sample research memo template



Memo - DRAFT - For Discussion Purposes Only

To: / Location:                         Doug Price
From: / Location:                         Beth Waterhouse
Date:                         March 5, 2007
Subject:                         ABC, Inc. SRLY Limitation
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
 
The purpose of this memorandum is to determine whether the losses of XYZ, Inc. can be used to offset income of ABC, Inc.
FACTS
In June 2006, ABC, Inc. ("ABC"), a U.S. corporation, acquired XYZ, Inc. ("XYZ"), also a U.S. corporation.  XYZ is now a wholly-owned U.S. subsidiary of ABC.  ABC is a profitable company and does not have net operating losses.  XYZ has net operating loss carryovers for U.S. tax purposes.  ABC would like to liquidate XYZ into ABC.
ISSUE
Will ABC be able to take benefit from XYZ's net operating losses, or are those losses limited by the separate return limitation year ("SRLY") rules?
CONCLUSION
For the taxable year of acquisition (i.e., 2006), ABC is required to compute the net operating loss deduction separately with respect to both XYZ and ABC.  In subsequent taxable years, ABC should be able to utilize the net operating loss without regard to the limitations which were imposed upon the former subsidiary.
 
LAW AND ANALYSIS
When a U.S. consolidated group acquires a new member, preacquisition losses and credits belonging to the acquired member are limited by “separate return limitation year” (SRLY) provisions under Treas. Reg. § 1.1502-15.  A SRLY is defined by the regulations as a tax year of a subsidiary in which the subsidiary was not a member of the consolidated group.  The SRLY limitation provides that preacquisition losses and credits can only be used to offset income earned by the subsidiary which originated the losses and credits.
When a subsidiary subject to a SRLY limitation is liquidated into its parent, and section 381 applies to carry-over the net operating loss from the liquidated subsidiary to the surviving corporation, Reg. § 1.1502-1(f) provides that the SRLY includes a “predecessor of a member.”  A predecessor of a member includes a transferor or distributor of assets to a member in a transaction to which section 381 applies (Rev. Rul. 75-378). 
When a subsidiary is liquidated into a parent during a consolidated return year, and its net operating loss carryovers are carried over to the parent under section 381(c)(1), then the SRLY rule must be computed with respect to both the subsidiary and parent in determining the amount of the consolidated net operating loss deduction for the taxable year in which the liquidation took place (Rev. Rul. 75-378; Priv. Ltr. Rul. 90-40-006).  In subsequent taxable years, the parent can take advantage of the unused net operating loss carryovers. [cite?]
 
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