United States

New rules for consolidated group NOL carryback waivers

Elections can implement agreements between buying and selling groups

TAX ALERT  | 

Temporary and proposed regulations for consolidated groups of corporations that apply net operating loss (NOL) carrybacks and carryovers have been published by Treasury Department and the IRS. The temporary regulations allow certain consolidated corporate groups to waive NOL carryback to all or part of an otherwise available NOL carryback period. 

These waivers can help make sure that, as between one consolidated corporate group that acquired a corporation, and another consolidated group that sold it, the tax benefits of NOL carrybacks are claimed in accordance with the agreement between the acquiror and the seller. This Alert discusses those new temporary regulations (T.D. 9900 (July 8, 2020)). We discuss the proposed regulations (REG-125716-18) in another Alert. 

Background: NOL carryback rules under the CARES Act 

Corporations may carry NOLs back to earlier years and obtain Federal income tax refunds of under provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted in 2020. The carryback period is five years. NOLs arising in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021 are eligible for carryback. Many corporations had already filed Federal income tax returns for some of these years prior to the March 27, 2020 enactment of the CARES Act. 

NOL carrybacks following consolidated corporation acquisitions 

Whether and to what extent NOL carrybacks can be claimed after one consolidated corporate group has acquired a corporation from another hinges on a number of considerations. 

An initial consideration is whether an NOL carryback is permitted at all. There are special limitations to consider where an acquiror consolidated corporate group may be able to carry an NOL attributable to the acquired corporation back to a year when it was a member of a seller consolidated group. These special rules may limit, eliminate, or even enhance the availability of NOL carrybacks, depending on the circumstances. For further discussion of these rules with some examples, please see our Alert Carrying back consolidated net operating losses under the CARES Act

If the tax rules would permit an NOL carryback to a tax year of the seller consolidated group, the next question is: who owns the potential NOL carryback benefit – the acquiror group or the seller group? Acquisition agreements often specify how any potential NOL carryback claims of the acquired corporation should be handled. However, many recent acquisition agreements did not spell this out, given that tax rules enacted in December 2017 but superseded in March 2020 by the CARES Act prohibited NOL carrybacks for corporations other than farming corporations and property and casualty insurance companies. It typically is prudent to consult with counsel regarding the parties’ rights under the relevant acquisition agreement. In many cases, it is helpful to confer and agree with the other party to the acquisition regarding whether NOL carrybacks should be claimed. For further discussion of this issue, please see our Alert Private equity and the five-year NOL carryback: Who owns the benefit?

What if the parties’ agreement and the acquisition’s economics dictate that no NOL carryback claim should be filed, even though the tax rules would permit the acquired corporation to claim a carryback to a year when it was a member of the selling corporate group? That’s when the NOL carryback waivers authorized under the new temporary regulations come in. A carryback waiver can help make sure that the potential federal income tax benefit of NOL carryforwards remains with the acquiror. 

Temporary regulations re: NOL carryback waivers 

The temporary regulations authorize NOL carryback waivers that apply only to NOLs attributable to a corporation acquired by one consolidated group from another. These elections, generally called split waiver elections, leave any NOLs attributable to other group members available for carryback. 

A split waiver election generally must be made by filing a statement with the acquiring group’s original, timely filed Federal income tax return for the year in which the NOL arises. However, the split waiver election may be made on a statement filed with an amended Federal income tax return if the filing deadline for the acquiring group’s Federal income tax return for the year in which the NOL arose is not at least 150 days after the applicable statutory amendment date (i.e., the deadline is before Aug. 24, 2020, which is 150 days after the CARES Act’s March 27, 2020 enactment date). 

Example 1: 

New Parent corporation (NP) acquired 100% of Target corporation’s (T’s) stock from Old Parent Corporation (OP) Oct. 31, 2018. NP group and OP group each end their tax year on December 31 annually. NP group incurred NOLs attributable to T in its years ended Dec. 31, 2018 and Dec. 31, 2019 (the T NOLs). The Tax Code prohibited carrybacks of the T NOLs until March 2020, when the CARES Act authorized carrybacks of the T NOLs to each of the five years preceding the years in which they arose. 

Carrying the T NOLs back would provide tax benefits to OP group. NP and OP agree that the T acquisition agreement, does not require NP to carry T NOLs back, but instead allows NP to carry T NOLs forward to benefit NP group. 

NP has filed its Federal income tax return for the year ended Dec. 31, 2018, which was due in 2019) but has not yet filed its return for the year ended Dec. 31, 2019, which is due after Aug. 23, 2020). 

NP will make a split waiver election waiving the carryback of the T NOL that arose during the tax year ended Dec. 31, 2018 by filing an election statement together with an amended Federal income tax return for that year. NP will make a split waiver election waiving carryback of the T NOL that arose during the tax year ended Dec. 31, 2019 by filing an election statement together with its original, timely filed Federal income tax return for the year ended Dec. 31, 2019. Neither election will affect NP group’s ability to carry back NOLs attributable to members of the NP group other than T.   

A different type of split waiver election (an extended spit waiver election) may be available in the special situation where the CARES Act extended a corporation’s permitted carryback period. As noted above, farming corporations and property and casualty insurance companies generally had a two year NOL carryback period extended to five years by the CARES Act. This election affects only the extended carryback period for an acquired member's attributed loss. 

Example 2:

Assume the situation is the same as in Example 1 above, except that T is a farming corporation. The Tax Code in effect during 2018 and 2019 permitted carrybacks of the T NOLs only to the two years preceding the year in which they arose. In March 2020, the CARES Act authorized carrybacks of the T NOLs to each of the five years preceding the years in which they arose. 

NP may now make an extended split waiver election waiving the carryback of the T NOL that arose during the tax year ended Dec. 31, 2018 to years preceding that year by more than two years. NP also may will make a split waiver election waiving carryback of the T NOL that arose during the tax year ended Dec. 31, 2019 to years preceding that year by more than two years by filing an election statement together with its original, timely filed Federal income tax return for the year ended Dec. 31, 2019. Neither election will affect NP group’s ability to carry back NOLs attributable to members of the NP group other than T.   

T has two taxable years during calendar 2018 in each of the above examples. Each of these taxable years is treated similarly to a full 12-month year when computing NOL carryback potential. For additional discussion and examples addressing the impact of short years when identifying carryback-eligible years, please see our Alert CARES Act delivers five-year NOL carryback to aid corporations.  

Conclusion 

Multiple considerations affect whether and to what extent NOL carrybacks can be claimed after one consolidated corporate group has acquired a corporation from another. New temporary regulations provide for NOL carryback waiver elections that can implement these NOL carryback determinations. 

These carryback waiver elections generally are made by filing a statement together with the tax return for the year in which the NOL arose. Because of the retroactive nature of the CARES Act’s NOL carryback rules, carryback waiver elections can in some cases be made with an amended tax return. 

The temporary regulations are effective July 2, 2020, apply to NOLs arising in years ending after July 2, 2020, and will expire on July 3, 2023. Taxpayers may apply them to any NOLs arising in a taxable year beginning after Dec. 31, 2017. Taxpayers considering NOL carrybacks or waiving NOL carrybacks should consult with their tax advisors. 

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