The taxpayer appears to argue that the text of
Section 108(b)(2) is “clear on its face” and requires that only an allocable portion of the CNOL be reduced. The taxpayer cites The Limited, Inc. v. Commissioner, 286 F.3d 324 (6th Cir. 2002), for the rule of statutory construction that requires a statute to be interpreted by assigning an ordinary and natural meaning to an undefined term.
Here, however, the “ordinary meaning” rule does not apply because the term at issue, NOL, is expressly treated in the consolidated return regulations. Under those regulations, the CNOL is not apportioned and allocated to a member except as specifically provided by the regulations. Therefore, absent such a special allocation rule, the only NOL is the CNOL.
The exclusion of a member’s COD income from gross income reduces the consolidated taxable income (CTI) of the entire group. Because attribute reduction is a substitute for income inclusion, the “deferral policy” of Section 108 is served by reducing the tax attributes that are available to reduce the group’s CTI in future consolidated return years. In fact, under Section 172, a consolidated group may carry forward a CNOL to offset CTI in future years. Therefore, the entire CNOL should be available to offset the excluded COD income that stands in the place of taxable income.
At the time of the enactment of the Bankruptcy Tax Act of 1980, the consolidated return regulations provided that the only NOL that a consolidated group member could have from a consolidated return year was the CNOL. So, if Congress had intended for Section 108(b)(2)(A) to be applied to group members by reducing an NOL determined at the separate-member level, it would have enacted a specific rule to allocate and apportion the CNOL to members for that purpose.
In the end, the high court said it was “fair to say that the concept of separate NOL…simply does not exist.” Therefore, the Supreme Court provided the answer to the central question in this case: the CNOL is the NOL subject to reduction when a member of a consolidated group realizes excluded COD income.
Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
1 See Section 108(b)(2)(A).