Carryback of post-acquisition consolidated NOL attributable to acquired corporation.

• Author: Packard, Pamela
• Position: Net operating losses

The final consolidated return regulations released July 2, 1999 (TD 8823) are well known among corporate tax practitioners for eliminating the separate return limitation year (SRLY) limit on pre-acquisition net operating losses (NOLs) of an acquired member when it overlaps with Sec. 382. However, these regulations may not be so well known for the change they made to the carryback of post-acquisition consolidated NOLs attributable to an acquired member.

Example: P, a profitable company, intends to acquire T in a tax-free corporate reorganization. T is a start-up company, believed to have high growth potential, but expected to continue to have substantial losses for the next several years. Because (for nontax reasons) P needs T to remain in a separate corporation, P can either acquire T's stock in a stock-for-stock B reorganization or a "reverse triangular" merger, or form a subsidiary to acquire T's assets in a "forward triangular" merger. In either event, P will file a consolidated return with T or the new subsidiary after the acquisition.

Because Sec. 382 will apply to P's acquisition of T, T's pre-acquisition NOLs will not be subject to the SRLY rules, regardless of whether T's stock or assets are acquired. However, if after the acquisition T's losses create a consolidated NOL (CNOL), the current benefit of the CNOL attributable to T will depend on whether P acquires T's stock or forms a new company to acquire T's assets.

Acquisition of T's stock: If P acquires T's stock, Sec. 381 is not applicable and the CNOL attributable to T is carried back to T's two preceding tax years (Regs. Sec. 1.1502-21(b)(2)(i)). However, this carryback will result in no tax benefit, as T had NOLs in those years.

Acquisition of T's assets: If a new corporation formed by P acquires T's assets, Sec. 381 applies and the CNOL attributable to the new subsidiary cannot be carried back to T (Sec. 381(b)(3)). However, under the final regulations, as a...