Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 64-93

1964-1 C.B. 325

Sec. 1502

IRS Headnote

Under the circumstances described below, the portion of a consolidated net operating loss of an affiliated group attributable to a member which was not in existence in the years preceding the loss year may be used in computing the consolidated net operating loss deduction of the group for the preceding years.

Full Text

Rev. Rul. 64-93

Advice has been requested whether the portion of a consolidated net operating loss of an affiliated group attributable to a member which was not in existence in the years preceding the loss year may be used in computing the consolidated net operating loss deduction of the group for the preceding taxable years, under the circumstances described below.

Corporations X, Y and Z were formed in 1961 and filed a consolidated income tax return as an affiliated group for that year. In that year all three corporations operated at a profit.

In 1962, corporation M was organized by X. M immediately became a member of the affiliated group and joined in the filing of a consolidated return for that year. Therefore, M was not in existence during any period when it was not a member of the affiliated group.

The specific question on which advice has been requested is whether the portion of the affiliated group's consolidated net operating loss for 1962 attributable to M may be carried back and applied against the affiliated group's consolidated taxable income for 1961.

Section 1.1502-31(a)(2) of the Income Tax Regulations defines the consolidated net operating loss deduction as an amount equal to the aggregate of the consolidated net operating loss carryovers and of the consolidated net operating loss carrybacks to the taxable year.

Section 1.1502-31(a)(4) of the regulations, insofar as material here, provides that a consolidated net operating loss carryback to a taxable year shall consist of the consolidated net operating loss of the affiliated group for certain succeeding taxable years to the extent not attributable to a corporation making a separate return or filing as a member of another affiliated group for that year . This amount is reduced to the extent it was absorbed as a carryback, consolidated or separate, for preceding years.

Section 1.1502-31(a)(5) of the regulations defines the consolidated net operating loss as consisting of an amount equal to the excess of the sum of the combined net operating losses of the several affiliated corporations plus certain consolidated deductions and losses, over the sum of the combined taxable income of the several affiliated corporations, with certain adjustments, and the consolidated net capital gain.

Since M did not come into existence until 1962, it did not file a separate return or join in a consolidated return filed by another affiliated group for any preceding taxable year. Accordingly, the exception for corporations filing separate returns or joining in a return filed by another group in preceding years is inapplicable to M . The portion of the 1962 consolidated net operating loss attributable to M may be included in the consolidated net operating loss carryback to 1961, thus increasing the consolidated net operating loss deduction for that year.

Compare American Trans-Ocean Navigation Corporation v. Commissioner , 229 Fed.(2d) 97 (1956), and Trinco Industries, Inc. v. Commissioner , 22 T.C. 959 (1954), which, although factually similar in some respects to the instant case, involved carrybacks to separate return years. See section 1.1502-31(d) of the regulations for certain of the present rules governing carrybacks to separate return years. In the instant case, the group which filed a consolidated return in 1962 also filed a consolidated return in 1961. Thus, the holdings that the losses at issue in the American Trans-Ocean Navigation and the Trinco Industries cases could not be carried back are not applicable here.

The decision by the United States Court of Appeals for the Fifth Circuit in the case of Phinney v. Houston Oil Field Material Company, Inc. , 252 Fed.(2d) 357 (1958), and the decision by the Tax Court of the United States in the case of Midland Management Company v. Commissioner , 38 T.C. 211 (1962), vacated and remanded by the United States Court of Appeals for the Eighth Circuit without reaching a decision on the substantive issues involved, 316 Fed.(2d) 190 (1963), that the portion of a consolidated net operating loss attributable to a newly organized subsidiary could not be carried back and applied against the consolidated taxable income of the affiliated group for years prior to the subsidiary's existence, will not be relied on by the Internal Revenue Service to disallow the carryback of such losses.