Part I. Financial — 0625 Inst 1120 (Schedule M-3) (PDF)

When To Complete Part I Part I must be completed for any tax year for which the corporation files Schedule M-3. At the top of page 1, check either box (1) Non-consolidated return, (2) Consolidated return (Form 1120 only), or (3) Mixed 1120/L/PC group, as applicable. In addition, check box (4) Dormant subsidiaries schedule attached, if applicable.

Line 1. Questions Regarding the Type of Income Statement Prepared For Part I, lines 1 through 12, use only the financial statements of the U.S. corporation filing the U.S. income tax return (or the consolidated financial statements for the U.S. parent corporation of a U.S. consolidated tax group). If the U.S. corporation filing a U.S. income tax return (or the U.S. parent corporation of a U.S. consolidated tax group) prepares its own financial statements but is controlled by another corporation (U.S. or foreign) that prepares financial statements that include the U.S. corporation, the U.S. corporation (or the U.S. parent corporation of a U.S. consolidated tax group) must use for its Schedule M-3, Part I, its own financial statements and not the financial statements of the controlling corporation.

If a non-publicly traded U.S. parent corporation of a U.S. consolidated tax group prepares financial statements and that group includes a publicly traded subsidiary that files financial statements with the Securities and Exchange Commission (SEC), the consolidated financial statements of the parent corporation are the appropriate financial statements for purposes of completing Part I. Do not use any separate company financial statements that might be prepared for publicly traded subsidiaries.

Non-Tax-Basis Financial Statements and Tax-Basis Financial Statements

A tax-basis income statement is allowed for Schedule M-3, and a tax-basis balance sheet for Schedule L, only if no non-tax-basis income statement and no non-tax-basis balance sheet were prepared for any purpose and the books and records of the corporation reflect only tax-basis amounts. The corporation is deemed to have non-tax-basis income statements and the related non-tax-basis balance sheets for the current tax year for purposes of Schedule M-3 and Schedule L if such non-tax-basis financial statements were prepared for and presented to management, creditors, shareholders, government regulators, or any other third parties for a period ending with or within the tax year.

If a Form 10-K is filed with the SEC for the period ending with or within the tax year, the corporation must check “Yes” for Part I, line 1a, and use that income statement for Schedule M-3. If Form 10-K is not filed and a non-tax-basis income statement is prepared that is a certified non-tax-basis income statement for the period ending with or within the tax year, the corporation must check “Yes” for Part I, line 1b, and use that income statement for Schedule M-3. If Form 10-K is not filed and no certified non-tax-basis income statement is

prepared but an unaudited non-tax-basis income statement is prepared for the period ending with or within the tax year, the corporation must check “Yes” for Part I, line 1c, and use that income statement for Schedule M-3.

Order of priority in accounting standards. If no Form 10-K is filed and two or more non-tax-basis income statements are both certified non-tax-basis income statements for the period, the income statement prepared according to the following order of priority in accounting standards must be used.

U.S. Generally Accepted Accounting Principles (GAAP).
International Financial Reporting Standards (IFRS).
Any other International Accounting Standards (IAS).
Statutory accounting for insurance companies.
Other regulatory accrual accounting.
Any other accrual accounting standard.
Any fair market value standard.
Any cash basis standard.

If no non-tax-basis income statement is certified and two or more non-tax-basis income statements are prepared, the income statement prepared according to the first listed of the accounting standards listed above must be used.

If no non-tax-basis financial statements are prepared for a U.S. corporation (or, in the case of a U.S. consolidated tax group, for the U.S. parent corporation's consolidated group) filing Schedule M-3 (Form 1120), the U.S. corporation (or the U.S. parent corporation of a U.S. consolidated tax group) must check “No” on questions 1a, 1b, and 1c; skip Part I, lines 2a through 3c; and enter the net income (loss) per the books and records of the U.S. corporation (or U.S. consolidated tax group) on Part I, line 4a.

If no non-tax-basis financial statements are prepared for a U.S. corporation (or, in the case of a U.S. consolidated tax group, for the U.S. parent corporation's consolidated group) filing Schedule M-3 (Form 1120) and the U.S. corporation is owned by a foreign corporation that prepares financial statements that includes the U.S. corporation (or the U.S. parent corporation's consolidated group), the U.S. corporation (or the U.S. parent corporation of the U.S. consolidated tax group) must check “No” on questions 1a, 1b, and 1c; skip Part I, lines 2a through 3c; and enter the net income (loss) per the books and records of the U.S. corporation (or U.S. consolidated tax group) on Part I, line 4a.

Line 2. Questions Regarding Income Statement Period and Restatements Enter the beginning and ending dates on line 2a for the corporation's annual income statement period ending with or within the current tax year.

The questions on Part I, lines 2b and 2c, regarding income statement restatements refer to the worldwide consolidated income statement issued by the corporation filing the U.S. income tax return (the consolidated financial statements for the U.S. parent corporation of a U.S. consolidated tax group) and used to prepare Schedule M-3. Answer “Yes” on lines 2b and/or 2c if the corporation's annual income statement has been restated for any reason. Attach a short explanation of the reasons for the restatement in net income for each annual income statement period that is restated, including the original amount and restated amount of each annual

Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025) 7

statement period's net income. The attached statement is not required to report restatements on an entity-by-entity basis.

Line 3. Questions Regarding Publicly Traded Voting Common Stock The primary U.S. publicly traded voting common stock class is the most widely held or most heavily traded within the United States as determined by the corporation. If the corporation has more than one class of publicly traded voting common stock, attach a list of the classes of publicly traded voting common stock and the trading symbol and the nine-digit CUSIP number of each class.

Line 4a. Worldwide Consolidated Net Income (Loss) per Income Statement Report on Part I, line 4a, the worldwide consolidated net income (loss) per the income statement (or books and records, if applicable) of the corporation. A corporation filing a non-consolidated Form 1120 for itself must report its worldwide income on Part I, line 4a.

In completing Schedule M-3, the corporation must use financial statement amounts from the financial statement type checked “Yes” on Part I, line 1, or from its books and records if Part I, line 1c, is checked “No.” If Part I, line 1a, is checked “Yes,” report on Part I, line 4a, the net income amount reported in the income statement presented to the SEC on the corporation's Form 10-K (the Form 10-K for the security identified on Part I, line 3b, if applicable).

If a corporation prepares non-tax-basis financial statements, the amount on Part I, line 4a, must equal the financial statement net income (loss) for the income statement period ending with or within the tax year as indicated on Part I, line 2a.

If the corporation prepares non-tax-basis financial statements and the income statement period differs from the corporation's tax year, the income statement period indicated on Part I, line 2a, applies for purposes of Part I, lines 4a through 8.

If the corporation does not prepare non-tax-basis financial statements and has checked “No” on Part I, line 1c, enter the net income (loss) per the books and records of the U.S. corporation or the U.S. consolidated tax group on Part I, line 4a.

Indicate on Part I, line 4b, which of the following accounting standards were used for line 4a.

U.S. Generally Accepted Accounting Principles (GAAP).
International Financial Reporting Standards (IFRS).
Statutory.
Tax-basis.
Other (specify).

Report on Part I, lines 5a through 10, as instructed below, all adjustment amounts required to adjust worldwide net income (loss) reported on this Part I, line 4a (whether from financial statements or books and records), to net income (loss) of includible corporations that must be reported on Part I, line 11.

Report on line 12a the worldwide consolidated total assets and total liabilities amounts for the corporation using the same financial statements (or books and records) used for

the worldwide consolidated income (loss) amount reported on Part I, line 4a.

If a U.S. corporation (a) has net income (loss) included on Part I, line 4a, and removed on Part I, line 6a or 6b, on another U.S. corporation's Schedule M-3; (b) files its own Form 1120 (separate or consolidated); (c) does not have a separate non-tax-basis financial statement (certified or otherwise) of its own; and (d) reports on Schedule L of its own Form 1120 total consolidated assets that equal or exceed $10 million at the end of the corporation's tax year, the corporation must answer questions 1a, 1b, and 1c, of Part I as appropriate for its own Form 1120 and must report on Part I, line 4a, the amount for the corporation's net income (loss) that is removed on Part I, line 6a or 6b, of the other corporation's Schedule M-3. However, if in the circumstances described immediately above, the corporation does have separate non-tax-basis financial statements (certified or otherwise) of its own, independent of the amount of the corporation's net income included on Part I, line 4a, of the other U.S. corporation, the corporation must answer questions 1a, 1b, and 1c, of Part I, as appropriate, for its own Form 1120, based on its own separate income statement, and must report on Part I, line 4a, the net income amounts shown on its separate income statement.

If line 4a includes net income (loss) for a corporation that files Form 1120-PC or Form 1120-L, see the instructions for Part I, line 10, for adjustments that may be necessary to reconcile financial statement income to statutory income.

Line 5. Net Income (Loss) of Nonincludible Foreign Entities Remove the financial net income (line 5a) or loss (line 5b) of each foreign entity that is included on Part I, line 4a, and is not an includible corporation in the U.S. consolidated tax group (nonincludible foreign entity). In addition, on Part I, line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends between any nonincludible foreign entity and any includible corporation. Do not remove in Part I the financial net income (loss) of any nonincludible foreign entity accounted for on Part I, line 4a, using the equity method.

Attach a supporting statement that provides the name, EIN (if applicable), and net income (loss) included on Part I, line 4a, that is removed on this line 5 for each separate nonincludible foreign entity. Also, state the total assets and total liabilities for each such separate nonincludible foreign entity and include those assets and liabilities amounts in the total assets and total liabilities reported on Part I, line 12b. The amounts of income (loss) detailed on the supporting statement should be reported for each separate nonincludible foreign entity without regard to the effect of consolidation or elimination entries. If there are consolidation or elimination entries relating to nonincludible foreign entities whose income (loss) is reported on the attached statement that are not reportable on Part I, line 8, the net amounts of all such consolidation and elimination entries must be reported on a separate line on the attached statement, so that the separate financial accounting income (loss) of each nonincludible foreign entity remains separately stated.

For example, if the net income (after consolidation and elimination entries) of a nonincludible foreign sub-consolidated group is being reported on line 5a, the attached supporting statement should report the income (loss) of each separate nonincludible foreign legal entity from

8 Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

each such entity's own financial accounting net income statement or books and records, and any consolidation or elimination entries (for intercompany dividends, minority interests, etc.) not reportable on Part I, line 8, should be reported on the attached supporting statement as a net amount on a line separate and apart from lines that report each nonincludible foreign entity's separate net income (loss).

Line 6. Net Income (Loss) of Nonincludible U.S. Entities Remove the financial net income (line 6a) or loss (line 6b) of each U.S. entity that is included on line 4a and is not an includible corporation in the U.S. consolidated tax group (nonincludible U.S. entity). In addition, on Part I, line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends between any nonincludible U.S. entity and any includible corporation. Do not remove in Part I the financial net income (loss) of any nonincludible U.S. entity accounted for on Part I, line 4a, using the equity method.

Attach a supporting statement that provides the name, EIN, and net income (loss) included on Part I, line 4a, that is removed on this line 6 for each separate nonincludible U.S. entity. Also, state the total assets and total liabilities for each such separate nonincludible U.S. entity and include those assets and liabilities amounts in the total assets and total liabilities reported on Part I, line 12c. The amounts of income (loss) detailed on the supporting statement should be reported for each separate nonincludible U.S. entity without regard to the effect of consolidation or elimination entries. If there are consolidation or elimination entries relating to nonincludible U.S. entities whose income (loss) is reported on the attached statement that are not reportable on Part I, line 8, the net amounts of all such consolidation and elimination entries must be reported on a separate line on the attached statement, so that the separate financial accounting income (loss) of each nonincludible U.S. entity remains separately stated. For example, if the net income (after consolidation and elimination entries) of a nonincludible U.S. sub-consolidated group is being reported on line 6a, the attached supporting statement should report the income (loss) of each separate nonincludible U.S. legal entity from each such entity's own financial accounting net income statement or books and records, and any consolidation or elimination entries (for intercompany dividends, minority interests, etc.) not reportable on Part I, line 8, should be reported on the attached supporting statement as a net amount on a line separate and apart from lines that report each nonincludible U.S. entity's separate net income (loss).

Line 7. Net Income (Loss) of Other Includible Foreign Disregarded Entities, Other Includible U.S. Disregarded Entities, and Other Includible Entities Include on Part I, line 7a, 7b, or 7c, the financial net income or (loss) of each foreign or U.S. disregarded entity or other includible entity that is not included in the consolidated financial group and therefore not included in the income reported on Part I, line 4a. Include on line 7a or 7b financial income of any disregarded entity that is not included in the income reported on Part I, line 4a, but is included on Part I, line 11 (other disregarded entities). Include on line 7c the financial income of any entity not a disregarded entity that is not included in the income reported on line 4a, but is included on line 11 (other includible entities). In addition, on Part I,

line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends for any other disregarded entity or other includible entities.

Attach a supporting statement that provides the name, EIN, and net income (loss) per the financial statement or books and records on lines 7a, 7b, and 7c, for each separate other U.S. disregarded entity or other includible entity. Also, state the total assets and total liabilities for each such separate includible entity and include those asset and liability amounts in the total assets and total liabilities reported on Part I, line 12d. The amounts of income (loss) detailed on the supporting statement should be reported for each separate other disregarded entity or other includible entity without regard to the effect of consolidation or elimination entries solely between or among the entities listed. If there are consolidation or elimination entries relating to such disregarded entity or other includible entities whose income (loss) is reported on the attached statement that are not reportable on Part I, line 8, the net amounts of all such consolidation and elimination entries must be reported on a separate line on the attached statement, so that the separate financial accounting income (loss) of each other disregarded entity or other includible entity remains separately stated. For example, if the net income (after consolidation and elimination entries) of a sub-consolidated group of other U.S. disregarded entities is being reported on line 7b, the attached supporting statement should report the income (loss) of each separate other U.S. disregarded entity from each entity's own financial accounting net income statement or books and records, and any consolidation or elimination entries (for intercompany dividends, minority interests, etc.) not reportable on Part I, line 8, should be reported on the attached supporting statement as a net amount on a line separate and apart from lines that report each other includible corporation's or entity's separate net income (loss).

Line 8. Adjustment to Eliminations of Transactions Between Includible Entities and Nonincludible Entities Adjustments on Part I, line 8, to reverse certain financial accounting consolidation or elimination entries are necessary to ensure that transactions between includible entities and nonincludible U.S. or foreign entities are not eliminated, in order to report the correct total amount on Part I, line 11. Also, additional consolidation entries and elimination entries may be necessary on Part I, line 8, related to transactions between includible entities that are in the consolidated financial group and other disregarded entities and other includible entities that are not in the consolidated financial group but that are reported on Part I, line 7a, 7b, or 7c, in order to report the correct total amount on Part I, line 11.

Include on Part I, line 8, the total of the following: (a) amounts of any adjustments to consolidation entries and elimination entries that are contained in the amount reported on Part I, line 4a, required as a result of removing amounts on Part I, line 5 or 6; and (b) amounts of any additional consolidation entries and elimination entries that are required as a result of including amounts on Part I, line 7a, 7b, or 7c. This is necessary in order that the consolidation entries and intercompany elimination entries included in the amount reported on Part I, line 11, are only those applicable to the financial net income (loss) of includible entities for the financial statement period. For example, adjustments must be reported on line 8 to remove minority interest and to reverse the elimination of intercompany dividends included

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on Part I, line 4a, that relate to the net income of entities removed on Part I, line 5 or 6, because the income to which the consolidation or elimination entries relate has been removed. Also, for example, consolidation or elimination entries must be reported on line 8 to reflect any minority interest ownership in the net income of other disregarded entities or other includible entities reported on Part I, line 7a, 7b, or 7c. Consolidation and elimination entries must also be reported on line 8 to eliminate any intercompany dividends between entities whose income is included on Part I, line 7a, 7b, or 7c, and other entities included in the consolidated U.S. income tax return. See line 11, Examples 4, 5, and 6.

If a corporate owner of an interest in another entity (a) accounts for the interest in the entity in the owner corporation's separate general ledger on the equity method, and (b) fully consolidates the entity in the owner corporation's consolidated financial statements, but the entity is not includible in the owner corporation's consolidated U.S. income tax return, then, as part of reversing all consolidation and elimination entries for the nonincludible entity, the corporate owner must reverse on Schedule M-3, Part I, line 8, the elimination of the equity income inclusion from the entity. If the owner corporation does not account for the entity on the equity method on its own general ledger, it will not have eliminated the equity income for consolidated financial statement purposes and therefore will have no elimination of equity income to reverse.

The attached supporting statement for Part I, line 8, must identify the type (for example, minority interest, intercompany dividends, etc.) and amount of consolidation or elimination entries reported, as well as the names of the entities to which they pertain. It is not necessary, but it is permitted, to report intercompany eliminations that net to zero on Part I, line 8, such as intercompany interest income and expense.

Line 9. Adjustment To Reconcile Income Statement Period to Tax Year Include on line 9 any adjustments necessary to the income (loss) of includible corporations to reconcile differences between the corporation's income statement period reported on line 2a and the corporation's tax year. Attach a statement describing the adjustment.

Statutory accounting for an insurance company subsidiary acquired or merged may require the use of a financial statement period for income reported on Part I, line 11, that differs from the period reported on Part I, line 4a or line 7. Report on Part I, line 10b, adjustments to income because of the differences in accounting period.

Line 10a. Intercompany Dividend Adjustments To Reconcile to Line 11, Line 10b. Other Statutory Accounting Adjustments To Reconcile to Line 11, and Line 10c. Other Adjustments To Reconcile to Amount on Line 11 Include on lines 10a, 10b, and 10c any other adjustments to reconcile net income (loss) on Part I, line 4a, through Part I, line 9, with net income (loss) on Part I, line 11. Include on line 10a the amount of any intercompany dividend adjustment required by statutory accounting. Include on line 10b the amount of any other required statutory accounting adjustment. Include on line 10c the amount of any other adjustment not required by statutory accounting.

Normally, all intercompany dividends will have been eliminated or excluded from the financial accounting consolidated net income (loss) reported on Part I, line 4a. However, an insurance company may be required to include certain intercompany dividends on Part I, line 11, so that the amount reported on Part I, line 11, agrees with statutory accounting net income (Annual Statement). If the net income (loss) of a corporation that files Form 1120-PC or Form 1120-L is included on Part I, line 4a or line 7, and is computed on a basis other than statutory accounting, include on line 10a the adjustments necessary such that Part I, line 11, includes intercompany dividends in the net income (loss) for the corporation to the extent required by statutory accounting principles. (For insurance companies included in the consolidated U.S. income tax return, see the instructions for Part I, line 11, and Part II, line 7.)

For any adjustments reported on Part I, lines 10a, 10b, and 10c, attach a supporting statement that provides, for each corporation to which an adjustment relates, the name and EIN of the corporation; the amount of net income included in Part I before any adjustments on line 10; the amount of net income included on Part I, line 11; the amount of the net adjustment that is attributable to intercompany dividend adjustments required to be reported by statutory accounting and included on Part I, line 10a; the amount of the net adjustment attributable to other statutory accounting requirements and included on Part I, line 10b; and the amount of the remainder of the net adjustment not required because of statutory accounting and included on Part I, line 10c. If any net adjustment is included for the corporation on Part I, line 10b or 10c, attach a supplemental supporting statement identifying the line (10b or 10c), the type, and the amount of each adjustment included in the net adjustment.

Line 11. Net Income (Loss) per Income Statement of Includible Corporations Report on line 11 the net income (loss) per the income statement (or books and records, if applicable) of the corporation. In the case of a U.S. consolidated tax group, report the consolidated income statement net income (loss) of all corporations listed on Form 851 and included in the consolidated U.S. income tax return for the tax year. Amounts reported in Parts II and III, column (a) (see instructions, later), must be reported on the same accounting method used to report the amount of net income (loss) per income statement of includible corporations on Part I, line 11, which for insurance companies is statutory accounting. If an insurance company is included in a consolidated Form 1120, the amount of net income reported on Part I, line 11, will include the statutory accounting net income for the insurance corporation and the GAAP net income for the non-insurance corporations included in the U.S. consolidated tax group. (For insurance companies included in the consolidated U.S. income tax return, see the instructions for Part I, line 10, and Part II, line 7.)

Do not, in any event, report on this line 11 the net income of entities not listed on Form 851 and not included in the consolidated U.S. income tax return for the tax year. For example, it is not permissible to remove the income of

10 Instructions for Schedule M-3 (Form 1120) (Rev. 6-2025)

nonincludible entities on lines 5 and/or 6, discussed earlier, then add back such income on lines 7 through 10, such that the amount reported on line 11 includes the net income of entities not includible in the consolidated U.S. income tax return. A principal purpose of Schedule M-3 is to report on this Part I, line 11, only the financial accounting net income of only the corporations included in the consolidated U.S. income tax return.

Whether or not the corporation prepares financial statements, Part I, line 11, must include all items that impact the net income (loss) of the corporation even if they are not recorded in the profit and loss accounts in the corporation's general ledger, including, for example, all post-closing adjusting entries (including workpaper adjustments) and dividend income or other income received from nonincludible corporations.

Example 4.

U.S. corporation P is publicly traded and files Form 10-K with the SEC. P owns 80% or more of the stock of 75 U.S. corporations, DS1 through DS75, between 51% and 79% of the stock of 25 U.S. corporations DS76 through DS100, and 100% of the stock of 50 foreign subsidiaries FS1 through FS50. P eliminates all dividend income from DS1 through DS100, and FS1 through FS50 in financial statement consolidation entries. Furthermore, P eliminates the minority interest ownership, if any, of DS1 through DS100 in financial statement consolidation entries. P's SEC Form 10-K includes P, DS1 through DS100, and FS1 through FS50 on a fully consolidated basis. P files a consolidated U.S. income tax return with DS1 through DS75.

P must check “Yes” on Part I, line 1a. On Part I, line 4a, P must report the consolidated net income from the SEC Form 10-K for the consolidated financial statement group of P, DS1 through DS100, and FS1 through FS50. P must remove the net income (loss) of FS1 through FS50 on Part I, line 5a or 5b, as applicable. P must remove the net income (loss) before minority interests of DS76 through DS100 on Part I, line 6a or 6b, as applicable. P must reverse on Part I, line 8:

a. The elimination of dividends received by P and DS1 through DS75 from DS76 through DS100 and FS1 through FS50; and

b. The recognition of minority interests' share of the net income (loss) of DS76 through DS100. Note. The minority interests' share, if any, of the income of DS1 through DS75 must be reported in Part II, line 8.

P reports on Part I, line 11, the consolidated financial statement net income (loss) attributable to the includible corporations. Intercompany transactions between the includible corporations that had been eliminated in the net income amount on line 4a remain eliminated in the net income amount on line 11. Transactions between the includible corporations and the nonincludible entities that are eliminated in the net income amount on line 4a are included in the net income amount on line 11 since the elimination of those transactions was reversed on line 8.

Foreign corporation F owns 100% of the stock of U.S. corporation P. P owns 100% of the stock of DS1, 60% of the stock of DS2, and 100% of the stock of FS1. F prepares certified audited financial statements. P does not prepare any financial statements. P files a consolidated U.S. income tax return with DS1.

P must not complete Schedule M-3, Part I, with reference to the financial statements of its foreign parent F. P must check “No” on Part I, lines 1a, 1b, and 1c; skip lines 2a

through 3c of Part I; and enter worldwide net income (loss) per the books and records of the includible corporations (P and DS1) on Part I, line 4a. P must enter any necessary adjustments on lines 5a through 10 in order for Part I, line 11, to report the net income (loss) of includible corporations P and DS1, net of eliminations for transactions between P and DS1.

Example 5.

U.S. corporation P owns 60% of corporation DS1 which is fully consolidated in P's financial statements. P does not account for DS1 in P's separate general ledger on the equity method. DS1 has net income of $100 (before minority interests) and pays dividends of $50, of which P receives $30. The dividend is eliminated in the consolidated financial statements. In its financial statements, P consolidates DS1 and includes $60 of net income ($100 less the minority interest of $40) on Part I, line 4a.

P must remove the $100 net income of DS1 on Part I, line 6a. P must reverse on Part I, line 8, the elimination of the $40 minority interest net income of DS1. In addition, P reverses its elimination of the $30 intercompany dividend in its financial statements on Part I, line 8. The net result is that P includes the $30 dividend from DS1 on Part I, line 11, and on Part II, line 7, column (a). P's dividend income included on the tax return from DS1 must be reported on Part II, line 7, column (d).

U.S. corporation C owns 60% of the capital and profits interests in U.S. LLC N. C does not account for N in C's separate general ledger on the equity method. N has net income of $100 (before minority interests) and makes no distributions during the tax year. C treats N as a corporation for financial statement purposes and as a partnership for U.S. income tax purposes. In its financial statements, C consolidates N and includes $60 of net income ($100 less the minority interest of $40) on Part I, line 4a.

C must remove the $100 net income of N on Part I, line 6a. C must reverse on Part I, line 8, the elimination of the $40 minority interest net income of N. The result is that C includes no income for N either on Part I, line 11, or on Part II, line 9, column (a). C's taxable income from N must be reported by C on Part II, line 9, column (d).

U.S. corporation P owns 60% of corporation DS1, which is fully consolidated in P's financial statements. P accounts for DS1 in P's separate general ledger on the equity method. DS1 has net income of $100 (before minority interests) and pays dividends of $50, of which P receives $30. The dividend reduces P's investment in DS1 for equity method reporting on P's separate general ledger where P includes its 60% equity share of DS1 income, which is $60. In its financial statements, P eliminates the DS1 equity method income of $60 and consolidates DS1, including $60 of net income ($100 less the minority interest of $40) on Part I, line 4a.

P must remove the $100 net income of DS1 on Part I, line 6a. P must reverse on Part I, line 8, the elimination of the $40 minority interest net income of DS1 and the elimination of the $60 of DS1 equity income. The net result is that P includes the $60 of equity method income from DS1 on Part I, line 11, and on Part II, line 6, column (a). P's dividend income included on the tax return from its investment in DS1 must be reported on Part II, line 7, column (d).

U.S. corporation C owns 60% of the capital and profits interests in U.S. LLC N. C accounts for N in C's separate general ledger on the equity method. N has net income of

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$100 (before minority interests) and makes no distributions during the tax year. C treats N as a corporation for financial statement purposes and as a partnership for U.S. income tax purposes. For equity method reporting on C's separate general ledger, C includes its 60% equity share of N income, which is $60. In its financial statements, C eliminates the $60 of N equity method income and consolidates N, including $60 of net income ($100 less the minority interest of $40) on Part I, line 4a.

C must remove the $100 net income of N on Part I, line 6a. C must reverse on Part I, line 8, the elimination of the $40 minority interest net income of N and the elimination of the $60 of N equity method income. The result is that C includes the $60 of equity method income for N on Part I, line 11, and on Part II, line 9, column (a). C's taxable income from N must be reported by C on Part II, line 9, column (d).

U.S. corporation C owns 60% of the capital and profits interests in U.S. LLC N. C accounts for N in C's separate general ledger on the equity method. N has net income of $100 (before minority interests) and pays a $50 cash distribution, of which C receives $30. The distribution reduces C's investment in N for equity method reporting on C's separate general ledger. C treats N as a corporation for financial statement purposes and as a partnership for U.S. income tax purposes. For equity method reporting on C's separate general ledger, C includes its 60% equity share of N income, which is $60. In its financial statements, C eliminates the $60 of N equity method income and consolidates N and includes $60 of net income ($100 less the minority interest of $40) on Part I, line 4a.

Example 6. U.S. corporation P owns 80% of the stock of corporation DS1. DS1 is included in P's consolidated income tax return, even though DS1 is not included in P's consolidated financial statements on either a consolidated basis or on the equity method. DS1 has current year net income of $100 after taking into account its $40 interest payment to P. P has net income of $1,040 after recognition of the interest income from DS1. Because DS1 is an includible corporation, 100% of the net income of both P and DS1 must be reported on Form 1120, page 1, of the PDS consolidated U.S. income tax return, and the intercompany interest income and expense must be removed by consolidation elimination entries.

P must report its financial statement net income of $1,040 on Part I, line 4a, and reports DS1's net income of $100 on Part I, line 7c. Then, in order to reflect the full consolidation of the financial accounting net income of P and DS1 on Part I, line 11, the following consolidation and elimination entries are reported on Part I, line 8: (a) offsetting entries to remove the $40 of interest income received from DS1 included by P on line 4a, and to remove the $40 of interest expense of DS1 included in line 7c for a net change of zero; and (b) an entry to reflect the $20 minority interest in the net income of DS1 (DS1 net income of $100 times 20% minority interest). The result is that Part I, line 11, reports $1,120: $1,040 from line 4a, $100 from line 7c, and ($20) from line 8. Stated another way, Part I, line 11, includes the entire $1,000 net income of P, measured before recognition of the

intercompany interest income from DS1 and the consolidation of DS1 operations, plus the entire $140 net income of DS1, measured before interest expense to P, less the minority interest ownership of $20 in DS1's separate net income ($100). The consolidated U.S. income tax group is required to include on the attached supporting statement for Part I, line 8, the details of the adjustment to the minority interest in the net income of DS1, but is not required to report the offsetting adjustment to the intercompany elimination of interest income and interest expense (though it is permitted to do so).

Line 12. Total Assets and Liabilities of Entities Included or Removed on Part I, Lines 4, 5, 6, and 7 Line 12 must be completed by all corporations that file Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the total amount (not just the corporation's share) of assets and liabilities of entities included or removed on Part I, lines 4, 5, 6, and 7. All assets and liabilities reported for Schedule M-3, Part I, lines 12a, 12b, 12c, and 12d, must be entered as positive amounts.

On line 12a, enter the worldwide consolidated total assets and total liabilities of all of the entities included in completing Part I, line 4a. On line 12b, enter the total assets and total liabilities of the entities removed in completing Part I, line 5. On line 12c, enter the total assets and total liabilities removed in completing Part I, line 6. On line 12d, enter total assets and total liabilities included in completing Part I, line 7.