United States

Corporation’s attempt at avoiding tax attribute reduction rejected

IRS applied plain language of unified loss rule to stock purchase


The corporate taxpayer in Internal Legal Memorandum (ILM) 201550034 sought to preserve its tax attributes, items such as tax basis in assets, net operating loss (NOL) carryforwards, or tax credit carryforwards. It had been purchased out of a consolidated corporate group, and it was in a situation where the unified loss rule (ULR) of Reg. section 1.1502-36 required it to reduce its tax attributes. The taxpayer and the IRS disagreed as to the amount of attribute reduction required.

The ULR’s attribute reduction requirement is intended to make sure that a loss attributable to a member of a consolidated corporate group is not duplicated, but is allowable only once. Where a consolidated group sells the subsidiary’s stock and deducts a loss realized on the sale, the former subsidiary’s attributes may need to be reduced to prevent potential duplication of that loss for the buyer’s benefit (via, for example, depreciation, amortization, or use of NOLs)). The buyer and seller generally may choose how to allocate between them the benefit of the tax loss in question and the burden of any attribute reduction, thanks to an election available under the ULR available to the seller (under Reg. section 1.1502-36(d)(6)).

The seller did not make that election, so the taxpayer in the ILM bore the full burden of any attribute reduction. The amount of attribute reduction required under the ULR is based, in part, on the value of the sold corporation’s stock. The ULR defines “value” as “the amount realized, if any, or otherwise the fair market value.”

The corporation in the ILM argued that, in its case, special circumstances should permit it to use the fair market value of its stock as determined by a valuation report as its stock value for the purposes of the attribute reduction rule. The IRS disagreed. It concluded that the plain meaning of the ULR’s value definition controls, so the actual purchase price paid by the buyer and realized by the seller was the corporation’s stock value for purposes of the attribute reduction rule.

The ILM illustrates the risks of taking tax positions in conflict with the plain meaning of tax regulations. It also serves as a reminder that the election available under the ULR can be valuable, since it generally allows taxpayers to reduce or reallocate tax attribute reduction caused by the sale of a subsidiary from a consolidated group. 


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