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Example in Proposed CNOL Regs Could Use a Couple of Tweaks

JUL. 20, 2020

Example in Proposed CNOL Regs Could Use a Couple of Tweaks

DATED JUL. 20, 2020
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Docket: IRS-2020-0020
Consolidated Net Operating Losses (REG-125716-18)

Comment On: IRS-2020-0020-0001
Consolidated Net Operating Losses

Document: IRS-2020-0020-0004
Consolidated Net Operating Losses (REG-125716-18)

Submitter Information

Name: Robert McGuirk, Esq./CPA

Address:

200 E. Saint Julian Street
Savannah, GA, 31401

Email: rmcguirk@huntermaclean.com

Phone: 912 236 0261

General Comment

This comment requests further clarification of the outcome in Example 6 of Regulation 1.1520-21(b)(2)(v).

Example 6 involves the carryback of a $16 of CNOL attributable to a P1, non-life insurance company, to offset consolidated taxable income of $45 in an earlier year, Year 1. The $45 of consolidated taxable income in Year 1 is partly attributable to P ($20), a member that is a corporation other than a nonlife insurance company and partly attributable to P1 ($25), a non-life insurance company. Example 6 indicates that the total potential carryback from Year 2 to Year 1 is $41, comprised of $16 of Year 1 income attributable to P ($20 x80% limitation) and $25 of Year 1 income attributable to P1 ($25 x 100%).

Clarification is requested regarding the portion of the $16 CNOL carryback from Year 2 that offsets consolidated taxable income in year 1 that is attributable to P ($20) versus P1 ($25).

Clarification is requested to aid in understanding the application of the 80% limitation in the event a CNOL attributable to P1 arising in Year 3 is carried back to Year 1.

There are at least two alternatives —

1) the Year 1 income of P would be offset by $7.11 ($20/$45 X $16) and the Year 1 income of P1 would be offset by $8.89 of P1 ($25/45 X $16). Consequently, of the remaining $29 of consolidated taxable income of the group in Year 1 (after the application of $16 CNOL carryback from Year 2), $12.89 would be attributable to P and ($20 - $7.11) and $16.11 would be attributable to P1 ($25 - $8.89).

2) the Year 1 income of P would be offset by $6.24 ($16/$41 X $16) and the Year 1 income of P1 would be offset by $9.76 ($25/$41 X $16). In this case, of the remaining $29 consolidated taxable income of the group in Year 1 (after the application of $16 CNOL carryback from Year 2), $13.76 would be attributable to P and ($20 - $6.24) and $15.24 would be attributable to P1 ($25 - $9.76).

In addition to updating the example to illustrate the outcome, the preamble to the Final Regulations should discuss the rationale/basis for adopting one approach over another.

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