The IRS has released temporary regulations (T.D. 9900
) allowing taxpayers that file a consolidated return to waive all or part of the pre-acquisition portion of the carryback period with respect to an acquired new member’s extended, five-year net operating loss (NOL) carryback under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, when such member had previously been part of another consolidated group.
The temporary regulations follow past guidance issued by the IRS in response to NOL carryback legislation, and provide a pair of “split-waiver” elections to permit taxpayers that file a consolidated corporate income tax return to waive either the default and extended carryback periods, or just the extended carryback period, for an acquired member. The guidance is issued specifically with regard to consolidated NOLs (CNOLs) arising as a result of the five-year carryback period provided by the CARES Act, but is issued in a form to have broader applicability should Congress amend Section 172 in the future to permit other extended loss carrybacks. The elections will be particularly helpful for consolidated groups with M&A deals that closed post-TCJA and did not provide for the resolution of NOL carrybacks within the stock purchase agreement.
The TCJA originally eliminated net operating loss (NOL) carrybacks for most corporations for tax years ending after 2017. The exceptions were for non-life insurance companies (i.e. property and casualty (P&C) insurance companies) and for certain farming losses. The CARES Act changed those rules to provide that NOLs arising in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021, may be carried back five years (the “amended carryback rules” under the temporary regulation’s definitions). NOLs arising in a fiscal tax year beginning in 2017 and ending in 2018 can be carried back two years, fixing a technical error in the TCJA.
Taxpayers can elect to waive the carryback altogether or to forgo applying the carryback to a Section 965 year but cannot otherwise elect any alternate carryback period. NOLs will be carried back to the earliest available year first. The CARES Act also temporarily suspends the TCJA provision that limited NOL usage to 80% of taxable income. The limit will not apply for tax years beginning before Jan. 1, 2021. For consolidated groups, this meant that absent additional guidance, the entire CNOL generated during the CARES Act amended carryback rules period either had to be carried back five tax years (on a member-by-member basis) or could be waived in its entirety for such carryback period.
Prior to the CARES Act, Congress provided amended carryback rules for NOLs in 2002 in response to the economic downturn following 9/11 and again in 2009 in response to the fiscal crisis. In both instances, the IRS responded with guidance for consolidated groups addressing the situation where a new member joins a consolidated group from an old consolidated group and has an allocable portion of the new consolidated group CNOL that otherwise carries back to the old consolidated group. The guidance provided taxpayers with a “split-waiver election” to only waive the CNOL carryback for electing new members to corresponding old consolidated group tax years. The current temporary regulations follows the tenor of the prior guidance for split-waiver elections.
New split-waiver guidance
The temporary regulations address the present availability of a split-waiver election but are worded broadly enough to have future applicability if Congress alters the NOL carryback period again. The fact pattern at issue is when an “acquiring group” has acquired a former member of a prior consolidated group and thereafter generates a CNOL where a portion of that CNOL is allocable to that acquired member and where the carryback rules have been amended (e.g. the CARES Act provision that changed regular carrybacks from zero to five years). The temporary regulations provide two split-waiver election options to such acquiring group.
The first option is an amended statute split-waiver election. On a year-by-year basis, on a timely filed original return, an acquiring group may elect to waive both the default and extended carryback periods for an acquired member. Thus, suppose a calendar year target corporation was a member of a consolidated group and is acquired by a new group in June of 2018. The new group then generates a CNOL in 2018, 2019 and/or 2020, a portion of which is attributable to the target. If no election is made, the attributable NOL must be carried back five tax years to the old group’s 2014, 2015 and/or 2016 tax years. If the amended statute split-waiver election is made for each such year, the portion of the CNOL attributable to the target corporation is not carried back for either the five years provided by the CARES Act or the default period (zero years under TCJA). Thus, such NOLs only carry forward. This election, in particular, is useful for M&A deals that closed post-TCJA and did not provide for the resolution of NOL carrybacks within the stock purchase agreement.
The second option is an extended split-waiver election. On a year-by-year basis, on a timely filed original return, an acquiring group may elect to waive only the extended carryback periods for an acquired member. Consider again the scenario described above, but with a P&C insurance company as the target corporation. If no election is made, the attributable NOL must be carried back five tax years to the old group’s 2014, 2015 and/or 2016 tax years. If the extended statute split-waiver election is made for each such year, the portion of the CNOL attributable to the target corporation is not carried back for the five years provided by the CARES Act, but is carried back for the default period, which is two years under Section 172 for P&C insurance companies. As a result, attributable CNOLs are carried back to the old group’s 2017 and 2018 tax years and/or the new group’s 2018 tax year.
Next steps and important due dates
The temporary regulations are meant to be broad enough to not only address CARES but have flexibility if Congress makes future Section 172 amendments. Taxpayers should be aware of three, relevant effective date provisions. The changes generally take effect for CNOLs in tax years ending after July 2, 2020. However, taxpayers may apply the rules retroactively to any CARES Act CNOLs. In such event, taxpayers have until Nov. 30, 2020 to make the elections on an amended return. The elections may also be made on an amended return within 150 days after the date future legislation amending the NOL carryback rules goes into effect, provided that the timely filed, original return due date does not fall within that period. The election may be very important for groups with M&A deals that closed after TCJA was enacted and don’t provide any resolution for carryback issues. Affected taxpayers should analyze the rules and be prepared to amend returns or make the election on an original return by the required timeframes.
For more information contacts:
Washington National Tax Office
+1 202 521 1563
Washington National Tax Office
+1 202 521 1503
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