Rev. Rul. 80-79

ISSUE

May a consolidated net operating loss and a consolidated unused investment credit that are attributable to a newly-organized corporation which became the parent of an affiliated group by acquiring the stock of two other unrelated corporations be carried back to the separate return years of the subsidiary members of the group?

FACTS

Corp P was incorporated by separate unrelated interests in April 1976 for the purpose of acquiring ownership of X and Y, two unrelated corporations which had filed separate returns since their own formation several years ago. Immediately after incorporation, P acquired all of the stock of X and Y, thus becoming the parent corporation of an affiliated group.

For taxable years ending December 31, 1976, and December 31, 1977, P and its subsidiaries X and Y filed consolidated federal income tax returns. In both years the consolidated group experienced net operating losses all of which were attributable to P. These losses included interest charges incurred in acquiring the stock of X and Y as well as other operating losses. P also made investment in those years that qualified for the investment tax credit.

LAW AND ANALYSIS

Section 1502 of the Internal Revenue Code grants the Secretary authority to issue such regulations as are deemed necessary in the case of consolidated returns. Section 1.1502-79(a)(1)(i) of the Income Tax Regulations provides that if a consolidated net operating loss can be carried under the principles of section 172(b) of the Code and 1.1502-21(b) of the regulations to a separate return year of a corporation (or could have been so carried if such were in existence) which was a member in the year in which such loss arose, then the portion of such consolidated net operating loss attributable to such corporation shall be apportioned to such corporation and shall be a net operating loss carryover or carryback to such separate return year. Under section 1.1502-79(a)(2), however, the portion of a consolidated net operating loss attributable to a member shall not be apportioned to a prior separate return year for which such member was not in existence and shall be included in the consolidated net operating loss carrybacks to the equivalent consolidated return year of the group (which may be a separate return year if the equivalent year is a separate return year), provided that such member was a member of the group immediately after its organization.

Section 1.1502-79(c) of the regulations provides that if a consolidated unused investment credit can be carried under the principles of section 46(b) of the Code and section 1.1502-3(b) to a separate return year of a corporation (or could have been so carried if such corporation were in existence) that was a member of the group in the year in which such unused credit arose, then the portion of such consolidated unused credit attributable to such corporation shall be apportioned to that corporation under the principles of section 1.1502-79(a)(1) and (2) and shall be an investment credit carryover or carryback to such separate return year.

Rev. Rul. 74-610, 1974-2 C.B. 288, holds that a consolidated net operating loss attributable to a new subsidiary wholly owned by another subsidiary which formerly owned the assets and operations that generated the loss may be carried back to the other subsidiary's separate return for a year in which the new wholly-owned subsidiary was not in existence but may not be carried back to the common parent's separate return for that year. The rationale is that if the new subsidiary had not been formed by the other subsidiary, the loss sustained by the new subsidiary would have been sustained by the other subsidiary and could have been carried back to the latter's separate return years.

In Rev. Rul. 74-610, the group member allowed the net operating loss carryback was the corporation that formed the loss corporation because that corporation would have incurred the loss had the loss corporation not been formed. In this revenue ruling, the loss sustained by P was not attributable to any assets or operations of X or Y. P was formed not by those corporations but by separate unrelated interests. Therefore, the loss of P would not have been incurred by X or Y if P had not been organized, and thus the loss may not be carried back as to the separate return years of X and Y under the rationale of Rev. Rul. 74-610. The same reasoning applies to disallow the unused investment credit carryback attributable to P to the separate returns years of X and Y.

HOLDING

The consolidated net operating loss and consolidated unused investment credit attributable to P may not be carried back to the separate return years of X and Y.