Two commonly-controlled subsidiaries of the same parent (one profitable, one running losses) plan a tax-free statutory merger mid-year -- however the merger is structured (whichever entity survives), how much of the loss-making subsidiary's current-year losses can offset the profitable subsidiary's income for that same year, and can older, prior-year net operating losses be used right away too?

Date note: the document header prints "October 21, 1985" (matching the TSB-A publication numbering) while the sign-off reads "DATED: September 9, 1985" -- these are not in conflict; unlike a genuine typo, this pattern (an internal determination signed on one date, formally issued/numbered weeks later) recurs across several nearby 1985 opinions in this batch. issued_date is set to the sign-off date, 1985-09-09, as the date the Department's determination was actually made.

Plain-English summary

Techtran Systems, Inc. ("Systems") and A.D. Data, Inc. ("A.D.") are both wholly owned subsidiaries of the same parent, Techtran Industries, Inc. -- both file a consolidated federal return with their parent but have historically filed SEPARATE New York franchise tax returns. As of their most recent returns (fiscal year ending August 31, 1984), A.D. had only a small $400 New York net operating loss carryover, while Systems carried a substantial $681,025 NOL carryover accumulated over several prior fiscal periods (including $54,072 inherited from a predecessor Idaho corporation, also named Techtran Systems, that merged into the present entity in 1981). For fiscal year ending August 31, 1985, A.D. expected to be PROFITABLE while Systems expected to continue operating at a LOSS. The parent considered a tax-free statutory merger between the two, effective June 1, 1985 (about 92 days before the August 31, 1985 fiscal year-end), under IRC section 368(a) -- and asked how the loss offset would work whichever entity survived.

New York's Article 9-A net operating loss deduction (section 208.9(f)) presumptively follows the federal computation under IRC section 172, limited to periods the loss-generating corporation was actually subject to Article 9-A tax. For a statutory merger, IRC section 381 lets a surviving corporation inherit certain tax attributes (including NOL carryovers) from the merged corporation, but section 381(c)(1)(B) caps how much of the merged corporation's CURRENT-YEAR loss can offset the survivor's income in that same first post-merger year: the offset is limited to a ratio of (days in the taxable year AFTER the merger date) to (total days in the taxable year). On these facts, with a June 1, 1985 merger date and an August 31, 1985 year-end, that ratio is 92:365.

The Department also addressed IRC section 381(c)(1)(B)'s interaction with F-reorganizations: ordinarily a federal NOL cannot be carried BACK from a merger survivor to the merged corporation's pre-merger years, unless the merger of a wholly owned subsidiary into its parent qualifies as both a section 332 liquidation AND a section 368(a)(1)(F) reorganization (requiring unchanged shareholders/proprietary interest, the same or integrated business activities before the merger, and unchanged business enterprise after). Since these commonly-controlled sister subsidiaries' merger doesn't fit that narrow F-reorganization carryback scenario, ordinary carryforward-only rules apply, with losses used in strict chronological order starting with the survivor's own losses.

Applying all this: WHICHEVER entity survives, Techtran Systems' fiscal-1985 loss can offset A.D.'s fiscal-1985 income only up to the 92:365-prorated amount; any remaining Systems loss carries forward to offset A.D.'s income in LATER years. Systems' PRIOR-period NOLs (the $681,025 carryover) cannot be used against the combined fiscal-1985 income at all -- they can only be applied to combined income in SUBSEQUENT periods, after first deducting any current-period combined loss and any of A.D.'s own prior-year carryovers. Finally, the Department flagged that the $54,072 piece of the carryover inherited from the 1981 Idaho predecessor merger may require ITS OWN separate proration, since that predecessor was a foreign corporation whose first New York taxable period was under twelve months.

What this means for you

Corporate groups merging commonly-controlled, differently-performing subsidiaries mid-year

A loss-making subsidiary's current-year losses don't fully offset a profitable sister subsidiary's same-year income in a mid-year statutory merger -- only the portion of the year AFTER the merger date counts, prorated by days. Time your merger date carefully if maximizing current-year loss utilization matters, since an earlier merger date increases the usable post-merger proration.

Using accumulated NOL carryovers after a merger

Older, prior-period net operating losses generally can't be used against the MERGER YEAR's combined income at all -- they roll forward to future years instead, applied in strict chronological order behind the surviving corporation's own losses. Plan multi-year projections accordingly rather than assuming a big accumulated NOL balance can immediately offset a newly profitable combined entity.

Common questions

Q: Does it matter which of the two merging subsidiaries survives the merger?
A: No -- the Department reached the same proration and carryforward conclusions regardless of whether A.D. Data or Techtran Systems was the surviving corporation.

Q: Can a merged subsidiary's post-merger loss be carried BACK to offset its own pre-merger income?
A: Generally no under IRC section 381, unless the merger qualifies as both a section 332 liquidation and a section 368(a)(1)(F) reorganization with unchanged shareholders and unchanged business activity -- a narrow exception not available on facts like these commonly-controlled sister-subsidiary mergers.

Q: In what order must multiple years of accumulated losses be applied?
A: In strict chronological order, beginning with the surviving corporation's own loss carryovers before reaching the merged corporation's carryovers.

Q: Can another corporate group rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other corporate groups, even those merging similarly commonly-controlled subsidiaries.

Citations and references

Statutes and regulations:

• Tax Law § 208.9(f)
• Internal Revenue Code § 368(a), § 368(a)(1)(F), § 381, § 381(c)(1)(B), § 332

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_25c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(25) C
Corporation Tax
October 21, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C850326A

On March 26, 1985 a Petition for Advisory Opinion was received from Techtran Systems,
Inc., 200 Commerce Drive, Rochester, New York 14604.
The issues here raised are: (1) if A.D. Data, Inc. and Techtran Systems, Inc. were to join in
a statutory tax free merger which was effective June 1, 1985 (pursuant to Internal Revenue Code
Section 368(a)), with A.D. Data continuing as the surviving corporation, to what extent would the
Techtran Systems losses incurred during fiscal year ending August 31, 1985 be available for use
against the A.D. Data income earned in the fiscal year ending August 31, 1985 for the purpose of the
New York State franchise tax;
(2)
to what extent could the prior period net operating losses of Techtran Systems be
carried forward and be used to offset the current period combined income and the combined income
of future periods for the purpose of the New York State franchise tax;
(3)
if A.D. Data, Inc., and Techtran Systems, Inc. were to join in a statutory tax free
merger which was effective June 1, 1985 (pursuant to Internal Revenue Code Section 368(a)), with
Techtran Systems continuing as the surviving corporation, to what extent would the Techtran
Systems losses incurred during the fiscal year ending August 31, 1985 be available for use against
the A.D. Data income earned in the fiscal year ending August 31, 1985 for the purpose of the New
York State franchise tax; and
(4)
to what extent could the prior period net operating losses of Techtran Systems be
carried forward and be used to offset the current period combined income and the combined income
of future periods for the purpose of the New York State franchise tax.
Techtran Systems, Inc., 200 Commerce Drive, Rochester, New York, (referred to herein as
"Systems") is a wholly owned subsidiary of Techtran Industries, Inc., 200 Commerce Drive,
Rochester, New York.
A.D. Systems, Inc., 200 Commerce Drive, Rochester, New York (referred to herein as
"A.D.") is also a wholly owned subsidiary of Techtran Industries, Inc.
While both "Systems" and "A.D." join with their parent corporation, Techtran Industries, Inc.
in filing a consolidated corporation income tax return (Form 1120) for Federal income tax purposes,
they have historically filed separate New York franchise tax returns.
The most recent tax returns filed by these Corporations related to their respective fiscal years
ending August 31, 1984.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(25) C
Corporation Tax
October 21, 1985

As of August 31, 1984, "A.D." reported a New York net operating loss carryover to its fiscal
year ending August 31, 1985 in the amount of $400. In the fiscal year ending August 31, 1984,
"A.D." reported a business allocation percentage of 50.70%. (The total corporate loss was $790).
As of August 31, 1984, Systems reported a New York net operating loss carryover in the
amount of $681,025. The loss carryover is attributable to the following fiscal periods:
Tax Period
Ending

New York
Net Operating Loss

8/31/81
11/30/81
8/31/82
8/31/83
8/31/84

$ 85,817
54,072
212,989
181,346
146,801

Income Allocation
Percentage For Period
100%
100%(*)
100%
100%
100%

(*)
The $54,072 loss indicated from the period ending November 30, 1981 was carried
over from a predecessor corporation, also called Techtran Systems, Inc. which was incorporated in
Idaho, and merged on November 30, 1981 with the present Techtran Systems, Inc. The predecessor
corporation also had a 100% business allocation percentage.
For the tax year ending August 31, 1985, "A.D." expects to operate at a tax profit. For the
fiscal year ending August 31, 1985, "Systems" expects to continue to operate at a tax loss.
Tax Law, Section 208, subdivision 9, paragraph (f) permits a corporation subject to tax under
Article 9-A a net operating loss deduction "which shall be presumably the same as the net operating
loss deduction allowed under Section 172 of the Internal Revenue Code of 1954, . . . except that .
. . such deduction shall not include any operating loss sustained . . . during any taxable year in which
the taxpayer was not subject to the tax imposed by this Article . . .". Under the limitation of this
provision, a net operating loss deduction of a survivor corporation in a merger can only embrace the
net operating loss deduction sustained by the merged corporation during that portion of a taxable
period when the merged corporation was subject to Article 9-A taxation.
Internal Revenue Code Section 381 provides that a corporation which acquires the assets of
another corporation in certain liquidations and reorganizations, including statutory mergers and
consolidations, may succeed to and take into account certain tax items of the distributor or transferor
corporation, including net operating loss carryovers. Internal Revenue Code Section 381(c)(1) sets
forth the rules which must be applied in determining the carryover of the transferor's loss;
subparagraph (B) states:

-3­
TSB-A-85(25) C
Corporation Tax
October 21, 1985

"In determining the net operating loss deduction, the portion of such
deduction attributable to the net operating loss carryovers of the
distributor or transferor corporation to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer
shall be limited to an amount which bears the same ratio to the
taxable income (determined without regard to a net operating loss
deduction) of the acquiring corporation in such taxable years as the
number of days in the taxable year after the date of distribution or
transfer bears to the total number of days in the taxable year."
Simply stated, the carryover of the predecessor's losses to the successor's first taxable year
ending after the transfer is limited to the successor's taxable income attributable to the portion of the
year after the transfer.
The Internal Revenue Code does not permit a net operating loss carryback from the survivor
of a merger to the merged corporation unless the merger of a wholly owned subsidiary into its parent
qualifies as a liquidation under Section 332 of the Code and as a reorganization under Section
368(a)(1)(F). To qualify as an "F" reorganization, the following requirements must be met:
(1)
The shareholders and proprietary interest in the parent must
not change as a result of the merger;
(2)
the transferor corporation and the acquiring corporation must
be engaged in the same business activity, or integrated activities
before the merger; and
(3)
the business enterprise of the survivor corporation and the
merged corporation must continue unchanged after the merger.
If a survivor of a merger in an "F" reorganization wishes to carry back a net operating loss
arising after the merger to a transferor corporation's pre-merger taxable years, it must show that the
loss is attributable to a separate business unit or division formerly operated by the merged
corporation and that the merged corporation had income in the pre-reorganization taxable years.
If the merged corporations do not qualify as an "F" reorganization net operating losses
incurred by the merged corporations must be carried back three years to the corporation which
incurred the loss as if the merger did not take place. If any of the losses of the merged corporations
are left for carry forward, they must be applied in strict chronological order, beginning with the loss
of the survivor corporation.
Accordingly, if A.D. Data, Inc. and Techtran Systems, Inc. were to join in a statutory tax free
merger which was effective June 1, 1985 (pursuant to Internal Revenue Code Section 368(a)), with
A.D. Data continuing as the surviving corporation, Techtran Systems' losses incurred during the

-4­
TSB-A-85(25) C
Corporation Tax
October 21, 1985

fiscal year ending August 31, 1985 would be available for use against the A.D. Data income earned
in the fiscal year ending August 31, 1985 but would be limited to an amount which bears the same
ratio to the taxable income (determined without regard to a net operating loss deduction) of "A.D."
in such taxable year as the number of days in the taxable year after the date of distribution or transfer
bears to the total number of days in the taxable year (in this instance, 92 : 365 times the loss incurred
by "Systems"). The amount of "Systems'" operating loss remaining would be available as a carry
forward to be used by "A.D." against any income earned by it in subsequent periods.
Prior period net operating losses of Techtran Systems could not be carried forward and used
to offset the combined income for fiscal period ending 8/31,85, but could be applied to combined
income of subsequent periods for New York State franchise tax purposes, after deduction of any
current period combined loss and any loss carryover form "A.D.'s" prior fiscal years.
If A.D. Data, Inc. and Techtran Systems, Inc. were to join in a statutory tax free merger which
was effective June 1, 1985 (pursuant to Internal Revenue Code Section 368(a)), with Techtran
Systems continuing as the surviving corporation, Techtran Systems' losses incurred during the fiscal
period ending August 31, 1985 available for use against A.D. Data income earned in the fiscal year
ending August 31, 1985 would still be limited to the amount which is attributable to the portion of
the taxable period after the date of merger or consolidation.
Prior period net operating losses of Techtran Systems could not be carried forward and used
to offset the combined income for fiscal period ending 8/31/85. However, such prior period losses
could be applied to combined income of subsequent periods. After deduction of any current period
combined loss and any loss carryover from "Systems'" prior periods, any loss carryover from "A.D."
would be available for use.
Note that the net operating loss deduction of $54,072 indicated from the period ending
November 30, 1981, acquired from a predecessor corporation also called Techtran Systems, Inc.,
which was incorporated in Idaho on 1/13/81 and began business in New York State on 5/13/81 may
require proration since the taxpayer was a foreign corporation beginning business in New York State,
and whose first taxable period was for less than twelve months, even though the predecessor
corporation had a 100% business allocation percentage.

DATED: September 9, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.