There are many ways to ensure that tax-allocation agreements address this problem. The agreement could, for example, stipulate that loss carry-forwards are absorbed in a first, proportionate manner. The Consolidated Tax Returns Regulations provide that losses that can be absorbed in a year of consolidated return are generally absorbed in the order of the tax years in which they were made and on a pro-rata basis [Treasury Regulations section 1.1502-21 (b)) (1)]. In the example above, this means that the group is treated as absorbing 533 USD (1,000 USD 3 separate business loss ÷ 3,000 USD consolidated loss × 1,600 CNOL) from the loss of subsidiary 1 and 1 1,067 USD (2,000 USD 3 separate business loss ÷ USD 3,000 Consolidated loss ÷ USD 3,000 3 consolidated loss × 1,600 CNOL) of the loss of 2 dollars. When several companies are grouped into a large group, the parent company acts directly with the IRS, pays the group`s tax debts and receives repayments. Tax allocation agreements are often used by members of a consolidated group to determine how these funds will be allocated and distributed. The authors describe the issues that companies must consider when developing such agreements, including how the loss of return and loss of net operating was influenced by the Tax Reduction and Employment Act of 2017. Generally accepted accounting principles (“GAAP”) require the consolidation of subsidiaries when the parent company holds more than 50% of the number of votes. Consolidated tax returns are governed by Section 1501 of the IRC and its rules. Tax legislation imposes a higher consolidation requirement than in GAAP. A consolidated tax return is allowed if the parent company owns 80.1% of the value of the subsidiary. These include common shares and all other equity instruments of the subsidiary, including preferred shares. As a result, it is much more difficult to obtain a consolidated tax return than the consolidated financial statements.
Chart 1 summarizes the consolidated group`s taxable income for year 1, which is $1,000; its tax debt is $210. Under the tax allocation agreement, Subsidiary 1 would be required to make a payment of $210 $US to Parent, which transfers the money to the IRS on behalf of the group.