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3. Election to Extend Carryback from 2008 or 2009 The five-year extended carryback period is available for any NOL incurred in a tax year beginning or ending in 2008 or 2009
The election to extend the carryback period, however, can only be made for an NOL from one tax year
Guidance issued in Rev. Proc. 2009-52 (November 20, 2009) (discussed below) 3
4. Exception for TARP Recipients The extended carryback election is not available for TARP Recipients, as defined in the Act
If the Federal Government acquired before the date of enactment an equity interest in the taxpayer or any warrant (or other right) to acquire any equity interest with respect to the taxpayer
If the taxpayer receives after the date of enactment funds from the Federal Government in exchange for such an equity interest or warrant
These rules apply to any taxpayer which at any time in 2008 or 2009 was or is a member of the same affiliated group determined without regard to section 1504(b) as a taxpayer described above
If a taxpayer becomes a TARP Recipient after making the NOL carryback election, the taxpayer is retroactively rendered ineligible for the extended carryback, and may be required to file amended returns
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5. Statutory Language In general, section 172(b)(1)(H) allows a taxpayer to elect to carry back an applicable net operating loss for between 3 and 5 years, rather than the 2-year period otherwise allowed
The term applicable net operating loss means the taxpayers net operating loss for a taxable year ending after December 31, 2007, and beginning before January 1, 2010
JCT Explanation (JCX-44-09): For all elections under this provision, the common parent of a group of corporations filing a consolidated return makes the election, which is binding on all such corporations
The election shall be made by the due date (including extension of time) for filing the return for the taxpayers last taxable year beginning in 2009
Once made, the election is irrevocable
Statute authorizes the issuance of anti-abuse regulations
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6. Rev. Proc. 2009-52 Provides basic guidance to allow taxpayers to elect to carry back an applicable net operating loss for a period of 3, 4, or 5 years, to offset taxable income in those preceding taxable years
For taxpayers that have not claimed a deduction for an applicable NOL
For taxpayers that previously claimed a deduction for an applicable NOL
For taxpayers that previously filed an election under section 172(b)(3) to forgo the NOL carryback period
For purposes of Rev. Proc. 2009-52:
taxpayer includes a consolidated group
applicable NOL includes a consolidated net operating loss (CNOL)
The common parent of the group makes the section 172(b)(1)(H) election (citing Reg. sections 1.1502-21(b), 77(a)).
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7. Rev. Proc. 2009-52 (cont.) [N]othing in this revenue procedure permits a consolidated group to otherwise make or revoke a carryback waiver election for the CNOL attributable to a member acquired from another group, described in Reg. section 1.1502-21(b)(3)(ii)(B). The conditions under which this election may be permitted will be the subject of separate guidance.
Under Reg. section 1.1502-21(b)(3)(ii)(B), if one or more members of a consolidated group becomes a member of another consolidated group, the acquiring group may irrevocably elect to relinquish, with respect to all CNOLs attributable to the member, the portion of the carryback period for which the corporation was a member of another group
Any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must be included in the waiver
The election must be filed with the acquiring consolidated groups original income tax return for the year in which the corporation(s) became member(s)
Taxpayer that previously elected under section 172(b)(3) to forgo the carryback period for an applicable NOL for a taxable year ending before November 6, 2009 may revoke that election and elect to apply the 5-year carryback provision of section 172(b)(1)(H)
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8. Scope of the TARP Taint Facts:
Target is a subsidiary that was included in a consolidated group that received TARP assistance
In 2008, M (a member of a different consolidated group, the P group) acquired all of the stock of Target, causing Target to become a member of the P group
Issues:
Is the P group precluded from electing a 5-year carryback of its 2008 or 2009 applicable NOL, since one of its members was a member of a group that received TARP assistance?
What if the P group purchased substantial operating assets from a group (or a separate return taxpayer) that received TARP assistance?
What if a consolidated group received TARP assistance, thereafter contributed operating assets to newly formed Target, and, in a separate transaction, then sold Target to the P group?
What if a consolidated group received TARP assistance and purchased the stock of a subsidiary that previously was included in a consolidated group that elected under section 172(b)(1)(H)?
Does it matter whether the prior carryback was to an earlier consolidated return year or the subsidiarys separate return year? 8
9. Taint from Prior Elections by Acquired Corporationsthe Total Taint Facts:
Target is a separate return taxpayer in 2008 and elects under section 172(b)(1)(H) to carry back its 2008 net operating loss 5 years
In 2009, all of the stock of Target is acquired by the P consolidated group, which made no such election for its 2008 CNOL
In 2009, the P group has a CNOL, none of which is attributable to Target
Issue: Is the P group unable to elect to carry back its CNOL for 5 years because Target made the election for its 2008 separate return NOL and is included in the P group for 2009?
Considerations:
The P group in 2009 is a distinct taxpayer for purposes of NOL/CNOL computations (i.e., separate from Target as a taxpayer in 2008)
The CNOL is the only NOL in 2009. See United Dominion Indus. v. U.S., 532 U.S. 822 (2001)
Section 172(b)(1)(H) specifically provides for such a complete taint in the context of TARP recipients, and didnt do so more generally for consolidated groups
What if Target had merged into a P group member under section 368(a)?
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10. Taint from Prior Elections by Acquired Corporationsthe SRY Carryback Taint Facts: The facts are the same, except
Target has a loss in 2009 that contributes to the P groups CNOL and
A portion of the P groups CNOL would be carried back to Targets preacquisition separate return years (to which a portion of Targets 2008 NOL are being carried under a section 172(b)(1)(H) election)
Issue: Is the P group unable to elect to carry back that portion of its CNOL that is apportioned to Target under Reg. section 1.1502-21(b) and that would be carried to Targets separate return years?
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11. Taint from Prior Elections by Acquired Corporationsthe SRY Carryback Taint (Cont.) Considerations:
United Dominion generally supports treating the CNOL as the only NOL for carryback purposes
But United Dominion did not involve CNOL carrybacks to separate return years
Rev. Proc. 2009-52 provides that taxpayer includes a consolidated group, applicable NOL includes a CNOL, and that the group parent makes the election
This is consistent with the JCT Explanation, which provides: For all elections under this provision, the common parent of a group of corporations filing a consolidated return makes the election, which is binding on all such corporations.
In general, the CNOL is computed in the aggregate under Reg. section 1.1502-21(e), and the parent may elect to waive the carryback provisions for the entire CNOL under Reg. section 1.1502-21(b)(3)(i)
But the waiver election may not be made separately for any member
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12. Taint from Prior Elections by Acquired Corporationsthe SRY Carryback Taint (Cont.) Considerations (Cont.):
If one or more members of a consolidated group becomes a member of another consolidated group, Reg. section 1.1502-21(b)(3)(ii)(B) permits the acquiring group to elect to relinquish, with respect to all CNOLs attributable to the member, the portion of the carryback period for which the corporation was a member of another group
But the waiver election must include any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group
Section 172(b)(1)(H)(i)-(iii) focuses on the applicable NOL year, not the carryback year, in determining whether a taxpayer may make an extended carryback election with respect to that year
But note that section 172(b)(1)(H)(iv) limits the amount of loss that may be carried back to the 5th preceding taxable year
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13. Taint from Prior Elections by Acquired Corporationsthe SRY Carryback Taint (Cont.) Considerations (Cont.):
Should the ability to elect with respect to the entire CNOL depend on whether Targets assets were acquired or Target was merged or liquidated into an historic member of the P group?
In a merger or liquidation case, the CNOL would be carried back to the groups prior years, not the Targets separate return years
But does section 172(b)(1)(H) focus on the year of the NOL or the carryback year?
The apportionment rules of Reg. section 1.1502-21(b) could unfairly taint P group CNOLS (e.g., if, in 2009, the P group generates a $100 CNOL, Target contributes a $100 loss and Targets subsidiary (acquired with Target) contributes $100 of income, a portion of the CNOL would be apportioned to Target)
Should that portion of the CNOL be tainted, even though the P group, without regard to Target and Target subsidiary, would have had a $100 CNOL?
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14. Taint from Prior Elections by Acquired Corporationsthe SRY Carryback Taint (Cont.) Considerations (Cont.):
Analogy to section 172(b)(1)(H) for 2001-2002
The 5-year carryback extension was limited to NOLs for taxable years ending in 2001 and 2002, but no rules were adopted to deny carrybacks in the case of consolidated return acquisitions, despite the potential for more than two years of carryback to a Targets separate return years (e.g., if a 1/31 Target was acquired by the P group on 1/31/01)
Concerns re tax sharing agreements led to Reg. section 1.1502-21T(b)(3)(ii)(C), permitting carryback waivers to the extent there was interaction with a prior consoldiated group this waiver ability is not inconsistent with more general carryback eligibility
To address similar tax sharing agreement concerns now, selective waivers could still be allowed by allowing a Reg. section 1.1502-21T(b)(3)(ii)(C) waiver with respect to the CNOL carryback apportioned to a Target that would be carried back to the Targets preacquisition consolidated group
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15. Making Elections on a Member-by-Member Basis? Should the P group be able to make different carryback elections under section 172(b)(1)(H) for the portions of the CNOL attributable to different members but carried back to the P groups years?
5 years / 4 years / 3 years
Should the P group be able to make different carryback elections under section 172(b)(1)(H) for the CNOL apportioned to members and carried back to the members separate return years?
5 years / 4 years / 3 years
Note that these issues seem closely related to the scope of TARP taint issues reviewed above 15
16. Authorities Regarding Treatment of the Group and its Attributes Compare United Dominion v. U.S., 532 U.S. 822 (2001) (generally treating the CNOL as the only NOL), GCM 39305 (a CNOL apportioned to a member is not a separate NOL for purposes of section 172s loss carryback waiver), ILM 200714017 (treating the group as a single taxpayer for purposes of section 108 attribute reduction), T.D. 9089 (same), ILM 200305019 (determining a CERT-tainted loss on a consolidated group basis), ILM 200149008 (noting that [i]n the case of a consolidated group, there is only one NOL, the consolidated NOL (CNOL)) with TAM 9715002 (applying the section 172(f)(2) limitation applicable to specified liability losses on a member-by-member basis because [i]n the consolidated return context, the taxpayer is generally the member, not the group.), FSA 199912007 (stating that [e]ach member of a consolidated group has separate taxpayer status but applying section 108 attribute reduction on a group basis) 16
17. CERT Rules If a corporation involved in a CERT has an NOL in a loss limitation year, the corporation may not be permitted to carry back a portion of the NOL to a tax year preceding the year of the CERT
The new five-year carryback legislation modifies the CERT rules to conform the determination of the loss limitation year with the extended NOL carryback rules
The CERT rules only restrict the portion of an NOL generated by interest deductions attributable to certain debt-financed stock acquisitions or distributions 17
18. CERT Rules The CERT rules generally apply if:
There is a CERT
A CERT is defined as a major stock acquisition or an excess distribution
The Taxpayer is an Applicable Corporation
The CERT Rules only apply to a C corporation (or successor corporation to such corporation) (1) that is the acquiring or acquired corporation in a major stock acquisition, or (2) that makes a distribution with respect to its stock (or redeems its stock) in connection with an excess distribution 18
19. CERT Rules The Loss Occurs in a Loss Limitation Year (LLY)
A LLY is the tax year in which the CERT occurred and, generally, each of the two following tax years. If an extended carryback is elected, the loss limitation period is extended to include the CERT year plus one year less than the extended carryback period
There is a Corporate Equity Reduction Interest Loss (CERIL)
The CERIL, which is the portion of the NOL that may not be carried back, is generally the portion of a corporations NOL that is generated by interest deductions with respect to the debt that financed the CERT
In determining the allocable interest deductions taken into account in computing the NOL for any taxable year, taxable income is computed by taking allocable interest deductions into account after all other deductions 19
20. 20 CCA 200305019
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22. 22 Consolidated CERT Rules Excess Distributions
23. Consolidated CERT Rules Allocable interest deductions for any loss limitation year is limited to the excess of
the amount allowable as a deduction for interest paid or accrued by the taxpayer during the loss limitation year, over
the average of such amounts for the three taxable years preceding the taxable year in which the CERT occurred
How should the interest be calculated for the three years preceding the CERT?
What do you do about short years caused by the acquisition?
What do you do if multiple entities have been acquired or transferred?
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24. 24 TAM 200432014
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26. § 1.368-2(l): All-Cash D Reorganizations Address related-party reorganizations when there is:
No consideration;
Consideration < FMV assets
Consideration = FMV assets
Where no consideration or consideration < FMV
Shares are deemed issued in an amount equal to the shortfall in consideration
Where adequate (nonstock) consideration is issued
Nominal share is deemed issued 26
27. § 1.368-2(l): All-Cash D Reorganizations Further explication of significance of nominal share
Treated as an actual share that has significance for federal income tax purposes, e.g., for § 358 and § 1.302-2(c).
Treated as deemed distributed (and, if necessary, contributed) to reflect actual post-reorganization capital structure
Deemed distribution may have adverse tax consequences
Outside of consolidated returns
Eliminating loss under § 311(a)
Triggering gain under § 311(b)
In consolidated returns
Turning potential ELA into a stock DIT
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28. § 1.1502-13(f)(3): Boot in Intercompany Reorganizations Nonqualifying property received as part of a transaction described in §1.1502-13(f)(3) is treated as received by the member shareholder in a separate transaction
§§ 302 and 311 would apply rather than §§ 356 and 361
The nonqualifying property is taken into account immediately after the transaction if §354 would apply but for the fact that it is received 28
29. § 1.1502-13(f)(7), Ex. 3 Ps S and B stock each has a value of $500 and a basis of $250
S merges into B.
Pursuant to a plan of reorganization, P receives B stock with a fair market value of $350 and $150 of cash 29
30. § 1.1502-13(f)(7), Ex. 3 Under §1.1502-13(f)(3), P is treated as receiving an additional $150 of B stock ($500 in all) and P takes a $250 basis in the B stock. See §358.
Immediately after the merger, $150 of the new B stock is treated as redeemed in a redemption treated as a distribution to which §301 applies. See § 302(d).
Ps basis in the B stock is reduced under § 1.1502-32 and § 301(c)(2) by $150.
Under § 1.302-2(c), proper adjustments are made to Ps basis in its B stock to reflect its basis in the B stock redeemed. 30
31. § 1.1502-13(f)(3) before [March 19, 2007 ?] P owns all of the stock of M and B, and M owns all of the stock of S with a basis of $25.
The FMV of S's assets and its stock is $100, and S sells all of its assets to B for $100 cash and liquidates.
The transaction is a D reorganization.
M is treated as receiving $100 of B stock
B is treated as redeeming the $100 of B stock deemed held by M 31
32. § 1.1502-13(f)(3) before [March 19, 2007 ?] An ELA is created in the $100 of B stock held by M ($25 starting basis under § 358 - $100 distribution = $75 ELA)
Because M ceases to hold any B stock, the ELA is treated as reducing Ps basis in B stock. § 1.302-2(c) Example 2.
See PLRs 9815050, 200810015 32
33. New § 1.1502-13(f)(7) Ex. 4 P owns all of the stock of M and B, and M owns all of the stock of S with a basis of $25.
The FMV of S's assets and its stock is $100, and S sells all of its assets to B for $100 cash and liquidates.
The transaction is a D reorganization.
M is treated as receiving $100 of B stock and a nominal share
B is treated as redeeming only the $100 of B stock deemed held by M 33
34. New § 1.1502-13(f)(7) Ex. 4 An ELA is created in $100 of B stock held by M ($25 starting basis under § 358 - $100 distribution = $75 ELA)
Because M ceases to hold the $100 of B stock, the ELA is treated as reducing Ms basis its nominal share of B stock. § 1.302-2(c) Example 3.
Because P holds all of the shares of B stock, M is treated as distributing the nominal share of B stock to P. 34
35. Questions The approach reflected in § 1.1502-13(f)(7), Ex. 4, has no effective dateis it retroactive to the effective date of the temporary regulations?
Are the results avoidable if M had owned some shares of B prior to the transaction?
The ELA in the shares deemed to be issued and then redeemed post-reorganization should transfer to the existing B shares that M continues to hold.
Are the results avoidable if M receives 1 share of B stock as consideration?
Why were results such as would occur in an actual redemption under Proposed § 1.302-5(a)(3) not considered as an acceptable way to address the basis in the shares treated as redeemed under § 1.1502-13(f)(3)?
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36. 36 Section 1504(a)(3) In general, if a corporation is included in a consolidated return and ceases to be a member of the consolidated group, then
Such corporation (and any successor corporation) may not be included in the consolidated return (or another consolidated return with the same common parent or a successor of such common parent) for 60 months
May reaffiliate sooner if permission is obtained from the Service
In many cases, permission is automatically granted pursuant to Rev. Proc. 2002-32 if certain representations can be made
The disaffiliation and subsequent consolidation has not provided and will not provide a benefit of a reduction in income, increase in loss, or any other deduction, credit, or allowance (a federal tax savings) that would not otherwise be secured or have been secured had the disaffiliation and subsequent consolidation not occurred
Takes into account the net tax consequences to all parties as well as the time value of money
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38. 38
39. 39
40. PLRs 201002015, 201002016, 201002017 [In the PLRs,] the disaffiliation and the reconsolidation
was not abusive, but rather resulted from the interaction of the five year requirements in section 1504(c)(2) and section 1504(a)(3)(A)
The PLRs waive the application of section 1504(a)(3)
Sub 3 and Sub 4 can join in filing a life-life consolidated return (PLR 201002015)
Corp A and Corp B can join in filing a life-life consolidated return (PLR 201002016)
Corp C and Corp D can join in filing a non-life consolidated return (PLR 201002017) 40
41. 41 PLR 201002002
42. 42 PLR 201002002
43. 43 NUBIL Recognized in an Affiliated Year
44. 44 Section 1504(a)(3)
