Magazine article The CPA Journal

Final Regulations on S Corporations Entering a Consolidated Return

Magazine article The CPA Journal

Final Regulations on S Corporations Entering a Consolidated Return

Article excerpt

The IRS issued final regulations under IRC section 1502, effective November 10, 1999, relating to acquisitions of S corporations. These rules apply to the acquisition of 80% or more of an S corporation's stock by a member of a consolidated group. The final regulations adopt the proposed regulations issued in December 1998 providing for the elimination of a major compliance burden arising from the interaction of the consolidated return roles and the S corporation rules.

Prior to the issuance of the proposed regulations, three separate tax returns needed to be filed for the year in which an S corporation was purchased and became part of a consolidated group:

* The short S corporation tax year that ended the day before the acquisition,

* The one

* The short C corporation tax year after the acquisition (included in the consolidated return of the acquirer).

Under the final regulations, an S corporation becomes a consolidated group member at the beginning of the day of its acquisition, and its tax year ends as of the end of the day before its acquisition. Accordingly, the acquired corporation will only have two short tax years: one for the period in which it was an S corporation and one for the period in which it was a consolidated group member. The final reg ulations thereby eliminate the need for the one-day return.

The due date for the acquired corporation's final S corporation return will be consistent with the current consolidated return rules for subsidiaries entering a con solidated return group. These rules provide that the short-period S corporation tax return is due on the earlier of 1) the date its S corporation return would be due had its tax year not ended or 2) the due date of the consolidated group's return for the tax year that includes the acquisition. …

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