Avoiding late returns when corporations are acquired by a consolidated group.

• Author: Harris, Deanna Walton

Often, a corporation will not qualify as a member of a consolidated group for its entire tax year. This could occur because an event (a "change in status") causes the corporation to become or cease to be a member of the consolidated group on a day that is not the last day of the acquired corporation's tax year. When a change in status occurs, the acquired corporation must apportion its income between the period included in the acquiring group's consolidated return and the period not included in that return. The return for this latter period is called a separate return. The "separate return" can refer to either a stand-alone return filed by an acquired corporation or a consolidated return filed by a different consolidated group, of which the corporation was a member prior to its acquisition by the consolidated group.

A common mistake made by tax practitioners responsible for filing consolidated returns is missing the due date for filing a corporation's separate return when it is acquired by a consolidated group. That due date may vary, depending on whether the corporation's stock or assets are acquired and whether the corporation was a member (other than the common parent) of a consolidated group prior to its acquisition. This item discusses the rules for determining the due date for an acquired corporation's separate return in some of these circumstances.

Background

Regs. Sec. 1.1502-76 must be reviewed in determining a consolidated group's taxable income for the year. It provides that a consolidated group must file its consolidated return on the basis of the common parent's tax year, and each subsidiary must adopt the common parent's annual accounting period for the first consolidated return year for which the subsidiary's income is includible in the consolidated return. The consolidated return must include the common parent's items of income, gain, deduction, loss and credit for the entire consolidated return year, and each subsidiary's items for the portion of the year for which it is a member. If the consolidated return includes the items of a corporation for only a portion of its tax year (determined without any close in year resulting from the change in status), items for the portion of the year not included in the consolidated return must be included in a separate return.

Regs. Sec. 1.1502-76(b)(1)(ii)(A) (1) provides that if a corporation (other than a former S corporation) becomes or ceases to be a member during a consolidated...