"Mike Lewis" <jmpj[at]cableone.net> wrote

- quote -

Mike:

The NOL allocation does not have to be reported on the T/R.
However, the owners cannot come up with a formula on their
own.

CCH is following the consolidated return regs. The amount
of a consolidated NOL (CNOL) that is attributable to a
member of the consolidated group is the product of the CNOL
and the percentage of the CNOL attributable to each member.
The cite is in the 1.1502-21 regs.

The percentage of the CNOL attributable to each member is
calculated by taking each member's NOL and dividing by the
total NOLs of the loss companies only.

For example, in your case a three member group with two
members having losses:

P has a income of 200; S1 has loss of (400); and S2 has a
loss of (600) resulting in a CNOL of (800).

S1's % = (400) / [(600)+(400)] = 40%
S2's % = (600) / [(600)+(400)] = 60%

CNOL allocated to S1 = 40% x 800 = 320
CNOL allocated to S2 = 60% x 800 = 480

This is important for following the investment adjustment
rules in determining P's basis in its subs (1.1502-32 regs).
Additionally, watch out for excess loss accounts (ELAs) if
the subs keep losing money.

An ELA is created when the negative adjustments to the
owning member's basis in the stock exceeds its unadjusted
basis plus all positive adjustments. The ELA is taken into
income on disposition of that stock. Dispositions include
events which result in deconsolidation of the stock. For
example, reducing ownership from 80% to 79% would
deconsolidate the sub and the ELA would be taken into income
by the parent company. (ELAs are in the 1.1502-19 regs).

These are extremely complicated regs and I make no claim
that I am an expert on them. However, I have had some
experience with them and so am confident in the above.

That being said, it's not to be used as advice. <VBG
The other thing to consider is whether there are state
implications. For instance, the companies may file T/Rs on
a separate company basis in one or more states. In that
case, you need to track the separate company state NOLS as
well as the allocated federal NOLs. And. of course, not all
of the states handle NOLs in the same way; e.g., apportioned
state NOLs are carried over from year to year in state 1;
federal NOLs (as adjusted for federal state differences) are
carried over from year and subject to whatever the
apportionment amount is in the carryover year, etc. (CA
takes the combined loss and then allocates it to all members
of the reporting group (including the income companies) and
allocates the NOL on a relative apportionment basis.)

Sorry for being long-winded.

Regards,

Peter C. Gatto, CPA

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I use CCH fx tax software. One client is a 3 corp
consolidation. One corp makes money and the other 2 lose
money usually. This year the consolidated loss was 300K
which adds to a prior year c/o of 700K. For some reason, the
software is allocating a portion of the loss to the two
losing companies and showing this as one of the schedules. I
won't affect this year but I don't won't to show unnecessary
info on the return.

Is it necessary to reflect an allocation on the consolidated
return? As far as I know, the owners could decide to
allocate the entire loss to the company that is making money
or any other formula they might choose. Is this wrong?

Mike Lewis, CPA

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