Ruling 2022-1
CORPORATION BUSINESS TAX
COMBINED UNITARY GROUP
NET OPERATING LOSSES
FACTS:
A Connecticut combined unitary group consists of four taxable members: Corporation A, Corporation B, Corporation C, and Corporation D (the “Combined Group”). The Combined Group has filed a Connecticut unitary corporation business tax return since the income year ending December 31, 2016. Corporation D is a wholly owned subsidiary of Corporation C; Corporation C is a wholly owned subsidiary of Corporation B; and Corporation B is a wholly owned subsidiary of Corporation A.
The Combined Group generated net operating losses (“NOLs”) for combined unitary tax purposes in income years ending December 31, 2016, and December 31, 2017, which were allocated to Corporation B, Corporation C, and Corporation D in both years. 1 These NOLs were reported on the Combined Group’s Connecticut unitary corporation business tax returns for the above years, and have not yet been utilized by any member of the Combined Group. 2
Corporation B and Corporation C were merged into Corporation D during the income year ending December 31, 2020. Corporation D is the surviving entity. Both mergers were treated as tax-free reorganizations for federal tax purposes under Internal Revenue Code section 368.
Subsequent to the mergers, Corporation A and Corporation D will file combined unitary corporation business tax returns together.
ISSUE:
Do the Combined Group’s NOLs that were allocated to Corporation B and Corporation C survive the mergers so that they may be utilized by Corporation D or any other member that was included in the Combined Group in the year of the loss, pursuant to Conn. Gen. Stat. § 12-217(a)(4)(A)?
RULING:
Yes. The NOLs allocated to Corporation B and Corporation C survive the mergers and may be utilized by Corporation D or any other member that was included in the Combined Group in the year of the loss, pursuant to Conn. Gen. Stat. § 12-217(a)(4)(A).
DISCUSSION:
Prior to the mergers, Corporation A, Corporation B, Corporation C, and Corporation D were taxed on a combined unitary basis.3 Pursuant to Conn. Gen. Stat. § 12-218e(d), Corporations B, C and D were allocated a portion of the NOLs generated by the Combined Group. As they were each a part of the Combined Group that generated the NOLs, Corporations B, C and D were permitted to share their NOLs with each other and with Corporation A on subsequent combined unitary tax returns.4 As such, any of the four Corporations could utilize the NOLs against their allocated share of the Combined Group’s income.
Following the mergers, Corporation B and Corporation C became a single corporation with Corporation D. As one entity, the business activities of surviving Corporation D are comprised of the collective business activities of former Corporations B, C, and D. Moreover, Corporation A and Corporation D will continue to file combined unitary tax returns together. Thus, the business activities subject to combined unitary tax remain the same both before and after the mergers. By allowing Corporation D to utilize the NOLs allocated to Corporation B and Corporation C or to share such NOLs with Corporation A, the income against which the NOLs will be applied will be generated by substantially the same businesses which incurred the losses.5
Therefore, where taxable members are allocated a portion of a combined unitary group’s NOLs, and one or more of the taxable members merge with another taxable member of the combined unitary group, those NOLs may continue to be shared and utilized by the surviving taxable members as permitted by Conn. Gen. Stat. § 12-218e(d)(2) and (3). Accordingly, the NOLs allocated to Corporation B and Corporation C survive the mergers and may be utilized by Corporation D or any other member that was included in the Combined Group in the year of the loss, pursuant to Conn. Gen. Stat. § 12-217(a)(4)(A).
RULINGS AND REGULATIONS UNIT
LITIGATION DIVISION
January 18, 2022
1 NOLs incurred by a combined group are allocated to and carried forward by the taxable members. See Conn. Gen. Stat. § 12-218e(d). See also Special Notice 2016(1), Combined Unitary Legislation – Corporation Business Tax, p. 11.
2 Consistent with Policy Statement 2008(2), Requests for the Issuance of a Ruling, the Department has not verified and is not confirming the accuracy of the statement of facts.
3 See Special Notice 2016(1), Combined Unitary Legislation – Corporation Business Tax.
4 Pursuant to Conn. Gen. Stat. § 12-218e(d), a taxable member is permitted to share an NOL with another taxable member so long as they were both members of the combined group in the income year the NOL was generated.
5 The facts in this Ruling are distinguishable from those in Golf Digest/Tennis, Inc. v. Commissioner of Revenue Services, 203 Conn. 455 (1987). In Golf Digest, two corporations filing separate Connecticut corporation business tax returns were merged into the plaintiff corporation. One of the two merged corporations had generated a Connecticut NOL in the income year ending December 31, 1979. The surviving corporation sought to carry this loss forward and claimed operating loss carryovers in income years ending December 31, 1980, and December 31, 1981. The Connecticut Supreme Court denied these carryovers, following the reasoning in Lisbon Shops, Inc. v. Koehler, 353 U.S. 382 (1957), that the income against which a carryover is claimed must have been produced “by substantially the same businesses which incurred the losses.” Id. at 390. Examining the federal treatment of NOLs following a merger, the Court in Lisbon Shops found that there was no indication that the federal provisions “were designed to permit the averaging of the pre-merger losses of one business with the post-merger income of some other business which had been operated and taxed separately before the merger.” Id. at 386-87 (emphasis added). Unlike Golf Digest, Corporations B, C and D were taxed on a combined unitary basis and, therefore, were not taxed separately before the mergers when the NOLs were generated.