New consolidated return election offers planning opportunities in Arizona. (State & Local Taxation)by Krevitsky, Philip L.
For any tax year beginning on or after December 31, 1993, an affiliated group of corporations may elect to file a consolidated Arizona income tax return. The election is made by filing such return on or before the extended due date of the Arizona return and attaching a copy of newly- created Arizona Form 122 (Arizona Consent Form). Form 122 must be signed by a current officer of each member of the affiliated group. Any affiliated group electing to file a consolidated return must file consolidated returns for all succeeding tax years unless the Arizona Department of Revenue (Department) consents to a change in filing method. The Department TABULAR DATA OMITTED expects to issue a ruling establishing the circumstances under which it would consent to a corporation terminating its consolidated filing election.
An affiliated group of corporations may also make a retroactive election to file consolidated Arizona income tax returns for tax years beginning on or after December 31, 1985, through the 1993 tax year, assuming a federal consolidated return was filed for those years. The retroactive election is made by filing amended Arizona tax returns on a consolidated basis for the earlier tax years. A completed copy of Arizona Form 122 must be attached to the amended return for the initial year to which the consolidated filing election relates. The Form 122 must be signed by a current officer of each member of the affiliated group.
Taxpayers filing amended returns on a consolidated basis must file such returns on or before December 31, 1994. Furthermore, those corporations making the retroactive election must file on a consolidated basis for the entire retroactive period (assuming the corporations were in existence and otherwise eligible to file consolidated returns).
The retroactive consolidated return election will be allowed for any eligible tax year beginning on or after December 31, 1985, even if that tax year is otherwise closed under the statute of limitations. In addition, all amended returns filed under this provision will be subject to audit without restriction for four years from the date that the consolidated election is filed or within the regular statute of limitations, whichever is later.
Filing 1993 Returns
As this law took effect on July 17, 1994, those corporate taxpayers whose 1993 returns will be filed on extension after July 17, 1994 may elect to file their original 1993 returns on a consolidated basis. Taxpayers who have already filed their 1993 returns and now wish to make a consolidated return election must file an amended return for the 1993 tax year. Taxpayers electing consolidated filing must file their original or amended returns on or before December 31, 1994.
Taxpayers that have fiscal years ending from March 31, 1994 through November 30, 1994, may have an original or extended due date for their 1993 original returns that falls later than December 31, 1994. These taxpayers may face the dilemma of having to estimate their 1993 tax position and file a "projected" return by December 31, 1994, in order to avail themselves of the retroactive consolidated filing election. In order to remedy this situation, the Department will allow these taxpayers to submit a letter (by December 31, 1994) stating their intention to report income on a consolidated basis for the 1993 tax year. The letter must be signed by an officer of the parent corporation. If 1993 is the initial year of operations, the letter must be signed by an officer of each entity in the group.
For a multistate taxpayer filing a consolidated return, a consolidated apportionment factor will be calculated using Arizona's standard apportionment formulas. The factor will be applied against the income of the affiliated group as if it were a single taxpayer. All Arizona property, payroll and sales of the affiliated corporations will be included in the numerator of the apportionment ratio regardless of whether each specific corporation has Arizona nexus on a separate basis.
Net Operating Losses
The Department has also issued a ruling regarding the calculation of the allowable Arizona net operating loss for corporations electing to file an Arizona consolidated corporate tax return. In general, net operating losses may not be carried forward if they were incurred by a corporation prior to a merger, consolidation or other type of reorganization with another corporation or group of corporations, to the extent that post- merger consolidation or reorganization gains are not attributable to the same business unit that incurred the prior losses.
Arizona has historically required combined filing for unitary businesses and prohibited the filing of combined returns by groups of corporations not engaged in a unitary business. The new consolidated return election provides an interesting option in that now qualified taxpayers may elect to file a group return even if members of the affiliated group are not unitary with one another. Thus, the consolidated election may offer certain affiliated groups an "insurance policy" by prohibiting the Department from subjectively combining or decombining unitary group members. On the other hand, the consolidated election, once made, will reduce a group of corporate taxpayers' discretionary ability to subjectively determine the most appropriate and advantageous filing methodology. Furthermore, making the retroactive consolidated return election will result in the prior years' returns' statue of limitations remaining open for a significantly longer period than would typically otherwise be the case.
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