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Avoiding Late Returns When Corporations Are Acquired by a Consolidated Group

Common mistake: Missing the due date for separate returns when companies are acquired by consolidated groups.

June 2007
from The Tax Adviser

Often, a corporation will not qualify as a member of a consolidated group for its entire tax year. This can 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 re-viewed 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 return year, it does so at the end of the day on which its status as a member changes, and its tax year ends for all Federal income tax purposes at the end of that day.

Example 1: The common parent of a June 30 fiscal-year-end consolidated group acquired all of the stock of a calendar-year corporation on March 31, 2007; the corporation became a member of the consolidated group at the end of that day. Thus, the acquired corporation’s items of income, gain, loss, deduction and credit attributable to the period Jan. 1, 2007 — March 31, 2007 must be reflected on the corporation’s separate return. Its remaining items will be reflected on the group’s consolidated return.

Sec. 6072(b) generally provides that a corporation’s return must be filed by the 15th day of the third month following the close of its tax year. Sec. 381(a) provides special rules for certain types of transactions, including reorganizations described in Sec. 368(a)(1)(A), (C), (D), (F) or (G). One of these special rules, Sec. 381(b)(1), provides that the tax year of a target corporation ends on the date its assets are transferred to an acquiring corporation.

Regs. Sec. 1.1502-76(c) contains special rules for determining the due date of a short-period return that results from a consolidated group’s acquisition of a stand-alone corporation or the common parent of a different consolidated group. Under this rule, the acquired corporation’s separate return is generally due at the earlier of two dates: the due date (including extensions) for filing the acquired corporation’s separate return (i.e., the short period) or the due date (including extensions) for filing the acquiring group’s consolidated return. The due date for the separate return is determined without regard to the fact that the corporation’s tax year is treated as ending because it joined the consolidated group.

Due Date for a Stock Acquisition

Example 2: The stock of X Corp., a stand-alone calendar-year corporation, was acquired by a June 30 year-end group on March 31, 2007, and X became a member of that group. In such a case, but for the acquisition (and Regs. Sec. 1.1502-76(b) (1)), X’s tax year would run from Jan. 1, 2007–Dec. 31, 2007 and have a return due date of March 15, 2008 (the 15th day of the third month following the end of X’s calendar year). The June 30 year-end group has a return due date (without extensions) of Sept. 15, 2007 (the 15th day of the third month following the end of the consolidated group’s June 30 year). For purposes of determining the due date of X’s separate return (i.e., the return for the period Jan. 1, 2007–March 31, 2007), the relevant due dates are March 15, 2008 and Sept. 15, 2007. Thus, under Regs. Sec. 1.1502-76(c), X’s separate return is due on the earlier of those two dates, Sept. 15, 2007.

Due Date for a Stock Acquisition

Example 3: Y Corp., a stand-alone, calendar-year corporation, was acquired by a June 30 year-end group at the end of the day on March 31, 2007, in a transaction described in Sec. 368 (a)(1)(A). In such a case, Sec. 381(b)(1) would apply, such that Y’s tax year would end on March 31, 2007 and its separate return would be due on June 15, 2007 (the 15th day of the third month following the end of Y’s year). The June 30 year-end group has a due date (without extensions) for its return of Sept. 15, 2007 (the 15th day of the third month following the end of the consolidated group’s June 30 year). For purposes of determining the due date of Y’s separate return (i.e., the return for the period Jan. 1, 2007–March 31, 2007), the relevant due dates are June 15, 2007 and Sept. 15, 2007. Thus, under Regs. Sec. 1.1502-76(c), Y’s separate return is due on the earlier of those two dates. This represents an acceleration of the short-period due date when compared to the due date for X’s return in Example 2.

The accelerated due date in Example 3 is often overlooked, because it is triggered by Sec. 381(b)(1), rather than the consolidated return rules. Specifically, Regs. Sec. 1.1502-76(c) requires a comparison of the due date of the acquired corporation’s separate return, computed as if its tax year did not end because of Regs. Sec.1.1502-76(b)(1)(ii)(A)(1), with the due date of the acquiring consolidated group’s consolidated return. In Example 3 above, Y’s tax year ends because of Sec. 381(b)(1), not because of Regs. Sec. 1.1502-76(b)(1)(ii)(A)(1). This tax year-end is thus used for purposes of due-date determination in Sec. 6072(b), then factored into the comparison of due dates for purposes of Regs. Sec. 1.1502-76(c).

Note: The due date for an acquired corporation’s separate return may also be accelerated, even though its stock was acquired. For example, if the corporation merges or is liquidated into another member of the acquiring consolidated group, in an unrelated transaction that occurs before the end of the acquired corporation’s original 12-month year, then the due date for the separate return is accelerated.

Example 4: A calendar-year consolidated group acquired all of the stock of a calendar-year corporation at the end of the day on March 31, 2007. The acquired corporation was liquidated into a group member on May 31, 2007, in a transaction not stepped together with the stock acquisition. Thus, the acquired corporation’s separate return would be due (without extensions) on Aug. 15, 2007 (as opposed to the March 15, 2008 date that would have applied had the acquired corporation stayed in existence).

Conclusion

As noted, it is quite common to miss the due date for an acquired corporation’s separate return for a year in which a change in status occurs. Missing that date could subject a client to failure-to-file penalties and could also affect the filing of required elections.

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Deanna Walton Harris, J.D., LL.M., and Jeffrey Vogel, J.D., LL.M., Washington, DC, are contributing writers of The Tax Adviser. Their views as reflected in this article do not necessarily reflect the views of the AICPA or The Tax Adviser.