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Section 1501 allows all of the members of an affiliated group of corporations to elect to file a consolidated return. A consolidated return permits the includible members of an affiliated group of corporations to combine their incomes into a single return. The detailed rules for filing consolidated returns are found in regulations promulgated pursuant to a broad delegation of authority in section 1502 of the Internal Revenue Code. In general, the regulations reflect a “single entity” approach that attempts to treat the several members of a consolidated group in the same manner as divisions of a single corporation. This article explains the most important general principles governing consolidated returns and is intended to provide an overview of the consolidated return regulations for lawyers who are generally unfamiliar with the detailed rules. Among other topics, the article explains (1) the rules governing eligibility to file a consolidated return, (2) the computation of consolidated taxable income, including relevant limitations on the use of net operating losses, (3) intercompany transactions and distributions, (4) stock basis adjustments, and (5) earnings and profits calculations. It explains both the rules in the consolidated return regulations and the differences from the rules that otherwise would govern had the corporations not elected to file a consolidated return.

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