The IRS has issued a private letter ruling (PLR 2013-42-004) providing that a taxpayer's net positive and negative income under Treas. Reg. 1.1502-21(f)(2), from a subsidiary with separate return limitation year (SRLY) net operating losses (NOLs), was included in the computation of consolidated taxable income for a SRLY subgroup of a consolidated group.
In general, if an entity joins a consolidated group with net operating loss carryovers, and the "overlap" rule under Treas. Reg. Sec. 1.1502-21(g) does not apply (which turns off SRLY rules when there is a Section 382 change that occurs contemporaneously with the SRLY event of joining the group), the NOLs are considered to be SRLY. These NOLs can be used only to offset the gains of the SRLY entity (or subgroup) until the SRLY entity (or subgroup) builds up enough positive income (the SRLY register) to "free up" the NOLs for use by the rest of the group.
In the letter ruling, the SRLY entities were merged out of existence into another member of the consolidated group, followed by the drop of certain assets. The rules do not allow the net positive income of a successor to "help" build up the SRLY cumulative register absent four exceptions. The first three exceptions rely on objective, factual situations. The fourth provides relief if the IRS so allows it. It appears relief was granted because the asset drop (thus invoking the successor rules) was represented to be undertaken for the purpose of obtaining certain regulatory approval, and the book value of such assets was greater than the book value of the acquiring subsidiary's assets.
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