The P-S-T affiliated group has filed consolidated tax returns for many years using the calendar year as its tax year. On October 1, P Corporation created a new subsidiary, X Corporation, with a $10,000 initial capital contribution, and X issued its stock to P. X opened a bank account and obtained a federal tax identification number. X did not conduct any business activities before year-end. Its only income was $125 in interest earned from the bank account. Due to a lack of communication or oversight, Ps tax department did not include Xs income in the current years consolidated tax return.

Your CPA firm has provided tax advice to P for several years, but Ps tax department has handled the federal tax return filings. Most of your work for P has been in the state and local tax area and on special federal tax assignments. You were aware of the affiliated groups future business plans for creating X. Will the oversight with respect to X disqualify the group from filing a consolidated tax return for the current year and future years? Can you avoid having to file a federal income tax return for X because of the small amount of its income? Does the failure to include X in this years consolidated tax return prevent it from being included in future years? What advice can you give your client about needing to include X in the consolidated tax return?