State Tax Alert: Loss Carry Forwards

In a Comptroller of Texas Tax Policy Division letter ruling, a change to a new combined unitary group will not be the sole determining factor of whether the new combined group may claim the temporary credit for business loss carry forwards.

This pivotal decision may allow entities with previously revoked credits to request reinstatement of these credits and possibly file amended returns for refunds for open tax years. However, the credit may not be claimed for any years beyond the statute of limitations. In addition, the credits for those years cannot be carried forward from a closed year.

Summary of Texas Policy Letter Ruling 201404878L (4/9/2014)

NOLs generated prior to 2008 had to be converted by each eligible entity into a temporary credit for use under the new margin tax. Under the prior policy and before this ruling, if a combined group’s common owner changed, whether by acquisition or sale of a member of the combined group, then a new combined group was created. All members of the new combined group lost their current and future carry forward temporary credits (i.e., NOLs).

Under the new policy effective April 9, 2014, temporary credit disallowance is now determined on an entity-by-entity basis. The Comptroller provides the following three situations for determining when a taxable entity changes a combined group and the resulting rights to claim temporary credits:

1. Leaving a Combined Group

A member entity leaves a combined group when it: (1) ceases to be engaged in a unitary business with the other member entities; (2) no longer shares common ownership with the other member entities; or (3) terminates or dissolves.  If any of these events occur with respect to a particular member, then only that member loses its right to claim its own credit and the combined group is no longer allowed to claim that member’s individual credit. Any credit that would have carried forward from a previous year is also lost as it relates to the departing member. However the remaining members of the combined group continue the ability to use their temporary credits.

2. Joining an Existing Group

An entity joins an existing combined group when (1) the common owner or a member entity of an existing combined group acquires a controlling interest in the entity; and (2) the acquired entity is engaged in a unitary business with the other member entities of the combined group. Although the acquired entity cannot transfer their temporary credits to the existing combined group (it is presumed that these credits are permanently lost), the acquisition of new members does not impact the ability of the existing combined group to claim their previously earned credits.

3. Entity’s Acquisition Creates a New Combined Group

An entity’s acquisition by another taxable entity results in the creation of a new combined group when a controlling interest in one taxable entity is acquired by another taxable entity, and the entities are engaged in a unitary business; or when a controlling interest in one taxable entity is acquired by an individual who already owns another taxable entity, and the entities are engaged in a unitary business. In both of these situations, only the acquired entity loses its right to claim the credit, and the newly formed combined group may not take the acquired entity’s credit on the combined group report. The acquiring entity does not lose the right to claim the credit for entities that were part of the combined group prior to the acquisition.   

Based on this letter ruling, companies may need to determine whether to file refund claims beginning with their 2010 Texas franchise tax return.

If you have questions about this new policy, contact us.

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