Consolidated group’s NOL subject to reduction under section 108

NOL subject to reduction under section 108

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.


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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).

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