We have developed a wide range of precedents that document tax-sharing and tax financing regimes. Among these precedents are: tax allocation agreements should be drawn up to ensure that the beneficiary members of the group bear their share of the consolidated tax liabilities. One option is to allocate the group`s liabilities as a percentage of consolidated taxable income on the basis of each member`s own tax debt or on the basis of each member`s taxable income. It is often necessary to take a stand-alone approach when a group includes a regulated member. As a general rule, the rates that regulators can charge a distribution company are based in part on its service costs, including taxes. When taxes are awarded in a different way than a separate base, customers can pay rates that reflect costs or benefits for other unregulated members of the consolidated group. As a result, a regulated member`s share of his group`s tax debt cannot, in many states, exceed the tax debt that the company would have owed to the IRS as a self-employed tax liability. Only a few states provide for a distribution of unregulated tax benefits through consolidated tax-sharing adjustments, the discussion of which goes beyond the scope of this article. 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.
One thinks of a parent company (parent company) which owns 100% of the shares of two subsidiaries (subsidiary 1 and subsidiary 2). The parent company is a pure holding company and does not generate separate corporate profits or losses. Suppose the consolidated group has a tax allocation agreement allocating the group`s tax debt on the basis of each member`s separate tax debt (i.e., members are required to pay the parent company an amount equal to the amount of tax they would be owed if they had filed a separate return for the year). 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.
In addition to the allocation and allocation of tax refunds, tax allocation agreements should also explicitly state whether the parent company, as the group`s representative, receives refunds or whether the group intends the parent company to own the refunded amounts. In the absence of a language that clearly communicates the group`s intentions, a parent company is more likely to be considered an owner when an agreement gives the parent company a margin of appreciation for the payment of its share of a refund or balance of that amount in the future payment of the subsidiary`s tax.