Rev. Rul. 74-610

Advice has been requested concerning the treatment of a net operating loss under the circumstances described below.

P is a domestic corporation engaged in the manufacturing business. S1 was organized on January 1, 1967, as a wholly-owned subsidiary of P. S2 was organized on January 1, 1972, as a wholly-owned subsidiary of S1 by a transfer of assets from S1 to S2.S2 was thus a member of the affiliated group immediately after its organization. Prior to 1973 each of the corporations filed separate Federal income tax returns. For 1973, the affiliated group, which includes each of the corporations, filed a consolidated Federal income tax return.

For the calendar year 1973 the affiliated group had a consolidated net operating loss, all of which was attributable to S2. The assets and operations that generated S2's portion of the consolidated net operating loss were formerly owned by S1. In 1970 both P and S1, in their separate returns, had taxable income greater than the 1973 consolidated net operating loss.

The specific question is whether the consolidated net operating loss attributable to S2 for 1973 may be carried back to either P or S1's separate income tax return for 1970.

The tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group is determined by the Income Tax Regulations under section 1502 of the Internal Revenue Code of 1954. The consolidated net operating loss deduction of the group, including carryovers and carrybacks, is computed in accordance with section 1.1502-21. Carryovers and carrybacks of consolidated net operating losses to separate return years are governed by section 1.1502-79. Subparagraph(a)(2) of that regulation provides that a consolidated net operating loss attributable to a group member not in existence in a carryback year shall be included in the consolidated net operating loss carrybacks to the equivalent consolidated return year of the group, provided that such member was a member of the group immediately after its organization. If such equivalent year is a separate return year, then the carryback shall be made to the separate return year. If the loss member of the group was not a member of the group immediately after its organization, the portion of the loss attributable to such member must be apportioned to it and may not be carried back by any other member of the group. Section 1.1502-79(a)(1).

Example (1) of section 1.1502-79(a)(4) of the regulations and Rev. Rul. 69-623, 1969-2 C.B. 171, illustrate that the portion of a consolidated net operating loss attributable to a subsidiary formed by its parent, which owns all the subsidiary's stock, may be carried back to the parent's separate return year, when the subsidiary was not in existence in the prior year. However, in neither case was there another group member having direct or indirect ownership of the loss member's stock.

As indicated above, the assets and operations that generated S2's portion of the consolidated net operating loss were formerly owned by S1. But for the formation of S2, the loss sustained by S2 in 1973 would have been sustained by S1 and could have been carried back by S1 to its separate return years.

Accordingly, the 1973 consolidated net operating loss attributable to S2 may be carried back to S1's separate income tax return for 1970. It may not however be carried back to P's separate income tax return for 1970.