Paul L. Caron

Wednesday, July 22, 2015

Tax Court Throws Marvel For $16 Million Loss In NOL Adjustment Case

MarvelMarvel Entertainment Group v. Commissioner, 145 T.C. No. 2 (July 21, 2015):

MEG was an affiliated group that filed consolidated returns. On Dec. 27, 1996, certain MEG member entities filed for bankruptcy under 11 U.S.C. ch. 11 and subsequently excluded cancellation of indebtedness (COD) income from their respective gross incomes under I.R.C. sec. 108(a)(1)(A) for MEG’s short taxable year ending Oct. 1, 1998. Pursuant to I.R.C. sec. 108(b)(2)(A), MEG reduced each member entity’s allocable share of consolidated net operating loss (CNOL) by each member entity’s previously excluded COD income. MEG carried forward into its successor affiliated group a $47,424,026 CNOL and used this amount to offset income of the successor group for its taxable years ending Dec. 31, 2003 and 2004.

R determined deficiencies for 2003 and 2004, arguing that I.R.C. sec. 108(b)(2)(A) required MEG’s 1998 tax attribute reduction to occur at the consolidated level rather than at the individual entity level. P, the successor to MEG and as agent for the members of the affiliated group, timely filed a petition disputing R’s determinations.

Held: Where a member of a consolidated group has excluded COD income during a consolidated return year before the adoption of sec. 1.1502-28T, Temporary Income Tax Regs., 69 Fed. Reg. 12071 (Mar. 15, 2004), the NOL subject to reduction pursuant to I.R.C. sec. 108(b)(2)(A) is the entire CNOL of the consolidated group. See United Dominion Indus., Inc. v. United States, 532 U.S. 822 (2001).

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