This paper provides a comprehensive overview of consolidated tax returns and GoSystem Tax RS software. It traces the legislative history of consolidated filing from World War I excess-profits regulations through the Tax Reform Act of 1969, then examines the eligibility requirements, election procedures, and rules for discontinuing consolidated filing. The paper weighs the key advantages — such as offsetting losses across affiliates and deferring intercompany gains — against disadvantages including binding election rules and loss disallowance provisions. The second half reviews Thomson Reuters' GoSystem Tax RS, a web-based tax compliance platform, covering its core features, strengths such as simultaneous multi-user access and automatic updates, and notable weaknesses including limited browser compatibility.
The consolidated tax return is, in simple terms, "a method by which to determine the tax liability of a group of affiliated corporations" (Pratt and Kulsrud 8-2). It is based on the assumption that the business operations of affiliated companies represent a single entity and that, accordingly, the group's aggregate income ought to be taxed rather than the separate incomes of the member corporations. It is important to note, however, that the return does not simply report the sum of the taxable incomes of all member corporations as one large conglomerate entity. Rather, it follows a set of special Treasury regulations in determining how to make adjustments for intercompany transactions and establishing which items to state on a consolidated basis (Pratt and Kulsrud 8-2).
The consolidated tax return traces its origins to the early regulations that governed the taxation of excess economic profits during the First World War (Pratt and Kulsrud 8-2). Under these regulations, the Internal Revenue Service (IRS) reserved the authority to limit tax avoidance by shifting the "excess profits" of one corporation to another. By 1917, the IRS was exercising this authority to curtail the benefits of affiliated corporations by requiring them to file consolidated tax returns. A year later, Congress codified the authority of the IRS and made it mandatory for affiliated corporations to file consolidated returns for income tax as well as excess profits tax purposes.
The excess profits tax, however, lost its relevance soon after and was repealed (Pratt and Kulsrud 8-2). A provision permitting the IRS to reallocate credits, expenses, or income among affiliated corporations was enacted as a way of ensuring that corporate income was clearly reflected. These two actions slashed the opportunity for income distortion and rendered mandatory return filing nearly irrelevant (Pratt and Kulsrud 8-2). As a consequence, filing was made optional, and remained so until the whole system was abolished in 1934 because of its role in aggravating the effects of the Great Depression (Pratt and Kulsrud 8-2). The system reappeared just before the beginning of the Second World War — still optional, but with higher filing costs and a penalty on taxable income (Pratt and Kulsrud 8-2).
Most corporations opted to file their returns separately in order to benefit from multiple surtax exemptions. These gains were, however, curtailed severely by the passage of the Tax Reform Act of 1969; and since then, there has been a growing interest in the issue of consolidated tax returns (Pratt and Kulsrud 8-2).
First, consolidated returns make it possible for groups to offset the tax liability and income of members using the credits and unused losses of other members in the current financial period (Pratt and Kulsrud 8-5; Warner 2). In this way, the conglomerate is able to reap tax benefits immediately, avoiding the need to wait for recovery carryovers (Pratt and Kulsrud 8-2). Moreover, excess credits or losses can be carried forward to subsequent periods.
Another key advantage of filing consolidated tax returns is the ability to defer intercompany gains until later periods (Pratt and Kulsrud 8-5; Warner 2). Such deferrals allow the group to enjoy the benefits of postponing the recapture of items such as investment tax credits and depreciation (Pratt and Kulsrud 8-5).
A third advantage is that consolidated filing exempts from tax any intercompany distributions between members, including dividends (Pratt and Kulsrud 8-5). Additional benefits include the ability of individual members subject to percentage limitations on credits and deductions to avoid such limitations, which are instead addressed on an aggregate, consolidated basis. Furthermore, the basis of a subsidiary's stock is increased by accumulated income during the filing years, so that if the subsidiary is ever divested by the parent company, the group may benefit through either an increase in resulting gains or a decrease in losses (Pratt and Kulsrud 8-5).
Consolidated tax returns impose an additional financial burden, as they require a group to comply with all relevant consolidated returns regulations (Pratt and Kulsrud 8-5). Secondly, the election to file is binding and can only be terminated with IRS authorization or through the disbandment of the group (Pratt and Kulsrud 8-5). Another fundamental disadvantage is that the tax credits of more profitable affiliates can be severely limited by the continued capital losses of a consistently poor-performing affiliate. Additionally, the law requires subsidiaries to align their tax years with those of their parent company; such adjustments can create short tax periods that are treated as complete tax periods for carryover and carryback purposes. Finally, under the controversial loss disallowance rules, losses incurred by a conglomerate on the disposition of a subsidiary's stock are often disallowed, causing adverse effects on the group's financial viability (Warner 3).
"Affiliated group rules, election process, and discontinuation"
"Features and capabilities of Thomson Reuters GoSystem"
"Multi-user access, security, and browser limitations reviewed"
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