Consolidated group received more time to expire unusable loss carryovers

Plain-English summary

A consolidated corporate group acquired another consolidated group in a qualifying cost-basis transaction. The acquired companies had net operating loss carryovers that the parent determined would be unusable because of section 382 limitations. The parent intended to elect under Treasury Regulation section 1.1502-32(b)(4) to treat specified losses as expiring before the acquired companies joined the new group, but its tax professional failed to make the election. The IRS found reasonable reliance, good faith, and no prejudice to the government. It granted 45 days to amend the acquisition-year consolidated return, subject to the condition that aggregate tax liability not be lower than if the election had been timely made.

Ruling snapshot

• Question: Could the parent make a late election to treat specified separate-return-year loss carryovers as expired before the acquisition?
• Outcome: approved, with 45 days to amend the consolidated return and subject to the aggregate-tax-liability condition
• Key authorities: IRC §§ 382, 1502; Treas. Reg. §§ 1.1502-32(b)(4), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201921003                                              Third Party Communication: None
Release Date: 5/24/2019                                        Date of Communication: Not Applicable
Index Number: 9100.22-00, 1502.32-00
                                                               Person To Contact:
--------------------                                           -----------------------, ID No. -------------------
------------------------------------------------------------   ---------------------------------------------------

-                                                              Telephone Number:
-----------------------------------------                      ----------------------
-----------------------------------                            Refer Reply To:
------------------------------------------                     CC:CORP:B04
                                                               PLR-121964-18
                                                               Date:
                                                               February 13, 2019




Legend

Parent                     =         ----------------------------------------------------------------------------------
                  ----------------------------------------------------------------------
--------------------------------------------------------------

Acquired                   =        -------------------

Sub 1                      =        -------------------

Sub 2                      =        ----------------

Sub 3                      =        ----------------------------

Merger Sub                 =        ------------------------------------

Date A                     =        -------------------

Date B                     =        -----------------------------

Date C                     =        ------------------

Date D                     =        ---------------------------

Date E                     =        --------------------

Date F                     =        ----------------------------

PLR-121964-18                               2

Year 1          =   ------------------------------

Year 2          =   ------------------------------

Year 3          =   ------------------------------

Year 4          =   ---------------------------

Year 5          =   ------------------------------

Year 6          =   ---------------------------

Year 7          =   -------------------------------------------

Year 8          =   -------------------------------------------

Year 9          =   ----------------------------------------------

Year 10         =   --------------------------------------------------

Year 11         =   -------------------------------------------

$a              =   --------------------

$b              =   ------------------

$c              =   ------------------

$d              =   ------------------

$e              =   ----------------------

$f              =   --------------------

$g              =   ------------------

$h              =   ------------------

$i              =   ---------------------

$j              =   ------------------

$k              =   ----------------

PLR-121964-18                                              3

$l                         =        ----------------

$m                         =        --------------------

$n                         =        -------------------

Company Official =                   -------------------------------------------------------------------------
-----------------------------------------------------------------------------

Tax Professional           =        ----------------------------------------------------------------------

Firm 1                     =        ----------------

Firm 2                     =        -----------------------


Dear --------------:

This letter responds to a letter dated July 13, 2018, submitted on behalf of Parent,
requesting an extension of time under §301.9100-3 of the Procedure and Administration
Regulations to file an election. Parent is requesting an extension of time to file an
election under §1.1502-32(b)(4) to treat loss carryovers from certain separate return
limitation years as expiring immediately before Acquired became a member of Parent’s
consolidated group, as described below (the “Election”). The material information is
summarized below.

Parent is the common parent of an affiliated group that files a consolidated federal income
tax return on a calendar year basis (“Parent Group”). On Date D, Parent Group, through
the formation of a new wholly-owned subsidiary, Merger Sub, acquired all of the issued
and outstanding classes of equity interests of Acquired, the common parent of a
consolidated group (“Acquired Group”), through a reverse triangular cash merger. The
transaction constituted a “qualifying cost basis transaction” within the meaning of
§1.1502-32(b)(4)(ii)(A). The former members of the Acquired Group became members of
the Parent Group beginning on Date E.

At the time of the acquisition, Acquired Group had consolidated net operating losses
(“CNOLs”) of $a and no net capital loss carryovers (within the meaning of §1.1502-22(b)).
Those CNOLs were composed of losses arising within the Acquired Group and losses
arising outside the Acquired Group with respect to certain members of the Acquired
Group that were acquired prior to Parent’s acquisition of Acquired. Acquired Group
acquired Sub 1 on Date C, Sub 2 on Date B, and Sub 3 on Date A.

On or before the due date of the Election, Parent’s tax team and its service providers,
Firm 1 and Firm 2, determined that some of the CNOLs would be unusable by Parent

PLR-121964-18                                 4

Group on account of section 382 limitations and, as such, that an election should be
made to treat such losses as expiring immediately before Acquired became a member of
the Parent Group.

For Year 2 through Year 5, Sub 1 had CNOLs totaling $b. On or before the due date of
the Election, Parent’s tax team and Firm 1 determined that all of such net operating
losses would be unusable in future years on account of section 382 limitations.
Accordingly, Parent intended to waive all $b of such net operating losses.

For Year 2 through Year 4, Sub 2 had CNOLs totaling $c. On or before the due date of
the Election, Parent’s tax team and Firm 1 determined that all of such net operating
losses would be unusable in future years on account of section 382 limitations.
Accordingly, Parent intended to waive all $c of such net operating losses.

For Year 1 through Year 3 (more than three tax years), Sub 3 had CNOLs totaling $d. On
or before the due date of the Election, Parent’s tax team and Firm 1 determined that all of
such net operating losses would be unusable in future years on account of section 382
limitations. Accordingly, Parent intended to waive all $d of such net operating losses.

For Year 7, Year 8, Year 9, Year 10, and Year 11, Acquired Group had CNOLs of $e, $f,
$g, $h, and $i, respectively. On or before the due date of the Election, and after taking
into account the use of a portion of the CNOLs in the years prior to the acquisition of
Acquired Group, and adjustments determined prior to that acquisition, Parent’s tax team
and Firm 2 determined that $j of the remaining CNOL from Year 7, the entire CNOLs from
Year 8 ($f) and Year 9 ($g), $k of the remaining CNOL from Year 10, and $l of the
remaining CNOL from Year 11 (for a total from Year 7, Year 8, Year 9, Year 10, and Year
11 of $m), would be unusable in future years on account of section 382 limitations.
Accordingly, Parent intended to waive such unusable amounts of NOLs.

In summary, Parent intended to treat as expiring CNOLs of $b, $c, $d, and $m, for a total
amount intended to be treated as expiring under the Election of $n.

Section 1.1502-32 provides rules for adjusting the basis of the stock of one member of a
consolidated group, S, owned by another member, M, to reflect S’s items of income gain,
deduction, and loss in order to treat the group members as a single entity. Section
1.1502-32(a)(1). Section 1.1502-32(b)(2) provides that M’s basis in S’s stock is adjusted
to reflect, among other things, S’s noncapital, nondeductible expenses. An expiring loss
carryover is such a noncapital, nondeductible expense. See § 1.1502-32(b)(3)(iii).

Section 1.1502-32(b)(4)(i) provides that if S has a loss carryover from a separate return
limitation year when it becomes a member of a consolidated group, the group may make
an irrevocable election to treat all or any portion of the loss carryover as expiring for all
federal income tax purposes immediately before S becomes a member of the
consolidated group. Section 1.1502-32(b)(4)(iv) provides that such an election must be

PLR-121964-18                                 5

made in a separate statement filed with the consolidated group’s return for the year S
becomes a member.

Parent intended to make the Election. The Election was due on Date F, the due date
(including extensions) of the Year 6 Parent Group consolidated federal income tax return,
but for various reasons a valid Election was not filed. Subsequently, this request was
submitted, under §301.9100-3, for an extension of time to file the Election. Parent has
represented that it is not seeking to alter a return position for which an accuracy-related
penalty has been or could be imposed under section 6662 at the time of the request for
relief.

Under §301.9100-1(c), the Commissioner has discretion to grant a reasonable extension
of time to make a regulatory election or a statutory election (but no more than six months
except in the case of a taxpayer who is abroad), under all subtitles of the Internal
Revenue Code except subtitles E, G, H, and I.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make a regulatory election.
Section 301.9100-1(a). Section 301.9100-1(b) defines a regulatory election as an
election whose due date is prescribed by a regulation published in the Federal Register,
or a revenue ruling, revenue procedure, notice, or announcement published in the Internal
Revenue Bulletin. Section 301.9100-2 provides automatic extensions of time for making
certain elections. Requests for relief under §301.9100-3 will be granted when the
taxpayer provides evidence to establish to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the
interests of the government. Section 301.9100-3(a).

The time for filing the Election is fixed by the regulations, i.e., §1.1502-32(b)(4)(iv).
Therefore, the Commissioner has discretionary authority under §301.9100-3 to grant an
extension of time for Parent to file the Election, provided Parent shows it acted
reasonably and in good faith, the requirements of §§301.9100-1 and 301.9100-3 are
satisfied, and granting relief will not prejudice the interests of the government.

Information, affidavits, and representations submitted by Parent, Company Official, and
Tax Professional explain the circumstances that resulted in the failure to timely file a valid
Election. The information establishes that Parent reasonably relied on a qualified tax
professional who failed to make, or advise Parent to make, the Election, and that the
request for relief was filed before the failure to timely make the election was discovered
by the Internal Revenue Service. See §301.9100-3(b)(1)(i) and (v).

Based on the facts and information submitted, including the representations made, we
conclude that Parent has shown it acted reasonably and in good faith, the requirements of
§§301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the
interests of the government. Accordingly, an extension of time is granted under

PLR-121964-18                                  6

§301.9100-3, until 45 days from the date on this letter, for Parent to amend the Year 6
Parent Group consolidated federal income tax return to include the Election to treat a total
amount of $n of CNOLs as expiring immediately before Acquired became a member of
Parent Group, as described above. A copy of this letter must be attached to the return.
Alternatively, if Parent Group files its returns electronically, Parent Group may satisfy this
latter requirement by attaching a statement to its return that provides the date on, and the
control number (PLR-121964-18) of, this letter ruling.

The above extension of time is conditioned on the Parent Group’s tax liability (if any)
being not lower, in the aggregate, for all years to which the Election applies, than it would
have been if the Election had been timely made (taking into account the time value of
money). No opinion is expressed as to the amount of any CNOLs or as to Parent Group’s
tax liability for the years involved. A determination thereof will be made by the applicable
Director’s office upon audit of the federal income tax returns involved. Further, no opinion
is expressed as to the federal income tax effect, if any, if it is determined that the
taxpayers’ tax liability is lower. Section 301.9100-3(c).

We express no opinion as to the tax consequences of filing the Election late under the
provisions of any other section of the Code and regulations, or as to the tax treatment of
any conditions existing at the time of, or resulting from, filing the Election late that are not
specifically set forth in the above ruling. For purposes of granting relief under §301.9100-
3, we relied on certain statements and representations made by Parent, Company
Official, and Tax Professional. However, the Director should verify all essential facts. In
addition, notwithstanding that an extension is granted under §301.9100-3 to file the
Election, penalties and interest that would otherwise be applicable, if any, continue to
apply.

This letter is directed only to the taxpayer(s) who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

Pursuant to the power of attorney on file in this office, a copy of this letter is being sent to
your authorized representative.

                                            Sincerely,


                                            _______________________
                                            Ken Cohen
                                            Senior Technician Reviewer, Branch 3
                                            Office of Associate Chief Counsel (Corporate)

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