IRS Publishes Final Regs on Agents for Affiliated Groups

[Editor's Note: At 80 F.R. 23237-23238, Apr. 27, 2015, the IRS published corrections to the following Treasury Decision which have been incorporated below.]

 Regulations Revising Rules Regarding Agency for a Consolidated Group

ACTION: Final regulations.

SUMMARY: This document contains final regulations regarding the agent for an affiliated group of corporations that files a consolidated return (consolidated group). The final regulations provide guidance concerning the identity and authority of the agent for a consolidated group. These final regulations affect all corporations in consolidated groups.

DATES: Effective Date: These regulations are effective on April 1, 2015.

Applicability Date: For dates of applicability, see § 1.1502-77(j).

FOR FURTHER INFORMATION CONTACT: Gerald B. Fleming at (202) 317-6975 or Richard M. Heinecke at (202) 317-6065 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1699. The collection of information in these final regulations is in paragraphs (c)(4), (c)(5)(iii), (c)(6)(i)(B), (c)(6)(ii), (c)(6)(iv), (c)(7)(i)(A), (c)(7)(i)(B), (c)(7)(ii), and (f)(3) of § 1.1502-77. The collection of information is necessary to make certain that the Commissioner of Internal Revenue (Commissioner), agent for the consolidated group, and members of the group are each informed of the proper identity of the agent for any given period, and are able to timely exercise their privileges and fulfill their responsibilities with respect to the filing of a consolidated return.

For more information, see Rev. Proc. 2015-26, IRB 2015-15, the revenue procedure published to accompany the final regulations that provides instructions with respect to all communications relating to the identification of an agent for a consolidated group.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

Background and Explanation of Provisions

1. Introduction

This Treasury Decision contains final regulations that amend 26 CFR part 1, under section 1502 of the Internal Revenue Code of 1986 (Code) (Final Regulations). Section 1502 authorizes the Secretary to prescribe regulations for corporations that join in filing consolidated returns and provides that such rules may be different from the provisions of chapter 1 of subtitle A of the Code that would apply if such corporations filed separate returns. These Final Regulations provide guidance under § 1.1502-77 with respect to the agent for a group of affiliated corporations that file a consolidated return (agent), including rules for identifying and communicating with the agent, and determining the scope of the agent's authority.

The Final Regulations apply to consolidated return years beginning on or after April 1, 2015. Regulations in effect before April 1, 2015 will continue to apply to consolidated tax years beginning before April 1, 2015.

Contemporaneously with the publication of the Final Regulations in the Federal Register, the IRS is issuing Rev. Proc. 2015-26, IRB 2015-15, providing instructions regarding the manner of making all communications that relate to the identification of an agent under the Final Regulations. Rev. Proc. 2015-26, IRB 2015-15, will obsolete Rev. Proc. 2002-43, 2002-2 CB 99 (see § 601.601(d)(2)(ii)(b) of this chapter) (Determination of Substitute Agent for a Consolidated Group When the Common Parent Ceases to Exist) with respect to consolidated return years for which these Final Regulations apply. Thus, Rev. Proc. 2002-43 will continue to apply for consolidated return years subject to prior regulations.

2. Overview of prior guidance regarding agents

On June 28, 2002, the IRS and the Treasury Department promulgated final regulations under § 1.1502-77 in TD 9002, 67 FR 43538, to provide rules concerning the identity and authority of the agent and the designation of a new agent. These regulations were amended by TD 9255 (71 FR 13001) (March 14, 2006) and TD 9343 (72 FR 40066) (July 23, 2007). (The June 28, 2002 regulations and amendments are collectively referred to in this preamble as the 2002 Regulations.)

On June 29, 2002, the IRS released Rev. Proc. 2002-43 to prescribe instructions for all communications relating to the determination of a substitute agent and the designation of a substitute agent by a terminating common parent.

On May 30, 2012, the IRS and the Treasury Department proposed regulations that would replace the 2002 Regulations (2012 Proposed Regulations). The 2012 Proposed Regulations were published in the Federal Register (77 FR 31786). No request for a hearing was received. One comment was received with respect to the 2012 Proposed Regulations, but it made no specific recommendations. No other comments were received, including with respect to the specific request for comments regarding the expansion of the circumstances in which the Commissioner could designate agents, and the ability of an agent to resign.

3. Summary of the 2002 Regulations

Under the 2002 Regulations, the common parent of a group ceased to be the agent if its existence terminated under applicable law, if it became disregarded as an entity separate from its owner for federal tax purposes (a disregarded entity), or if it became an entity classified as a partnership for federal tax purposes. In such cases, the common parent could generally designate its successor, another member of the group, or a group member's successor as the substitute agent for the group (provided such designee was a domestic corporation for federal tax purposes). However, any such designation required affirmative approval by the Commissioner.

Although in general a common parent must be a domestic corporation, a common parent could be an entity created or organized under the laws of a foreign country and treated as a domestic corporation by reason of section 7874 (treating a foreign corporation as a domestic corporation as a result of certain outbound inversion transactions) or an election under section 953(d) to treat a foreign insurance company as a domestic corporation (foreign common parent). In recognition of the logistical problems this could create, the 2002 Regulations permitted the Commissioner to designate a domestic member of the group to act as the agent (domestic substitute agent) in the case of a foreign common parent.

Finally, the 2002 Regulations provided certain rules relating to partnerships and partners subject to sections 6221 through 6234 of the Code, enacted by section 402 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 324) (TEFRA), generally providing that the Commissioner would deal directly with a member that was the tax matters partner (TMP) regarding specified matters for the partners in a TEFRA partnership even if the TMP is not the agent.

4. Overview of the 2012 Proposed Regulations

The 2012 Proposed Regulations retained the general rules, concepts, and examples of the 2002 Regulations. However, the 2012 Proposed Regulations renumbered, restructured, and revised the 2002 Regulations to minimize the circumstances under which the identity of the agent would not be clear. The 2012 Proposed Regulations also increased the number of situations in which the identity of the agent would be determined without action by taxpayers or the Commissioner. The proposed changes are described in the following paragraphs 4.A. through 4.G.

A. Default Successors

The 2002 Regulations generally permitted a terminating agent to designate the substitute agent. However, the IRS observed that terminating agents, to the extent they designated at all, tended to designate their successors rather than another member of their group. To simplify the procedures and align them with taxpayers' practices, the 2012 Proposed Regulations provided that if an agent had a sole successor (default successor), the default successor would automatically become the group's agent when the prior agent ceased to exist, such as in a merger. The terminating agent would not be permitted to designate an agent unless there was no default successor, in which case the agent could only designate an entity that was a member of the group for the consolidated return year (or a successor of such a member). The 2012 Proposed Regulations also prescribed limited circumstances under which the Commissioner could replace a default successor.

B. Entities Eligible to Be an Agent

The 2012 Proposed Regulations included disregarded entities and partnerships among the entities permitted to be agents for prior years in which they or their predecessors were not treated as disregarded. Thus, if a common parent converted or merged into a disregarded entity or partnership, whether by reason of a state law merger, a state law conversion, or a federal tax election, the continuing or successor juridical entity (whether a disregarded entity or partnership) would continue as the agent for the prior periods.

C. TEFRA Partnerships

In general, the Code and regulations governing the treatment of TEFRA partnerships provide that the Commissioner will deal with the TMP regarding specified matters for the partners in a TEFRA partnership. See generally, sections 6221 through 6234. The 2002 Regulations provided two TEFRA specific rules relating to members that were partners in a TEFRA partnership. Under the first rule, a subsidiary that was the TMP of a TEFRA partnership would act in its own name regarding partnership matters, without requiring any action by the agent. Under the second rule, the Commissioner would deal with a subsidiary that was a partner in a TEFRA partnership in the performance of an examination of the TEFRA partnership. This second rule, however, appeared to create some confusion in the context of other provisions of the 2002 Regulations.

To provide more clarity with respect to the second rule, the 2012 Proposed Regulations provided that: (1) the agent will generally act as agent for a member that is a partner in a TEFRA partnership regarding all matters related to the partnership, including execution of a settlement agreement under section 6224(c) (as illustrated in Example 12 in § 1.1502-77(g) of the 2012 Proposed Regulations) and extension of the statute of limitations with respect to items other than the items of the TEFRA partnership (as illustrated in Example 11 in § 1.1502-77(g) of the 2012 Proposed Regulations); and (2) the Commissioner, without having to deal with each member separately by "breaking agency" pursuant to § 1.1502-77(f)(2)(i) of the 2012 Proposed Regulations, may communicate directly with a subsidiary or a disregarded entity owned by a subsidiary that is a partner in a TEFRA partnership whenever the Commissioner determines that such direct communication will facilitate the conduct of an examination, appeal, or settlement with respect to the partnership. However, like the 2002 Regulations, the 2012 Proposed Regulations provided that any member of the group designated as the TMP of a TEFRA partnership will act in its own name and perform its responsibilities with respect to the partnership without requiring any action by the agent.

D. Commissioner's Approval of Substitute Agent

Although the 2002 Regulations required the Commissioner to approve any designation, in practice, designation approval requests were denied only rarely. To simplify procedures, and thereby conserve resources and enhance efficiency, the 2012 Proposed Regulations eliminated the requirement. However, to ensure that IRS records accurately reflect the identity of an agent, the 2012 Proposed Regulations provided that a default successor, or a terminating agent that has no default successor, must notify the IRS (in writing in the manner prescribed by the Commissioner) when the default successor or an entity designated by a terminating agent becomes the group's new agent.

E. Commissioner's Authority to Designate Agent

The 2012 Proposed Regulations provided several limited circumstances in which the Commissioner could designate or replace an agent, either on its own initiative or at the request of other members. Examples were included in the 2012 Proposed Regulations to illustrate the circumstances in which an agent may be designated.

The 2012 Proposed Regulations did not provide the Commissioner with the ability to replace a domestic default successor under circumstances in which it could not replace the common parent.

F. Foreign Entity as Agent

As previously noted, the 2002 Regulations did not preclude foreign entities from acting as agent, but provided that the Commissioner could designate a domestic substitute agent. The IRS and the Treasury Department recognize that such an entity may have the best access to information, but also that these situations present unique logistical issues. Accordingly, the 2012 Proposed Regulations did not preclude a foreign entity from being the agent and preserved the Commissioner's discretion to replace a foreign entity.

G. Post-Dissolution Winding Up Period

Questions arose under the 2002 Regulations with respect to the actions that could be performed by a terminating agent during the "winding up" period following its dissolution. Because winding up statutes vary widely among the states, the IRS and the Treasury Department determined that no single rule for post-dissolution terminating agents would be appropriate in all cases. The 2012 Proposed Regulations resolved the issue by providing that an entity that has dissolved or otherwise ceased to exist under applicable law can no longer be the agent, irrespective of its powers under state or local law during its post-dissolution winding up period.

5. Final Regulations

The rules adopted in these Final Regulations are consistent with those set forth in the 2012 Proposed Regulations. The Final Regulations, however, make several revisions to the 2012 Proposed Regulations. First, as further described in section 5.A. of this preamble, the Final Regulations expand the circumstances under which the Commissioner may replace an agent on the Commissioner's own accord. Second, the Final Regulations clarify that a terminating agent without a default successor may only designate an agent with respect to a completed year. See section 5.A.iii. of this preamble. Third, the Final Regulations organize the provisions that permit the Commissioner to designate an agent into two categories: (1) those provisions that authorize the Commissioner to replace an agent on the Commissioner's own accord, with or without a written request from a member; and (2) a provision described in section 5.B. of this preamble permitting the Commissioner to replace an agent pursuant to a member's written request. Fourth, as described in section 5.C. of this preamble, the Final Regulations allow an agent to resign under certain circumstances. Fifth, the Final Regulations clarify that an agent other than the common parent generally serves as agent under the same terms and with the same rights as the common parent. A significant exception to this general rule discussed in section 5.A.iii. of this preamble applies in the case of an agent designated by the Commissioner, in that such an agent may not designate an agent upon its termination unless the Commissioner designated the agent solely because a prior agent terminated without a default successor and without designating an agent (other than in the case of a group structure change as defined in § 1.1502-33(f)(1)).

In addition, the Final Regulations contain clarifying and non-substantive changes to the text of the 2012 Proposed Regulations and redesignate the 2002 Regulations as § 1.1502-77B (§ 1.1502-77A continues to apply for consolidated return years beginning before June 28, 2002).

A. Designation On Commissioner's Own Accord

The Final Regulations prescribe four circumstances in which the Commissioner may designate an agent on the Commissioner's own accord. Three of the circumstances are adopted from the 2012 Proposed Regulations: the Commissioner may designate an agent if (1) a terminating agent has no default successor and fails to designate an agent; (2) the Commissioner believes that the agent or its default successor exists but such entity fails to timely respond to notices properly sent by the Commissioner; or (3) the agent is or becomes a foreign entity (for example, through the agent's continuance into a foreign jurisdiction or certain transactions subject to the inversion rules of section 7874). The Final Regulations add an additional situation to the second circumstance so that the Commissioner may designate an agent where the agent either fails to timely respond to notices or fails to perform its obligations as agent. Finally, the Final Regulations add a fourth circumstance: the Commissioner may designate a new agent for a current year if a previously designated agent ceases to be a member of the group.

i. Replacing agent that fails to perform its obligations

The IRS and the Treasury Department recognize that there may be situations in which an agent is failing to perform its obligations as agent under the Code or regulations. Neither the 2002 Regulations nor the 2012 Proposed Regulations provided a remedy to designate an agent in such situations. As a result, members would not be able to accurately file a return, determine their federal tax liability, or obtain refunds, and the Commissioner might have to deal with each member separately by "breaking agency" pursuant to § 1.1502-77(f)(2)(i) of the 2012 Proposed Regulations. This could, in turn, result in significant uncertainty and undue burden for group members as well as the Commissioner. For example, assume the Commissioner breaks agency for a consolidated return year that has ended (completed year) and then one or more members files a claim for refund of income taxes paid for that year. Because of the uncertainty as to which member(s) would be entitled to all or a portion of the refund, the Government would likely be forced to interplead all potential member-claimants in an ensuing refund case.

The preamble to the 2012 Proposed Regulations requested comments with respect to this issue, but no comments were received. Nevertheless, the IRS and the Treasury Department have considered this issue and determined that the best interests of all concerned would be served by providing the Commissioner the authority to replace an agent that fails to perform its obligations as agent as prescribed by federal tax law. Accordingly, the Final Regulations provide that the Commissioner may, with or without a written request from a member, designate an agent to replace any agent that fails to perform its obligations as agent as prescribed by the Code or regulations promulgated thereunder.

ii. Replacing agent that ceases to be a member for current year

The 2012 Proposed Regulations did not provide guidance for situations in which an agent previously designated by the Commissioner ceases to be a member during a consolidated return year that is not a completed year (current year). Thus, under the 2012 Proposed Regulations, there could be situations in which a group would have a non-member agent or no agent at all. The Final Regulations address these issues by requiring that the agent for the current year be a member of the group. An agent designated by the Commissioner will generally continue as the agent in successive consolidated return years except in three circumstances: (1) if the Commissioner specifies a limited or specific period of agency in the designation; (2) if the agent ceases to be a member of the group; or (3) if the agent is replaced pursuant to the Final Regulations.

The Final Regulations also provide an additional circumstance in which the Commissioner may designate an agent on the Commissioner's own accord. Specifically, the Final Regulations permit the Commissioner, with or without a written request from a member, to designate an agent for the current year if an agent previously designated by the Commissioner ceases to be a member of the group without leaving a default successor in the group. In that situation, a member of the group should request that the Commissioner designate an agent.

iii. Effect of certain designations on the Commissioner's own accord

The Proposed Regulations permitted an agent that terminates without a default successor to designate an agent. If a terminating agent had no default successor and failed to designate an agent, the Commissioner could designate an agent with or without the request of any member. The Final Regulations generally adopt these rules with one significant modification. If a terminating agent was itself designated by the Commissioner on the Commissioner's own accord and the terminating agent does not have a default successor, the Final Regulations provide that the terminating agent is not permitted to designate an agent if it was designated because the agent it replaced (1) ceased to be a member of the group in a current year; (2) failed to timely respond to notices or failed to fulfill its obligations under the Code or regulations; or (3) became a foreign entity. Because the Commissioner's ability to administer the tax law is impaired under these circumstances, the IRS and the Treasury Department determined that the interests of tax administration would be best served by monitoring of designated agents and groups in these limited cases. Accordingly, the IRS and the Treasury Department determined that the Commissioner, rather than the terminating agent, should designate the agent in these situations. In such cases, any member (including the terminating agent) of the group is permitted to request that the Commissioner designate a new agent. The Final Regulations permit other categories of agents previously designated by the Commissioner to designate an agent upon termination provided the terminating agent does not (1) have a default successor or (2) terminate in a group structure change. The Final Regulations clarify that a terminating agent that is permitted to designate an agent may only do so with respect to completed years.

Finally, to prevent groups from nullifying a designation made by the Commissioner, the Final Regulations provide that a designating agent may not designate as an agent any entity that the Commissioner previously replaced as agent. The designating agent may, however, submit a request that the Commissioner designate as agent the entity previously replaced as agent.

B. Designation Upon Written Request by a Member

The 2002 Regulations and the 2012 Proposed Regulations provided a mechanism whereby upon the written request from a member, the Commissioner could, but was not required to, replace an agent previously designated by the Commissioner. The Final Regulations retain this provision to permit a member to request that the Commissioner designate a new agent in circumstances other than the specifically enumerated circumstances in which the Commissioner may designate an agent on the Commissioner's own accord.

C. Resignation of Agent

Under the 2002 Regulations, a common parent remained the agent for any year for which it was the common parent, with only a termination of the common parent terminating that agency. However, the IRS and the Treasury Department recognize that there could be circumstances in which an agent would want to resign and have another entity take its place as agent. For example, assume P, the common parent of the P consolidated group, becomes a subsidiary of the group in a transaction under § 1.1502-75(d) (resulting in a group structure change described in § 1.1502-33(f)(1)), and the group continues with N as the new common parent and agent. If unrelated X acquires the stock of P, P would leave the group but would still be the agent for the years during which it was the group's common parent. In that situation, it might be more efficient for all concerned if P were to resign as agent in favor of another member. Although the 2012 Proposed Regulations did not include a mechanism for an existing agent to resign, the preamble to the 2012 Proposed Regulations requested comments with respect to this issue. No comments were received. Nevertheless, the IRS and the Treasury Department have considered the issue and determined that it would be in the best interests of all concerned and sound tax administration for agents to have the ability to resign, at least in limited situations.

Accordingly, the Final Regulations provide a mechanism for agents to resign with respect to completed years. However, there are four conditions that must be met. First, the agent must provide written notice to the Commissioner that it no longer intends to be the agent for a completed year. Second, an entity that could have been designated by the resigning agent upon its termination must consent, in writing, to be the agent for that year. Third, immediately after its resignation takes effect, the resigning agent must not be the agent for the current year. Fourth, the Commissioner must not object to the agent's resignation. If these conditions are satisfied, the new agent must notify each member of the group that it has become the agent.

Effective/Applicability Date

The Final Regulations apply to consolidated return years beginning on or after April 1, 2015. The 2002 Regulations, redesignated as § 1.1502-77B, and Rev. Proc. 2002-43 continue to apply with respect to consolidated return years beginning on or after June 28, 2002, and before April 1, 2015. However, the new rules permitting the resignation of agents may be relied upon for completed years otherwise governed by the 2002 Regulations (or any predecessor regulations).

Special Analyses

It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the proposed regulations preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.

Drafting Information

The principal author of these final regulations is Richard M. Heinecke, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

* * * * *

Section 1.1502-77B also issued under 26 U.S.C. 1502 and 6402(j).

* * * * *

§ 1.338-1 [Amended]

Par. 2. Section 1.338-1 is amended by removing the language "§ 1.1502-77(e)(4)" in the last sentence of paragraph (b)(2)(viii) and adding the language "§ 1.1502-77(c)(8)" in its place.

Par. 3. Section 1.1502-77A is amended as follows:

§ 1.1502-77A Common parent agent for subsidiaries applicable for consolidated return years beginning before June 28, 2002.

* * * * *

(g) Effective/applicability dates. * * *

§ 1.1502.77 [Redesignated as § 1.1502-77B]

Par. 4. Add an undesignated center heading under § 1.1502.77A, redesignate § 1.1502-77 as § 1.1502-77B and, in newly redesignated § 1.1502-77B, revise the section heading and paragraph (h)(1)(i) to read as follows: REGULATIONS APPLICABLE TO TAXABLE YEARS BEGINNING ON OR AFTER JUNE 28, 2002, AND BEFORE APRIL 1, 2015.

§ 1.1502-77B Agent for the group applicable for consolidated return years beginning on or after June 28, 2002, and before April 1, 2015.

* * * * *

(h) Effective/applicability date -- (1) Application -- (i) In general. This section applies to consolidated return years beginning on or after June 28, 2002, and before April 1, 2015. For instructions regarding communications relating to the determination of a substitute agent and other matters under this section, see Rev. Proc. 2002-43, 2002-2 CB 99 (see § 601.601(d)(2)(ii)(b) of this chapter). For rules governing the resignation of certain agents for the group subject to this section, see § 1.1502-77(c)(7) and (j)(2).

* * * * *

Par. 5. Section 1.1502-77 is added to read as follows:

§ 1.1502-77 Agent for the group.

(a) Agent for the group -- (1) Sole agent. Except as provided in paragraphs (e) and (f)(2) of this section, one entity (the agent) is the sole agent that is authorized to act in its own name regarding all matters relating to the federal income tax liability for the consolidated return year for each member of the group and any successor or transferee of a member (and any subsequent successors and transferees thereof). The identity of that agent is determined under the rules of paragraph (c) of this section.

(2) Agent for each consolidated return year. Agency for the group is established for each consolidated return year and is not affected by the status or membership of the group in later years. Thus, subject to the rules of paragraph (c) of this section, the agent will generally remain agent for that consolidated return year regardless of whether one or more subsidiaries later cease to be members of the group, whether the group files a consolidated return for any subsequent year, whether the agent ceases to be the agent or a member of the group in any subsequent year, or whether the group continues pursuant to § 1.1502-75(d) with a new common parent in any subsequent year.

(3) Communications under this section. Any designation, notification, objection,request, or other communication made to or by the Commissioner pursuant to paragraphs (c) and (f)(2) of this section must be made in accordance with procedures prescribed by the Commissioner in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter), forms, instructions, or other appropriate guidance.

(b) Definitions. The following definitions apply for purposes of this section

2. Paragraph (b)(1) is amended by removing the language "(or substitute agent designated under § 1.1502-77(d) for the carryback year)" and adding "(or the agent determined under § 1.1502-77(c) or § 1.1502-77B(d) for the carryback year)" in its place.