The U.S. Tax Court today released an opinion in a case of “first impression” with respect to identifying the appropriate net operating loss (NOL) in the consolidated return context. Specifically, the issue before the Tax Court was, as a matter of law, whether a consolidated group’s NOL subject to reduction under section 108(b)(2)(A) for its short tax year ending October 1, 1998, is: (1) the entire consolidated net operating loss (CNOL) of the consolidated group; or (2) a portion of the CNOL allocable to each member of the consolidated group.
The Tax Court held that when a member of a consolidated group has excluded COD income during a consolidated return year before the adoption of Reg. section 1.1502-28T (March 2004), the NOL subject to reduction pursuant to section 108(b)(2)(A) is the entire CNOL of the consolidated group. Marvel Entertainment LLC v. Commissioner, 145 T.C. No. 2 (July 21, 2015). Read the Tax Court’s 36-page opinion [PDF 131 KB]
The taxpayer was an affiliated group that filed consolidated returns. In late December 1996 certain member entities filed for bankruptcy (a Chapter 11 petition), and subsequently excluded cancellation of indebtedness (COD) income from their respective gross incomes under section 108(a)(1)(A) for the group’s short tax year ending October 1, 1998.
Pursuant to section 108(b)(2)(A), the taxpayer reduced each member entity’s allocable share of consolidated net operating loss (CNOL) by each member entity’s previously excluded COD income. The taxpayer carried forward into its successor affiliated group a CNOL of over $47 million and used this amount to offset income of the successor group for its tax years ending December 31, 2003 and 2004.
The IRS determined deficiencies for 2003 and 2004, arguing that section 108(b)(2)(A) required the 1998 tax attribute reduction to occur at the consolidated level—rather than at the individual entity. The issue before the Tax Court, thus, was the question concerning the NOL subject to reduction under section 108(b)(2)(A).
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.