Magazine article The CPA Journal

NOL Clarifications: SRLY and Ceilings

Magazine article The CPA Journal

NOL Clarifications: SRLY and Ceilings

Article excerpt

NOL CLARIFICATIONS: SRLY AND CEILINGS

By Ricky & Proper, Senior Tax Manager, American Express Tax and Business Serices, Inc.

In June 1999, the Treasury Department issued regulations that eliminated the need to apply the separate return limitation year (SRLY) rules in certain circumstances where IRC section 382 also applies. A SRLY is a tax year of a subsidiary (or subgroup) before it becomes a member of a consolidated group. The SRLY rules limit the use of losses and their carryovers to both consolidated and separate return years. Before these regulations, a SRLY limitation often arose when there was also a change of ownership (more than 50%) in the subsidiary that triggered IRC section 382. In response to criticism, the IRS eliminated SRLY restrictions in certain situations where there is an overlap with the change of ownership rules under IRC section 382.

In general, the new regulations would increase the amount of net operating losses (NOL) that a consolidated group could absorb. This change is effective for tax returns with an original due date after June 25, 1999. For a detailed discussion of the SRLY overlap rules, see "Acquisition of Loss Companies by Consolidated Groups," by Randy A. Schwartzman and Donald A. Barnes, The CPA Journal, December 1999.

The SRLY overlap rules resulted in unfavorable tax consequences for subsidiaries acquired during a tax year of the consolidated group to which the new regulations applied but before their actual issuance on June 25, 1999 (the interim period). The Treasury Department indicated in Notice 2000-53 that it would issue regulations for an election that allowed a subsidiary which ceased to be a member of a consolidated group in the interim period to avoid the application of the overlap rules to NOLs and capital losses for the year it left the group. The election would only apply if the subsidiary were acquired through a qualified stock purchase (80% of the stock purchased within a 12month period by a corporate purchaser). The election could only be made by the departing member and would have no impact on the consolidated return of the selling group. Until the final regulations are issued, a departing member may make the election by writing "Election Pursuant to Notice 2000-53" across the top of its first original or amended Form 1120 for the first taxable year after it ceases to be a member of the selling group. …

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