Tax Report
Schnee (1999) describes the process of defining an affiliated groupin order to elect to file a consolidated tax return. He notes that inorder to qualify as a member of an affiliated group "the group must ownstock representing at least 80% of the voting power and 80% of the value ofthe subsidiary. A recent case explored the definition of voting power." Itis important to note that the phrase "80% of voting power is not clearlydefined", but has been historically defined as the ability to elect membersof the board of directors. Recently, the IRS ruled against theconsolidation of the income tax returns of Alumax and Amax corporations,based on limitations of the board's power, although the affiliated group
Finally, oneelection can be used to adjust earnings and profits of a subsidiary, andreduces the need for the use of two separate income tax allocations (Raineyand Yates). Consolidated companiescan avoid double taxation by making an election that applies tointercompany stock gains or loss. ility to elect members of the board of directors forAlumax (Axelrod). Another newelection gives an alternative where extraordinary items such as income anddeductions of a subsidiary can be allocated ratably. Prior to the regulations proposed in this report,transactions that occur between the members of a consolidated group werenot considered intercompany transactions simply on the basis of shareholder-corporate relationships. Axelrod (1994) notes that the Department of Treasury and IRSconsolidated return regulations "add a degree of complexity" to the taxreturn process. 1502-31(e) permits an election that a loss carryoverattributable to the common parent expires prior to a change in groupstructure (such as when a group becomes a subsidiary). New regulationseliminate the potential for prematurely triggering intercompany stock gainsby allowing a one-time election that can be applied to all intercompanystock losses or gains before the July 12, 1995 tax years. An election can be filed with a group'sconsolidated return that identifies amounts of loss carryovers in order towaive loss carryovers from separate return limitation years. Proposed regulations put transactions likedistributions, contributions, redemption's and liquidations under a broaderdefinition of intercompany transactions. Rainey and Yates (1996) note six new elections, to be consideredannually that can impact consolidated tax returns.
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Acceptance Essays
