Consolidated return filing for subsidiary in receivership

Editor: Mark G. Cook, CPA, CGMA

The IRS released Letter Ruling 202423008 on June 7, 2024, to address whether a subsidiary member of a consolidated group could remain part of the group and be included in the group’s consolidated return while the subsidiary was in receivership under a court order that included its planned liquidation and dissolution.

Background

The taxpayer requesting the rulings is the common parent of a consolidated group. The parent directly owns all the stock of the subsidiary, an insurance company subject to tax under Sec. 831. The subsidiary has been a member of the parent’s consolidated group. The subsidiary executed a consent to an order of receivership for the appointment of a department as its receiver.

Receiverships “are proceedings in state or federal court outside the scope of the Bankruptcy Code where a receiver is appointed to manage the assets of the debtor” (Internal Revenue Manual §34.4.1.8(1)).

Further, a regulator advised a government official that there were grounds to begin delinquency proceedings against the subsidiary. Subsequently, a court ordered the appointment of the department as receiver for liquidating the subsidiary.

The taxpayer made the following representations:

• The receivership and court-ordered liquidation of the subsidiary are governed by statute;
• The parent anticipates that, for each tax year with respect to which the subsidiary is expected to be a member of the parent group, the department will provide the parent a balance sheet and income statement for the subsidiary and will prepare a pro forma tax return for the subsidiary to be included in the consolidated return for the parent group;
• Subject to the consent order, the parent owns 80% or greater of the vote and value of the shares of the subsidiary’s stock;
• Except for the final dissolution of the subsidiary pursuant to the consent order, the parent does not intend to sell or otherwise dispose of an amount of the subsidiary’s stock that would reduce the parent’s ownership to less than 80% of the total voting power of all shares of the subsidiary’s stock or to a value less than 80% of the total fair market value (FMV) of all shares of the subsidiary’s stock;
• The parent anticipates that the subsidiary will hold an amount of assets until its dissolution pursuant to the consent order; and
• The parent has not claimed a worthless securities loss deduction under Sec. 165(g) with respect to the subsidiary’s stock.

Rulings

The IRS, citing Rev. Rul. 84-170, ruled that the subsidiary’s court-ordered liquidation would not end its status as a corporation for purposes of Sec. 6012 before the completion of the subsidiary’s final dissolution pursuant to the consent order. The IRS also ruled that the subsidiary must be included in the parent group’s consolidated return unless and until either (1) permission to discontinue filing consolidated returns is granted to the parent under Regs. Sec. 1.1502-75(c), or (2) the parent reduces its ownership of the subsidiary’s stock to less than 80% of the total voting power of all shares of the subsidiary’s stock or to less than 80% of the total FMV of all its shares through a sale or other disposition of an amount of subsidiary stock (citing Rev. Rul. 63-104).

Regs. Sec. 1.1502-75(a)(2) provides that “[a] group which filed … a consolidated return for the immediately preceding taxable year is required to file a consolidated return” unless permission for the group to discontinue filing consolidate returns pursuant to Regs. Sec. 1.1502-75(c) is granted. Sec. 1504 provides that a corporation is a member of an affiliated group if it is both an includible corporation and, except if it is the common parent, one or more of the other includible members of the group own stock meeting the Sec. 1504(a)(2) 80% vote-and-value test in the corporation.

Implications

This ruling clarifies that the court-ordered liquidation of the subsidiary subject to receivership does not cease the subsidiary’s status as a corporation under Sec. 6012 until final dissolution. Accordingly, tax practitioners should be aware of the consolidated return regulations pursuant to Regs. Sec. 1.1502-75(c) for a subsidiary in receivership. The ruling accords with the IRS’s Field Service Advice memorandum 200051002, dated Sept. 15, 2000: “Once an affiliated group of corporations elects to file a consolidated return, it is required to file a consolidated return for subsequent years.”

Editor Notes

Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Cook at mcook@singerlewak.com.

Contributors are members of or associated with SingerLewak LLP.