United States

Entire consolidated group can protect tax attributes post-bankruptcy


Loss corporations frequently incur an ownership change as a result of bankruptcy reorganizations under Chapter 11 (or similar case) of the Bankruptcy Code. Pursuant to section 382, such ownership changes result in limitations on the post-restructuring company's use of net operating losses (NOLs) and other tax attributes. Fortunately, sections 382(l)(5) and (l)(6) (L5 and L6, respectively) provide special rules to protect the NOLs and attributes of the post-restructuring loss corporation. The preservation of NOLs is an attractive option for taxpayers that anticipate taxable income upon emerging from bankruptcy. As taxable income is generated, the NOLs from the pre-bankruptcy years can reduce or eliminate the corporate tax liability. To this end, L5 provides favorable rules that allow a loss corporation to preserve its NOLs and other tax attributes without limitation, presuming certain conditions are met. Furthermore, an L6 election will subject the NOLs and attributes to limitation under section 382, but under an alternative computation that accounts for the taxpayer's increased value attributable to the cancelled debt following the change in ownership.

When a loss corporation is a member of a consolidated group, the section 382 rules within the consolidated regulations generally apply to the group on a single entity basis.1 However, uncertainty exists as to how L5 and L6 apply when a member of a consolidated group is not a party to the bankruptcy. In PLR 201435003, the IRS ruled that a consolidated group that incurred an ownership change as part of a bankruptcy reorganization would be treated as a single entity, including the non-debtor subsidiaries. Thus, the NOLs and attributes of the entire group were eligible for L5 and L6 treatment, including the NOLs and attributes of the affiliates that were not included in the bankruptcy proceedings.

In the ruling, the IRS provides welcome clarity on how the section 382 rules apply to non-bankrupt members of a consolidated group. Taxpayers should consult their tax advisors for more information on how the section 382 rules may apply to a loss corporation undergoing or contemplating bankruptcy proceedings.

1 Reg. section 1.1502-91.


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