No extended NOL carryback for successor of TARP recipient
No extended NOL carryback for successor of TARP recipient
Chief Counsel Advice 201605018
In Chief Counsel Advice (CCA), IRS concluded that a taxpayer who acquired a Troubled Asset Relief Program (TARP) recipient in a statutory merger was prevented by the Code Sec. 381 attribute carryover rules from electing the extended net operating loss (NOL) carryback in Code Sec. 172(b)(1)(H).
Background—net operating loss carrybacks. Code Sec. 172(a) allows taxpayers a net operating loss deduction (NOLD) in computing their income tax liability. A taxpayer’s NOLD for a tax year equals the aggregate of its NOL carrybacks and NOL carryovers to that year.
Code Sec. 172(b)(1)(A) provides the general rule that an NOL for any tax year is an NOL carryback to each of the two tax years preceding the loss year and an NOL carryover to each of the 20 tax years following the loss year. Code Sec. 172(b)(1)(H) allows a taxpayer to elect an extended carryback period (three to five years) for one “applicable NOL,” generally an NOL generated in 2008 or 2009. This extended carryback election was added to the Code by the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA); hence it is often referred to as a WHBAA election.
The WHBAA election is not available to certain taxpayers, including any taxpayer that received benefits under TARP. (WHBAA Sec. 13(f))
Background—carryover of tax attributes in certain corporate acquisitions. Code Sec. 381 provides a set of rules for the carryover of tax attributes in certain corporate acquisitions. Code Sec. 381(a) lists the types of acquisitions governed by the section, while Code Sec. 381(c) contains a list of items of the acquiree corporation that the acquiring corporation succeeds to and takes into account.Code Sec. 381(a) includes statutory mergers under Code Sec. 368(a)(1)(A).
Where Code Sec. 381(a) does not apply because the item or tax attribute is not listed in Code Sec. 381(c), no inference is to be drawn as to whether the item or attribute is to be taken into account by the successor corporation. (Reg. § 1.381(a)-1(b)(3))
Case law provides that tax attributes carry over to the successor corporation in situations where the reorganization is in the form of a statutory merger. (Metropolitan Edison Co., (1939) 22 AFTR 30722 AFTR 307) In Metropolitan Edison , the court noted that, in a statutory merger, the corporate personality of the transferor is drowned in that of the transferee. In Dover, (2004) 122 TC 324122 TC 324, the Court said that “in any corporate amalgamation involving the attribute carryover rules of Code Sec. 381, the surviving or recipient corporation is viewed as if it had always conducted the business of the formerly separate corporation(s) whose assets are acquired by the surviving corporation.”
The Explanation of the Staff of the Joint Committee on Taxation (Blue Book) for the WHBAA contains an example of a taxpayer with an NOL in 2008 that, in 2009, joins an affiliated group that has a member in which the federal government acquired an equity interest pursuant to TARP. The Blue Book concludes that the taxpayer may not utilize the extended carryback rules under Code Sec. 172(b)(1)(H) with regard to the 2008 NOL.
Reg. § 1.1502-21T(b)(3)(v)(E), Example 3, illustrates a case in which the X group, which included subsidiary T, made an extended carryback election for its 2008 consolidated net operating loss (CNOL), a portion of which was attributable to T. At the end of 2008, P acquired all of the stock of T from X. For 2009, the P group sustained a CNOL, a portion of which was attributable to T. P made the extended carryback election for its 2009 CNOL. The example concludes that the extended carryback election by the X group for 2008 (which includes a portion of the CNOL attributable to T) does not disqualify the P group from making the extended carryback election for its 2009 CNOL.
Facts. FP owns all of the stock of Taxpayer. Taxpayer is a holding company that is the common parent of a consolidated group (the “Taxpayer Group”).
During Year 1, FP acquired all of the stock of Target in a taxable transaction. FP then caused Target to merge with and into Taxpayer, pursuant to Code Sec. 368(a)(1)(A), with Taxpayer surviving (the “merger”).
In an earlier year, the federal government acquired shares of preferred stock and warrants in Target in exchange for cash pursuant to the Emergency Economic Stabilization Act of 2008 (EESA) (“TARP proceeds,” and Target is sometimes hereinafter referred to as a “TARP recipient”).
In Year 2, Taxpayer, on behalf of the Taxpayer Group, made the extended carryback election with respect to the CNOL incurred in its Year 1 consolidated return year. IRS challenged this carryback.
2014 Legal Advice Issued by Field Attorneys. IRS, in a short Legal Advice Issued by Field Attorneys (LAFA; Legal Advice Issued by Field Attorneys 20144601F, see Weekly Alert ¶ 38 11/26/2014) looked at the above facts and said that Target was a TARP recipient by reason of it receiving payment for its preferred stock with warrants from the U.S. Treasury under TARP. As a TARP recipient, Target was not eligible for the extended NOL carryback under Code Sec. 172(b)(1)(H).
As a result of the statutory merger, Taxpayer was a successor to Target, stepped into the shoes of Target, and assumed its tax attributes. As the successor to a TARP recipient, Taxpayer succeeded to the characterization as a TARP recipient and was therefore not eligible for the extended NOL carryback under Code Sec. 172(b)(1)(H).
Chief Counsel agrees with LAFA. IRS has now, in a CCA, responded to the taxpayer’s arguments and has come to the same conclusion as that in the LAFA—namely that Taxpayer was prohibited from making the extended carryback election.
Taxpayer asserted that Code Sec. 381(c) attributes are found in the Code, and that TARP status is not part of the Code. It also argued that the attributes listed in Code Sec. 381(c) and analogous ones (based on court cases and published or private rulings) focus on specific tax return items and do not support a drastic change to the acquiring corporation’s own tax characteristics as a result of a merger.
IRS noted that the ’54 Senate report that accompanied the promulgation of Code Sec. 381(c) directly supported the rule, in Reg. § 1.381(a)-1(b)(3), that for a tax attribute not listed in Code Sec. 381(c), no inference is to be drawn as to whether the attribute is to be taken into account by the successor corporation.
IRS cited that same Senate report and said that Congress made it clear that a corporation could not eliminate an unwanted tax attribute by merging into another corporation. It said that Code Sec. 381(c) “makes it difficult to escape the tax consequences of the law by means of a legal artifice such as liquidation and reincorporation or merger into another corporation.”
Taxpayer’s contention that tax attributes to which an acquiring corporation succeeds in a transaction to which Code Sec. 381(a) applies are limited to those items found in Code Sec. 381(c) is contrary to the legislative history, case law, and historic practice. The absence of any specific language in EESA and WHBAA regarding successors in transactions to which Code Sec. 381(a) applies is far from unusual.
Taxpayer’s assertion that the attributes to which an acquiring corporation succeeds are only the specific tax return items listed in Code Sec. 381(c) and do not support a “drastic change to the acquiring corporation’s own tax characteristics as a result of a merger,” is not supported by the Code.
If Taxpayer was correct that TARP-recipient status is not a tax attribute to which a transferee succeeds in a Code Sec. 381(a) transaction, then the making of the extended carryback election that is expressly prohibited by the statute could be easily avoided. For example, assume a foreign corporation owns two calendar-year U.S. corporations, X and Y. X was a TARP recipient, but Y was not. Y paid a substantial amount of federal income taxes in years prior to 2009 but has sold off most of its assets and operates only a small business. At the beginning of 2009, it is anticipated that X will sustain substantial operating losses in the coming year. For the purpose of avoiding the prohibition on extended carrybacks by TARP recipients, X merges into Y at the beginning of 2009 in a transaction qualifying under Code Sec. 381(a). As expected, X’s former operations (conducted by Y during 2009) generate substantial losses, and Y makes an extended carryback election for its 2009 NOL under the theory that X’s status as a TARP recipient does not taint Y’s ability to make the extended carryback election.
Finally, Taxpayer argued that Reg. § 1.1502-21T(b)(3)(v)(E), Example 3, supported its position. It said that IRS’s allowing a successor corporation to make an extended carryback election when the predecessor corporation had also made the extended carryback election in a prior year, in that reg example, negates the application of TARP recipient status to the successor of a TARP recipient.
IRS disagreed. It said that WHBAA provides that the extended carryback election is not available to any taxpayer which at any time in 2008 or 2009 was or is a member of the same affiliated group as a TARP recipient. In other words, although Reg. § 1.1502-21T(b)(3)(v)(E), Example 3 tolerates, under certain circumstances, effective extended carryback elections of NOLs for more than one tax year, it does not allow such an election, under any circumstances, by a TARP recipient or even by a corporation that was affiliated with a TARP recipient at any time in 2008 or 2009.
References: For the election of 3-to-5-year carryback period for 2008 or 2009 NOLs, see FTC 2d/FIN ¶ M-4355 ; United States Tax Reporter ¶ 1724.315 ; TaxDesk ¶ 356,023 ; TG ¶ 17302 .