Rev. Rul. 89-80

1989-1 C.B. 273, 1989-25 I.R.B. 8.

                       Internal Revenue Service

                                 Revenue Ruling

      CONSOLIDATED RETURNS; CARRYBACK OR CONSOLIDATED NET OPERATING LOSSES

    FOLLOWING THE CONSOLIDATION OF TWO UNRELATED COMMON PARENT CORPORATIONS

                            Published: June 19, 1989

Section 1502. - Regulations, 26 CFR 1.102-75: Filing of consolidated returns.

(Also Section 381: 1.381(b)(1).)

  Consolidated returns; carryback or consolidated net operating losses following the consolidation of two unrelated common parent corporations. Pursuant to the reverse acquisition rules of section 1.1502-75(d)(3) of the regulations, the portion of a consolidated net operating loss attributable to a newly formed common parent, following the consolidated of two unrelated common parents under section 368(a)(1)(A) of the Code, may be carried back to prior years of the affiliated group which is treated as continuing in existence. No portion of the consolidated net operating loss attributable to the newly formed common parent may be carried back to the prior years of the affiliated group which is treated as terminating.

ISSUE

  After a consolidation described in section 368(a)(1)(A) of the Internal Revenue Code, to what extent may the transferor corporations carry back consolidated net operating losses that are attributable to the newly formed common parent corporation?

FACTS

  X and Y were the common parent corporations of separate affiliated groups, each of which filed consolidated federal income tax returns. Pursuant to a plan of consolidation, X and Y consolidated into P, a newly formed corporation, in a transaction qualifying as a reorganization within the meaning of section 368(a)(1)(A) of the Code. The shareholders of X and Y each exchanged their stock for stock of P. Upon consummation of the consolidation, X and Y ceased to exist. The subsidiary members of the former X and Y groups became subsidiary members of the P affiliated group. After the consolidation, the former X shareholders, as a result of having owned stock in X, owned more than 50 percent of the fair market value of the outstanding stock of P.

  P filed a consolidated federal income tax return on a calendar year basis with the members of the P affiliated group. The P affiliated group incurred a net operating loss for the first tax year after the consolidation.

LAW AND ANALYSIS

  Section 381(a)(2) of the Code provides, in part, that, in a transfer of assets to which section 361 applies and which is in connection with a reorganization described in section 368(a)(1)(A), the acquiring corporation succeeds to and takes into account the items of the transferor corporation described in section 381(c). Section 361 provides for the nonrecognition of gain or loss in a statutory merger or consolidation described in section 368(a)(1)(A).

  Section 381(b)(1) of the Code provides that the tax year of the distributor or transferor corporation ends on the date of distribution or transfer. Section 381(b)(3) provides that the corporation (acquiring corporation) acquiring property in a distribution or transfer described in section 381(a) is not entitled to carry back a net operating loss or a net capital loss, for a tax year ending after the date of distribution or transfer, to a tax year of the corporation (transferor corporation) distributing property.

  Section 1.1502-75(d)(1) of the Income Tax Regulations provides that as a general rule an affiliated group of corporations is considered as remaining in existence if the common parent corporation remains as the common parent and at least one subsidiary remains affiliated with it.

  Section 1.1502-75(d)(3)(i) of the regulations describes a class of transactions (reverse acquisitions) and provides for them an exception to the general rule of section 1.1502-75(d)(1). Specifically, this exception provides that if a corporation (the first corporation) or any member of the group of which the first corporation is the common parent, acquires:

  (a) stock of another corporation (the second corporation), and as a result the second corporation becomes (or would become but for the application of section 1.1502-75(d)(3)(i)) a member of a group of which the first corporation is the common parent, or

  (b) substantially all of the assets of the second corporation, in exchange  (in whole or in part) for the stock of the first corporation, and the stockholders (immediately before the acquisition of the second corporation, as a result of owning stock in the second corporation, own (immediately after the acquisition) more than 50 percent of the fair market value of the outstanding stock of the first corporation, then any group of which the first corporation was the common parent immediately before the acquisition ceases to exist as of the date of acquisition, and any group of which the second corporation was the common parent immediately before the acquisition is treated as remaining in existence with the first corporation becoming the common parent of the group.

  Section 1.1502-75(d)(3)(v)(b)(1) of the regulation provides, in general, that if, in an acquisition described in section 1.1502-75(d)(3)(i), the first corporation files a consolidated federal income tax return for the first tax year ending after the date of acquisition, and if the acquisition is described in section 381(a)(2) of the Code, then, for purposes of section 381, all tax years ending on or before the date of acquisition of the first corporation and of each corporation that immediately before the acquisition is a member of the group of which the first corporation is the common parent, are treated as tax years of the 'transferor corporation' that is referred to in section 381(a). The second corporation does not close its tax year merely because of the acquisition. Tax years ending on or before the date of acquisition of the second corporation and of each corporation that immediately before the acquisition is a member of any group of which the second corporation is the common parent, are treated as tax years of the 'acquiring corporation' that is referred to in section 381(a). See section 1.1502-75(d)(3)(v)(b)(2).

  Section 1.1502-79(a)(1)(i) of the regulations provides, in general, that if a consolidated net operating loss can be carried under the principles of section 172(b) of the Code and section 1.1502-21(b) of the regulations to a separate return year of a corporation that was a member in the year in which such loss arose, then the portion of such consolidated net operating loss attributable to such corporation is apportioned to such corporation and is a net operating loss carryover or carryback to such separate return year; accordingly, such portion is not included in the consolidated net operating loss carryovers or carrybacks to the equivalent consolidated return year.

  Section 1.1502-1(e) of the regulations provides that the term 'separate return year' means a tax year of a corporation for which it files a separate return or for which it joins in the filing of a consolidated return by another group.

  In the present situation, the consolidation of X and Y into P and the issuance of more than 50 percent of the stock of P to the shareholders of X constitutes a 'reverse acquisition' as described in section 1.1502-75(d)(3)(i) of the regulations. For purposes of section 1.1502-75(d)(3)(i), P qualifies as the 'first corporation' since P acquired substantially all of the assets of the transferor corporations in exchange for P stock. The fact that P did not exist before the transaction does not change this result. X qualifies as the 'second corporation' because X shareholders immediately before the consolidation), as a result of owning stock in X, own (immediately after the consolidation) more than 50 percent of the fair market value of the outstanding stock of P. Accordingly, the X group remains in existence (with P becoming the common parent). Section 1.1502-75(d)(3)(i). As a result, the X group does not close its tax year. Section 1.1502-75(d)(3)(v). Because the X group remains in existence, tax years of the X group ending on or before the consolidation are not 'separate return years' unless they would have been such in the absence of the consolidation.

  Section 1.1502-75(d)(3)(v)(b)(2) of the regulations reverses the application of section 381(b)(3) of the Code such that tax years of X (the second corporation) ending on or before the consolidation, and of each corporation that immediately before the consolidation is a member of any group of which X is the common parent, are treated as tax years of the acquiring corporation. Therefore, X is not treated as a transferor corporation, and, under section 172(b) of the Code and section 1.1502-21(b) of the regulations, consolidated net operating losses of the P group that are attributable to P may be carried back to tax years of X and the former X group ending on or before the date of the consolidation. Furthermore, consolidated net operating losses of the P group that are attributable to the subsidiary members of the former X group (which continues as the P group) may be carried back to prior tax years of the former X group ending on or before the consolidation to the extent permitted under section 172(b) and section 1.1502-21(b).

  Y is treated as a transferor corporation for purposes of section 381(b) of the Code because its shareholders did not acquire more than 50 percent of the fair market value of the stock of P, therefore, the Y group ceases to exist and its tax years ends on the date of the consolidation. Thus, tax years of Y and the former Y group ending on or before the effective date of the consolidation are treated as separate return years. Consolidated net operating losses of the P group that are attributable to P may not be carried back to prior tax years of Y and the former Y group.

Section 381(b)(3).

  Consolidated net operating losses of the P group that are attributable to the subsidiary members of the former Y group, to the extent permitted by section 172(b) of the Code and section 1.1502-21(b) of the regulations, may be carried back to the separate return years of the subsidiary members of the former Y group ending on or before the consolidation. Section 1.1502-79(a)(1).

HOLDING

  The portion of consolidated net operating losses attributable to P, the newly formed entity, may be carried back to the prior tax years of X and the X group. None of the consolidated net operating losses attributable to P may be carried back to prior tax years of Y and the former Y group.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Richard M. Marsh of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling contact Mr. William Barry on (202) 566-4551 (not a toll-free call).

Rev. Rul. 89-80, 1989-1 C.B. 273, 1989-25 I.R.B. 8.