Tax allocation agreements should be developed to ensure that beneficiary members of the group bear their share of the consolidated tax liabilities. One option is to allocate the group`s liabilities as a percentage of consolidated taxable income on the basis of each member`s own tax debt or on the basis of each member`s taxable income. It is often necessary to take a stand-alone approach when a group includes a regulated member. As a general rule, the rates that regulators can charge a distribution company are based in part on its service costs, including taxes. When taxes are awarded in a different way than a separate base, customers can pay rates that reflect costs or benefits for other unregulated members of the consolidated group. As a result, a regulated member`s share of his group`s tax debt cannot, in many states, exceed the tax debt that the company would have owed to the IRS as a self-employed tax liability. Only a few states provide for a distribution of unregulated tax benefits through consolidated tax-sharing adjustments, the discussion of which goes beyond the scope of this article. In the example above, USD 1,400 (3,000 CNOL carried over to year 4, 1,600 CNOL used to compensate for the group`s taxable year 4) of the CNOL at the end of the 4th year. If the remaining loss is attributable to a member who then leaves the group, several complex questions arise. While an in-depth discussion of these issues goes beyond the scope of this section, you should consider the following circumstances: If a parent company sells a subsidiary`s stock at a loss and the member is deconsolidated, the consolidated refund rules may allow the superior entity to reassign some of the member`s tax attributes.
[See section 1.1502-36 of Treasury Regulations; see also Internal Income Code (IRC) Section 108 and Treasury Regulations section 1.1502-28.] This allows the parent company to retain the outgoing member`s tax attributes and prevents that member from using these attributes in subsequent separate return years. To avoid this, a buyer may require, prior to the closing of the transaction, that the group`s tax allowance agreement be amended to contain a language that expressly prohibits the parent from reallocating a member`s tax attributes. Alternatively, a tax allocation agreement could assign a refund based on the member who generates the taxable income that allows the group to use the advance. Under this method, the group would be treated in such a way as to record the total loss of subsidiary 1 in year 3, the subsidiary having generated 1,100% of the revenues that allowed it to use the notes. Since Subsidiary 1`s share of the loss is fully absorbed, the group would then turn to its subsidiary 2 and use $600 $US of its $2,000 stake in CNOL.