The Consolidated Tax Return: Principles, Practice, Planning, 5th ed.
In 1993, the U.S. income tax system celebrated its 80th birthday, and for nearly all its four score years (beginning in 1917), the concept of consolidated returns has been part of it. Like the tax system as a whole, however, consolidated return principles have not become simpler and more understandable over time. Indeed, complexity has been piled upon complexity, change upon change, and the regulations emanating from the fairly simple mandate of section 1502 of the Internal Revenue Code--"The Secretary shall prescribe such regulations as he may deem necessary..."-- without question dwarf most other regulations in scope and intricacy. (Perhaps only section 482 has generated a greater pages-of-regulations to words-of-statute ratio. ) The web of consolidated return provisions can, pardon the pun, tax the most seasoned tax professional, and can leave the novice with his or her head aching.
The current consolidated return regulations can trace their origin to 1966, but the rules that have been amended, revised, and clarified so many times since their original promulgation that many would argue that not much remains of 1966 regulations. Consider, for instance, the overwhelmingly complex set of rules that have come on the scene since the Tax Reform Act of 1986. Final regulations have been issued on the disallowance of subsidiary stock losses, dual consolidated losses, the nonapplication of section 304 to intercompany stock transfers, and the effect of options on affiliated group status. The Department of the Treasury and Internal Revenue Service have also developed special restoration rules for deferred gains in section 1031 exchanges, installment sales, and intercompany sales of partnership interests, as well as on dividend stripping. There have also been rules issued on exceptionally narrow subjects such as refunds resulting from insolvent financial institutions that are group members and the consolidation of Blue Cross/Blue Shield organizations.
If all tax practitioners had to do at any one time was worry about the rules that are in effect (and to determine to what periods they apply), the tax law would still not be simple, but it would be easier to deal with than it is today. In point of fact, that is not all practitioners have to contend with. There are temporary regulations, which occupy the nether world between proposed and final rules (having immediate applicability and force but not promising any particular degree of certainty and stability), as well as proposed rules that are in the process of being vetted by the tax community. Both types of non-final regulations find their home in the consolidated return area. Thus, taxpayers confront temporary rules requiring stock basis and earnings and profits adjustments following reverse acquisitions and similar transactions, and a raft of proposed regulations involving subjects such as SRLY losses, investment adjustments, earnings and profits, and excess-loss accounts. Proposed regulations are also outstanding on changes of ownerships, the allocation of income and deduction between short tax periods for new and departing members, the application of the alternative minimum tax to consolidated groups, and the calculation of section 382 loss limitations on a group and subgroup basis.
In order words, the rules relating to consolidated returns are constantly changing and exhaustingly complex. What is more, there is not a single, unifying theory that animates the rules. Rather, two divergent philosophies compete for the Treasury's attention. Some rules--for example, those relating to deferred intercompany transaction--epitomize the separate-entity concept, whereas others--such as the SRLY subgroup and section 382 regulations--embody the single-entity concept. It is important to understand the conceptual schizophrenia that marks the consolidated return rules, not only to gain an understanding of why particular provisions are the way they are, but to gain some insight into how unanswered questions under the regulations might be answered.
Given the complicated state of the consolidated return world, all but the brainiest or the most brazen of tax professionals would be well advised to seek help. Help is readily available in the Fifth Edition of The Consolidated Tax Return: Principles, Practice, Planning. This treatise by Jack Crestol, Kevin M. Hennessey, and Richard F. Yates can be beneficially used by both the experienced tax professional and the newcomer, by both the person who deals with the consolidated return rules on a day-to-day basis and the generalist who finds himself or herself thrust into the middle of a problem on short notice. The book will enable tax practitioners to navigate the shoals of the regulations.
The book consists of 11 chapters, 2 appendices, and several tables (as well as a comprehensive index). The introductory materials in chapter 1 are especially helpful for the neophyte, placing the current rules in historical context. Chapter 2 discusses the full range of administrative issues under the regulations, from what groups are eligible to file consolidated returns (and how certain antiabuse rules restrict the privilege), to electing to file on an consolidated basis, to the mechanics of perfecting an election, to terminating an election. The chapter also delves into the implications of reverse acquisitions (where a large corporate group is taken over, in form, by a member of a smaller group, but the shareholders of the larger group obtain a controlling interest in the smaller group). Chapter 2--and, indeed, the entire book--is replete with citations to authorities (from the legislative history to private letter rulings) and with examples to illustrate the rules.
Chapter 3 of the book addresses special accounting method and period issues relating to consolidated returns, including the adoption of the taxable year of the common parent, the income that is includible in the consolidated return, and the rules relating short-period returns. Chapter 4 covers intercompany transactions and distributions, including inventory adjustments, the disposition of subsidiary stock, and the obligations of group members.
Chapter 5 demonstrates at once the in-over-your-head quality of the consolidated return rules and the compelling need for navigational assistance. Entitled "Consolidated Taxable Income," the 277-page chapter is remarkably thorough. Consolidated NOLs posed a special challenge to the authors, for there are two sets of rules--the extant final regulations and a set of proposed rules that (when they go into effect) will apply as of January 29, 1991. Taxpayers face a weighty, not-at-all hypothetical conundrum: from which set of the parallel NOL rules should they take their lead from. In their discussion of the loss disallowance rules, the built-in loss rules, and numerous other rules (from the special rules relating to groups including life insurance companies to the depreciation deduction to the safe harbor leases and golden parachute payments), the authors provide much needed assistance.
Chapter 6 of the book addresses basis issues, and covers deemed dividends, the new investment adjustment regime, excess loss accounts, and consent dividends. The chapter also discusses the implications of section 338 elections.
Chapter 7 covers the determination of consolidated tax liability, delving into areas such as the alternative minimum tax, the personal holding company tax, and the accumulated earnings tax. The authors also analyze the consolidated return aspects of the general business credit, foreign tax credit, research credit, targeted jobs credit, and the PAYSOP credit. Chapter 8 discusses earnings and profits, including how the consolidated tax liability is to be allocated among group members for E&P purposes. Chapter 9 discusses estimated tax issues, refunds, penalties, and the basic statute of limitations for assessments.
Chapter 10 contains a compendium of all the elections that confront a consolidated group. Obviously, the first and most obvious election is the election to file consolidated returns, but also discussed are elections as diverse as the decision to include Mexican or Canadian subsidiaries in the group and the election to include a company in the group (as of the first of the year) where the company joined the group within 30 days of the beginning of the year (the latter of which the IRS has proposed to eliminate). The chapter also discusses the election to allocate consolidate tax liability in a particular manner, and contains a model tax allocation agreement providing much food for thought. Also covered are elections relating to deemed dividends and consent dividends, section 338, the deferral of intercompany profits, apportioning the section 382 limitation, and dual consolidated losses (among others). The comprehensive discussion of the elections available to groups filing on a consolidated basis for the first time, as well as the elections to be made in subsequent years, should prove useful to all tax practitioners.
Chapter 11, entitled "Tax Planning," provides a good overview of the various advantages and disadvantages of filing consolidated returns. It also discusses 22 separate tax-planning opportunities, ranging from charitable contributions to security transaction, to excess losses.
The book also includes two comprehensive appendices. The first contains a set of model forms and workpapers, and the second is a detailed and thought-provoking Acquisition or Disposition Checklist. The checklist should be either where a tax practitioner begins his or her research and analysis, or where he or she ends it. It will doubtless trigger thoughts and ideas, and aid the planner in ensuring that nothing is overlooked.
The Fifth Edition of The Consolidated Return reflects the cumulative experience and insight of three top-notch practitioners--Jack Crestol, Kevin Hennessey, and Richard Yates. Kevin Hennessey has been a mainstay at Tax Executives Institute's educational programs (and elsewhere) for more than two decades. Although I am not personally acquainted with the book's other two authors, it is clear that they all share judgment born of experience, and a enthusiasm for, and confidence in their understanding of, the subject matter that leaves the reader feeling secure.
I possess no special expertise in consolidated return issues, and therefore cannot bring an expert's perspective to this review. (Not to damn him with faint praise, but Kevin Hennessey has taught me most of what I know about consolidated returns.) I can say, however, that Crestol, Hennessey and Yates have done an outstanding job of explaining the consolidated return rules, of identifying issues that tax practitioners need to consider, and of providing guidance on how those issues can be addressed. Of particular value are the chapter on tax planning ideas, the model forms, and the acquisitions and dispositions checklist. The book, moreover, is complete enough to be of substantial assistance to the experienced practitioner. Where the consolidated return rules fail to address an issue, or are susceptible to multiple interpretations, the authors offers their views on what approach taxpayers may take (and may want to-take).
In summary, The Consolidated Return is both encyclopedic in scope and easy to use (or at least as easy as any book on such a daunting subject). It will serve a useful purpose in any tax library.
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|Author:||McCormally, Timothy J.|
|Article Type:||Book Review|
|Date:||Jan 1, 1994|
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