In year 2, the consolidated group has no taxable income as the taxable income of subsidiary 1, $1,000, is fully offset by the loss of $1,000 by Subsidiary 2 (Figure 2). As in Year 1, Subsidiary 1 is required to pay the parent company an amount equal to the tax it owes if it had filed a separate return for the year ($210). However, in two years, the question arises as to whether Subsidiary 2 should be compensated for using the group`s US$1,000 loss. The answer depends on the terms of the tax agreement. In the absence of a tax agreement, Subsidiary 2 will find it difficult to compel the parent company to do so for the loss of a potentially valuable tax attribute as a whole. 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. In addition to federal income tax issues, there are several government tax issues that consolidated groups should address in their tax allocation agreements; While a broad debate on public taxes goes beyond the scope of this article, they can have significant effects, and changes in legal rates or sharing factors of the company from the year in which a loss is generated and the year in which the loss is absorbed by the group can cause problems of tax allocation.
In addition, the national taxes of the group members often differ from the group`s public taxes, and tax allocation agreements must address the distribution of these differences. For this reason, groups should work closely with their lawyers and tax advisors to ensure that their tax agreement is properly considered in federal and national affairs. The Treasury Regulations Section 1.1502-33 (d) contains different methods of allocating consolidated tax debt between group members for income and profit purposes, and Section 1.1502-32 (b) (iv) (4) (d) provides that a parent company`s taxable base can be calculated on a subsidiary`s portfolio. However, there is no indication in tax law whether and how some members actually own their share of the group`s tax debt. The government may not need to provide such a guide, as the consolidated restitution rules make all members too liable for the group`s tax debt on several occasions [Treasury Regulations Section 1.1502-6 (a)]. These rules give the IRS the power to recover all of the consolidated tax debt of a member`s group if the parent company does not pay the liability. It should be noted that members cannot use a tax allocation agreement to avoid multiple liability; In other words, the IRS may recover the full liability of the group from a member, even if, in accordance with the provisions of the tax agreement, the member is required to pay only a small percentage of the total tax owed. Alternatively, a tax allocation agreement could assign a refund based on the member who generates the taxable income that allows the group to use the advance. Under this method, the group would be treated in such a way as to record the total loss of subsidiary 1 in year 3, the subsidiary having generated 1,100% of the revenues that allowed it to use the notes. Since subsidiary 1`s share of the loss is fully absorbed, the group would then turn to subsidiary 2