United States

IRS win in Marvel may impact prior attribute reduction after COD event


Companies that filed consolidated tax returns including cancellation of debt (COD) income before Aug. 30, 2003, must continue to analyze the net operating loss (NOL) carryforwards and tax basis that survived the COD event. These companies typically confronted a then-uncertain tax question: should they reduce tax attributes (such as NOLs and tax basis) on a consolidated basis or a separate company basis? Using the separate company approach often resulted in preservation of significant amounts of NOLs or tax basis. Regulations effective for debt discharges occurring after Aug. 29, 2003, required adoption of the consolidated approach. Reg. section 1.1502-28T, subsequently replaced with Reg. section 1.1502-28.

Some companies still carry NOLs or tax basis preserved by the separate company approach or have claimed deductions for these items in open tax years. These companies continue to consider the potential effects a 2015 decision on their financial statements and tax returns.

The Tax Court’s decision in Marvel Entertainment v. Commissioner, 145 T.C. No. 2 (2015), held that the consolidated attribute reduction approach applied even before the 2003 regulations’ effective date. The taxpayer subsequently filed an appeal of this decision with the Second Circuit Court of Appeals.

The Tax Court’s Marvel decision represents precedential authority contrary to certain tax positions taken by companies adopting the seprate company approach. Companies that used the separate company approach to preserve NOLs or tax basis have accordingly been considering the financial statement and tax return ramifications of this decision. Certain events that have occurred since the COD event in question – such as acquisitions of companies, changes in management or information systems – may make this task more difficult. 


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