Groups Get Some NOL Answers and Carryback Waiver Relief

Treasury has proposed regulations to assist consolidated groups in computing net operating losses under the Tax Cuts and Jobs Act and provided rules for waiving loss carrybacks allowed under the coronavirus stimulus relief package.

The government issued proposed section 1502 regs (REG-125716-18) July 2 that address absorption of consolidated NOL (CNOL) carryovers and carrybacks applicable to consolidated groups under the TCJA and the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

The accompanying temporary regs (T.D. 9900), which also serve as part of the proposed rules, address the provision in the CARES Act that allows companies to carry back NOLs — specifically, the consolidated group’s ability to make split-waiver elections. The regs provide rules for groups that acquire new members that were members of another consolidated group to elect in a year after the year of acquisition to waive all or part of the carryback period for some losses attributable to the acquired members.

The proposed regs provide updated guidance regarding, among other things, the 80 percent limitation — effective for tax years beginning after December 31, 2020 — and address changes to two overlapping components of the consolidated return regs. Those are the CNOL allocation and ordering rules under reg. section 1.1502-21(b) and the rules for life-nonlife groups under reg. section 1.1502-47.

The proposed rules also address the application of the NOL carryback provisions following enactment of the TCJA and the CARES Act.

Under proposed reg. section 1.1502-21(b), the amount allowed as a deduction for a consolidated return year beginning after December 31, 2020, equals the sum of pre-2018 NOLs carried to that year and post-2017 NOLs carried to that year after applying the 80 percent limitation. These regs also address special rules for groups that contain at least one nonlife insurance company and rules applicable to losses arising in a separate return limitation year.

Several provisions under reg. section 1.1502-47 concerning treatment of consolidated groups with life insurance companies and property and casualty insurance companies are outdated, according to Treasury and the IRS, which proposed removing and revising the provisions as a result.

The TCJA amended section 172 to, in most circumstances, eliminate NOL carrybacks, limit NOLs to 80 percent of taxable income, and allow carryforwards indefinitely. Pre-TCJA, taxpayers could generally carry back losses for two years and forward for only 20 years.

The CARES Act upended those rules by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021.

The CARES Act also allows taxpayers to carry back losses arising in tax years 2018 through 2020 for up to five years before the year of the loss.

Beginning in tax year 2021, life insurance companies will be treated the same as other companies under section 172 rather than falling under a special rule. But property and casualty insurance companies can continue to use NOLs to offset 100 percent of taxable income, with their unused losses being subject to the pre-2018 carryback and carryforward rules.

Treasury and the IRS have yet to issue proposed rules under section 172 addressing the general applicability of the NOL rules under the TCJA.

Waiver Elections

Under the consolidated return regs, when a group acquires a member from another consolidated group, the NOL carryovers attributable to the target corporation are first carried to the old parent corporation’s consolidated return year, subject to reductions and limitations. The losses that are neither absorbed by the group nor subject to limitations may be carried to the target’s first separate return year or, if applicable, to the consolidated return year of its new group.

However, an acquiring group may make an irrevocable election under reg. section 1.1502-21(b)(3)(ii)(B) to waive all CNOLs attributable to the target corporation for the portion of the carryback period during which it was a member of another consolidated group.

That election, referred to as a split waiver, applies to all the losses of a specific target corporation that would otherwise be subject to a carryback to a former group under section 172. The election must be made in a separate statement filed with the acquiring consolidated group’s original income tax return for the year in which the corporation became a member.

Under a different rule (reg. section 1.1502-21(b)(3)(i)), consolidated groups may make an annual irrevocable election to waive the entire carryback period for a CNOL for any return year. The annual election applicable to the entire group can’t be made separately for any member and must be made in a separate statement filed with the group’s consolidated tax return for the year in which the loss arises.

Thus, if an acquiring group didn’t make the one-time split-waiver election for a newly acquired target corporation with its consolidated return for the year in which it acquired the corporation, then, absent any contractual agreement, it could still make the annual waiver election for any year of the group for its entire CNOL carryback.

But that all-or-nothing election to waive the carrybacks for the entire group comes at the price of forgoing other portions of the group's losses that it could otherwise carry back to its own prior years under the CARES Act.

As practitioners requested, Treasury and the IRS have dusted off now-expired temporary regs that addressed a similar dilemma in response to the 2009 stimulus legislation that allowed corporations to extend the loss carryback period from two years to five years for either their 2008 or 2009 NOL.

The new temporary rules provide two split-waiver election options for consolidated groups with one or more acquired members and that have CNOLs eligible to be carried back beyond the statutorily allowed number of years in effect at the time of the acquisition.