Changes Suggested for Split Election Rule in Proposed CNOL Regs

July 30, 2020

RE: IRS REG-125716-18

Treasury Department and IRS Officials Who Review Consolidated Return Regulations:

This letter is in response to the request for comments on proposed and temporary regulations relating to the carryback and carryover of net operating losses to or from a consolidated return year. The individuals with responsibility for drafting and reviewing these regulations have done a remarkable job given the myriad of special rules governing the use of net operating losses of different types of corporations and losses from special types of activities contained in both the TCJA and the CARES Act. Also, kudos to the drafters for using the recent legislation relating to life insurance companies as an opportunity to promulgate long overdue updates to the regulations pertaining to life insurance companies that are members of a consolidated group.

This letter addresses the rule for a split election by a consolidated group to waive the carryback of a portion a CNOL attributable to a member that joined the group during the carryback period. As discussed below, the rule is both too broad and too narrow, depending on the rationale for the election in the proposed regulations.

When the regulations under Reg. Sec. 1502-21, effective for consolidated groups with return dates after June 25, 1999, were proposed, they provided that the election not to carry back a CNOL was an all or nothing proposition. There was no provision for a split election. I called Mark Hoffenberg, who was then the Tax Legislative Counsel attorney with responsibility for corporate tax regulations. I remarked that the all-or-nothing rule made sense if the group was stable. However, if a portion of a CNOL would be carried back to a separate return year of a member, the group should be allowed to elect to waive the carryback for that member, but not be required to forfeit the carryback of the portion of the CNOL attributable to long-standing members. I followed up the phone conversation with a letter in which I described the problem of the portion of a CNOL attributable to a member acquired from another consolidated group during the carry back period, and the logistical problems regarding the filing of a refund claim by the selling group and the potential for disagreement over who owned the refund. Unfortunately, that was the only example I provided.

When the final regulations were issued, Reg. Sec. 1.1502-21(b)(2)(ii)(B) contained a rule that allowed the group to make a split election to waive the portion of a CNOL attributable to a member, but only if the member was a member of a different consolidated group in a carryback year. If the rule was meant to address the situation I described in my letter, it was too broad. If the acquired member was the common parent of different consolidated group, there would be no squabble over filing a refund claim for the carryback and getting the refund, because the acquiring group would own and control the target group.

The rule provided by the regulations, however, was too narrow given the Congressional purpose underlying section 172(b)(3), which authorized the waiver of an NOL carryback. The General Explanation to the Tax Reform Act of 1976, prepared by the staff of the Joint Committee (p. 189), states that the election was designed to prevent a corporation's foreign tax credit carryover from being “bumped” in the carryback year by an NOL carryback and the potential for the credit carryover to expire unused. Given that rationale, the consolidated return regulations should provide a split election for the portion of a CNOL attributable to any member if that portion would be carried back to a separate return year, regardless of whether the member was a member of a different consolidated group or a stand-alone corporation in the carryback year. The foreign tax credit position of a stand-alone corporation may be entirely different from the position of the consolidated group that acquires the corporation.

The Congressional purpose was recognized by the Treasury Department and the IRS when regulations under Reg. Sec. 1.1502-21 were proposed in 2012. Those proposed regulations would have allowed a split election whenever a portion of a CNOL would otherwise be carried back to a separate return year, whether or not that year was a year in which the member was in another consolidated group. Unfortunately, the temporary regulations did not adopt that rule. Accordingly, I suggest that the when the regulations are issued as final regulations, a split election be made available whenever a portion of a CNOL is attributable to any member if a year to which the loss would otherwise be carried back was a separate return year, which includes a year in which it joined in filing a consolidated return with another group. (See Reg. Sec. 1.1502-1(e)).

Also, there are some minor tweaks to the language in the proposed regulations under Reg. Sec. 1.1502-21, which I believe would be helpful to make the regulations easier to follow.

Thank you for your consideration of these comments. If you have any questions, I can be reached at (202) 320-5489 (not a toll-free call).

Sincerely,

Lawrence M. Axelrod
Arlington, VA