How Acquired Target Corporations Can Avoid Denial of Extension Requests

Editors: Mindy Tyson Cozewith, CPA, M. Tax., and Sean Fox, MPA

Consolidated Returns

Recently, two C corporations in similar circumstances were surprised that the IRS denied their Forms 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. In each instance, the parent company of a calendar-year-end consolidated return group had acquired another calendar-year-end consolidated return group. Because the acquisitions took place on June 30, 2010, and August 31, 2010, respectively, both target corporations filed a short-year return for 2010 preacquisition activity. In each case, a Form 7004 was electronically filed between December 31, 2010, and March 15, 2011, for the short-year return and was rejected by the IRS. Then, in each case, a paper Form 7004 was filed before March 15, 2011, and the IRS rejected each of those filings on a Form 6513, Extension of Time to File. In each case, the taxpayer had completed the Form 7004 with all the required basic identification information including the short tax year beginning and ending dates. In addition, under the heading “Short tax year” on line 5b, both taxpayers checked the box for “Consolidated return to be filed” as the reason their tax years were less than 12 months.

Eventually, these taxpayers acquired extensions for their short-year returns, but not without much communication with the IRS. Why did this happen, and how can it be avoided in these circumstances?

The explanation is fairly straightforward: The e-file system rejected the e-filed Forms 7004 because its programming decided that they were filed late (i.e., after two months and 15 days from the indicated short-year end date). Similarly, upon receiving the paper Forms 7004, IRS personnel responded with denials on Forms 6513 because they saw only that the extension requests were made more than 2½ months after the end of the short tax years.

In fact, the extension requests were timely because of the application of the consolidated return regulations (Regs. Sec. 1.1502-76(c)). Under those regulations, the due date for the tax return (and for the extension of time to file) for each target group for the tax year January 1, 2010, through the acquisition date was March 15, 2011, the same as the due date for the new calendar-year parent company’s consolidated return. However, in these two cases, the extension requests did not refer to these regulations, and the IRS could not see that they were timely.

For the e-filed Forms 7004, the system had no business rules or other facts to work with. The IRS indicated in discussions in conjunction with this matter that an e-filed Form 7004 does not currently allow taxpayers to attach a statement informing the IRS of the application of Regs. Sec. 1.1502-76(c). Then, when the taxpayers filed paper Forms 7004, they did not attach a statement informing the IRS personnel that Regs. Sec. 1.1502-76(c) was applicable. Thus, the IRS had no indication that the forms were not filed late.

As a result of discussions about these two cases, the IRS is modifying Form 7004 to include a new checkbox on Form 7004, line 5b, that will be marked “Other” and allow for an attachment to explain the reason or special circumstances for a short tax year. The IRS plans to include these revisions in the 2012 version of Form 7004, which will be available in January 2013.

Recommendation

Until the revised Form 7004 is issued, extensions for situations such as those described above should be filed only on paper, with an attached explanation. This is permissible, based on the Form 7004 instructions. Additional information can be requested from the IRS e-file help desk at 1-866-255-0654. 

EditorNotes

Mindy Tyson Cozewith is a director, Washington National Tax in Atlanta, and Sean Fox is a director, Washington National Tax in Washington, DC, for McGladrey & Pullen LLP.

For additional information about these items, contact Ms. Cozewith at (404) 751-9089 or mindy.cozewith@mcgladrey.com.

Unless otherwise noted, contributors are members of or associated with McGladrey & Pullen LLP.