Form 1120 Schedule O Guidance: Tax Year 2007
This guidance is provided to supplement the Form 1120 Schedule O and Instructions currently available.
Who Must File
- A corporation must file Schedule O with its income tax return, amended return, or claim for refund for each tax year that the corporation is a “component” member of a controlled group, even if no apportionment plan is in effect. (See the Schedule O instructions, Section 1563 regulations, and the information below for assistance in determining the component members of a controlled group.) By filing this schedule, the corporation consents to the allocation by the component members of the controlled group of certain tax benefits. An apportionment plan (including an amended plan), once adopted, remains in effect until it is terminated.
Note: An apportionment plan may be adopted by the component members of a controlled group to apportion specified tax benefit items, such as the tax bracket amounts, among the members of that group. In contrast, a tax sharing agreement is a private contractual arrangement, separate from the tax return elections and related filings, under which the members of a consolidated group commit to compensate each other for the interaction of their tax attributes.
When Schedule O is required to be filed:
- If the corporation is a component member of a controlled group and the tax year began on or after December 22, 2006. A consolidated group is treated as one member of the controlled group for apportionment purposes. (Also see Example 2 below where there is no apportionment plan in place.)
Note: When a consolidated group is a member of a controlled group, then the common parent of the consolidated group should file one Schedule O for all members of the consolidated group. That Schedule O should contain the consolidated information for all the members of the consolidated group using one line/entry for the consolidated group.
When Schedule O is NOT required to be filed:
- ALL members of the controlled group, who are required to file a U.S. tax return, join in filing a single consolidated return (i.e., resulting in only one component member and thus no controlled group). In such case, Form 1120, Schedule J, Line 1 should NOT be checked
- If the corporation (or consolidated group) is part of a controlled group and the tax year began prior to December 22, 2006 (in such case, Schedule O can be filed voluntarily)
Clarification for Part I, Line 2
The words “This corporation” may be misleading. “This corporation” may apply to a single corporation or a consolidated group which is a member of a controlled group. See discussion above for when Schedule O is required to be filed.
Clarification for Part I, Line 3
Skip Line 3 if:
- The controlled group has previously adopted an apportionment plan and is not amending the plan or terminating the plan
- The controlled group is not adopting a plan (all members share equally in the apportionment)
- You should never have more than one box checked on line 3.
- Select box 3a or 3c if there has been a change to the membership of the controlled group (1 or more members joins or leaves).
- 3a – Check this box to adopt an apportionment plan.
- 3b – Check this box if the controlled group has a plan in place and all members agree to amend the plan.
- 3c – There are two ways that an apportionment plan may be terminated, automatic or voluntary. A final Schedule O must be filed for the terminated group. Future guidance will be provided regarding final Schedule O filing requirements and the adoption of an apportionment plan for the new controlled group.
The following are examples of when a controlled group may or may not terminate.
Example A: A corporation leaves the controlled group. This is considered an automatic termination of the apportionment plan.
Example B: A corporation joins the controlled group. This is considered an automatic termination of the apportionment plan.
Example C: A controlled group ceases to be in existence after the apportionment plan was adopted. This is considered an automatic termination of the apportionment plan.
Example D: One of the subsidiaries leaves the consolidated group or a new subsidiary joins the consolidated group. The consolidated group is still a member of the controlled group so this would not be considered an automatic termination of the apportionment plan.
Mapping of Line 3 entries to Line 4
|Line 3 Entry||Appropriate Line 4 Entry|
|No entry||4a or 4b|
Clarification for Part I, Line 4
The Note in the Schedule O Instructions states that all members of the controlled group may complete a written agreement setting forth the terms of the adopted or amended apportionment plan. It must be signed by an authorized person on behalf of each component member. This signed agreement must be maintained as part of each member’s records. Do not send this agreement as part of the return.
- 4a – If no apportionment plan is in effect and none is being adopted, then all tax benefits are shared equally among the members in Parts II, III, and IV.
Parts II, III, and IV
- MeF schemas define the Group Member’s Name and EIN in Line 1 to be the Name and EIN of the filer of the Form 1120 (top level 1120 return in the case of a consolidated return).
- If several component members are part of a consolidated group, enter just the name and EIN of common parent of the group and not the names and EINs of the other members of the consolidated group.
Example 1: (assume an apportionment plan is in effect): Controlled Group 1 which consists of the following members: Corporation A (a consolidated corporation with 7 subsidiaries), Corporation B (a non-consolidated corporation), Corporation C (a non-consolidated corporation), Corporation D (a non-consolidated corporation). There are 4 component members of the controlled group. A consolidated group that is also a member of the controlled group is considered to be a single member.
Example 2: (assume an apportionment plan is NOT in effect): Controlled Group 1 which consists of the following members: Corporation A (a consolidated corporation with 7 subsidiaries), Corporation B (a non-consolidated corporation), Corporation C (a non-consolidated corporation), Corporation D (a non-consolidated corporation). There are 11 component members of the controlled group. The combined information for the consolidated group (i.e., 8/11 of each tax benefit item) is entered as one group member on Schedule O.
- Column (e) – Members are allocating the $1M income threshold. See section 6655(g)(2)(B)(ii).
- Column (f) – Section 179 Allocation should not be included in column f, Other Apportionments. (See Regs. Section 1.179-2(b)(7)(ii)).
Guidance for completing Schedule O when the members’ apportionment plan is terminated
The most common way that an apportionment plan (that is in effect for the members of a controlled group) is terminated is if a member joins or leaves that controlled group. This section provides guidance on completing Schedule O in that case. A change to the membership of a consolidated group that is a component member of the group does NOT constitute a termination.
Line 1 – Select appropriate checkbox
Line 2 – Check box b and provide the dates the corporation was a member of the group
Line 3 – Select checkbox c
Line 4 – Select checkbox e and the appropriate clause below (I, ii, iii, or iv) as appropriate
Parts II, III, and IV
Complete Parts II, III and IV. If the corporation joining or leaving the group is still a component member (including an additional member) of the group for this year, complete these parts according to the terms of any apportionment plan.
If the corporation joining or leaving the group will not be a component member of the group for this year, then the columns in Parts II, III, and IV should be completed based on the table below:
|a|| Corporation name followed by “(E)”
The remaining members of the group will apportion the various tax items according to the terms of any newly adopted apportionment plan.
Guidance for completing Schedule O when a component member has a short taxable year that does not include a December 31st date
These instructions apply if a component member has a short taxable year that does not include a December 31st date in such year (“short taxable year”). For example, corporation X is a calendar year taxpayer. On May 31, 2007, X is liquidated. X’s taxable year beginning on January 1, 2007 and ending on May 31, 2007 is a short taxable year. There are several common circumstances by which a corporation’s taxable year could end before the last day of such year and become a short taxable year: (1) it is sold to a consolidated group, or (2) it is liquidated (including a deemed liquidation resulting from a section 338 election).
These instructions provide special rules only for determining the amount of a tax benefit item to be apportioned to such corporation for such year. They do not affect the amount of the tax benefit items to be apportioned to the other members, i.e., members whose tax years include a December 31st date in such year.
Note: These instructions do not apply if a component member has a short table year that does include a December 31st date in such year. For example, corporation Y is a fiscal year taxpayer with a taxable year ending on September 30. On January 31, 2008, Y is liquidated. Y’s taxable year beginning on October 1, 2007 and ending on January 31, 2008 is not a short taxable year within the meaning of section 1561(b). Thus, the normal apportionment rules apply.
In determining the amount of a tax benefit item apportioned to a corporation for its short taxable year, do not follow the apportionment described in any apportion plan in effect for that controlled group. Rather, divide the full amount of the tax benefit item by the number of component members of the controlled group as of the last day of that corporation’s short taxable year. That amount is the amount of that tax benefit item to be apportioned to that member. The remaining members will also apportion a full amount of that tax benefit item according to the terms of any apportionment plan.
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