Posts Tagged ‘Regs. §1.1502-77(a)(1)’


Tuesday, June 2nd, 2015

As a general proposition, the common parent of a consolidated group for a consolidated return year is, in fact, the sole agent with regard to an affiliated group’s income tax liability. Regs. §1.1502-77(a)(1).

Furthermore, the common parent generally must remain as the agent for a consolidated return year that had ended, even if in a later year another corporation became the common parent or the group terminated.

An exception to this point was, however, demonstrated with the adoption of the final regulations in Treasury Decision 7517.

Suppose, for instance, that as of January 1 of Year 1, P had been the common parent and agent for the P consolidated group comprised of P and its two subsidiaries, S and S-1.

Assume P had filed a consolidated return for the P affiliated group for Year 1.

On January 1 of Year 3, P merged with and into Z-1, a subsidiary of Z, in a forward triangular merger.

As a consequence, the merger transaction constituted a reverse acquisition under Regs. §1.1502-75(d)(3)(i) that resulted in a group structure change, because P’s shareholders received more than fifty percent of Z’s stock in exchange for all of P’s stock.

As the corporation, which survived in the merger, and the successor of P, Z–1 qualified as a default successor for the P affiliated group for Years 1 and 2.

Z not only became the new common parent for the P affiliated group for consolidated return years after the merger, but also became the new agent as a result of the group structure change.

Therefore, P was not permitted to designated an agent for Years 1 or 2, because Z-1 was P’s default successor and the agent for the P affiliated group for Years 1 and 2.

Particularly important, Z-1 must file the P group’s consolidated return for Year 2. Regs. §1.1502-77(g), exp. 8.

Expressed another way, a common parent cannot act as agent for a completed year or any subsequent completed years if it ceased to exist or had resigned.

Five new rules were adopted by T.D. 9716, when Regs. §1.1502-77 became effective. The changes made were as follows:

1) Expanded the circumstances under which the Commissioner may replace an agent on the Commissioner’s own accord.

2) Clarified that a terminating agent without a default successor may only designate an agent with respect to a completed year.

3) Organized the provisions that permit the Commissioner to designate an agent into two categories: (a) those provisions that authorize the Commissioner to replace an agent on the Commissioner’s own accord, with or without a written request from a member; and (b) a provision permitting the Commissioner to replace an agent pursuant to a member’s written request.

4) Allowed an agent to resign under certain circumstances.

5) Clarified that an agent other than the common parent generally serves as agent under the same terms and with the same rights as the common parent.

An exception to the above fifth change must be applied in the case of an agent designated by the Commissioner. Under this special rule, an agent may not designate an agent upon its termination, unless the Commissioner had designated the agent solely because a prior agent terminated without a default successor and without designating an agent.

Nevertheless, this special exception must not be applied in the case of a group structure change as defined in Regs. §1.1502–33(f)(1).