Final consolidated return agency regulations released

Tax Hot TopicsTax Hot Topics The Treasury Department recently finalized regulations (T.D. 9715) under Treas. Reg. Sec. 1.1502-77 that should reduce ambiguity regarding agency and consolidated groups.

The final regulations state that the legal successor to a common corporate parent for state law purposes is the agent for the group for the prior open tax years. The final regulations, which apply prospectively to consolidated return tax years beginning on or after April 1, 2015, also list four circumstances where the IRS can appoint an agent unilaterally. They are the following:
  1. The terminating agent has no default successor and does not designate one
  2. The IRS believes an agent or default successor exists but has failed to timely respond to IRS notices.
  3. The agent is or becomes a foreign entity.
  4. A previously designated agent ceases to be a member of the group.

The last circumstance is an addition to the 2012 proposed regulations.

Generally, the common parent of the consolidated group is the agent for the group when dealing with the IRS (for example, for extending statutes of limitation or responding during an audit). However, when the common parent ceases to exist or is nonresponsive, it create the question of who is the proper agent for the group for open tax years.

The prior regulations under Treas. Reg. Sec. 1.1502-77, which were released in 2002, allowed a terminating common parent latitude to designate the new agent for the group. However, the prior regulations also raised a number of questions for transactions such as foreign inversions, when the common parent became a disregarded entity or partnership, and when a member of the group held an interest in a Tax Equity and Fiscal Responsibility Act (TEFRA) partnership. The new final regulations resolve much of ambiguity by adopting a default successor rule that essentially provides that the legal successor to the common parent for state law purposes is the agent for the group for such prior open tax years.

The new final regulations also clarify when the agent for the group acts on behalf of a member who holds an interest in a TEFRA partnership and what happens if a member happens to be the tax matters partner of a TEFRA partnership.

The IRS also released an accompaniment to the final regulations, Rev. Proc. 2015-26, which states the manner in which a terminating common parent can notify the IRS of the identity of a new, default successor, the resignation of an agent and the manner in which the IRS may appoint a successor, among other things.

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