Rev. Rul. 57-294

Advice has been requested whether the portion of a consolidated net operating loss for the calendar year 1954, attributable to a corporation which became a member of an affiliated group of corporations in that year, and the net operating loss of the corporation for that part of 1954 before affiliation are allowable as a net operating loss carryback to the corporation's taxable year 1952 when it filed a separate income tax return.

On May 31, 1954, all of the issued and outstanding stock of M corporation was purchased by another corporation. Both corporations keep their books and file their income tax returns on the calendar-year basis. For the calendar year 1954, a consolidated income tax return was filed by the affiliated group showing a consolidated net operating loss. The consolidated net operating loss included a net operating loss sustained by M for the seven-month period in 1954 during which it was a member of the affiliated group. M filed a separate income tax return for the short period from January 1, 1954, to May 31, 1954, showing a net operating loss for the first five months of 1954. For the calendar years 1952 and 1953, M had filed separate income tax returns showing net income for 1952 and a net operating loss for 1953.

Section 172(b)(1) of the Internal Revenue Code of 1954 provides that a net operating loss for any taxable year ending after December 31, 1953, shall be a net operating loss carryback to each of the two taxble years preceding the taxable year of such loss and a net operating loss carryover to each of the five taxable years following the taxable year of such loss.

Section 1.1502-31(e) of the Income Tax Regulations provides that any period of less than 12 months for which either a separate return or a consolidated return is filed under the provisions of section 1.1502-13 of the Regulations, because of a change in affiliated group during a taxable year, shall be considered as a taxable year.

In the instant case, the period for which the income of M is included in the consolidated return and the period for which a separate return was filed are both considered taxable years for the purpose of the net operating loss carryback and carryover provisions of section 172(b)(1) of the Code.

Accordingly, it is held that, where a calendar-year corporation became a member of an affiliated group which also reported on the calendar-year basis, a net operating loss sustained by it for that part of 1954 prior to affiliation may be carried back to its separate return for the year 1952. If it also sustained a net operating loss for that part of 1954 following affiliation, such portion of the consolidated net operating loss for that year as is attributable to it may be carried back to its separate return for the calendar year 1953 and to its short period return for 1954 prior to affiliation. If the net operating losses of the subsidiary are not absorbed in such preceding taxable years, the remaining portion may be carried, over to each of the five taxable years following the taxable years of such losses, subject to the limitations, if applicable, of section 1.1502-31(b)(3) of the Income Tax Regulations.

Where the affiliated group terminates during a taxable year because there is no subsidiary affiliated with it, such taxable year will be considered the immediately preceding taxable year for purpose of section 172(b)(1) of the Code to which the net operating loss shown on the separate return of the subsidiary for the short taxable period ending thereafter may be carried.