An eligible life insurance company can join an affiliated group’s federal consolidated return with nonlife companies only if the group makes a section 1504(c)(2) election and the life company meets the regulatory eligibility tests. The group files separate life and nonlife subgroup results; it does not simply pool every member’s income and deductions.
When can a life insurer join a nonlife group return?
Section 1504(c)(2) permits an election to include eligible domestic life insurance companies taxed under section 801 in an affiliated group’s consolidated return with nonlife corporations. The five-year rule is an eligibility screen, not a guarantee that a company qualifies as soon as it has been in the group for five years.
Apply the five-year base-period tests
Under 26 CFR §1.1502-47(b)(12), the base period is generally the common parent’s five taxable years immediately before the group year for which the return and eligibility determination are being made. The regulation’s tests address whether the life company:
- Was in existence and a member of the group during the relevant period.
- Actively conducted a trade or business.
- Avoided specified changes in tax character and disproportionate asset acquisitions that can prevent qualification.
Eligibility is determined for each consolidated-return year beginning with the first year the election is effective. An ineligible life company is not an includible corporation under section 1504(c)(2); if the ineligible life company is the common parent, the election cannot be made.
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Do not assume a predecessor’s years automatically count
The regulation’s tacking rule may allow a new corporation to count a qualifying period of an older corporation, but it depends on the facts and regulatory conditions. The relevant transferors, assets and values, transaction provisions, tax character, and asset-acquisition history all matter. Treat tacking as a transaction-specific analysis, not an automatic exception to the five-year requirement.
Which return does the group file?
The common parent’s corporate type determines the main consolidated return. The forms below are the choices identified in the IRS instructions; the group’s composition does not by itself determine which one is the main return.
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| Common parent | Main consolidated return |
|---|---|
| Life insurance company | Form 1120-L |
| Insurance company other than a life insurer | Form 1120-PC |
| Another type of corporation | Form 1120 |
How are life and nonlife results reported?
A life-nonlife group must identify the filing as a life-nonlife return and report the two subgroups’ results separately. The group reports nonlife consolidated taxable income or loss on Form 1120 or Form 1120-PC, as applicable, and consolidated life insurance company taxable income (LICTI) on Form 1120-L. Depending on the common parent, these forms may be the main return or attachments.
The return must also show the setoffs required by specified paragraphs of §1.1502-47. The 2025 Form 1120-L instructions state that, when the section 1504(c)(2) election is in effect, nonlife members’ items are not taken into account in computing a life member’s tentative LICTI. Follow the applicable regulation and the filing-year instructions for the subgroup calculations and required setoffs.
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Assemble the supporting filings
The IRS instructions call for supporting member statements, consolidated balance sheets, and a retained-earnings reconciliation. Form 851 applies, and a newly included subsidiary generally requires Form 1122. The exact attachment and presentation requirements depend on the filing year and group structure, so use that year’s instructions.
When is Schedule M-3 required?
The IRS 2025 Form 1120-L instructions state that a life insurance company with total assets of $10 million or more on the last day of its tax year must file Schedule M-3 (Form 1120-L). This is the stated threshold for the life-company situation described in those instructions; confirm the asset calculation under the applicable filing-year guidance.
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For mixed groups, the Schedule M-3 instructions describe separate sub-consolidations for the Form 1120, Form 1120-PC, and Form 1120-L subgroups, with those totals then consolidated in the group reporting. Check the schedule instructions for the group’s structure rather than treating the mixed group as one undifferentiated M-3 calculation.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to establish before filing
- The group’s common parent and the appropriate main return form.
- Whether a section 1504(c)(2) election is available and in effect.
- Each life company’s eligibility for the specific return year, including any proposed tacking analysis.
- The correct separate life and nonlife subgroup computations, required setoffs, and supporting forms.
- Whether Schedule M-3 is required under the instructions for that filing year.
The framework above reflects the IRS 2025 Form 1120-L and 1120-PC instructions, the 2025 Schedule M-3 (Form 1120-L) instructions, and 26 CFR §1.1502-47. A company’s ownership history, business activity, tax character, asset acquisitions, election history, and tax year can change the result; these general rules do not establish a particular group’s eligibility or whether a loss in one subgroup may offset income in the other.
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