Consolidated return regs. provide special return due-date rules for short tax years

Editor: Annette B. Smith, CPA

This item discusses special return due-date rules for a target corporation’s short tax year when it joins a consolidated group. It also examines procedures for extending the short-year return due date.

In general, the due date for filing a short-period return resulting from a change of accounting period is determined from the end of the short period. For example, in the case of a short tax year that begins on Jan. 1, 2019, and ends on Jan. 16, 2019, the taxpayer’s return normally would be due on May 15, 2019 (the 15th day of the fourth month after the end of the tax year) (Sec. 6072(a)). However, the general rule does not apply to a corporation that has a short tax year because it joins a consolidated group. Instead, special rules in the consolidated return regulations determine the due date of the short-period return.

Return due-date rules

The return-filing requirements for a new member of a consolidated group are provided in Regs. Sec. 1.1502-76(c). The due date of the new subsidiary’s separate short-period return depends on the date the group’s consolidated return is filed. If the consolidated return is filed on or before the due date for the new subsidiary’s separate short-period return, then the short-period return must be filed by the due date (including extensions) of the consolidated return.

If the consolidated return is not filed by the due date of the separate return, the new subsidiary may either (1) file a return for just the short period, or (2) file a return for the entire tax year. (Special rules beyond the scope of this item ensure consistency between the final separate return for the new subsidiary and a subsequent return for the consolidated group.) In either case, the due date for the separate return is determined by reference to the normal ending date of the tax year of the subsidiary (including extensions and not taking the consolidation into account). This discussion assumes that the new subsidiary will file a final separate return for just the short period.

The following examples are based on those in Regs. Sec. 1.1502-76(c)(3).

Example 1: Calendar-year Corporation P acquires all the stock of Corporation S as of the close of Dec. 31, 2017. Corporation S has a fiscal year ending March 31. As of July 15, 2018, the normal unextended return due date for a March 31 tax year, a consolidated return has not been filed by the Corporation P group. Therefore, the due date (not including extensions) for Corporation S’s separate return for the short tax year April 1, 2017, through Dec. 31, 2017, is July 15, 2018.

Example 2: The facts are the same as in Example 1, except that Corporation P acquires all the stock of Corporation S as of the close of Sept. 30, 2018, and Corporation P files a consolidated return for the group for 2018 on April 15, 2019 (not having obtained an extension). Thus, a consolidated return has been filed by the Corporation P group on or before July 15, 2019, the normal unextended return due date for a March 31 tax year. Therefore, the due date for Corporation S’s separate return for the short tax year April 1, 2018, through Sept. 30, 2018, is April 15, 2019, the due date of the consolidated return.

In addition to determining whether the new subsidiary’s return was timely filed, and therefore the potential application of the Sec. 6651(a)(1) late-filing penalty, the special return due-date rules establish the due date for payment of the tax under Sec. 6151(a), and therefore the start date for underpayment interest under Sec. 6601 and/or the Sec. 6651(a)(2) late-payment penalty.

The Internal Revenue Manual (IRM) provides an oversimplified (and therefore in some situations not useful) explanation of the special return due-date rules. IRM Section 3.11.16.6.4.1 recognizes that Regs. Sec. 1.1502-76 “applies to returns filed by a corporation which becomes a member of a consolidated group during the tax year,” and then simply states that the “short period return has the same due date as the consolidated return of the parent.” However, that statement is true only if (1) both the parent and the subsidiary (a) had the same tax year and (b) file (or do not file) an extension; or (2) the consolidated return is filed on or before the due date for the new subsidiary’s separate short-period return (not taking the consolidation into account). The “If/Then” table in IRM Section 21.7.4.4.4.4(5) correctly states the special rules.

Uncertainties

IRM Section 3.11.16.6.4.1 cautions IRS employees that “[i]t is important to recognize these returns and follow the procedures outlined in this section in order to suppress the penalties for late filing and late payment of tax that would otherwise be assessed” [emphasis in original].

The special return due-date rules in Regs. Sec. 1.1502-76(c) provide welcome flexibility. However, one area of uncertainty, and therefore concern, results from the interplay between the special return due-date rules and Sec. 6081 extensions requested on Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. IRM Section 3.11.212.8.2(7)(d) is helpful insofar as it states that an extension request filed for a short tax year by a corporation that has joined a consolidated group should be considered timely if it is received or postmarked on or before the due date of the full-year return, provided (1) a short tax year is indicated on line 5a of the Form 7004; (2) the “Consolidated Return to Be Filed” box is checked on line 5b; and (3) the taxpayer notates on the form or an attachment “Regs. Sec. 1.1502-76,” “changing tax year to get in step with parent,” “will file consolidated return,” or something similar.

Nevertheless, as a practical matter, it may be advisable to file the extension on or before the 15th day of the fourth month following the end of the short tax year in order to reduce and perhaps eliminate the possibility of the Form 7004 being denied on the grounds that it was filed late. However, this conservative practice does not necessarily mean that the correct extended due date will be posted to the taxpayer’s account. That is because it is unclear whether the IRS’s systems are able to post to the new subsidiary’s account an extended due date for its separate short-year Form 1120, U.S. Corporation Income Tax Return, that on its face appears to be longer than the six-month period permitted by Sec. 6081(a).

For instance, in Example 1, Corporation S files on the basis of a March 31 tax year, but in 2017 it has a short tax year ending Dec. 31, 2017. Ordinarily, the due date of a return for a Dec. 31, 2017, tax year could be extended only to Oct. 15, 2018. But since the special rules in Regs. Sec. 1.1502-76 provide an unextended due date of July 15, 2018 (based on the taxpayer’s normal March 31 year end), it appears that a Form 7004 filed by Corporation S should result in an extended due date of Jan. 15, 2019. This position appears to be supported by IRS nondocketed Service advice review 1997 NSAR 5679 (5/16/97) and Chief Counsel Advice memorandum 200910056, although in both of those documents the operative dates are redacted.

Note the circumstances

In the end, the limitations of the IRS’s processing systems should not be dispositive; instead, the technically correct return due date should be viewed as controlling. To help the IRS identify and properly process extensions and returns that implicate the special return due-date rules, those documents should be notated as being “Filed under Regs. Sec. 1.1502-76.”

EditorNotes

Annette B. Smith, CPA, is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington, D.C.

For additional information about these items, contact Ms. Smith at 202-414-1048 or annette.smith@pwc.com.

Contributors are members of or associated with PricewaterhouseCoopers LLP.