Academic journal article Journal of Accountancy

Consolidated Carryback of Product Liability Expenses

Academic journal article Journal of Accountancy

Consolidated Carryback of Product Liability Expenses

Article excerpt

The U.S. Supreme Court resolved a conflict between the Fourth and Sixth Circuit appeals courts in a case involving the 10-year carryback of product liability losses under IRC section 172(b)(1) for an affiliated group filing a consolidated return. In 2000, in Intermet Corp., 209 F3d 901, the Sixth Circuit had determined Treasury regulations sections 1.1502-11 and 1.1502-21 allowed net operating losses to be carried back for 10 years to the extent consolidated product liability losses exceeded the consolidated net operating loss. However, in United Dominion Industries, Inc., the Fourth Circuit held that the product liability losses to be carried back for 10 years were limited to the individual company's respective taxable income.

United and its subsidiaries, an affiliated group filing a consolidated return, had a net operating loss for each of the tax years in question. Members of the group had aggregate product liability losses that were less than the entity's consolidated net operating loss. The specific companies generating the product liability losses each had positive separate taxable income. United carried back the aggregate amount of product liability losses for the full 10-year period. The IRS initially agreed with United but was overruled by the congressional joint committee on internal revenue taxation. The district court also agreed with United. However, the Fourth Circuit disallowed the 10-year carryback, arguing that, since the particular companies with the product liability losses also had positive separate taxable income, none of the consolidated net operating losses qualified for the 10-year carryback.

Result. For the taxpayer. The Supreme Court said the Fourth Circuit was wrong in its holding that no part of the consolidated group's net operating loss qualified for the special 10-year carryback for product liability expenses.

United had argued that the consolidated return regulations under IRC section 1502 supported its position. Regulations section 1502-11 requires a consolidated group to determine its consolidated net operating loss as follows. Each group member computes its separate taxable income as though it were a separate corporation, with some modifications. …

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