Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 57-20

1957-1 C.B. 293

Sec. 1502

IRS Headnote

In the computation of consolidated taxable income, any election which must be made to determine a subsidiary corporation's separate taxable income, and which would be available to a corporation filing a separate income tax return, may be made by the common parent corporation on behalf of such subsidiary corporation. The scope of the agency of the common parent corporation includes the making of such elections on behalf of a subsidiary corporation as the subsidiary corporation could make without the expressed approval of the Commissioner, if separate income tax returns were filed. However, any change in an election previously made by a subsidiary corporation in the computation of its separate income, which would require the approval of the Commissioner if separate returns were filed, may not be made by the common parent corporation without obtaining the approval of the commissioner.

Full Text

Rev. Rul. 57-20

Advice has been requested as to the proper method of making elections in consolidated income tax returns.

In the instant case, a parent company and its subsidiary corporations contemplate filing a consolidated return for the taxable year 1956. The consolidated returns will involve the necessity of making elections with respect to methods of accounting, depreciation, inventories, and research and experimental expenditures.

Section 1.1502-31(b)(1) of the Income Tax Regulations, C.B. 1955-2, 317, at 345, provides that the taxable income of each member of an affiliated group filing a consolidated return shall be computed, with certain exceptions, in accordance with the provisions of the Internal Revenue Code covering the determination taxable income of separate corporations. Section 1.1502-31(a)(1) of those regulations defines consolidated taxable income to be the combined taxable income of the several affiliated corporations plus or minus the sum of specified items. Section 1.1502-16(a) of those regulations authorizes the common parent company to act as sole agent for each member of the affiliated group in all matters (other than the making of the subsidiary's consent required by section 1.1502-12(b) of such regulations) relating to the tax for which a consolidated return is made or required.

The concept of consolidated taxable income necessarily requires each subsidiary to compute its separate taxable income. Thus, an election would have to be made by or for each subsidiary with respect to matters for which elections are permitted by the Internal Revenue Code of 1954 in order to determine its separate taxable income. This is not to be interpreted as meaning that the consolidated return is required to contain signed statements by each subsidiary relating to its separate elections (other than those specifically required by the regulations governing consolidated returns), since the scope of the agency of the parent corporation, as provided for in section 1.1502-16(a), includes the making by the common parent corporation of such elections on behalf of its subsidiaries as the subsidiaries could make without the expressed approval of the Commissioner, of separate income tax returns were filed.

Accordingly, it is held that in the computation of consolidated taxable income, any election which must be made to determine a subsidiary corporation's separate taxable income, and which would be available to a corporation filing a separate income tax return, may be made by the common parent on behalf of such subsidiary corporation. However, any change in an election previously made by a subsidiary corporation in the computation of its separate income, which would require the approval of the Commissioner if separate returns were filed, may not be made by the common parent corporation without obtaining the approval of the Commissioner. The scope of the agency of the common parent corporation includes the making of such elections on behalf of a subsidiary corporation as the subsidiary corporation could make without the expressed approval of the Commissioner, if separate income tax returns were filed.