United States

Utah: Pre-Acquisition Losses of Merged Corporation cannot be used by Surviving Corporate Division

Jan 09, 2017
From KPMG TaxWatch

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An Administrative Law Judge (ALJ) for the Utah State Tax Commission recently held that the Utah losses of a corporation that was merged out of existence due to an acquisition could not be used to offset income earned by the corporate division that maintained the same operations as the original corporation. Prior to the acquisition, one of the corporate entities operated a manufacturing plant in Utah and generated separate company Utah losses. Subsequently, another entity acquired the Utah manufacturing entity’s foreign parent and commenced integration efforts between the foreign parent’s U.S. businesses and its own operations. As part of this effort, the Utah manufacturing entity was merged into one of the acquiring entity’s subsidiaries, becoming a division of that subsidiary. However, the division maintained the same plant and operations in Utah as the original corporation. For the years at issue, the taxpayer (the filing entity) filed combined Utah returns and attempted to use the losses to offset the Utah taxable income of the combined group. Later, the taxpayer argued that it should be allowed to use the losses to offset the income from the division that essentially operated as the prior corporation.

By statute, Utah provides that an “acquired corporation may deduct the acquired corporation’s net losses incurred before the date of the acquisition against the acquired corporation’s separate income . . . if the acquired corporation has continued to carry on a trade or business substantially the same as that conducted before the acquisition.” The taxpayer argued before the ALJ that under this statute it should be allowed to deduct the separate company losses that the Utah subsidiary incurred prior to the acquisition against the separate income of the Utah division. The Auditing Division, on the other hand, argued that none of the losses incurred prior to the acquisition remained available for carry forward after the acquired corporation was merged out of existence. Once this occurred, there was no longer an acquired corporation that could deduct its own pre-acquisition net losses against its post-acquisition income. Furthermore, once the Utah subsidiary no longer existed as a corporation, it could not “continue to carry on a trade or business substantially the same as that conducted before the acquisition,” as required by statute. The ALJ agreed with the Division that the statute did not allow the pre-merger losses of the Utah subsidiary to be deducted against the corporate division’s post-acquisition income. The ALJ also rejected the taxpayer’s argument that the Division could apply its alternative apportionment authority to deviate from the statutory provisions regarding use of losses, as the issue before it was not related to apportionment. Finally, the ALJ upheld the imposition of a ten percent negligence penalty. The Division had previously audited the taxpayer for the tax years at issue and disallowed the carry forward of the Utah subsidiary’s separate company losses. After the IRS audit adjustments, the taxpayer filed amended returns for the same years, which reported the federal audit adjustments and once again attempted to use the Utah subsidiary’s separate company losses against the taxpayer’s income. Please contact Chris Hoge at 810-237-1350 with questions on this ALJ decision.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.