Internal Revenue Code Section 172(b) generally allows a taxpayer to carry back a current year net operating loss (NOL) to each of the preceding two years and carry forward any excess to the 20 years following the loss year. However, the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) amended Section 172 to allow taxpayers to elect to carry back an NOL generated in either 2008 or 2009, but not both, up to five years, rather than the otherwise applicable two-year period.
To take advantage of the extended carryback provision, taxpayers were required to make an election by the due date (including extension) of the tax return year beginning in 2009. Although the WHBAA provided the extended carryback to most taxpayers, it prohibited taxpayers that received money from the federal government under the Troubled Asset Relief Program (TARP) – including taxpayers that are members of the same affiliated group as the TARP recipient – from taking advantage of this extended carryback. The IRS recently clarified whether a taxpayer that didn’t receive TARP monies itself but acquired an entity that had received TARP monies is eligible to make the extended carryback election for losses incurred in 2008 or 2009.
The Facts in the FAA
In Field Attorney Advice (FAA) 20144601F, the taxpayer is the parent of an affiliated group of corporations that files a consolidated U.S. federal tax return. Through a stock purchase transaction, the taxpayer acquired an entity that previously had received TARP money from the government. Immediately after the acquisition, the acquired entity merged into the taxpayer’s parent through a tax-free statutory merger.
The taxpayer reported an NOL on its consolidated U.S. federal tax return in the year of acquisition and did not attach a statement claiming use of the extended NOL carryback provision. The taxpayer proceeded to file an NOL carryback claim with the IRS, requesting refunds back to the fifth year preceding the year of the loss. The taxpayer subsequently filed a second NOL carryback claim that corrected the first and added a disclosure indicating that the taxpayer was not a TARP recipient. The taxpayer then filed an amended tax return to include additional income, which required them to revise the NOL carryback claim. The IRS issued the taxpayer tentative refunds based on its filed NOL carryback claims.
The Conclusion in the FAA
The IRS concluded in the FAA that the taxpayer wasn’t eligible for the extended five-year NOL carryback because it was a successor to a taxpayer that received TARP assistance. Based on the structure of the acquisition and subsequent statutory merger into the parent, the IRS considered carryover tax attributes under Section 381. Under Section 381, the successor to the acquired entity inherits the tax attributes of that entity. Therefore, the IRS asserted that the acquired entity’s TARP recipient status is an attribute inherited by the successor in the acquisition – meaning the taxpayer was not eligible for the extended five-year NOL carryback.
Chief Counsel Advice Confirms FAA Assertion
The FAA assertion was subsequently the subject of a Chief Counsel Advice (CCA) memorandum in response to a request to supplement the rationale provided in the FAA.
The CCA acknowledged that TARP status isn’t included in Section 381’s list of tax attributes. It noted, however, that the legislative history provides that analogous tax items not listed in Section 381 can nevertheless be treated as if they were. The CCA concluded that TARP status is analogous to some of the listed attributes and therefore could also be treated as one of the attributes. It further stated that an acquired entity shouldn’t be able to remove its status as a TARP recipient by merging into another corporation.
Organizations that acquired a TARP recipient in a carryover basis transaction and carried back NOLs using the extended five-year carryback election should consult their tax adviser to discuss any potential tax effect.