What Is a Fiscal Unity and How Does It Work?

A fiscal unity, known in the United States as an affiliated group, is a tax regime where related corporations are treated as a single entity for corporate income tax. This arrangement allows a parent company and its subsidiaries to combine their financial results and file one consolidated return instead of separate ones. A main benefit of this structure is that losses from one company can offset profits from another, which can lower the group’s overall current tax liability. The requirements and operational mechanics for this arrangement are outlined in the Internal Revenue Code and Treasury Regulations.

Eligibility for Forming a Fiscal Unity

To form an affiliated group eligible to file a consolidated return, a corporate group must meet requirements defined by the Internal Revenue Code. The structure must have a common parent corporation and one or more chains of subsidiaries. Both the parent and subsidiaries must be “includible corporations,” which covers most domestic C corporations but excludes entities like tax-exempt corporations, most REITs, and some insurance companies.

The main eligibility requirement is the stock ownership test detailed in Internal Revenue Code Section 1504. The parent company must directly own stock in at least one subsidiary that possesses at least 80% of the total voting power and 80% of the total value of that corporation’s stock. This is known as the “80-80 test.” Every other subsidiary in the group must also be owned to this 80% vote and value threshold by one or more members of the group.

Beyond the ownership rules, each subsidiary joining the group must adopt the common parent’s taxable year for a consistent reporting cycle. The election to file a consolidated return is binding. Once made, the group must continue to file on a consolidated basis in subsequent years unless specific termination conditions are met.

The Application Process

Electing to file as a consolidated group is integrated with the tax filing itself and is done when the common parent files the group’s first consolidated income tax return. No separate, advance application to the IRS is needed, as the filing of the return signifies the election.

The parent company files Form 1120, the U.S. Corporation Income Tax Return, with two required attachments. The first is Form 851, Affiliations Schedule, which lists all corporations in the group, their stock ownership details, and any changes in the group’s composition. This form provides the IRS with a map of the affiliated structure and confirms the 80-80 ownership test is met.

Each subsidiary joining the group must also provide its consent by completing Form 1122. On this form, the subsidiary agrees to be bound by the regulations governing consolidated returns. The parent company gathers the signed Form 1122 from each subsidiary and attaches it to the consolidated Form 1120.

Tax Treatment Within a Fiscal Unity

When operating as a consolidated group, the common parent corporation acts as the agent for the entire group. It is responsible for filing a single return that is built from the separate taxable income or loss of each individual company, which are then combined at the group level.

The primary tax treatment is the aggregation of profits and losses. The taxable income of profitable members is combined and then reduced by the losses of any unprofitable members. For instance, if a parent company has $500,000 in profit and its subsidiary has a $100,000 loss, the group’s consolidated taxable income is $400,000. This improves cash flow by allowing immediate use of losses.

The consolidated regime has special treatment for intercompany transactions under Treasury Regulation §1.1502, which aims to treat the group as a single economic entity. For example, if one subsidiary sells an asset to another at a gain, that gain is deferred until a “triggering event” occurs, like the asset being sold outside the group. This single-entity approach ensures tax consequences arise from the group’s interactions with outside parties, not from internal transfers. Dividends paid between group members are also eliminated from taxable income.

Joint and Several Liability

Filing a consolidated return imposes joint and several liability on all members of the group. This principle holds that every corporation that was a member of the group for any part of the tax year is individually responsible for the entire tax liability for that year. This includes any tax deficiencies, penalties, and interest.

The IRS can collect the full amount of the group’s tax debt from any single member, regardless of that member’s individual profitability. For example, if a group owes $1 million in taxes and the parent defaults, the IRS can demand the entire amount from a subsidiary. This is true even if that subsidiary had a net operating loss for the year.

This liability is not affected by any internal tax-sharing agreements between the companies. Such agreements have no bearing on the IRS’s ability to collect from any member it chooses. The liability also follows a company after it leaves the group, meaning a former subsidiary can still be held responsible for tax debt incurred during the years it was a member.

Termination and Deconsolidation

An affiliated group’s election to file a consolidated return remains in effect until the group is terminated. Termination occurs if the common parent is acquired by an outside entity or if it no longer meets the 80-80 ownership test in at least one subsidiary.

Individual subsidiaries can also be deconsolidated without terminating the entire group. This happens if ownership of a subsidiary’s stock drops below the 80% threshold for vote or value. A group can request to discontinue filing consolidated returns, but this requires applying to the IRS and showing “good cause.”

When a subsidiary is deconsolidated, it must begin filing a separate tax return. The departure can have immediate tax consequences, as deferred gains or losses from prior intercompany transactions may be triggered. A corporation that ceases to be a member of a consolidated group is prohibited from rejoining that group’s return for 61 months.