For US taxpayers, the CARES Act1 created a valuable new tax asset—the ability to carry net operating losses (NOLs) back five years.2 But a company’s access to that asset may depend on its tax sharing or tax allocation agreements (TSAs).

TSAs provide the framework for how consolidated group members use each other’s tax attributes and for how members are compensated for that use. That framework is important when a company leaves or joins a consolidated group. And it is all the more important when a tax attribute in the current year (such as an NOL) can be carried back to a year before that company left or joined the group.

But the landscape for TSAs is in flux. For example, the CARES Act set up the third NOL scheme in as many years:

(1) before 2018, two-year carrybacks were allowed;
(2) for 2018 and 2019, no carrybacks were allowed, and
(3) now, five-year carrybacks are temporarily allowed for NOLs from 2018, 2019 and 2020—including carrybacks to years with higher tax rates.

Against all that, the Supreme Court’s recent decision in Rodriguez v. FDIC changed the body of law that governs issues not addressed (or not clearly addressed) in a TSA.3

As a result, many (perhaps most) current TSAs will be out of date. They may not contemplate NOL carrybacks. If they do, they may not contemplate tax rate differences. And either way, their drafters may have assumed that a different body of law would govern open questions.

In short, it’s time for companies to focus on the NOL provisions of the CARES Act and to evaluate their TSAs.


The CARES Act. The CARES Act was the largest legislative response (so far)4 to the economic effects of the COVID-19 pandemic. The $2.2 trillion package had many components, including general tax relief, a major piece of which was the broadened use of NOL deductions.5

A few years earlier, Congress had substantially curtailed taxpayers’ ability to use NOLs as part of tax reform. There, through the Tax Cuts and Jobs Act (the TCJA),6 Congress eliminated taxpayers’ ability to carry back NOLs to prior years (before that, taxpayers could carry back NOLs two years). And for NOLs taxpayers sought to carry to future years, the TCJA imposed an 80% income limitation.

The CARES Act removed (at least temporarily) both restrictions. As Congress had done during the last financial crisis,7 it gave taxpayers the ability to carry back NOLs for a five-year period, potentially generating highly-valuable refund claims. This time, however, the carryback feature is supercharged, because—if carried to pre-2018 tax years—NOLs will offset income taxed at a much higher rate (35% rather than 21%). The CARES Act also provided a time-value-of-money benefit by temporarily removing the 80% income limitation. This allows immediate use of NOLs, as opposed to having to wait until future years to use them (for some taxpayers, this can end up being a permanent difference as well).8 To implement these relief provisions, the IRS even used its administrative authority to expand the 12-month deadlines for filing so-called “quick” refund claims, which allow taxpayers to receive these benefits within 90 days.9

For companies with NOLs to carry back, this looks like nothing but good news. So what could go wrong? The answer, depending on your situation, may be quite a bit.

Tax Sharing Agreements. For most corporate taxpayers, things are rarely so simple as having a loss in one year and income in another. To begin with, most corporate “taxpayers” are actually affiliated groups of taxpayers. And those groups often have members that previously were in different groups, have former members that are now in different groups, or have former members that are now separate taxpayers.

The Internal Revenue Code allows an affiliated group of corporations to file a single, consolidated return.10 When it does so, the group’s members are generally treated as a single taxpayer for computing the group’s taxable income. Beyond convenience, this has a number of advantages, chief among them, the ability to offset one member’s income with another’s loss (as opposed to the first’s paying tax on its income and the second’s waiting for a later year to offset its own income with the loss).

Treating an affiliated group as a single taxpayer, however, produces its own administrative challenges, which are addressed through extensive regulations.11 While the members are treated as a single taxpayer in computing the consolidated group’s income, each remains a separate legal entity that must keep track of its own tax attributes. Among other things, the regulations require taxpayers to adjust their basis in, and the earnings and profits (E&P) of, their consolidated subsidiaries according to the subsidiaries’ income and losses.12 One purpose of these adjustments is to prevent income and losses reported by the consolidated group from being double counted when a subsidiary leaves the group.13

Double counting, however, is only one problem. Another is compensation. When one subsidiary’s loss offsets another’s income, the loss-generating subsidiary effectively transfers value to the rest of the group, which would otherwise have to pay tax on the offset income. When this happens, the regulations require adjustments to tax attributes but do not require actual economic compensation. Should the loss-generating subsidiary be compensated? 

These issues become more complicated when a corporation leaves an affiliated group—be it by sale, spin-off, merger, or otherwise. For example, suppose a former subsidiary generates an NOL and carries it back to a year when it was a member of the group, generating a refund. Is the subsidiary entitled to be compensated for all or part of that refund? Or is it just the group’s to use without compensation to the former subsidiary? The “fair” or “right” answer isn’t always obvious.

To deal with these problems, companies frequently enter TSAs, which specify the entities entitled to particular benefits and the entities responsible for particular costs. Generally speaking, these agreements can take a number of forms. For example, there are TSAs that many consolidated groups adopt to govern the economic sharing of tax attributes and other tax-related items during the group’s existence. There are also tax allocation provisions in stock purchase or merger agreements. And there are standalone tax sharing agreements negotiated at the time of a spin-off or other corporate separation.

Creating a TSA for a consolidated group in advance can have benefits, because not all exits are planned: for example, during the last financial crisis, the FDIC took a number of banks into receivership, causing them to leave their consolidated groups.14 But those benefits depend on the TSA’s clearly covering later events. In our experience, that is not always the case.

CARES Act Raises Potential Issues

Whose Refund? As noted above, the CARES Act changed the rules for NOL carrybacks. But it was hardly the first change to those rules. During the last financial crisis, Congress allowed five-year carrybacks. Once that crisis subsided, it still allowed two-year carrybacks. Then, with the TCJA, it eliminated carrybacks altogether and imposed limits on carryovers to future years.  

Depending on when a TSA was last reviewed, it may contemplate any of those prior regimes. As a result, when a former member elects to carry its loss back to a consolidated year, it may come calling for payment from its former parent, raising a number of questions:

  • Does the current TSA address NOL carrybacks at all?
  • Does it require a former subsidiary to carry back losses or, alternatively, require them to forego carrybacks?
  • Does it contemplate only two-year carrybacks (as under pre-TCJA law)?
  • Does it provide that former members are entitled to compensation if they carry NOLs back into consolidated return years?
  • Does it contemplate the change in rates and how that should affect compensation?

If the TSA doesn’t address NOL carrybacks or is imprecise in doing so, what general principles did the drafters assume would apply to fill gaps? Before February 25, courts in some circuits applied Federal common law.15 But, in Rodriguez v. FDIC, a unanimous Supreme Court admonished them for doing so, insisting that they must apply state contract law and equitable principles instead. While state law may reach the same answer in some cases,16 the policy considerations driving state rules may bear little resemblance to Federal tax policy, with potentially surprising results—at least from a tax perspective.

How Is the Refund Claimed? Assuming all those questions have been resolved, how does the consolidated group and its former subsidiary go about getting a refund? Here, taxpayers may benefit from the “quick” refund procedure under which the IRS does little more than check the math before paying the refund within 90 days (under IRS procedures, this typically occurs within 45 days).17 But, when a former subsidiary wants to seek a refund, it may have a problem: only the consolidated parent can make the required filing. Does the TSA obligate it to do so?

Who Fights the IRS? Finally, an audit delayed is not an audit denied: after paying the quick refund, the IRS is expected to audit the merits of the refund and is armed with powerful tools to claw back erroneous payments. What does the TSA say about audits? Is one party in control of the audit? Is that party the one that receives the benefit of the NOL? If not, what measures are in place to protect that party’s interests (e.g., to ensure the vigorous defense of the NOL or to ensure that the party in control of the audit doesn’t bargain away the NOL to resolve other issues)?

Practical Steps

Unfortunately, TSAs are often written with a different level of precision than the parties might wish for in hindsight. They might not be precise enough to cover foreseeable situations. Or they might lack general rules that can be applied to resolve issues caused by a change in law (as just occurred). Beyond that, not all future events are foreseeable—how many TSAs were drafted in contemplation of the current pandemic?

These uncertainties lead to ambiguities, which can lead to disputes. And, as a practical matter, these disputes tend to be acrimonious, pitting former colleagues against each other, with each side honestly believing that the other is trying to take advantage. As a result, these disputes can be difficult to settle and may lead to arbitration or litigation.

What is more, in our experience, many TSAs fail to adequately address situations of financial distress or bankruptcy (of either the parent or its former subsidiary). In those situations, one side can find itself arguing with a receiver or with creditors that had no involvement in the initial drafting of the TSA. Indeed, in those situations, ambiguities may even be used as leverage to negotiate for a greater share, regardless of the “correct” answer under the agreement.

Add to all of this the fact that—in practice—the complexity may be multiplied. First, a subsidiary that leaves one group often joins another, potentially resulting in layers of TSAs to interpret and resolve for each question. Second, when a subsidiary leaves a group, provisions on tax attributes are often not limited to the TSA and may appear in any number of agreements associated with an acquisition. As a result, a review of TSAs may require fact-finding about other related agreements.

So what should a taxpayer do now?

Review TSAs and Other Agreements. Given the changes in law under the CARES Act, taxpayers should review their TSAs and associated agreements for potential exposures. But that review should not be limited to NOLs. Taxpayers should also consider:

  • Sales of Members. Suppose that a group’s common parent sells the stock of a group member. How is the common parent’s gain or loss treated under the TSA? If the common parent recognizes a loss, are other members required to compensate it for the tax benefit of the loss?
  • Disregarded Entities (DREs). We have seen many TSAs that treat DREs as though they were corporate members of the group. In some circumstances, this can raise issues because, for tax purposes, a DRE’s income and attributes belong to its corporate owner. Does the group defined in the TSA include entities that are disregarded for federal income tax purposes (e.g., single member LLCs)?
  • State and Local Taxes. Some state and local rules for NOL carrybacks and carryovers differ from the federal tax rules. In some cases, the amounts involved can be significant. How does the TSA treat those differences?

Think About Resolution Strategies. Part of the review should include dispute resolution options. Does the agreement call for mandatory arbitration? Does it include a choice of law provision? Taxpayers should also consider how well suited they are for addressing ambiguities identified during their review of the TSAs. Is it better to proactively address an issue now? Or is it better to wait and see if it comes up?

Unless the agreements are crystal clear, it may be prudent to assume a dispute may ultimately lead to arbitration or litigation. This would argue for identifying all parties to the TSA negotiation, interviewing witnesses (starting with the friendly ones), and reviewing the memos, emails, and other documents that could shed light on ambiguous provisions. In our experience, having a tight handle on the facts—from both documents and witnesses—is crucial to deciding whether to seek compensation under a TSA and to deciding how to defend against such a claim from the other side. Similarly, because the personnel on either side of the dispute were often colleagues, a careful debrief of friendly witnesses and assessment of personalities on the other side can lead to highly perceptive understandings of what makes the other side tick and what can bring them to the bargaining table without arbitration or litigation.

Finally, TSAs should be carefully reviewed to ensure compliance with any notice provisions. And counsel should be consulted as to whether document preservation holds are in order.

Time Is of the Essence. There is some urgency to reviewing TSAs and thinking about resolution strategies. First, taxpayers have limited time to use the quick refund procedures for NOLs (depending on a taxpayer’s taxable year, deadlines may be as early as June 30, 2020).18 Second, should a subsidiary, group, or former subsidiary enter bankruptcy, the time to modify TSAs will likely be closed. Beyond that, bankruptcy will introduce others to the table (e.g., creditors’ committees), adding complexity to any decision not clearly addressed in the TSA.

In sum, the CARES Act and the Supreme Court’s decision in Rodriguez v. FDIC made many TSAs out of date. Regardless, in our experience, many TSAs do not adequately cover issues that arise in times of financial distress anyway. For that reason, now is the time to review and update TSAs and to develop strategies to minimize costly disputes. And with the short timeline under the quick-refund procedures, the sooner, the better.

1 Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, H.R. 748 (Mar. 27, 2020).

2 For a more detailed discussion of these provisions, see Wilcox, Kittle, Giardelli, Leeds, & Johnson, CARES Act Adds Five-Year Carryback Period and Suspends 80% Limitation for 2018, 2019 and 2020 Net Operating Losses, Mayer Brown (Mar. 27, 2020).

3 Rodriguez v. FDIC, Dkt. 18-1269, slip op. (Feb. 25, 2020). For further discussion, see Trust, Kiriakos, Gavant, & Gross, US Supreme Court Discards Bob Richards Rule, Holds ‘Federal Common Law’ Does Not Govern Inter-Company Distribution of Tax Refunds, Mayer Brown (Mar. 5, 2020).

4 Cf. Heath and Economic Recovery Omnibus Emergency Solutions Act, H.R. 6800 (passed House May 15, 2020).

5 Net Operating Loss deductions allow taxpayers to use losses generated in one year to offset income generated in another. This prevents taxpayers from being disadvantaged by the timing of when they generate losses and income (i.e., when losses and income are generated in the same year, they offset; the NOL deduction attempts to achieve the same result when losses and income are generated in different years).

6 See generally, Pub. L. 115-97, 131 Stat. 2054 (Dec. 22, 2017).

7 See American Recovery and Reinvestment Act of 2009, Pub. L. 115-5, § 1211, 123 Stat 115, 335 (Feb. 17, 2009).

8 The 80% limitation allows taxpayers to offset no more than 80% of their income with a NOL carryover from a prior year. Assuming the taxpayer has income in the following years, this is only a timing difference: the taxpayer can take the remaining deduction, but it must wait to do so. If, however, the taxpayer never has sufficient income to use the remaining 20%, this becomes a permanent difference: there is no future income to offset with the remaining 20%.

9 See Kittle-Kamp, Kittle, Wilcox, & Choi, Who CARES for Taxpayer Cash Flow? The IRS and Its Quick Refund Fix, Daily Tax Report (May 15, 2020).

10 See generally 26 U.S.C. §§ 1501–1564.

11 See e.g.,26 C.F.R. §§ 1.1502-0–1.1502-100.

12 See generally 26 C.F.R. § 1.1502-32; 26 C.F.R. § 1.1502-33.

13 For a simplified example involving a basis adjustment, suppose a subsidiary with a basis and value of $1,000 has a taxable loss of $100, which reduces its value to $900. That loss benefits the consolidated group by offsetting another subsidiary’s $100 taxable gain. If the group then sold the loss generating subsidiary for $900, without a basis adjustment, it would have another $100 loss ($1000 of basis minus $900 realized on the sale). The regulations reduce the basis by the amount of the loss, preventing the non-economic loss on sale ($900 of basis minus $900 realized on the sale). 26 C.F.R. § 1.1502-32(b)(2)(i).

14 See, e.g., In re BankUnited Financial Corp., 727 F.3d 1100 (11th Cir. 2013); In re Indymac Bancorp, Inc., 554 F. App’x 668 (9th Cir. 2014); FDIC v. AmFin Financial Corp., 757 F.3D 530 (6th Cir. 2014), cert. denied, 574 U.S. 1153 (2015); In re Downey Fin. Corp., 593 F. App’x 123, (3d Cir. 2015).

15 See, e.g., In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262, 265 (9th Cir. 1973); In re Prudential Lines Inc., 928 F.2d 565, 570–71 (2d Cir. 1991); Capital Bancshares, Inc. v. FDIC, 957 F.2d 203, 208 (5th Cir. 1992); Barnes v. Harris, 783 F.3d 1185, 1196 (10th Cir. 2015).

16 On remand in Rodriguez, the Tenth Circuit reached the same result applying only Colorado state law. See Rodriguez v. FDIC, No. 17-1281 (10th Cir. May 26, 2020).

17 For a detailed discussion of the application of section 6411 in this scenario, Kittle-Kamp, Kittle, Wilcox, & Choi, Who Cares for Taxpayer Cash Flow? The IRS and its Inspired Quick Refund Fix, Daily Tax Report (May 15, 2020).

18 See Notice 2020-26, § 3, 2020-18 I.R.B. 744, 745 (Apr. 27, 2020).