Imagine that a client is pursuing the acquisition of Corporation A that has a su
ID: 2445850 • Letter: I
Question
Imagine that a client is pursuing the acquisition of Corporation A that has a substantial net operating loss. Corporation B is a member of the controlled group and is currently included in the consolidated tax return that also has a net operating loss. Analyze the potential advantages and disadvantages of Corporation B’s acquisition of Corporation A and Corporation A’s subsequent inclusion in Corporation B’s consolidated tax return. Suggest the key tax issues the client should consider in determining the deductibility of the net operating losses.
Explanation / Answer
Solution-
In the leading case, where corporation B's acquisition of Corporation A has been made, the analysis would begin from the net operating losses carryover. Here as a result of change in ownership due to inclusion of corporation A into Corporation B, there is advantage for the corporate taxpayers to take benefit from the tax attributes as well as net operating losses that are accessed after acquisition.At the same time there is limits for the income against which the net operating losses has to be deducted, as well as limits for the tax liability for which tax attributes need to be adjusted or applied.The losses that are allowed as to be absorbed in the return year will be absorbed from same date on which occurred. The losses carried from the taxable years and those which are available to offset consolidated taxable income for the year. Moreover, the amount of any net losses carry over as well as carry backs absorbed by the group in which corporation B lies will be apportioned among members in the percentage of net operating losses attribute to them at the start of year.