United States

Second Circuit affirms IRS victory in Marvel Entertainment

Consolidated section 108 attribute reduction affirmed for pre-2003

TAX ALERT  | 

The 2nd U.S. Circuit Court of Appeals has affirmed the United States Tax Court’s prior decision in the Marvel Entertainment case. The case addresses what was once a gray area of tax law—an area now governed by regulations that became effective Aug. 30, 2003. The decision affects companies that, like Marvel Entertainment, reported more favorable tax results than the regulations now permit.

Those companies included cancellation of debt income realized before Aug. 30, 2003, in a consolidated federal income tax return. They took the beneficial view that they would reduce tax attributes (such as net operating losses (NOLs) and tax basis) on a separate company basis rather than on a consolidated basis. Using the separate company approach often resulted in preservation of significant amounts of NOLs or tax basis.  

Regulations now require use of the consolidated attribute reduction approach. The Marvel Entertainment decisions hold that consolidate attribute reduction was proper even before the issuance of governing regulations in 2003.

Some companies still carry NOLs or tax basis preserved by applying the separate company approach or have claimed deductions for these items in open tax years. These companies should consider the potential effects of the recent Marvel Entertainment decision on their financial statements and tax returns.

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