July 6, 2020 / North America
On Thursday, the Treasury and the IRS released Temporary Regulations which provide consolidated groups added flexibility with respect to the carryback of a consolidated net operating loss (CNOL), including the ability to do splits. These regulations are welcomed as they enable consolidated groups to carry back their losses without the risk of having to share the benefit of the CNOL with another consolidated group. This is especially important for funds that acquired portfolio companies (or add-ons) from a consolidated group within the carryback period provided in the CARES Act.
The CNOL’s Back Flip– The TCJA and The CARES Act
In general, a consolidated group has a single CNOL in a given year, which is comprised of the excess of the consolidated group’s deductions over the group’s gross income. If a consolidated group has a CNOL that will be carried back, then the CNOL generally must be allocated among the members that contributed to the CNOL. As a result, it is possible that a portion of the CNOL will be carried back to a taxable year in which the member was not a member of the consolidated group (including a year in which it was a member of another consolidated group).
Example: On December 31, 2015, P acquires all of the stock of T from X and T joins P’s consolidated group. Prior to the acquisition, T was a member of X’s consolidated group. In 2017, the P consolidated group generates a CNOL, $100x of which is allocable to T. As of 2017, P could carry back the CNOL for two taxable years and wishes to do so. However, T’s portion of the CNOL will be carried back to 2015 when it was a member of X’s consolidated group.
To avoid this result, the P consolidated group could have either waived the carryback of the entire CNOL for all members (a general waiver) or elected to forgo only the portion of the carryback period for an acquired member during which it was a member of another consolidated group (a split-waiver election). However, a split-waiver election must have been filed with the return for the year the member joined the consolidated group.
As discussed previously, as part of TCJA, a taxpayer is generally unable to carry back any of its net operating losses (NOLs). Therefore, consolidated groups did not file split-waiver elections for post-2017 taxable years as the election would have been viewed as unnecessary. However, as a result of the CARES Act, taxpayers can generally carry NOLs generated in taxable years beginning after December 31, 2017 and before January 1, 2021 back for five taxable years.
Therefore, without any further guidance, a consolidated group member which is allocated a portion of the CNOL and which joined the consolidated group after December 31, 2012 may have:
The Temporary Regulations, which taxpayers can apply to taxable years beginning after December 31, 2017, allow groups to make either an “amended statute split-waiver election” or an “extended split-waiver election.” The elections are only available if the statute governing the carryback of CNOLs is modified after the acquired member joins the loss group. In that case, the “default carryback period” is the carryback period under the law existing at the time the acquiring group acquired the acquired member and the extended carryback period consists of the taxable years added to a default carryback period by the changed statute. Since no carryback was allowed under TCJA before the CARES Act, the application of either election would generally yield the same result under current law. Nonetheless, the following table compares the two elections:
The election generally has to be filed with the acquiring group’s original tax return for the year in which the CNOL arose. If this date is not at least 150 days after the date of the statutory amendment, then it may be attached to an amended return that is filed within 150 days after the date of the statutory amendment. However, for taxable years beginning before January 1, 2021 for which the deadline to file the tax return (including extensions) is before November 30, 2020, the statement can be attached to an amended return filed by November 30, 2020.
In order to file either of these elections:
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