The IRS has issued temporary regs that permit consolidated groups (that acquire new members that were members of another consolidated group) to elect to waive all or part of the pre-acquisition portion of an extended carryback period under the Code Sec. 172 net operating loss (NOL) rules for certain losses attributable to the acquired members. The temporary regs respond to the enactment of section 2303 of the CARES Act, which retroactively provided that an NOL arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, must be carried back to each of the five taxable years preceding the taxable year in which the NOL arises.
Background—NOLs in general.
For purposes of Code Sec. 172, an NOL equals the excess of a taxpayer’s deductions allowed by chapter 1 of the Code over the taxpayer’s gross income, computed with the modifications specified in Code Sec. 172(d). (Code Sec. 172(c))
For a taxable year beginning before January 1, 2021, Code Sec. 172(a)(1) allows as a deduction an amount equal to the aggregate of the NOL carryovers and carrybacks to such year.
Background—Tax Cuts and Jobs Act amendments to Sec. 172.
Prior to the enactment of the CARES Act, Code Sec. 172 was most recently amended by the Tax Cut and Jobs Act (PL 115-97, TCJA). In relevant part, section 13302(b) of the TCJA amended Code Sec. 172(b) to generally prohibit the carryback of NOLs arising in taxable years beginning after December 31, 2017 (post-2017 NOLs).
The TCJA also provided limited exceptions to the general carryback prohibition by amending Code Sec. 172(b)(1)(B) and Code Sec. 172(b)(1)(C)(i) to provide that farming losses (within the meaning of Code Sec. 172(b)(1)(B)(ii)) and losses incurred by insurance companies (as defined in Code Sec. 816(a)) other than life insurance companies (non-life insurance companies), respectively, must be carried back to each of the two taxable years preceding the taxable year of the loss.
Therefore, prior to enactment of the CARES Act, taxpayers generally could not carry back post-2017 NOLs to prior taxable years. (Preamble to TD 9900)
Background—CARES Act amendments to Sec. 172.
Sec. 2303(b) of the CARES Act added Code Sec. 172(b)(1)(D). This provision contains an additional exception (referred to below as the amended carryback rules and defined at Reg. §1.1502-21T(b)(3)(ii)(C)(2)(iv)) to the general prohibition of NOL carrybacks.
Unless a taxpayer waives the carryback period (discussed below), Code Sec. 172(b)(1)(D) provides that an NOL arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, must be carried back to each of the five taxable years preceding the taxable year in which that NOL arises (five-year carryback period).
Except as otherwise discussed below, Code Sec. 172(b)(2) requires taxpayers to carry the entire amount of such NOL back to the earliest taxable year of that five-year carryback period.
Code Sec. 172(b)(2) also provides that the portion of the NOL that must be carried to each successive taxable year in the five-year carryback period equals the amount, if any, that was not used in the preceding taxable years to which the NOL was carried.
Code Sec. 172(b)(1)(D)(i)(II), as added by section 2303(b)(1) of the CARES Act, further provides that the exceptions to the prohibition of NOL carrybacks regarding farming losses and non-life insurance companies do not apply to NOLs that are subject to the five-year carryback period. See Code Sec. 172(b)(1)(B)(i) (regarding farming losses) and Code Sec. 172(b)(1)(C)(i) (regarding non-life insurance companies).
Therefore, farming losses and losses incurred by non-life insurance companies arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, are carried back five years instead of two years. (Code Sec. 172(b)(1)(D)(i)(II))
Background—election to waive carryback under Sec. 172(b)(3).
Code Sec. 172(b)(3) permits a taxpayer entitled to a carryback period under Code Sec. 172(b)(1) to make, with respect to an NOL for any taxable year, an irrevocable election to relinquish the carryback period. A taxpayer generally must make this election (i) in such manner as may be prescribed by the IRS, and (ii) by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the NOL for which the election is to be in effect.
However, solely with regard to NOLs arising in a taxable year beginning in 2018 or 2019, Code Sec. 172(b)(1)(D)(v)(II), as added by section 2303(b)(1) of the CARES Act, provides a special rule that requires elections to waive the carryback period for such NOLs under Code Sec. 172(b)(3) be made no later than the due date (including extensions of time) for filing the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020.
Background—consolidated return regs.
Reg. §1.1502-21(a) defines the consolidated net operating loss (CNOL) deduction for any consolidated return year as “the aggregate of the net operating loss carryovers and carrybacks to the year,” i.e., (i) CNOLs of the consolidated group, and (ii) any NOLs of the group’s members arising in separate return years.
A CNOL is, for a consolidated return year, the excess of a consolidated group’s deductions over the group’s gross income, as determined under Reg. §1.1502-11(a) (without regard to any CNOL deduction). (Reg. §1.1502-21(e))
Background—general rules regarding NOL carryovers and carrybacks.
The NOL carryovers and carrybacks to a taxable year are determined under the principles of Code Sec. 172 and Reg. §1.1502-21. Thus, losses permitted to be absorbed in a consolidated return year generally are absorbed in the order of the taxable years in which they arose, and losses carried from taxable years ending on the same date, and which are available to offset consolidated taxable income for the year, generally are absorbed on a pro rata basis. (Reg. §1.1502-21(b)(1))
If any percentage of the CNOL that is attributable to a member (determined pursuant to Reg. §1.1502-21(b)(2)(iv)(B)) may be carried to a separate return year of the member, the amount of the CNOL that is attributable to the member is apportioned to the member and carried to the separate return year. (Reg. §1.1502-21(b)(2)(i))
If carried back to a separate return year, the apportioned loss may not be carried back to an equivalent, or earlier, consolidated return year of the group. (Reg. §1.1502-21(b)(2)(i)
Background—general waiver election to relinquish entire carryback.
Reg. §1.1502-21(b)(3)(i) permits a consolidated group to make an irrevocable election under Code Sec. 172(b)(3) to relinquish the entire carryback period with respect to a CNOL for any consolidated return year (general waiver election).
When making this general waiver election for a consolidated return year, a consolidated group cannot make this election separately for a particular member. (Reg. §1.1502-21(b)(3)(i))
Rather, the consolidated return regulations provide only a narrowly scoped “split-waiver election” (described below) that a consolidated group can make solely with respect to one or more members that previously were members of another group. (Reg. §1.1502-21(b)(3)(i))
A general waiver election must be made in a separate statement filed with the group’s Federal income tax return for the consolidated return year in which the NOL arises. (Reg. §1.1502-21(b)(3)(i))
Background—split-waiver election.
A consolidated group (acquiring group) that acquires a new member (acquired member) that was a member of another consolidated group (former group) may make an irrevocable election to relinquish, with respect to all CNOLs of the acquiring group that are attributable to the acquired member, the portion of the carryback period for which the acquired member was a member of a former group (split-waiver election). (Reg. §1.1502-21(b)(3)(ii)(B))
If an acquiring group makes a split-waiver election for a consolidated return year, the portion of the acquiring group’s CNOL attributable to the acquired member for which the election is made will not be carried back to a former group. (Reg. §1.1502-21(b)(3)(ii)(B))
Unlike a general waiver election, a split-waiver election is not a yearly election, but rather applies to all CNOLs attributable to an acquired member that otherwise would be subject to a carryback to a taxable year of a former group under Code Sec. 172. (Reg. §1.1502-21(b)(3)(ii)(B))
Eligibility for a split-waiver election is subject to certain conditions and procedures. Importantly, a split-waiver election must be made in a separate statement filed with the acquiring group’s original Federal income tax return for the year the corporation became a member. In other words, if a split-waiver election is not made with that tax return, the election cannot later be made by amending this return in a subsequent consolidated return year or by attaching the above-described statement to a Federal income tax return for a later consolidated return year. If any other corporation joining the acquiring group was affiliated with the acquired member immediately before the acquired member joined the acquiring group, that other corporation also must be included in the split-waiver election. (Reg. §1.1502-21(b)(3)(ii)(B))
Background—prior regs providing consolidated groups with certain additional elections for waiving carrybacks of losses.
On prior occasions, enacted legislation has amended Code Sec. 172 to extend the carryback period for NOLs. Those statutory changes impacted consolidated groups that acquired one or more corporations prior to the statutory extension of the carryback period. (Preamble to TD 9900)
Because of these statutory changes, during the past two decades, the IRS has provided consolidated groups with certain additional elections for waiving carrybacks of losses into other, former groups. For example, see TD 9490 ( Regs afford consolidated groups some flexibility in choosing longer NOL carryback) and TD 8997 ( Regs give consolidated groups special 5-year NOL carryback choices). Together, these two sets of regs are referred to as the 2002 and 2010 split-waiver regulations. (Preamble to TD 9900)
These additional elections, while responsive to particular statutory amendments, have reflected common policy objectives of providing affected groups with the ability to waive all or a portion of the statutorily extended NOL carryback period. (Preamble to TD 9900)
Amended statute split-waiver election.
Consistent with the 2002 and 2010 split-waiver regulations, the temporary regs permit an acquiring group (Reg. §1.1502-21T(b)(3)(ii)(C)(2)(ii)) to make a special split-waiver election with regard to a CNOL for a consolidated return year in which an acquired member (Reg. §1.1502-21T(b)(3)(ii)(C)(2)(i)) was included in the acquiring group and to which amended carryback rules (defined at Reg. §1.1502-21T(b)(3)(ii)(C)(2)(iv)) apply (amended statute split-waiver election). (Reg. §1.1502-21T(b)(3)(ii)(C)(2)(v))
Through this election, an acquiring group can relinquish that part of the extended carryback period (as defined at Reg. §1.1502-21T(b)(3)(ii)(C)(2)(viii)) during which an acquired member was a member of a former group (for the portion of a CNOL attributable to the acquired member), notwithstanding that the group did not file a split-waiver election for the year in which the acquired member became a member of the acquiring group (as required by Reg. §1.1502-21(b)(3)(ii)(B)). (Reg. §1.1502-21T(b)(3)(ii)(C)(2)(v))
Accordingly, an amended statute split-waiver election applies only to the portion of a CNOL that is attributable to an acquired member for the portion of the carryback period (including the default carryback period, defined under Reg. §1.1502-21T(b)(3)(ii)(C)(2)(vii)), and the extended carryback period) during which the acquired member was a member of a former group. (Preamble to TD 9900)
An acquiring group makes an amended statute split-waiver election on a year-by-year basis, consistent with the 2002 and 2010 split-waiver regulations. (Reg. §1.1502-21T(b)(3)(ii)(C)(2)(vi))
Consequently, an acquiring group may make this election for the portion of a CNOL attributable to an acquired member that arises in any particular taxable year to which an amended carryback rule applies (amended carryback CNOL, defined at Reg. §1.1502-21T(b)(3)(ii)(C)(2)(iii)), regardless of whether the acquiring group makes such an election for CNOLs arising in other consolidated return years. (Preamble to TD 9900)
However, also consistent with the 2002 and 2010 split-waiver regulations, an acquiring group can make an amended statute split-waiver election with respect to an amended carryback CNOL only if any carryback to a taxable year included in the extended carryback period is not claimed on a return or other filing by a former group that is filed on or before the date this election is filed by the acquiring group. (Reg. §1.1502-21T(b)(3)(ii)(C)(3))
Also consistent with the 2002 and 2010 split-waiver regulations, an acquiring group can make an amended statute split-waiver election with respect to an acquired member only if the acquiring group did not file (i) a valid split-waiver election with respect to that acquired member on or before the effective date of the relevant amended carryback rules, or (ii) a general waiver election with respect to a CNOL of the acquiring group from which the amended carryback CNOL is attributed to the acquired member. (Reg. §1.1502-21T(b)(3)(ii)(C)(3))
The amended statute split-waiver election generally must be made by attaching a statement to the acquiring group’s timely filed tax return (including extensions) with regard to the consolidated return year during which the amended carryback CNOL was incurred. In certain circumstances, the statement may be attached to an amended return, but that return must be filed no later than 150 days after the effective date of the relevant amended carryback rules. (Reg. §1.1502-21T(b)(3)(ii)(C)(5), Reg. §1.1502-21T(b)(3)(ii)(C)(6))
Extended split-waiver election.
To provide acquiring groups with additional flexibility for making split-waiver elections, the temporary regs provide a second, alternative split-waiver election (extended split-waiver election) that applies solely to the extended carryback period (i.e., the additional carryback years provided under amended carryback rules). (Reg. §1.1502-21T(b)(3)(ii)(C)(2)(ix))
Through an extended split-waiver election, an acquiring group can ensure that amended carryback CNOLs are carried back to taxable years of former groups only to the extent those losses would have been carried back under prior law (i.e., the default carryback period). In other words, this election affects only the extended carryback period for an acquired member’s attributed loss. (Preamble to TD 9900)
The extended split-waiver election and the amended statute split-waiver election are subject to the same conditions and procedures, and provide the same relief, except that the extended split-waiver election waives only the extended carryback period. (Preamble to TD 9900)
Therefore, any CNOL carryback to default carryback years would be unaffected by an extended split-waiver election. For example, if the default carryback period were two years and a change in law extended the carryback period to five years, an acquiring group could make an extended split-waiver election to waive the carryback to a former group of only the three additional carryback years with respect to the amended carryback CNOL. Accordingly, the extended split-waiver election is available if losses attributable to the acquired member have been carried back solely to taxable years of a former group in the default carryback period but not in the extended carryback period. (Preamble to TD 9900)
Applicability date.
These temporary regulations apply to any CNOLs arising in a taxable year ending after July 2, 2020. However, taxpayers may apply these temporary regulations to any CNOLs arising in a taxable year beginning after December 31, 2017. (Reg. §1.1502-21T(h)(9))
The applicability of the temporary regulations will expire on July 3, 2023. (Preamble to TD 9900)
To continue your research on the rules for deducting NOL carryforwards and carrybacks, see FTC 2d/FIN ¶M-4001 et seq.; United States Tax Reporter ¶1724.
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