What Is Consortium Relief and How Do You Claim It?

While the term “consortium relief” is specific to international tax systems, its core principle exists in the United States. The idea is to permit related corporate entities to offset the taxable profits of one company with the losses of another. In the U.S. federal tax system, this is achieved when an “affiliated group” of corporations with a common parent elects to file a consolidated tax return, treating the group as a single taxpayer.

The primary benefit is the ability to aggregate the income and losses of all member corporations. This means that net operating losses or capital losses from one member can directly reduce the taxable income or capital gains of profitable members within the same group. This strategy requires understanding the precise requirements for forming an affiliated group.

Establishing a Qualifying Consortium

In the United States, the ability to combine profits and losses is reserved for an “affiliated group,” a corporate structure defined in Internal Revenue Code (IRC) Section 1504. This status depends on a quantifiable stock ownership test establishing a clear parent-subsidiary relationship. The entire framework is built around a “common parent corporation,” which must be an includible corporation that anchors the ownership chain.

This structure requires a two-part ownership requirement that must be continuously met. First, the parent corporation must directly own stock possessing at least 80% of the total voting power of at least one other corporation. Second, the parent must also own stock that equals at least 80% of the total fair market value of the subsidiary’s stock. These two requirements are collectively known as the “80% vote and value test.”

This ownership requirement extends down through a chain of corporations. For an affiliated group to exist, other corporations in the group must also directly own stock meeting the 80% vote and value test in other members. For example, if Parent Corp owns 80% of Subsidiary A, and Subsidiary A owns 80% of Subsidiary B, all three form an affiliated group connected back to the common parent.

Not all corporations are eligible to be part of an affiliated group, even if the ownership tests are met. Only “includible corporations,” which are standard C corporations, can join. The IRC specifically excludes entities such as S corporations, foreign corporations (with limited exceptions for certain entities in Canada and Mexico), tax-exempt corporations, and certain types of insurance companies.

The definition of stock for the 80% test also has specific qualifications. Certain types of non-participating, non-convertible preferred stock are not counted when assessing the 80% value threshold. This stock is often limited as to dividends and does not participate in corporate growth, so the tax code disregards it for determining affiliation. This allows companies to raise capital using certain preferred stock without breaking the affiliated group status.

Available Reliefs for Surrender

When an affiliated group files a consolidated return, it can pool the financial results of its members, allowing for the immediate use of losses from one company to offset the income of another. The treatment of net operating losses (NOLs) is a significant relief. If one subsidiary generates an NOL, that loss can be used to reduce the consolidated taxable income of the entire group, rather than being carried forward by the single loss-making entity.

This offsetting principle extends to capital transactions. Within a consolidated group, one member’s capital losses can be used to offset the capital gains of another member. This provides greater flexibility than for a standalone corporation and can prevent a situation where one member pays tax on a large capital gain while another has an unusable capital loss.

Another advantage is the treatment of intercompany transactions. When goods or services are sold between members of the group, the gain or loss on that transaction is deferred. Under Treasury Regulation §1.1502, this gain or loss is not recognized until a “triggering event” occurs, such as when the asset is sold to an outside entity. This deferral prevents the group from paying tax on profits that have not yet been realized from an economic perspective.

Consolidation also applies to certain tax credits, such as the foreign tax credit. This allows the group to use the excess foreign tax credits of one member against the U.S. tax liability on the foreign source income of another. This aggregation can lead to a more efficient use of credits that might be limited if each company filed separately.

Calculating the Maximum Claimable Amount

Calculating a consolidated group’s tax liability is a multi-step process. It begins with each member company determining its own taxable income or loss on a separate basis, as if filing its own return. This baseline figure for each member is then subjected to adjustments required by consolidated return regulations.

After determining each member’s separate taxable income, adjustments are made for transactions between group members. The most common adjustments involve eliminating intercompany dividends, where dividends paid by one member to another are excluded from the recipient’s income to prevent double taxation. Gains and losses from deferred intercompany transactions are also accounted for at this stage.

After these adjustments, the separate taxable incomes of all members are aggregated. This combined figure represents the group’s income before consolidated deductions are applied. The group’s consolidated net operating loss, capital loss, and other consolidated items are then calculated and applied to this aggregated income.

For example, consider an affiliated group with two members, Parent P and Subsidiary S. If Parent P has a separate taxable income of $500,000 and Subsidiary S has a net operating loss of $150,000, the loss offsets the income. This results in a consolidated taxable income of $350,000 for the group.

The final tax liability is then computed based on this final consolidated taxable income figure. This process ensures that the tax is based on the economic performance of the group as a single enterprise. All members of the group must also adopt the common parent’s taxable year, ensuring all calculations are based on the same accounting period.

The Claim and Consent Process

Filing a consolidated tax return is a formal election. An affiliated group makes this election by filing its first consolidated return on Form 1120, U.S. Corporation Income Tax Return. Attached to this first return must be Form 851, Affiliations Schedule, which details the group’s corporate structure, common parent, and all subsidiary members.

A component of this election is securing the formal consent of every subsidiary. Each subsidiary member must complete and execute Form 1122, Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated Income Tax Return. These signed consent forms must be attached to the group’s first consolidated Form 1120, as this step is a legal requirement.

Once made, the election to file a consolidated return is binding for all subsequent tax years. The group must continue to file on a consolidated basis unless it is terminated or receives IRS permission to deconsolidate. Termination occurs if the common parent no longer meets the criteria, such as its ownership falling below the 80% threshold. Gaining permission to deconsolidate without a structural change requires showing a valid business reason to the IRS.

The filing deadline for the consolidated Form 1120 and its attachments is the same as for a standard corporate return. The return is due by the 15th day of the fourth month after the end of the group’s tax year. The group can get an automatic six-month filing extension, but any tax due must be paid by the original deadline.