Service rules attribute reduction under Sec. 108(b) on a consolidated basis.

• Author: Brown, Steve
• Position: IRS; Internal Revenue Code

Tax professionals should be aware of Field Service Advice (FSA) 9912007. It concludes that, if members of a consolidated group exclude discharge of indebtedness (COD) income under Sec. 108(a), the required attribute reduction under Sec. 108(b) must reduce the group's consolidated net operating loss (CNOL) as a tax attribute, even if no portion of the CNOL is attributable to the members with the excluded income.

The following example is provided in the FSA.

Example: P is the parent of B, which owns over 80% of C. P files a consolidated return that includes B, C and other group members. Several years before the year at issue, a number of substantial intercompany loans were made by P to B and, to a lesser extent, by B to C.

Thereafter, P, B and C joined in filing a Chapter 11 bankruptcy petition. A plan of reorganization was filed on behalf of the debtors and approved by the bankruptcy court. Under the plan, B and C merged into P. Additionally, the members' substantial intercompany debts were cancelled.

At issue is the taxpayer's treatment of the discharge of indebtedness from the plan of reorganization. Because B and C were discharged from their debts in a Title 11 case, they excluded their COD income under Sec. 108(a). They reduced only CNOLs attributable to B and C. B and C reduced their tax attributes for this amount in accordance with Sec. 108(b). Finally, P and B (i.e., the creditor members) claimed bad debt deductions for approximately the amount of discharge, which ultimately increased the group's CNOL carryforward by a like amount.

The taxpayer contends that the CNOL attributable to P and B (i.e., the group's creditor members) is not a tax attribute of B and C, respectively (i.e., the group's debtor members), and is not subject to Sec. 108(b) attribute reduction. Although there is not much authority on this subject, the taxpayer argued that the reference to tax attributes of "the taxpayer" in Secs. 108(b)(1) and 1017(a) clearly indicates that attribute reduction in a consolidated group is to be done on a member-by-member basis. In fact, the IRS had previously ruled on a Sec. 108(b) attribute reduction issue in Letter Ruling 9121017, using the same reasoning to arrive at the Conclusion that attribute reduction under Sec. 108(b) in a consolidated group is on a member-by-member basis. Of course, Letter Ruling 9121017 cannot be cited as precedent.

The FSA does not agree with this result. Although it acknowledges that each member of a...