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 life insurance 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).

Note.   If an election under section 1504(c)(2) is in effect for an affiliated group for the tax year, all items of members of the group that are not life insurance companies must not be taken into account in figuring the tentative LICTI of members that are life insurance companies.

File supporting statements for each corporation included in the consolidated return. Do not use Form 1120-L 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-L. 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 Returns.

Statements

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

Reconciliation.   A schedule must be attached that reconciles the NAIC Annual Statement to Form 1120-L.

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 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-L 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-L. 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 on 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 enter the corporation's name and EIN on each supporting statement or attachment.

Accounting Methods

The return of a life insurance company must be filed using the accrual method of accounting or, to the extent permitted under regulations, a combination of the accrual method with any other method, except the cash receipts and disbursements method. In all cases, the method used must clearly show taxable income.

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, and 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 and 2002-54.

Include any net positive section 481(a) adjustment on page 1, line 7. If the net section 481(a) adjustment is negative, report it on page 1, line 18.

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 any amount 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 keep copies of any returns filed. 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, including the capital gains tax, 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 employer identification number, the tax period to which the deposit applies, and Form 1120-L 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-L, 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 30 on page 11.

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 the corporation's 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.

Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, gross valuation overstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return.   A corporation that does not file its tax return by the due date, including extensions, may have to pay a penalty of 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause. Corporations that file late must attach a statement explaining the reasonable cause.

Penalty for late payment of tax.   A corporation that does not pay the tax when due generally may have to pay a penalty of ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the corporation can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty.   This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid to the IRS. These taxes are generally reported on Form 720, 941, 943, or 945 (see Other Forms, Returns, and Statements That May Be Required on page 3). The trust fund recovery penalty may be imposed on all persons determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the instructions for Form 720, or Pub. 15 (Circular E), Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties.   Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

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