Consolidated Return

If an affiliated group of corporations includes one or more domestic life insurance companies taxed under section 801, the common parent may elect to treat those companies as includible corporations. The life insurance companies must have been members of the group for the 5 tax years immediately preceding the tax year for which the election is made. See section 1504(c)(2) and Regulations section 1.1502-47(d)(12).

File supporting statements for each corporation included in the consolidated return. Do not use Form 1120-PC as a supporting statement. On the supporting statement, use columns to show the following, both before and after adjustments:

• Items of gross income and deductions.
• A computation of taxable income.
• Balance sheets as of the beginning and end of the tax year.
• A reconciliation of income per books with income per return.
• A reconciliation of retained earnings.

Enter the totals for the consolidated group on Form 1120-PC. Attach consolidated balance sheets and a reconciliation of consolidated retained earnings. For more information on consolidated returns, see the regulations under section 1502.

Note.   If a nonlife insurance company is a member of an affiliated group, file Form 1120-PC as an attachment to the consolidated return in lieu of filing supporting statements. Across the top of page 1 of Form 1120-PC, write Supporting Statement to Consolidated Return.

Statements

NAIC annual statement.   Regulations section 1.6012-2(c) requires that the NAIC annual statement be filed with Form 1120-PC. A penalty for the late filing of a return may be imposed for not including the annual statement when the return is filed.

Tax shelter disclosure statement.   For each reportable tax shelter transaction entered into prior to January 1, 2003, in which the corporation participated, directly or indirectly, the corporation must attach a disclosure statement to its return for each tax year that its Federal income tax liability is affected by its participation in the transaction. In addition, for the first tax year a disclosure statement is attached to its return, the corporation must send a copy of the disclosure statement to the Internal Revenue Service, LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111 Constitution Ave., NW, Washington, DC 20224. If a transaction becomes a reportable transaction after the corporation files its return, it must attach a statement to the following year's return (whether or not its tax liability is affected for that year). The corporation is considered to have indirectly participated if it participated as a partner in a partnership or if it knows or has reason to know that the tax benefits claimed were derived from a reportable transaction.

Disclosure is required for a reportable transaction that is a listed transaction. A transaction is a listed transaction if it is the same as or substantially similar to a transaction that the IRS has determined to be a tax avoidance transaction and has identified as a listed transaction by notice, regulation, or other published guidance. See Notice 2001-51, 2001-34 I.R.B. 190, for transactions identified by the IRS as listed transactions. The listed transactions identified in this notice will be updated in future published guidance.

See Temporary Regulations section 1.6011-4T for details, including:

1. Definitions of reportable transaction, listed transaction, and substantially similar.
2. Form and content of the disclosure statement.
3. Filing requirements for the disclosure statement.

For reportable transactions entered into after December 31, 2002, use Form 8886, Reportable Transaction Disclosure Statement, to disclose information for each reportable transaction in which the corporation participated, directly or indirectly. Form 8886 must be filed for each tax year that the Federal income tax liability of the corporation is affected by its participation in the transaction. The following are reportable transactions.

• Any transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
• Any transaction offered under conditions of confidentiality.
• Any transaction for which the corporation has contractual protection against disallowance of the tax benefits.
• Any transaction resulting in a loss of at least $10 million in any single year or $20 million in any combination of years.
• Any transaction resulting in a book-tax difference of more than $10 million on a gross basis.
• Any transaction resulting in a tax credit of more than $250,000, if the corporation held the asset generating the credit for less than 45 days.

See the Instructions for Form 8886 for more details.

Stock ownership in foreign corporations.   Attach the statement required by section 551(c) if the corporation:

1. Owned 5% or more in value of the outstanding stock of a foreign personal holding company and
2. Was required to include in its gross income any undistributed foreign personal holding company income from a foreign personal holding company.

Transfers to a corporation controlled by the transferor.   If a person receives stock of a corporation in exchange for property, and no gain or loss is recognized under section 351, the person (transferor) and the transferee must each attach to their tax returns the information required by Regulations section 1.351-3.

Assembling the Return

To ensure that the corporation's tax return is correctly processed, attach all schedules and other forms after page 8, Form 1120-PC and in the following order:

1. Schedule N (Form 1120).
2. Form 8302.
3. Form 4136.
4. Form 4626.
5. Form 851.
6. Additional schedules in alphabetical order.
7. Additional forms in numerical order.

Complete every applicable entry space on Form 1120-PC. Do not write See Attached instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Also, be sure to put the corporation's name and EIN on each supporting statement or attachment.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported.

Figure taxable income using the method of accounting regularly used in keeping the corporation's books and records. Generally, permissible methods include:

• Cash,
• Accrual, or
• Any other method authorized by the Internal Revenue Code.

The gross amounts of underwriting and investment income should be computed on the basis of the underwriting and investment exhibit of the NAIC annual statement to the extent not inconsistent with the Internal Revenue Code and its Regulations. In all cases, the method used must clearly show taxable income.

Generally, a corporation must use the accrual method of accounting if its average annual gross receipts exceed $5 million. See section 448(c).

Under the accrual method, an amount is includible in income when:

• All the events have occurred that fix the right to receive the income, which is the earliest of the date (a) the required performance takes place, (b) payment is due, or (c) payment is received and
• The amount can be determined with reasonable accuracy.

See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:

• All events that determine the liability have occurred,
• The amount of the liability can be figured with reasonable accuracy, and
• Economic performance takes place with respect to the expense.

There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related regulations for the rules for determining when economic performance takes place.

Change in Accounting Method

Generally, the corporation must get IRS consent to change the method of accounting used to report taxable income (for income as a whole or for any material item). To do so, it must file Form 3115, Application for Change in Accounting Method. For more information, see Pub. 538, Accounting Periods and Methods. See Rev. Proc. 2002-9, 2002-31 I.R.B. 327, as modified by Rev. Proc. 2002-19, 2002-13 I.R.B. 696 and Rev. Proc. 2002-54, 2002-35 I.R.B. 432.

Section 481(a) adjustment.   The corporation may have to make an adjustment under section 481(a) to prevent amounts of income or expenses from being duplicated or omitted. The section 481(a) adjustment period is generally 1 year for a negative adjustment and 4 years for a net positive adjustment. However, a corporation may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The corporation must complete the appropriate lines of Form 3115 to make the election. For more details on the section 481(a) adjustment, see Rev. Proc. 2002-9, 2002-19, and 2002-54.

Include any net positive section 481(a) adjustment on Schedule A, line 13. If the net section 481(a) adjustment is negative, report it on Schedule A, line 31.

Safe harbor method of accounting for premium acquisition expenses.   Insurance companies subject to tax under section 831 are provided with a safe harbor method of accounting for premium acquisition expenses, and a procedure to obtain automatic consent to change to the safe harbor method by Rev. Proc. 2002-46, 2002-28 I.R.B. 105.

An insurance company changing its method of accounting for premium acquisition expenses to the safe harbor method described in Rev. Proc. 2002-46 must follow the automatic change in method of accounting provisions of Rev. Proc. 2002-9, as modified by Rev. Proc. 2002-19, with the following modifications:

1. The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply; and
2. To assist the Service in processing changes in method of accounting and ensure proper handling, section 6.02(4)(a) of Rev. Proc. 2002-9 is modified to require that a Form 3115 filed under Rev. Proc. 2002-46 include the statement Automatic Change Filed Under Rev. Proc. 2002-46. The statement should be legibly printed or typed on the appropriate line of Form 3115.

Accounting Periods

An insurance company must figure its taxable income on the basis of a tax year. The tax year is the annual accounting period the insurance company uses to keep its records and report its income and expenses.

As a general rule under section 843, the tax year for every insurance company is the calendar year. However, if an insurance company joins in the filing of a consolidated return, it may adopt the tax year of the common parent corporation even if that year is not a calendar year.

Rounding Off to Whole Dollars

The corporation may show amounts on the return and accompanying schedules as whole dollars. To do so, drop amounts less than 50 cents and increase any amount from 50 cents through 99 cents to the next higher dollar.

Recordkeeping

Keep the corporation's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The corporation should also keep copies of all filed returns. They help in preparing future and amended returns.

Depository Method of Tax Payment

The corporation must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing corporate income taxes are discussed below.

Electronic Deposit Requirement

The corporation must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2003 if:

• The total deposits of such taxes in 2001 were more than $200,000 or
• The corporation was required to use EFTPS in 2002.

If the corporation is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the corporation is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400. To enroll online, visit www.eftps.gov.

Depositing on time.   For EFTPS deposits to be made timely, the corporation must initiate the transaction at least 1 business day before the date the deposit is due.

Deposits with Form 8109

If the corporation does not use EFTPS, deposit corporation income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the corporation may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary, i.e., a commercial bank or other financial institution authorized to accept Federal tax deposits. Make checks or money orders payable to that depositary.

To help ensure proper crediting, write the corporation's EIN, the tax period to which the deposit applies, and Form 1120-PC on the check or money order. Be sure to darken the 1120 box on the coupon. Records of these deposits will be sent to the IRS.

If the corporation prefers, it may mail the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to Financial Agent.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

If the corporation owes tax when it files Form 1120-PC, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary, or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to the corporation's payments of estimated tax.

• The corporation must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.
• The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
• Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
• If the corporation does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

For more information on estimated tax payments, including penalties that apply if the corporation fails to make required payments, see the instructions for line 15 on page 9.

Overpaid Estimated Tax

If the corporation overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment must be at least 10% of expected income tax liability and at least $500. File Form 4466 after the end of the corporation's tax year, and no later than the 15th day of the third month after the end of the tax year. Form 4466 must be filed before the corporation files its income tax return.

Foreign insurance companies, see Notice 90-13, 1990-1 C.B. 321, before computing estimated tax.

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