The Internal Revenue Service (“IRS”) issued Private Letter Ruling 105886-13 on July 15th, 2013 regarding the treatment of a subsidiary’s post-merger net positive income, net capital gain and Internal Revenue Code (“IRC”) 38(c) contributions for the purpose of computing a Separate Return Limitation Year (“SRLY”) subgroup’s consolidated net income, consolidated net capital gain and consolidated 38(c) credit with respect to tax loss carryovers and tax credit carryovers of a terminating group.
The IRS advised the taxpayer that under 1.1502-21(f)(2) and 1.1502-22(f) the surviving group’s lower-tier subsidiary, the successor, should include its net positive income and net capital gain in the computation of the consolidated taxable income of the SRLY subgroup with respect to the loss carryovers. Further, under 1.1502-3(d)(2)(iii) the successor should include its post-merger net positive or negative contribution to the consolidated IRC 38(c) limitation in the computation of the consolidated section 38 credit of the SRLY subgroup with respect to the tax credit carryovers.
