Overview
This lecture reviews how to handle tax years, income allocation, and tax return due dates for corporations joining or leaving a consolidated group, including special rules for reverse acquisitions.
Tax Years and Consolidated Groups
- When a corporation joins a consolidated group, the group keeps its tax year end (e.g., 12/31).
- A member joining a group must file a separate return for the period before joining, and its due date is the earlier of its own due date or the consolidated group’s due date.
- Standard corporate tax return due date: 3.5 months after year end, or 2.5 months for June 30 year-end corporations.
- If a member leaves a group, it files a separate return for the post-membership period.
- If a departing member does not join another group, it keeps its prior tax year end; if it joins a new group, it adopts the new group’s year end.
Allocation of Taxable Income
- For partial-year group membership, income must be split between the separate return and consolidated group periods.
- The default method is to close the books at the time of entry or exit and allocate income accordingly.
- If the year end does not change, an election can be made to prorate income by days; extraordinary items (e.g., asset sales) must be specifically identified and allocated.
Reverse Acquisitions
- A reverse acquisition occurs when the shareholders of a company being acquired end up with more than 50% of the acquiring company.
- In a reverse acquisition, the consolidated group is treated as the group of the company whose shareholders hold the majority.
- The group’s tax year end follows the majority shareholder’s pre-acquisition year end.
- If the acquired company was not previously in a consolidated group, it may elect to file a consolidated return; otherwise, the acquiring group keeps its year end unless an election is made.
Key Terms & Definitions
- Consolidated group — Parent and subsidiaries filing a single consolidated tax return.
- Separate return — A tax return filed independently by a corporation for periods outside group membership.
- Close the books — Method allocating income based on actual results up to joining/leaving date.
- Proration — Allocating income based on a time ratio if year end remains unchanged.
- Extraordinary items — Non-operational gains/losses (e.g., asset sales) that must be allocated separately.
- Reverse acquisition — Transaction where acquired company’s shareholders control the new consolidated group.
Action Items / Next Steps
- Review methods of income allocation (close the books vs. proration).
- Be able to determine due dates for separate and consolidated returns.
- Understand reverse acquisition rules and effects on tax year end.