Imagine that a client is pursuing the acquisition of Corporation A that has a su
ID: 2445861 • 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
Net operating loss for entity if included in the controlled group minimize the total tax liability of the corporation, as it is deducted from the total taxable income of the controlled group. It is the tax planning strategy most of the corporation follow where they purchase or acquire the entities which are in loss so that the loss can be included in the controlled group which can minimize the tax liability of the firm. In this case the loss for the corporation A is consolidated with the loss of the corporation B thus both the entities are the loss generating entities, but this can prove as an advantage to the controlled group as the loss for these entities can minimize the tax liability of the controlled group. The disadvantage is under section 351 of IRS says that the loss of the particular entity can be used to minimize the tax liability of the same entity and is not transferable to the other entity that means if the entity is continuously generating loss it cannot be transferred to the other entity which has the high tax liability, thus it ends up paying high tax.
Key issues client should consider are:
The carry back and carryforward period of the loss.
Check if the section 351 limitation applies or not.