Split-waiver election relief and other NOL guidance

| 7/16/2020
Split-waiver election relief and other NOL guidance

On July 2, the IRS and the U.S. Department of the Treasury released temporary and proposed regulations addressing various issues affecting consolidated net operating losses (CNOLs) as a result of the Tax Cuts and Jobs Act of 2017 (TCJA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Split-waiver carrybacks

Under Regulation Section 1.1502-21, a “split-waiver” election is available to waive the carryback of NOLs of a subsidiary acquired from another consolidated return group. Under a split-waiver election, the acquiring consolidated group can elect to waive carrybacks of the subsidiary to the extent the NOLs of the subsidiary would be carried back to the seller’s consolidated return. This election must be made in the first tax year in which the subsidiary joins the acquirer’s group, and it is binding on all future tax years.

The temporary regulations not only allow taxpayers to revisit their split-waiver elections to account for the NOL carryback provisions extended under the CARES Act but also provide a framework for future law changes that provide for NOL carryback extensions. Under the proposed regulations, acquiring groups would have two split-waiver election options when an NOL carryback period is extended. The first option is an amended statute split-waiver election. On a year-by-year basis on a timely filed original return, an acquiring group may elect to waive both the default and extended carryback periods (the additional taxable years added to the CNOL carryback period that was in effect at the time of the acquisition) for an acquired member. The second option is an extended split-waiver election. On a year-by-year basis on a timely filed original return, an acquiring group may elect to waive only the extended carryback periods for an acquired member. Additionally:

  • An amended split-waiver election allows for an election to be made even if the split-waiver election was not made at the time of the acquisition. The election is made on a year-by-year basis. The amended split-waiver election is available only if a valid split-waiver election was not filed on or before the effective date of the relevant amended carryback rules (or if a general waiver election with respect to a CNOL of the acquiring group from which the amended carryback CNOL is attributed to the acquired member was not filed). The amended statute split-waiver election generally must be made by attaching a statement to the acquiring group’s timely filed tax return (including extensions) for the consolidated return year during which the amended carryback CNOL was incurred. In certain circumstances, the statement may be attached to an amended return, but such return must be filed no later than 150 days after the effective date of the relevant amended carryback rules. 
  • An extended split-waiver election waives only the extended NOL carryback period from a law change. For example, if the default carryback period was two years and a change in law extended the carryback period to five years, an acquiring group could make an extended split-waiver election to waive the carryback to a former group of only the three additional carryback years with respect to the amended carryback CNOL.

The temporary regulations also include a special provision allowing either election to be made related to the CARES Act extended NOL carryback provisions no later than Nov. 30, 2020.

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Proposed changes to separate return limitation year (SRLY) NOL rules

The SRLY rules apply to a consolidated return group’s use of an NOL when the NOL was incurred prior to that member joining its current group. The SRLY rules generally do not apply to a transaction that is both a SRLY and a Section 382 event. Under the SRLY rules, the loss carryforwards of the SRLY member (or a SRLY subgroup) can be used only to the extent of that member’s contribution to the taxable income of the group. This contribution to taxable income is measured by the SRLY cumulative register. 

The goal of the SRLY NOL rules is to put the SRLY member on parity with a separate company filer with respect to NOL usage. The proposed regulations modify the computation of the cumulative register to account for the TCJA’s 80% limitation on the use of NOL carryforwards. To illustrate, assume a stand-alone corporation has a 2018 NOL that was carried forward to 2019. If the corporation had $100 of 2019 taxable income, it would be allowed to use only $80 of NOL. Assume that on Jan. 1, 2019, the corporation joined a consolidated group in a transaction to which the SRLY NOL rules apply. Even though the corporation earned $100, its cumulative register is adjusted to $80 to reflect the TCJA 20% NOL limitation.

Five-year carryback of losses for insurance companies other than life insurance companies

Under the TCJA, NOLs of insurance companies other than life insurance companies can be carried back five years. The proposed regulations provide rules addressing the use of consolidated NOLs for groups that include regular corporations and these insurance companies.

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Carl Karpiak
Howard Wagner - social
Howard Wagner
Partner, National Tax Services