Filing Carryback Claims for Consolidated Groups

In June 21, 2001, the IRS issued Regs. Sec. 1.1502-78, affecting consolidated groups. Under Regs. Sec. 1.1502-78(e), consolidated groups can determine when to file an application for a tentative carryback adjustment. In addition, Regs. Sec. 1.1502-78(e)(2) provides a special rule that allows certain corporations that become new members of a consolidated group to extend the deadline for filing an application for a tentative carryback adjustment, resulting from losses or credits arising in the new member's last separate return limitation year (SRLY). For these purposes, the consolidated group must treat the SRLY as ending on the same date as the end of its current tax year.

Sec. 6411(a) applies to filing an application for a tentative carryback adjustment by a consolidated group. The special rule for new members provides that, solely for purposes of complying with the 12-month requirement for making application under Sec. 6411(a), the SRLY of a new qualified member shall be treated as ending on the same date as the end of the current tax year of the consolidated group that the qualified new member joins.

A new member is a corporation that, in the preceding tax year, did not qualify as a member (as defined in Regs. Sec. 1.1502-1(b)) of the consolidated group that it now joins. A new member of a consolidated group qualifies for purposes of these provisions if, immediately prior to becoming a new member, it was:

• The common parent of a consolidated group; or
• Not required to join in filing a consolidated return.

Two examples in Regs. Sec. 1.1502-78(e)(2)(iv) illustrate these provisions. In Example 1, Individual A owns 100% of the stock of X, a corporation that is not a member of a consolidated group and files separate returns on a calendar-year basis. On January 31 of year 1, X becomes a member of the Y consolidated group, which also files returns on a calendar-year basis. X is a qualified new member as defined in Regs. Sec. 1.1502-78(e)(2)(iii)(B), because, immediately prior to becoming a new member of Y, X was not required to join in filing a consolidated return. As a result of its becoming a new member of Y, X's separate return for the short tax year (January 1 of year 1January 31 of year 1) is due September 15 of year 2 (with extensions) (see Regs. Sec. 1.1502-76(c)). Y's consolidated return is also due September 15 of year 2 (with extensions) (see Sec. 1.1502-76(c)). Solely for the purpose of complying with the 12-month requirement for making an application for a tentative carryback adjustment under Sec. 6411(a), X treats its SRLY as ending on December 31 of year 1. X's application for a tentative carryback adjustment is therefore due on or before December 31 of year 2.

Example 2 assumes the same facts as in Example 1, except that immediately before becoming a new member of Y, X was a member of the Z consolidated group. Because X was required to join in filing the consolidated return for Z, it is not a qualified new member as defined in Regs. Sec. 1.1502-78(e)(2)(iii). X's items for the one-month period will be included in Z's consolidated return. Z's application for a tentative carryback adjustment, if any, continues to be due within 12 months of the end of its tax year, which is not affected by X's change in status as a new member of Y.

According to the Service, until it modifies Form 1139, Application for a Tentative Carryback Adjustment, to reflect the changes made by the final regulations, an application filed under the special rule must contain the following information (written in red) on the existing form:

• The year-end of the consolidated group the new member joined; and
• The phrase "Filed pursuant to Treas. Reg. section 1.1502-78(e)(2)," written at the top of the form.

In response to the changes made by this regulation, IRS Service Centers have developed a procedure to assist in processing applications filed under Regs. Sec. 1.1502-78(e)(2). This procedure requires that the new member include the additional information (as set forth above) on Form 1139. This procedure supplements existing guidelines for filing and processing Form 1139.

The proposed regulation was issued as Temp. Regs. Sec. 1.1502-78T(g), but the final regulation has been renumbered as Regs. Sec. 1.1502-78(e). The provisions therein apply for applications by new members of consolidated groups for tentative carryback adjustments resulting from net operating losses, net capital losses or unused business credits arising in new members' SRLYs after 2000.

From Brian E. Keller, CPA, Oak Brook, IL