Tax Court denies NOL carryforwards under SRLY rules
In HBM Holdings Co. v. Comm’r, 167 T.C. No. 6 (2026), the Tax Court held that roughly $29.6 million of claimed NOL deductions were unavailable under the SRLY rules. This case illustrates that a corporate restructuring designed to augment or preserve NOL utilization should be planned with care and attention to detail, as the ability to claim a liquidated subsidiary’s NOLs can be affected by the choice or ordering of restructuring steps.
A parent corporation, HBM Holdings, succeeded to about $108 million of NOL carryforwards when its subsidiary liquidated in 2018. Its consolidated corporate group claimed approximately $29.6 million of federal NOL deductions on subsequent tax returns. The IRS claimed that the SRLY rules prevented those NOLs from sheltering $29.6 million of taxable income, and the Tax Court agreed.
Value of the NOLs at stake
An NOL deduction is, in simple terms, a deduction for a prior year's losses taken against the current year's profits, governed by section 172 of the tax code. The ability to claim NOL deductions at issue likely would have saved HBM Holdings over $6 million of tax liability. A central appeal of the consolidated return regime is that one group member’s losses generally can shelter other members’ income under Reg. sections 1.1502-11 and 1.1502-21. However, multiple tax rules potentially limit this sort of NOL utilization benefit.
One of those rules is the section 382 limitation, generally applicable after an “ownership change” as defined under section 382. No section 382 limitation was at stake in HBM Holdings.
Where section 382 doesn’t apply, the SRLY rules under Reg. sections 1.1502-1(f)(1) and 1.1502-21(c) generally prevent a consolidated corporate group from importing losses a corporation generated before it joined the group and using them against the income of other members. A SRLY loss deduction generally is limited to the extent of the loss member's own cumulative contribution to consolidated taxable income — a running “register” measured corporation by corporation. See Reg. section 1.1502-21(c)(1)(i).
How the consolidated corporate group came together
A multi-year sequence of steps drove the result in HCM Holdings. For those interested in the tax planning details, it is worth walking through a part of that sequence.
HBM Holdings, then an S corporation, was formed in 2014 as a holding company for multiple subsidiaries. One of its subsidiaries was Delavau Holdings (Delavau), a corporation with NOL carryovers. HBM Holdings revoked its S corporation election effective July 1, 2018. Delavau filed a check-the-box election to be disregarded as separate from HBM effective July 1, 2018, which produced a deemed liquidation of Delavau into HBM at the close of business on June 30, 2018. In that liquidation, HBM Holdings succeeded to Delavau's NOL carryovers of approximately $108 million.
From July 1, 2018, forward, HBM Holdings and its subsidiaries filed consolidated federal income tax returns as a newly formed affiliated group. During those years, HBM Holdings had no separate taxable income of its own. The group nevertheless claimed deductions based on the NOLs HBM Holdings inherited from Delavau.
HBM Holdings’ failed arguments
The SRLY regulations contain an exception known as the "lonely parent” rule. NOLs from the separate return years of a lonely parent—the corporation that is now the consolidated group’s common parent—generally qualify for this favorable exception under Reg. section 1.1502-1(f)(2)(i).
HBM Holdings argued that the lonely-parent exception should cover the NOL carryovers it inherited from Delavau. However, the court held that the exception applies only to the separate return years of the common parent itself, not to the separate return years of a predecessor of the common parent. In other words, HBM Holdings was the lonely parent; Delavau, whose separate years generated the losses, was not.
HBM Holdings countered by arguing that Delavau could not be a predecessor because no consolidated group existed on the date of the deemed liquidation. The court rejected that argument, noting that the definition of “predecessor” in Reg. section 1.1502-1(f)(2)(i) contains no requirement that a predecessor be a member of the same consolidated group as a successor corporation.
Finally, HBM Holdings argued that the SRLY rules should not disallow its NOL deductions because the relevant corporate group members that joined the consolidated group moved together as a SRLY subgroup. The Tax Court did not accept that argument either. The court noted that a SRLY subgroup is composed of members who joined the affiliated group at the same time and were members of the same former group, and that the regulations’ term “former group” refers to another affiliated group (as defined under section 1504). See Reg. sections 1.1502-1(a) and 1.1502-21(c)(2). Because HBM Holdings previously was an S corporation, it could not have been a member of an affiliated group.
Second-guessing the consolidated group structuring
The HBM Holdings group might have been able to maintain deductions for the NOLs stemming from Delavau if the consolidated group structuring had proceeded in a different manner.
Under Reg. section 1.1502-21(c)(1)(i), even a SRLY-limited loss can be used against the loss member's own contribution to consolidated taxable income. However, the successor to Delavau’s losses, HBM Holdings, was a holding company that did not generate its own taxable income rather than a profitable operating corporation. Therefore, HBM’s consolidated group structure placed Delavau’s NOL carryovers in a corporation without income for those losses to offset.
Additionally, electing disregarded entity status for Delavau effective July 1, 2018, placed the deemed liquidation at the close of business one day before the HBM Holdings consolidated group came into existence. See Reg. sections 301.7701-3(c)(1)(iii), -3(g)(1)(iii) and -3(g)(3)(i). HBM Holdings therefore succeeded to the Delavau NOLs while it was still an S corporation, and not while it was part of any SRLY subgroup.
Conclusion: Impact of restructuring on NOL utilization
The HBM Holdings case demonstrates that structuring steps among a group of related companies should be carefully considered when NOL carryover utilization is a goal. It typically is helpful to consider whether and how the SRLY and the section 382 limitations would apply to a draft restructuring step plan while the step plan can still be changed. The choice and ordering of restructuring steps can dictate whether or not the SRLY rules prevent a consolidated corporate group from using NOL deductions.
Consulting with your tax advisor regarding any proposed group restructurings can help map out tax consequences and their potential impact on any anticipated tax claims.
