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Instructions for Form 1120 Schedule M-3 2006 Tax Year

General Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
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Table of Contents

Purpose of Schedule

Schedule M-3 Part I asks certain questions about the corporation's financial statements and reconciles financial statement worldwide net income (loss) for the corporation (or consolidated financial statement group, if applicable), as reported on Schedule M-3, Part I, line 4, to net income (loss) per the income statement of the corporation for U.S. taxable income purposes, as reported on Schedule M-3, Part I, line 11.

Schedule M-3 Parts II and III reconcile financial statement net income (loss) for the U.S. corporation (or consolidated tax group, if applicable) as reported on Schedule M-3, Part I, line 11, to taxable income on Form 1120, page 1, line 28.

What's New

  • The instructions clarify that Schedule M-3 applies equally to a corporation filing a non-consolidated return and to a corporate group filing a consolidated return and is required for all Form 1120 returns for which the $10 million or more end-of-year asset threshold is met.

  • Corporations that have a direct or indirect ownership interest in a partnership may have certain reporting responsibilities as a “reportable entity partner.” See Reportable Entity Partner Reporting Responsibilities on page 3.

  • For tax years ending in December 2006 or later, if the parent corporation of a U.S. consolidated tax group files Form 1120 and any member of the group files Form 1120-L, U.S. Life Insurance Company Income Tax Return, or Form 1120-PC, U. S. Property and Casualty Insurance Company Income Tax Return, each member of the mixed group must file either Schedule M-3 (Form 1120), new Schedule M-3 (Form 1120-L), or new Schedule M-3 (Form 1120-PC), as appropriate. See Who Must File, on this page. Mixed groups must also file new Form 8916, Reconciliation of Schedule M-3 Taxable Income with Tax Return Taxable Income for Mixed Groups.

  • The section, Completion of Schedule M-3 and Certain Allocations, Limitations, and Carryovers, discusses information equally applicable to non-consolidated returns, consolidated returns without insurance companies, and mixed group returns with an insurance company.

  • In Part I, new checkboxes were added for (1) non-consolidated return, (2) consolidated return (Form 1120 only), (3) mixed 1120/L/PC group, and (4) dormant subsidiaries schedule attached.

  • The instructions for Part I, line 7 clarify the treatment of certain disregarded entities.

  • The instructions for Part I, lines 9 and 10, clarify the reporting of income statement period adjustments that may be required for an insurance company subsidiary acquired or merged.

  • Part I, line 10, includes (a) intercompany dividend adjustments, (b) other statutory accounting adjustments, and (c) other adjustments to reconcile to the amount on line 11. The instructions clarify what should be reported on each line.

  • In Parts II and III, new checkboxes (5) through (7) were added to indicate whether the Schedule M-3 is for the (5) mixed 1120/L/PC group, (6) subconsolidated 1120 group, or (7) sub-consolidated 1120 eliminations.

  • The instructions for Parts II and III clarify that a schedule or explanation may be attached to any line even if none is required.

  • Part II, line 17, Cost of Goods Sold, requires new Form 8916-A, Reconciliation of Cost of Goods Sold Reported on Schedule M-3, to be attached.

  • The instructions for Part II, line 17, Cost of Goods Sold, have been revised to include two additional exceptions for amounts (from Part II, lines 18 and 21) that are not reportable on Part II, line 17.

  • Part II, line 24, Capital loss limitation and carryforward used, is a combination of Part II, line 24 and Part II, line 25, of the 2005 Schedule M-3 (Form 1120).

  • Part II, lines 29a, 29b, and 29c were added to facilitate mixed groups (insurance and non-insurance companies) consolidations.

Where To File

If the corporation is required to file (or voluntarily files) Schedule M-3 (Form 1120), the corporation must file Form 1120 and all attachments and schedules, including Schedule M-3 (Form 1120), with the Internal Revenue Service Center, Ogden, UT 84201-0012.

Who Must File

  • Any domestic corporation or group of corporations required to file Form 1120, U.S. Corporation Income Tax Return, that reports on Schedule L of Form 1120 total assets at the end of the corporation's tax year that equal or exceed $10 million must complete and file Schedule M-3 instead of Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.

  • A corporation filing a non-consolidated Form 1120, U.S. Corporation Income Tax Return, that reports on Schedule L for Form 1120 total assets that equal or exceed $10 million must complete and file Schedule M-3 instead of Schedule M-1 and must check box (1) Non-consolidated return, at the top of Page 1 of Schedule M-3.

  • Any U.S. consolidated tax group consisting of a U.S. parent corporation and additional includible corporations listed on Form 851, Affiliations Schedule, required to file Form 1120, that reports on Schedule L of Form 1120 total consolidated assets at the end of the tax year that equal or exceed $10 million must complete and file Schedule M-3 instead of Schedule M-1, and must check box (2) consolidated return (Form 1120 only), or box (3) Mixed 1120/L/PC group, as applicable, at the top of Page 1 of Schedule M-3.

A U.S. corporation filing Form 1120 that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1. A corporation filing Schedule M-3 must check the box on Form 1120, page 1, item A, indicating that Schedule M-3 is attached, whether required or voluntary. A corporation filing Schedule M-3 must not file Schedule M-1.

If the parent corporation of a U.S. consolidated tax group files Form 1120 and files Schedule M-3, all members of the group must file Schedule M-3. However, if the parent corporation of a U.S. consolidated tax group files Form 1120 and any member of the group files Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, or Form 1120-L, U.S. Life Insurance Company Income Tax Return, that member must file Schedule M-3 (Form 1120-PC) or Schedule M-3 (Form 1120-L), respectively, and the group must comply with the mixed group consolidated Schedule M-3 reporting described under Schedule M-3 Consolidation for Mixed Groups (1120/L/PC) on page 4. A mixed group must also file Form 8916, Reconciliation of Schedule M-3 Taxable Income with Tax Return Taxable Income for Mixed Groups.

If the parent company of a U.S. consolidated tax group files Form 1120 and any member of the group files Form 1120-PC or Form 1120-L and the consolidated Schedule L reported in the return includes the assets of all of the companies (the insurance companies as well as the non-insurance companies), in order to determine if the group meets the $10 million threshold test for the requirement to file Schedule M-3, use the amount of total assets reported on Schedule L of the consolidated return. If the parent company of a U.S. consolidated tax group files Form 1120 and any member of the group files Form 1120-PC or Form 1120-L and the consolidated Schedule L reported in the return does not include the assets of one or more of the insurance companies in the U.S. consolidated tax group, in order to determine if the group meets the $10 million threshold test, use the sum of the amount of total assets reported on the consolidated Schedule L plus the amounts of all assets reported on Forms 1120-PC and 1120-L that are included in the consolidated return but not included on the consolidated Schedule L.

Note.

Schedule M-3 is not required for taxpayers filing Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, Form 1120-H, U.S. Income Tax Return for Homeowners Associations, and Form 1120-SF, U.S. Income Tax Return for Settlement Funds.

There is a unique Schedule M-3 for taxpayers required to file Form 1065, U.S. Return of Partnership Income, Form 1120S, U.S. Income Tax Return for an S Corporation, and for Forms 1120-PC or 1120-L.

Cooperatives filing Form 1120-C, U.S. Income Tax Return for Cooperative Associations, that report end of year assets of $10 million or more must complete Schedule M-3 (Form 1120) instead of Schedule M-1.

For insurance companies included in the consolidated U.S. federal income tax return, see the instructions for Part I, lines 10 and 11 and Part II, line 7, for guidance on Schedule M-3 reporting of intercompany dividends and statutory accounting adjustments.

Example 1.

  1. U.S. corporation A owns U.S. subsidiary B and foreign subsidiary F. For its 2006 tax year, A prepares consolidated financial statements with B and F that report total assets of $12 million. A files a consolidated U.S. federal income tax return with B and reports total consolidated assets on Schedule L of $8 million. A's U.S. consolidated tax group is not required to file Schedule M-3 for the 2006 tax year.

  2. U.S. corporation C owns U.S. subsidiary D. For its 2006 tax year, C prepares consolidated financial statements with D, but C and D file separate U.S. federal income tax returns. The consolidated accrual basis financial statements for C and D report total assets at the end of the tax year of $12 million after intercompany eliminations. C reports separate company total year-end assets on its Schedule L of $7 million. D reports separate company total year-end assets on its Schedule L of $6 million. Neither C nor D is required to file Schedule M-3 for the 2006 tax year.

  3. Foreign corporation A owns 100 percent of both U.S. corporation B and U.S. corporation C. C owns 100 percent of U.S. corporation D. For its 2006 tax year, A prepares a consolidated worldwide financial statement for the ABCD consolidated group. The ABCD consolidated financial statement reports total year-end assets of $25 million. A is not required to file a U.S. federal income tax return. B files a separate U.S. federal income tax return and reports separate company total year-end assets on its Schedule L of $12 million. C files a consolidated U.S. federal income tax return with D and, after eliminating intercompany transactions between C and D, reports consolidated total year-end assets on Schedule L of $8 million. B is required to file Schedule M-3 because its total year-end assets reported on Schedule L exceed $10 million. The CD U.S. consolidated tax group is not required to file Schedule M-3 because its total year-end assets do not exceed $10 million.

Other Issues Affecting Schedule M-3 Filing Requirements

If a corporation was required to file Schedule M-3 for the preceding tax year, but reports on Form 1120, page 1, Item D, or on Schedule L of Form 1120 total consolidated assets at the end of the current tax year of less than $10 million, the corporation is not required to file Schedule M-3 for the current tax year. The corporation may either (a) file Schedule M-3, or (b) file Schedule M-1, for the current tax year. However, if the corporation chooses to file Schedule M-1 for the current tax year, and for a subsequent tax year the corporation is required to file Schedule M-3, the corporation must complete Schedule M-3 in its entirety (Part I and all columns in Parts II and III) for that subsequent tax year.

In the case of a U.S. consolidated tax group, total assets at the end of the tax year must be determined based on the total year-end assets of all includible corporations listed on Form 851, net of eliminations for intercompany transactions and balances between the includible corporations. In addition, for purposes of determining whether the corporation (or U.S. consolidated tax group) has total assets at the end of the current tax year of $10 million or more, the corporation's total consolidated assets must be determined on an overall accrual method of accounting unless both of the following apply: (a) the tax returns of all includible corporations in the U.S. consolidated tax group are prepared using an overall cash method of accounting, and (b) no includible corporation in the U.S. consolidated tax group prepares or is included in financial statements prepared on an accrual basis.

Other Form 1120 Schedules Affected by Schedule M-3 Requirements

Report on Schedules L, M-2, and Form 1120, page 1, amounts for the U.S. corporation or, if applicable, the U.S. consolidated tax group.

Schedule L

Total assets shown on Schedule L, line 15, column (d) (or, in the case of some consolidated mixed groups with a Form 1120 parent and an insurance subsidiary, the assets reported on Form 1120, page 1, item D), must equal the total assets of the corporation (or, in the case of a U.S. consolidated tax group, the total assets of all members of the group listed on Form 851) as of the last day of the tax year, and must be the same total assets reported by the corporation (or by each member of the U.S. consolidated tax group) in the financial statements, if any, used for Schedule M-3. If the corporation prepares financial statements, Schedule L must equal the sum of the financial statement total assets for each corporation listed on Form 851 and included in the consolidated U.S. federal income tax return (includible corporation) net of eliminations for intercompany transactions between includible corporations. If the corporation does not prepare financial statements, Schedule L must be based on the corporation's books and records. The Schedule L balance sheet may show tax-basis balance sheet amounts if the corporation is allowed to use books and records for Schedule M-3 and the corporation's books and records reflect only tax-basis amounts.

For purposes of measuring total assets at the end of the year, assets may not be netted or offset against liabilities. In addition, total assets may not be reported as a negative amount.

Schedule M-2

The amount shown on Schedule M-2, line 2, Net income (loss) per books, must equal the amount shown on Schedule M-3, Part I, line 11. Schedule M-2 must reflect activity only of corporations included in the consolidated U.S. federal income tax return.

Consolidated Return (Form 1120, Page 1)

Report on Form 1120, page 1, each item of income, gain, loss, expense, or deduction net of elimination entries for intercompany transactions between includible corporations. The corporation must not report as dividends on Form 1120, Schedule C, any amounts received from an includible corporation. In general, dividends received from an includible corporation must be eliminated in consolidation rather than offset by the dividends-received deduction.

Entity Considerations for Schedule M-3

For purposes of Schedule M-3, references to the classification of an entity (for example, as a corporation, a partnership, or a trust) are references to the treatment of the entity for U.S. federal income tax purposes. An entity that generally is disregarded as separate from its owner for U.S. federal income tax purposes (disregarded entity) must not be separately reported on Schedule M-3 except, if required, on Part I, line 7. On Schedule M-3, Parts II and III, any item of income, gain, loss, deduction, or credit of a disregarded entity must be reported as an item of its owner. In particular, the income or loss of a disregarded entity must not be reported on Part II, lines 9, 10, or 11 as from a separate partnership or other pass-through. The financial statement income or loss of a disregarded entity is included on Part I, line 7, only if its financial statement income or loss is included on Part I, line 11, but not on Part I, line 4.

Reportable Entity Partner Reporting Responsibilities

A reportable entity partner with respect to a partnership filing Form 1065 is an entity that (1) owns or is deemed to own, directly or indirectly, under these instructions a 50 percent or greater interest in the income, loss or capital of the partnership on any day of the tax year on or after June 30, 2006, and (2) was required to complete Schedule M-3 on its most recently filed US federal income tax return or return of income filed prior to that day.

For the purposes of these instructions: (1) the parent corporation of a consolidated tax group is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by any member of the tax consolidated group; (2) the owner of a disregarded entity is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the disregarded entity; (3) the owner of 50 percent or more of a corporation by vote on any day of the corporation tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the corporation during the corporation tax year; (4) the owner of 50 percent or more of partnership income, loss, or capital on any day of the partnership tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the partnership during the partnership tax year; and (5) the beneficial owner of 50 percent or more of the beneficial interest of a trust or nominee arrangement on any day of the trust or nominee arrangement tax year is deemed to own all corporate and partnership interests owned or deemed to be owned under these instructions by the trust or nominee arrangement.

A reportable entity partner with respect to a partnership (as defined above) must report the following to the partnership on September 15, 2006, or if later, within 30 days of first becoming a reportable entity partner and, after first reporting to the partnership under these instructions, thereafter within 30 days of the date of any change in the interest it owns or is deemed to own, directly or indirectly, under these instructions, in the partnership: (1) its name, (2) its mailing address, (3) its taxpayer identification number (TIN or EIN) if applicable, (4) its entity or organization type, (5) the state or country in which it is organized, (6) the date on which it first became a reportable entity partner on or after June 30, 2006, (7) the date with respect to which it is reporting a change in its ownership interest in the partnership, if applicable, (8) the interest in the partnership it owns or is deemed to own in the partnership, directly or indirectly (as defined under these instructions) as of the date with respect to which it is reporting, and (9) any change in that interest as of the date with respect to which it is reporting.

Example 2.

  1. A, an LLC filing a Form 1065 for 2006, is owned 50 percent by U.S. corporation Z. A owns 50 percent of B, C, D, and E, which are also LLCs filing a Form 1065 for calendar year 2006. Z was first required to complete Schedule M-3 (Form 1120) for its corporate tax year ended December 31, 2005, and filed its Form 1120 with Schedule M-3 for 2005 on September 15, 2006. As of September 16, 2006, Z was a reportable entity partner with respect to A and, through A, with respect to B, C, D, and E. On October 5, 2006, Z reports to A, B, C, D, and E, as it is required to do within 30 days of September 16, that Z is a reportable entity partner directly owning (with respect to A) or deemed to own indirectly (with respect to B, C, D, and E) a 50 percent interest. Therefore, because Z was a reportable entity partner for 2006, each of A, B, C, D, and E is required to complete Schedule M-3 (Form 1065) for 2006, regardless of whether they would otherwise be required to complete Schedule M-3 for that year.

  2. Same ownership fact as in item 1, above, but on September 15, 2005, Z filed a tax return on Form 1120 and was required to complete Schedule M-3 for the tax year ending December 31, 2004. Therefore, Z is a reportable entity partner of K as of June 30, 2006. On September 15, 2006, P reports to A, B, C, D, and E, as it is required to do, that Z is a reportable entity partner as of June 30, 2006, directly owning (with respect to A) or deemed to own indirectly (with respect to B, C, D, and E) a 50 percent interest. Therefore, because Z was a reportable entity partner for 2006, each of A, B, C, D, and E is required to complete Schedule M-3 (Form 1065) for 2006, regardless of whether they would otherwise be required to complete Schedule M-3 for that year.

  3. P, a US corporation, is the parent of a financial consolidation group with 50 domestic subsidiaries DS1 through DS50 and 50 foreign subsidiaries FS1 through FS50, all 100 percent owned on June 30, 2006. On September 15, 2005, P filed a consolidated tax return on Form 1120 and was required to complete Schedule M-3 for the tax year ending December 31, 2004. On June 30, 2006, DS1, DS2, DS3, FS1, and FS2 are each 10 percent partners in partnership K which files Form 1065 for the tax year ending December 31, 2006. P is deemed to own, directly or indirectly (under these instructions) all corporate and partnership interests of DS1, DS2, DS3, as the parent of the tax consolidation group and therefore is deemed to own 30 percent of K on June 30, 2006. P is deemed to own, directly or indirectly, (under these instructions) all corporate and partnership interests of FS1 and FS2 as the owner of 50 percent or more of each corporation by vote and therefore is deemed to own 20 percent of K on June 30, 2006. P is therefore deemed to own 50 percent of K on June 30, 2006. P was required to complete the Schedule M-3 (Form 1120) with its 2004 Form 1120 filed September 15, 2005, its most recently filed U.S. federal income tax return filed prior to June 30, 2006. P owns or is deemed to own, directly or indirectly, (under these instructions) 50 percent or more of K on June 30, 2006, and was required to complete Schedule M-3 on its most recently filed U.S. income tax return filed prior to that date. Therefore, P is a reportable entity partner of K as of June 30, 2006. On September 15, 2006, P reports to K, as it is required to do, that P is a reportable entity partner as of June 30, 2006, deemed to own (under these instructions) a 50 percent interest in K. K is therefore required to complete Schedule M-3 when it files its Form 1065 for its tax year ending December 31, 2006.

Consolidated Schedule M-3 Versus Consolidating Schedules M-3 for Form 1120 Groups

A consolidated tax return group with a parent corporation that files a Form 1120 is a mixed group if any member is a life insurance company (files using Form 1120-L) or a property and casualty insurance company (files using 1120-PC). See Schedule M-3 Consolidation for Mixed Groups (1120/L/PC) below.

A U.S. consolidated tax group must file a consolidated Schedule M-3. Parts I, II and III of the consolidated Schedule M-3 must reflect the activity of the entire U.S. consolidated tax group. The parent corporation also must complete Parts II and III of a separate Schedule M-3 to reflect the parent's own activity. In addition, Parts II and III of a separate Schedule M-3 must be completed by each includible corporation to reflect the activity of that includible corporation. Lastly, it generally will be necessary to complete Parts II and III of a separate Schedule M-3 for consolidation eliminations.

If a U.S. consolidated tax group that is not a mixed group consists of four includible corporations (the parent and three subsidiaries) all filing Form 1120, the U.S. consolidated tax group must complete six Schedules M-3 as follows: (a) one consolidated Schedule M-3 with Parts I, II, and III completed to reflect the activity of the entire U.S. consolidated tax group; (b) Parts II and III of a separate Schedule M-3 for each of the four includible corporations to reflect the activity of each includible corporation; and (c) Parts II and III of a separate Schedule M-3 to eliminate intercompany transactions between includible corporations and to include limitations on deductions (e.g., charitable contribution limitations and capital loss limitations) and carryover amounts (e.g., charitable contribution carryovers and capital loss carryovers). See the discussion, Completion of Schedule M-3 and Certain Allocations, Limitations, and Carryovers.

Note.

On Part II and Part III, indicate on the line after the common parent's name whether the Schedule M-3 is for the: (1) consolidated group; (2) parent corporation; (3) consolidation eliminations; or (4) subsidiary corporation, by checking the appropriate box.

Schedule M-3 Consolidation for Mixed Groups (1120/L/PC)

Special Schedule M-3 consolidation rules apply to a mixed group, that is, a consolidated tax group that (a) includes both a corporation that is an insurance company and a corporation that is not an insurance company, or (b) includes both a life insurance company and a property and casualty insurance company, or (c) includes a life insurance company, a property and casualty insurance company, and a corporation that is not an insurance company.

Mixed group consolidation for Schedule M-3, Parts II and III, requires (a) subgroup sub-consolidation of the 1120 subgroup, the 1120-PC subgroup, and the 1120-L subgroup, each with its own sub-consolidated Schedule M-3, Parts II and III, and (b) consolidation of the subgroup sub-consolidation totals on a consolidated Schedule M-3, Part II that ties to a consolidated Schedule M-3, Part I and a consolidated Form 8916, Reconciliation of Schedule M-3 Taxable Income with Tax Return Taxable Income for Mixed Groups.

In addition to one Schedule M-3, Part II and one Schedule M-3, Part III for each corporation in the three subgroup sub-consolidations, there will be generally a total of six additional Schedule M-3, Parts II and six additional Schedule M-3, Parts III for the subgroup sub-consolidations. Specifically, there must be one Part II and one Part III for each subgroup's sub-consolidated amounts and one Part II and one Part III for each subgroup's sub-consolidation eliminations amounts.

At the mixed group consolidated level, there must be a consolidated Schedule M-3, Part II, and, if applicable, a Part II for consolidation eliminations not includable in the subgroup eliminations. At the consolidated level, there must also be a consolidated Schedule M-3, Part I and a consolidated Form 8916. For a mixed group, there is no Schedule M-3, Part III at the consolidated level.

The corporation must check the applicable mixed group checkboxes on all Schedules M-3, Parts I, II, and III, as discussed below.

Subgroup Sub-Consolidation: 1120 Subgroup, 1120-PC Subgroup, and 1120-L Subgroup

A subgroup Schedule M-3, Parts II and III, sub-consolidation must be prepared with all necessary eliminations within the subgroup for each of the three possible subgroups that are in fact present: one subgroup for those corporations reporting on Form 1120; one subgroup for those corporations reporting on Form 1120-PC; and one subgroup for those reporting on Form 1120-L. The parent corporation is included in the subgroup that corresponds to the form on which it reports and the entire consolidated group files. For example, in the case of a Form 1120 parent and Form 1120 consolidated group, the parent is included in the Form 1120 subgroup sub-consolidation. Each subgroup uses its own Schedule M-3 form (1120, 1120-PC, 1120-L), Parts II and III, for each corporation within the subgroup and for the subgroup sub-consolidation and the subgroup eliminations.

The three subgroup sub-consolidation taxable income calculations on Schedule M-3 must follow the separate return requirements of the regulation under Section 1502 and all other applicable regulations taking into account the amounts separately reported on Form 8916. Capital loss limitation and carryforward used and charitable deduction limitation and carryforward used are not taken into account in the determination of the three subgroup sub-consolidated taxable incomes on Schedule M-3, but are reflected on Form 8916 and in the calculation of the life/non-life loss limitation and carryforward used. See, Life/Non-Life Loss Limitation and Carryforward Used Calculations, on page 5.

The reconciliation totals for book, temporary difference, permanent difference, and taxable income for each subgroup are reported on Forms 1120, 1120-PC, or 1120-L, as applicable, Schedule M-3, Part II, line 29a, columns (a), (b), (c), and (d), and equal the sum of the line amounts on Part II, lines 26 through 28. For a mixed group, Schedule M-3, Part II, lines 29b, 29c, and 30 are blank on the Forms 1120, 1120-PC, or 1120-L, as applicable, for the separate corporations (parent and subsidiary) and for the three subgroup sub-consolidations.

Reconciliation of Mixed Group Subgroup Sub-Consolidation Amounts to Schedule M-3 Part I, line 11, and to Tax Return Taxable Income

At the consolidated level, use the Schedule M-3 (Forms 1120, 1120-PC, or 1120-L), Parts I and II, that matches the form on which the parent corporation reports and the entire consolidated group files. For a mixed group, the consolidated Schedule M-3, Part II, lines 29a, 29b, and 29c amounts are the roll-ups of the applicable amounts from the three subgroup sub-consolidation Part II, line 29a amounts. (If a consolidated level Part II for consolidation eliminations not includable in the subgroup eliminations is applicable, the roll-up amounts must be adjusted by the applicable elimination amounts.) The consolidated Schedule M-3, Part II, line 30 amounts are the sum of the applicable amounts on the consolidated Part II, lines 29a, 29b, and 29c. For a mixed group, the consolidated Part II, lines 1 through 28 are blank and no consolidated Part III is required to be completed.

For mixed groups, the consolidated Part II line 30 column (a) must equal Part I, line 11, with appropriate adjustments for statutory accounting requirements reflected on Part I, line 10. The consolidated taxable income indicated on Part II, line 30, column (d), must equal the amount shown on Form 8916, line 1. Form 8916, line 8 must equal taxable income reported on the tax return.

Completion of Mixed Group Checkboxes for Schedule M-3 Part II and Part III

Note.

The following discussion of checkboxes will assume that the 1120 subgroup includes the corporate parent of the mixed group.

Forms 1120, 1120-PC, and 1120-L, Schedule M-3, Parts II and III, each have a checkbox (5) at the top indicating a mixed group. Checkbox (5) and one or more other applicable checkboxes must be checked.

For example, an 1120 parent corporation included in the 1120 subgroup must check Schedule M-3 (Form 1120), Parts II and III, box (2) Parent corporation and box (5) Mixed 1120/L/PC group. An 1120 subsidiary corporation within the 1120 subgroup must check Schedule M-3 (Form 1120), Parts II and III, box (4) Subsidiary corporation and box (5) Mixed 1120/L/PC group. An 1120-PC subsidiary corporation within the 1120-PC subgroup must check Schedule M-3 (Form 1120-PC), Parts II and III, box (4) Subsidiary corporation and box (5) Mixed 1120/L/PC group. An 1120-L subsidiary corporation within the 1120-L subgroup must check Schedule M-3 (Form 1120-L), Parts II and III, box (4) Subsidiary corporation and box (5) Mixed 1120/L/PC group.

The 1120 subgroup sub-consolidation Schedule M-3 (Form 1120), Parts II and III, must be indicated by checking box (5) Mixed 1120/L/PC group and box (6) 1120 group for the sub-consolidation and by checking box (5) Mixed 1120/L/PC group, and box (7) 1120 eliminations for the eliminations. The 1120-PC subgroup subconsolidation Form 1120-PC Schedule M-3, Parts II and III, must be indicated by checking box (5) Mixed 1120/L/PC group and box (6) 1120-PC group for the sub-consolidation and by checking box (5) Mixed 1120/L/PC group, and box (7) 1120-PC eliminations for the eliminations. The 1120-L subgroup sub-consolidation Schedule M-3 (Form 1120-L), Parts II and III, must be indicated by checking box (5) Mixed 1120/L/PC group and box (6) 1120-L group for the sub-consolidation and by checking box (5) Mixed 1120/L/PC group, and box (7) 1120-L eliminations for the eliminations.

A mixed group with a Form 1120 parent corporation completes a consolidated level Schedule M-3 (Form 1120), Parts I and II and a consolidated Form 8916. The mixed group consolidated Schedule M-3, Part II, must be indicated by checking box (1) consolidated group and box (5) Mixed 1120/L/PC group. (If a consolidated level Part II for consolidation eliminations not includable in the subgroup eliminations is applicable, that Part II must be indicated by checking box (3) Consolidated eliminations and box (5) Mixed 1120/L/PC group.)

Life/Non-Life Loss Limitation and Carryforward Used Calculations

The applicable life/non-life loss limitation and all carryforward used calculations are made using the amounts determined for taxable income in the three subgroup subconsolidations and other applicable amounts separately reported on Form 8916. The calculated life/non-life loss limitation or carryforward used amounts, if any, are not entered on Schedule M-3. The calculated amounts, if any, are entered on Form 8916.

Mixed Group With 1120 Parent: Transition Rule For Schedule M-3, Parts II and III, Columns (a) and (d) For Tax Years Ending December 2006 Through November 2007

For tax years ending December 2006 through November 2007, if a mixed group has an 1120 parent that is required to complete Parts II and III, columns (a) and (d), all 1120 subsidiaries must complete Parts II and III, columns (a) and (d).

However, all 1120-PC and 1120-L subsidiaries included in the mixed group tax consolidated group have the option of completing columns (a) and (d) for all of Parts II and III, or of completing columns (a) and (d) only for Part II, line 29a, to show the net contribution of the subsidiary to the consolidated group total Part II, line 30, columns (a) and (d) shown on the 1120 subgroup sub-consolidation Part II. The 1120-PC subgroup sub-consolidation Part II, line 29a, must reflect the columns (a) and (d) net total amounts for all 1120-PC subsidiaries. The 1120-L subgroup sub-consolidation Part II, line 29a must reflect the columns (a) and (d) net total amounts for all 1120-L subsidiaries. The 1120 subgroup sub-consolidation must reflect the total net amounts for column (a) and (d) for all applicable lines. The consolidated level Part II must reflect the total net amounts for columns (a) and (d) for all applicable lines 29a, 29b, 29c, and 30.

Note.

All corporations within the mixed group tax consolidation group are required to complete columns (b) and (c) for all applicable lines on all Schedules M-3 Parts II and III, whether Form 1120, Form 1120-PC, or Form 1120-L.

Completion of Schedule M-3 and Certain Allocations, Limitations, and Carryovers

A corporation (or any member of a U.S. consolidated tax group) required to file Schedule M-3 must complete the form in its entirety. In particular, a corporation filing a nonconsolidated return that meets the filing requirements for Schedule M-3 must complete Parts I, II, and III. Such a corporation does not check any of the checkboxes at the top of Parts II and III. In the case of a U.S. consolidated tax group, Part I must be completed once, on the consolidated Schedule M-3, by the parent corporation. Parts II and III must be completed by the parent corporation, each includible corporation, and a consolidating eliminations entity.

At the time the Form 1120 is filed, all applicable questions must be answered on Part I, all columns must be completed on Parts II and III, and all numerical data required by Schedule M-3 must be provided. Any schedule required to support a line item on Schedule M-3 must be attached at the time Schedule M-3 is filed and must provide the information required for that line item.

All detailed schedules for Part II and Part III of Schedule M-3 must be attached for each separate entity included in the consolidated Part II and Part III, including those for the parent company and the eliminations entity, if applicable. It is not required that the same supporting detailed information be presented for Part II and Part III of the consolidated Schedule M-3.

If an item attributable to an includible corporation is not shared by or allocated to the appropriate member of the group but is retained in the parent corporation's financial statements (or books and records, if applicable), then the item must be reported by the parent corporation in its separate Schedule M-3. For example, if the parent of a U.S. consolidated tax group prepares financial statements that include all members of the U.S. consolidated tax group and the parent does not allocate the group's income tax expense as reflected in the financial statements among the members of the group but retains it in the parent corporation, the parent corporation must report on its separate Schedule M-3 the U.S. consolidated tax group's income tax expense as reflected in the financial statements.

Any adjustments made at the consolidated group level that are not attributable to any specific member of the U.S. consolidated tax group (e.g., disallowance of net capital losses, contribution deduction carryovers, and limitation of contribution deductions) must not be reported on the separate consolidating parent or subsidiary Schedules M-3 but rather on the consolidated Schedule M-3 and on the consolidating Schedule M-3 for consolidation eliminations (or on Form 8916 in the case of a mixed group).

If an includible corporation has (1) no activity for the tax year (e.g., because the corporation is a dormant or inactive corporation), (2) no amount for the corporation was included in Part I, line 11, and (3) the corporation has no amounts to report on Part II and Part III of Schedule M-3 for the tax year, the parent corporation of the U.S. consolidated tax group may attach to the consolidated Schedule M-3 a statement that provides the name and EIN of the includible corporation in lieu of filing a blank Part II and Part III of Schedule M-3 for such entity. On Part I, check box (4) Dormant subsidiaries schedule attached.

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