ALI-ABA Course of Study
Consolidated Tax Return Regulations
Section 1504: Consolidated Group
Membership Issues
Steven B. Teplinsky
Steptoe & Johnson LLP
Washington, DC
October 4-5, 2007
Copyright © 2007, Steven B. Teplinsky
Rights Reserved
All
Internal Revenue Service Circular 230 Disclosure:
As provided for in Treasury regulations, advice (if
any) relating to federal taxes that is contained in
this communication (including attachments) is not
intended or written to be used, and cannot be
used, for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting,
marketing or recommending to another party any
plan or arrangement addressed herein.
Slide 2
§1504:
Required Consolidation of a
Nonmember?
Slide 3
CCA 200729035 (Apr. 11, 2007)
P
Several
Foreign
OpCos
7
Regional
Cooperatives
More than 20% vote
Less than 80% vote
National
Cooperative
•
•
Query: Did the IRS conclude that National Cooperative must be treated as a member
of P’s consolidated group for all purposes?
See §1501 (“An affiliated group of corporations shall, subject to the provisions of this
chapter, have the privilege of making a consolidated return ….”); Treas. Reg.
§1.1502-13(h) (“If a transaction is engaged in or structured with a principal purpose to
avoid the purposes of this section (including, for example, by avoiding treatment as
an intercompany transaction), adjustments must be made to carry out the purposes
of this section.”).
Slide 4
§1504(a)(3):
Required Five-Year Lapse
Before Reconsolidation
Slide 5
§1504(a)(3)(A)
•
§1504(a)(3)(A): “If-(i) a corporation is included … in a consolidated return filed by an
affiliated group …, and
(ii) such corporation ceases to be a member of such [affiliated] group
…,
… such corporation (and any successor of such corporation) may not be
included in any consolidated return filed by the affiliated group (or by
another affiliated group with the same common parent or a successor of
such common parent) before the 61st month beginning after its first taxable
year in which it ceased to be a member of such affiliated group.”
•
Note:
– §1504(a)(3) limits the inclusion of a corporation in a consolidated return filed by
a consolidated group. §1504(a)(3) does not affect the inclusion of the
corporation in the affiliated group itself.
– There is no definition of “successor” for purposes of §1504(a)(3).
Slide 6
§1504(a)(3)(B): Waiver of Five-Year
Reconsolidation Waiting Period
•
§1504(a)(3)(B): “The Secretary may waive the application of subparagraph
(A) to any corporation for any period subject to such conditions as the
Secretary may prescribe.”
•
Rev. Proc. 2002-32, 2002-1 C.B. 959, and Rev. Proc. 2006-21, 2006-24
I.R.B. 1050 (modifying Rev. Proc. 2002-32), provide rules regarding
waivers.
Slide 7
§1504(a)(3): Legislative History
• §1504(a)(3) was enacted in 1984.
• Conference Committee Report states that “[t]he rule is an anti-abuse
rule, and the conferees expect the Treasury to so apply it.”
– Conference Committee Report does not identify the targeted abuse.
– Presumably, Congress was attempting to prevent taxpayers from
electively deconsolidating the group or deconsolidating certain group
members for a desired period of time.
Slide 8
§1504(a)(3)(A): Base Case
Year 1
P
P
X
100% T Stock
T
Result
P
$
$
S
Year 4
S
X
S
T
T
X
100% T Stock
• T is barred from joining the P group’s consolidated return until Year 7.
Slide 9
Base Case – Parent Variation
Year 1
Result
Year 4
$
Shareholders
P
S
T
•
•
•
$
100% P
Stock
X
X
100% P
Stock
A
X
A
P
P
S
S
T
T
The new P affiliated group is barred from filing a consolidated return until Year 7
(absent a waiver). See PLRs 200607012, 200517024, 200539007.
What if P acquired a new subsidiary in Year 3 (while P was a member of X’s group)?
Would P and the new subsidiary be permitted to file a consolidated return in Year 5
without a waiver?
What if P acquired a new subsidiary in Year 5 (while P was the parent of a new P
group)?
Slide 10
The Successor Case
Year 1
Result
Year 3
PS
PS
P
P
A
PS
90%
A
P
10%
10% P Stock
W
S
S
W
V
S
W/V
Merge
$
T
100%
V Stock
A
T
T
V
•
•
•
Although there are numerous definitions of “successor” for particular consolidated return
regulations, there is no definition of “successor” for purposes of §1504(a)(3).
Nevertheless, W presumably is V’s successor. Query whether the respective pre-merger values
of W and V are relevant.
If W is V’s successor, W is subject to §1504(a)(3).
–
–
If P has an excess loss account (an “ELA”) in W’s stock, it appears that the ELA is triggered. See
Treas. Reg. §1.1502-19(c)(1)(ii) & (c)(2).
If W was a buyer or seller in an intercompany transaction, it appears that the intercompany item
should be taken into account immediately before the merger under Treas. Reg. §1.1502-13(d)
(subject to other applicable Code sections, such as §267).
Slide 11
The Successor Parent Case
Year 1
Year 2
A
P
$
40% P
Stock
A
P
Result
Year 3
P
A
Old P
Shareholders
A
60%
40%
P/T
Merge
T Stock
S
V
V
S
T
V
S
T
S
V
X
•
•
•
T
X
X
X
If T had merged into a P subsidiary, the surviving corporation presumably would have been a
successor of T and thus would have been precluded from joining in the P group’s consolidated
return under §1504(a)(3)(A).
Because T instead merges into P, it appears that P is T’s successor and that P is precluded from
joining in the P group’s consolidated return. Cf. the Base Case - Parent Variation.
If P is precluded from joining in the P group’s consolidated return, is the P group completely
deconsolidated, or is P the only affiliated group member excluded from the consolidated return?
–
–
If S, X, and V can file a consolidated return without P, must they do so?
If S, X, and V file a consolidated return without P, how would the consolidated return regulations work?
Slide 12
The Interposed Successor Case
Year 1
PS
Year 3
PS
P
P
S
100% V Stock
•
•
90%
10%
V
P
T
S/V
T
Presumably, S is V’s successor, and thus is excluded from the P consolidated group under §1504(a)(3).
The treatment of T is unclear. If S is not a member of P’s consolidated group, it is unclear how to make appropriate
adjustments under the consolidated return regulations.
–
–
–
–
–
–
•
A
Merge
A
T
PS
10% P Stock
S
$
V
A
Result
Should S’s basis in its T stock be adjusted under Treas. Reg. §1.1502-32? If yes, should P’s basis in its S stock be
adjusted under the tier-up rules of Treas. Reg. §1.1502-32(a)(3)(iii)?
What of adjustments to earnings and profits (“e&p”) under Treas. Reg. §1.1502-33?
Should appropriate stock basis and e&p adjustments be “suspended” until S is included in P’s consolidated return?
Should transactions between P and T be intercompany transactions under Treas. Reg. §1.1502-13 if the investment
adjustment provisions do not operate in a manner that preserves single entity treatment?
If S sells the T stock, should the loss disallowance regulations of Temp. Treas. Reg. §1.337(d)-2T apply?
If S is not included in the P consolidated group, can S and T elect to consolidate?
See §1501 (stating that “[a]n affiliated group of corporations shall, subject to the provisions of this chapter, have the
privilege of making a consolidated return…”); Treas. Reg. §1.1502-75(a) (generally requiring that all eligible
members join in the consolidated return).
Slide 13
Parent Liquidation Case
Year 1
A
Result
B
A
(2) P liquidates
B
P
S1
(1) P contributes
some assets
S1
S2
S2
•
Can the S1 affiliated group elect to consolidate?
–
–
•
•
Or is S1 a successor to P, causing §1503(a)(3)(A) to apply?
Or should the S1 affiliated group be required to consolidate?
Does it matter what portion of P’s assets are contributed to S1?
Does it matter when P contributes assets to S1?
–
–
–
In connection with the liquidation transaction,
In a separate transaction more than two years before P liquidates, or
In a separate transaction more than five years before P liquidates.
Slide 14
Parent Termination Case #1 (PLR 200438015)
Merger
S Corp
P
S Sub
S
•
•
•
S
(2) Merger
T
(1) Stock of
Other Subs
Other
Subs
S Corp/P
S Sub/S
T
Other
Subs
The merger of P into S Corp deconsolidates the P group and disaffiliates T and the Other Subs.
S Corp’s contribution of Other Subs to T reaffiliates T and the Other Subs, with T as the common
parent of a new affiliated group.
Can the T affiliated group elect to consolidate?
–
–
–
•
T
S Corp/P
S Sub
Other
Subs
Result
Year 1
Year 1
Or is T a successor to P, in which case §1503(a)(3)(A) applies?
Does it matter what portion of P’s assets were contributed to T?
Would it matter if P contributed assets to T before the merger, of if S Corp contributed P assets to T one or two
years after the merger?
In PLR 200438015, the Service concluded that the T group had the privilege of filing a consolidated
return beginning in the first year after the transaction.
–
–
–
In light of taxpayer’s representations, the Service may have viewed T as P’s successor and granted a waiver
under §1504(a)(3)(B), although the ruling doesn’t refer to a waiver or the waiver provision.
The taxpayer represented that “[t]he transfers of assets from [P] to [T] will represent less than X of [P].”
Should the percentage of P’s assets or S’s assets transferred to T be relevant?
Slide 15
Parent Termination Case #2 (PLR 200604017)
Old
P
Result
Date B
Effective Date A
Old
P
Old
P
Converts to S Corp
Sub
Sub
Sub
Convert to QSubs
Sub
1
Sub
1
Sub
1
Subs 2, 3, & 4
New P
Sub 2
Sub 3
Sub 4
Sub 2
Sub 3
Sub 4
New P
Sub 2
•
•
•
•
Sub 4
The conversion of Old P to an S Corp terminates the Old P group effective Date A.
The Conversion of Sub 1 to a QSub disaffiliates Subs 2-4 effective Date A.
The contribution of Subs 2-4 to New P creates a new affiliated group with New P as the parent.
Can the New P group elect to consolidate (without a waiver)?
–
–
•
Sub 3
Or is New P a successor to Old P, causing §1503(a)(3)(A) to apply?
Does it matter what portion of Old P’s assets were contributed to New P?
In PLR 200604017, the Service concluded that New P “will not be considered a successor” under
§1504(a)(3)(A) and that the New P group may elect to file a consolidated return.
–
–
The taxpayer represented that “[t]he stock of Sub 2, Sub 3, and Sub 4 accounted for approximately x% (less than
5%) of the total fair market value of Old Parent.”
This 5% threshold is unrelated to the “substantially all” standard contained in Rev. Proc. 77-37, 1977-2 C.B. 568
(90% net value/70% gross value).
Slide 16
Section 355 – New Affiliated Group Case #1 (PLR 200023040)
Year 1
Year 1
P
D
Controlled
Other
Subs
P
F
Year 1
(1) P
contributes
some D stock
to F
P
P
D
F
F
Controlled
Newco
Newco
Other
Subs
(2) F forms
Newco with
some D
stock and
other assets
Result
D
Controlled
(3) D distributes
the Controlled
stock in return
for D stock
D
F
Newco
Controlled
Other
Subs
Other
Subs
•
•
•
P and D continue to be an affiliated and consolidated group, with P as the common parent.
Newco, Controlled and the Other Subsidiaries are a new affiliated group, with Newco as the
common parent.
– Can the Newco affiliated group elect to consolidate?
– Or is Newco a successor to P, causing §1504(a)(3)(A) to apply?
In PLR 200023040, the Service expressly granted a waiver of §1504(a)(3)(A), thus apparently
concluding that Newco was a successor of P.
Slide 17
Section 355 – New Affiliated Group Case #2 (PLR 200626011)
Public
Public
Public
Controlled
Stock
Distributing
Distributing
Contributed
Subs
Retained
Subs
Contributed
Subs
Controlled
Retained
Subs
Distributing
Controlled
Retained
Subs
Contributed
Subs
Controlled
Contributed
Subs
•
•
Distributing and the Retained Subs continue to be a consolidated group.
Can Controlled and the Contributed Subs file a consolidated return?
– Or is Controlled a successor to Distributing, causing §1504(a)(3)(A) to apply?
•
In PLR 200626011, the Service held that Controlled will not be considered a
successor to Distributing for purposes of §1504(a)(3), and that Controlled
and the Contributed Subs could elect to file a consolidated return.
– The ruling does not refer to any taxpayer representation regarding the relative
values of Distributing and the Contributed Subs transferred to Controlled.
Slide 18
Taxable Asset Acquisition Case
$
P
85% of T Stock
B
(1)
15%
85%
(2)
S
T
T
T checks the box to
be treated as a
partnership (§332 as
to B, §331 as to P)
•
Can the P group continue? Or is P the successor of deconsolidated T because P has acquired
15% of T’s assets in a taxable transaction?
•
What if P retained 25% of T’s stock (so that (i) P acquired 25% of T’s assets and (ii) T’s liquidation
was a §331 liquidation for both P and B)?
•
What if, instead, P purchased a significant portion of T’s assets prior to selling the stock of T?
Slide 19