Cleveland partner Kelly Burgan and associate Adam Fletcher co-authored an article, "Carrying Back and Planning Ahead: Ownership of Consolidated Tax Group Refunds in Bankruptcy," which was published in the May 2010 TMA Ohio Chapter Newsletter. TMA is the premier national organization of professionals dedicated to corporate renewal and turnaround management.
According to Burgan and Fletcher, "Recently, Congress extended the carry-back period for net operating loss deductions ("NOL's") from two to five years, with the passage of the American Recovery and Reinvestment Act of 2009 and the WorkerHomeownership, and Business Assistance Act of 2009. This expanded opportunity for tax refunds, especially during a time of financial crisis, could lead to more battles over tax refunds in the bankruptcies involving members of consolidated tax groups. Advisors to such companies should consider planning ahead to minimize potential conflicts."
The authors continue: "For affiliated corporate entities, filing as a consolidated tax group can be highly beneficial. Members of a consolidated tax group can offset past or present income tax liability using the excess tax credits or NOL's of fellow group members, generating tax savings or refunds using tax attributes that are unusable by the entity that generated them. But when one or more members of a consolidated tax group file bankruptcy, prior cooperation can turn into litigation."
Burgan and Fletcher go on to note that the legal battles "commonly center around the ownership of tax refunds generated by the consolidated group" and that "IRS regulations add another layer of complication by deeming the common parent of the affiliated entities the sole agent for the group," detailing the issues that arise in such cases.
The authors conclude: "Recent changes to the tax code and troubled economic times will likely lead to an increase in litigation over the ownership of consolidated tax group refunds in bankruptcy over the next several years. Consolidated tax groups can avoid potential litigation by planning ahead and carefully drafting tax-sharing agreements that clearly spell out the relationship the group members desire with regard to ownership of their tax refunds."