As they apply to tax years beginning before June 28, 2002, the consolidated return regulations set a trap for the unwary. Companies that do not observe certain formalities in those regulations risk a challenge to the validity of refund claims. The trap is for companies filing refund claims for consolidated group members or predecessors in interest that ‑‑ for the tax year of the refund claim ‑‑ had a different common parent.

The consolidated return regulations generally provide that the consolidated group members must act through the group’s common parent. With few exceptions, a member cannot act on its own behalf. The regulations provide that if the common parent is about to terminate, the common parent must designate its successor. If the common parent terminates and does not designate, the remaining group members may designate a new agent for the group. The designation procedures are in Rev. Proc. 2002-43.

If there is no designation, the consolidated return regulations allow the Service to deal with an alternative agent (e.g., the old common parent’s successor) for certain limited purposes. But those regulations are silent about who ‑‑ in the absence of a designation ‑‑ may file a member’s refund claim for a prior year when the member had a different common parent. It is possible that without a designation, the Service will argue that the refund claim is invalid and that a refund court does not have jurisdiction. In Browning Ferris Indus., Inc. & Subs. v. United States, 2007 U.S. Claims LEXIS 63 (March 2, 2007) (“BFI”), the Court of Federal Claims gave the Service ammunition for that argument.

In BFI, a member’s refund claim was filed by the common parent for the year to which the refund claim applied. But before that common parent filed that refund claim, the common parent became a Delaware LLC, effectively a liquidation of the common parent for tax purposes. No new agent was designated for the prior year. Once the refund claim was docketed in the Court of Federal Claims, the company realized that it had filed through an entity that no longer existed and therefore moved to dismiss the case for lack of jurisdiction. In the meantime, the company properly designated a new agent and refiled the refund claim. The court granted the motion to dismiss and held that there was no properly filed administrative claim and therefore no jurisdiction under section 7422.

The government moved for reconsideration of the court’s decision. The government made three arguments. First, the government argued that because the Service has the power to deal with each group member individually, the individual group members collectively filed a single valid refund claim. The court disagreed, quoting BFI’s response that this argument “confuse[s] what the IRS is permitted to do with what the taxpayers may do.” Second, the government argued that the BFI claim was a valid informal claim. The court reasoned that while the informal claim doctrine can preserve jurisdiction for refund claims that are in some way defective, it cannot cure defects with the identity of the taxpayer. The court held that the termination of the common parent “implicated the essence of the regulation scheme for consolidated returns.” Finally, the government argued that this strict application of the consolidated return regulations will prejudice taxpayers. The court held that it could not consider such equities; it has no discretion over subject matter jurisdiction.

While the government argued equities in its motion for reconsideration, those considerations are probably limited to the confines of the BFI case. In practice, the government appears to interpret these regulations as strictly as the BFI court. We have experience with the government pressing a strict interpretation of these regulations. And in a recent FSA (Release No. 20071701F, August 22, 2006), the Service strictly interpreted these regulations even though that interpretation put a greater administrative burden on the Service.

In that FSA, the common parent had merged into a new corporation and ceased to exist. The Service determined that in the absence of a proper designation, it must deal directly with the each of the individual members of a consolidated group in extending the statute of limitations and waiving the restrictions on assessment and collection.

The Service determined that it could have dealt with an alternative agent, but there was not an alternative agent in this instance.

The lesson, of course, is that corporate taxpayers should tread carefully. Treasury prospectively amended these regulations in 2002 to provide that the new common parent is the default agent in the absence of a designation. But if you are about to file a refund claim for 2002 or earlier, you should make sure that the common parent who files the claim was the common parent for the year of the claim and that the common parent still exists. Without a designation, the Service may press the decision in BFI and argue that there is not a properly filed administrative claim.

For further information, please contact:

Layla Asali, lasali@milchev.com, 202-626-5866

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