingly, as were the cited range of applicable sections.
Applicability dates.
The final regs are effective December 30, 2024, and apply to consolidated return years for which the due date of the return (without regard to extensions) is after that date.
Reg. §1.52-1(c)(1) applies to years beginning on or after January 1, 2025. Similarly, Reg §1.414(c)-2(b)(1) also applies to plan years beginning on or after January 1, 2025.
Modified proposed rules.
Supplementing the final regs, the IRS also issued a notice of proposed rulemaking (89 FR 106884) regarding the August 2023 regs’ withdrawal of previously proposed rules under Code Sec. 357(c). The proposed consolidated Section 357(c) regs were scrapped because Reg §1.1502-32 and Reg §1.1502-80 already serve to prevent duplicative stock basis reduction.
But as one commenter told the IRS, the withdrawal of the Section 357(c) regs raised a question on basis reductions when affiliated group members transfer stock. Specifically, the commenter asked whether the transferor’s basis in the transferee stock should be reduced for an assumed Code Sec. 357(c)(3)(A) liability at the time of the exchange (front-end adjustment) or at the time when the Section 357(c)(3)(A) deduction is absorbed with no prior basis reduction under Code Sec. 358 (back-end adjustment).
The IRS said the withdrawal did not mean to require taxpayers use a front-end adjustment approach. Thus, the regs were reproposed to emphasize that a back-end adjustment is appropriate, applicable to consolidated return years for which the due date of the return is after the reproposed regs are finalized.
Taxpayers may submit written or electronic comments and request a public hearing until March 31, 2025.
For more information on the consolidated return election, see Checkpoint’s Federal Tax Coordinator ¶ E-7750.
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