Treasury releases temporary regulations regarding waiving NOL carrybacks for certain consolidated groups
On July 2, 2020, the U.S. Treasury Department released proposed regulations (REG-125716-18) and temporary regulations (TD 9900) (“Temporary Regulations”) under Internal Revenue Code (IRC) Section 1502 allowing consolidated groups to elect to waive all or part of the pre-acquisition portion of an acquired member’s extended net operating loss (NOL) carryback period under IRC Section 172.
NOL treatment under the CARES Act
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, a NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, must be carried back to each of the five taxable years preceding the taxable year in which that NOL arose. (This is referred to by the Temporary Regulations as “amended carryback rules.”) The portion of an NOL not used in a carryback year must be carried forward to each successive taxable year in the five-year carryback period.
Taxpayers can irrevocably elect to relinquish the carryback period under IRC 172(b). There are, however, additional rules applicable to waivers of carrybacks for consolidated groups. These rules have been expanded as a result of the amended carryback rules.
Split-waiver elections for NOLs part of consolidated returns (CNOLs)
The amended carryback rules have created unintended consequences for consolidated groups that have consolidated NOLs (CNOLs) where a portion of the CNOL is attributed to the post-acquisition activity of a member acquired from another consolidated group. The Temporary Regulations refer to these NOLs as “Amended carryback CNOLs.”
Traditionally, if a member joined a consolidated group, a split-waiver election could be made to relinquish the pre-acquisition portion of the carryback period for the acquired member. Thus, the post-acquisition CNOL attributed to the acquired member would not be carried to the parent of the member’s prior consolidated group. Under existing regulations, the split-waiver election is required to be included in the consolidated tax return for the year of acquisition.
Under the Tax Cuts and Jobs Act of 2017, the carryback period of NOLs was repealed for NOLs arising in tax years beginning after Dec. 31, 2017. Thus, consolidated groups that acquired subsidiaries in tax years beginning after Dec. 31, 2017, may not have filed split-waiver elections in the year of acquisition, as the law in effect at the time did not allow for carryback of NOLs. With the emergence of the amended carryback rules, guidance was needed for how consolidated groups should address the carryback of amended carryback CNOLs, when no split-waiver election was filed in the tax return for the year of acquisition (i.e., years beginning after Dec. 31, 2017).
Under the Temporary Regulations, two additional split-waiver elections are available for consolidated groups.
Amended statute split-waiver election
With an amended statute split-waiver election, with regard to a CNOL for a specific tax year, consolidated groups “can relinquish that part of the extended carryback period 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,” the Temporary Regulations say This election can be made on a year-by-year basis for the CNOL attributable to an acquired member that arises in any specific year for which an amended carryback rule applies. This election can only be made “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.”
Extended split-waiver election
“To provide acquiring groups with additional flexibility for making split-waiver elections,” the Temporary Regulations also offer the extended split-waiver election, which applies solely to the extended carryback period. With an extended split-waiver election, the amended carryback CNOLs of an acquired member are carried back to taxable years of former groups “only to the extent those losses would have been carried back under prior law (that is, the default carryback period).”
Conditions and procedures for making the elections
The amended statute split-waiver election and extended split-waiver election are both irrevocable. The elections can be made by filing a statement in accordance with Treas. Reg. 1.1502-21T(b)(3)(ii)(C)(5). In general, the statement must be filed “with the acquiring group’s timely filed tax return (including extensions) with regard to the consolidated return year that the amended carryback CNOL was incurred.” However, the statement may be attached to amended returns if filed by Nov. 30, 2020 (150 days after July 2, 2020).
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