Current Developments: Affiliated and Related Corporations

Transcription

1 American Bar Association Section of Taxation Current Developments: Affiliated and Related Corporations January 21, 2011 Michelle Albert Ernst & Young LLP Marcie Barese PricewaterhouseCoopers LLP Andrew Eisenberg Jones Day Greg Featherman KPMG LLP Marie Milnes-Vasquez Internal Revenue Service

2 Agenda Regulatory update from the Government 9100 Relief for Consolidated Groups Making a Section 172(b)(1)(H) Election Section 1504(a)(3) - PLR Application of Treasury Regulations Section (h) Anti-Abuse Rule - ILM Section 382 and Consolidation - PLR

3 9100 Relief for Consolidated Groups Making a Section 172(b)(1)(H) Election

4 9100 Relief Available for Consolidated Groups to Make a Section 172(b)(1)(H) Election The Service will entertain 9100 relief requests for an extension of time for consolidated groups to make the extended carryback election under section 172(b)(1)(H)* Due date for calendar-year consolidated groups was September 15, See section 172(b)(1)(H)(iii)(II) Under (a), the Service may grant an extension of time to make a regulatory election Regulatory election : An election whose due date is prescribed by a regulation in the Federal Register or in guidance published in the IRB. See (b) Note the time for making the election under T(b)(3)(v) mirrors the statutory due date Consider: Section 1502 authority Consolidated attribute Waiver election under (b)(3)(i) *Section 172(b)(1)(H) allows an extended carryback period of up to five years for a single net operating loss incurred in either 2008 or

5 Practical Considerations To request 9100 relief: Submit a private letter ruling request Requests for 9100 relief may be granted when the taxpayer provides evidence to establish that The taxpayer acted reasonably and in good faith, and Granting relief will not prejudice the interests of the Government Standard for relief will not be met if taxpayer uses hindsight; see Means of making the section 172(b)(1)(H) election: Filing of Amended Return (Form 1120X) Filing of Application for Tentative Carryback Adjustment (Form 1139) See Rev. Proc , IRB 744 5

6 AMT Benefit of Making the Election Consolidated groups may make a section 172(b)(1)(H) election even when there is no capacity to absorb the loss, in order to eliminate the 90 percent limitation with respect to the applicable NOL on a carryforward basis. Notice , IRB 326, Q&A - 11 Section 56(d)(1)(A)(ii) provides that the 90 percent limitation does not apply to an ATNOL deduction attributable to an NOL for which a taxpayer made a section 172(b)(1)(H) election Question: Can a consolidated group that made split waiver elections with respect to recently acquired members still make a valid section 172(b)(1)(H) in order to gain the AMT benefit on a carryforward basis? 6

7 Considerations for Fiscal Year Groups Filing Form 1139 An Application for Tentative Carryback Adjustment Must be filed within 12 months after the close of the taxable year; see section 6411(a) Under section 6411(b), the Service has 90 days to examine the application The Service may disallow, without further action, any application that contains errors of computation that cannot be corrected within the 90-day period or that contains material omissions 9100 Relief is not available for an extension to file Form 1139* What happens if the application needs to be filed before PLR is issued? To prevent application from being denied, fiscal-year consolidated groups are advised to file Form 1139 with a statement that a PLR request has been submitted to the National Office * Note the time for filing Form 1139 is extended for certain newly-acquired members under

8 Section 1504(a)(3)

9 Five Year Reconsolidation Rule Section 1504(a)(3)(A) A simple looking rule that is not simple to apply, elevates the waiver rule of Section 1504(a)(3)(B), and in particular the automatic waiver rule of Rev. Proc , to an important planning tool for taxpayers. Section 1504(a)(3)(A) provides*: A corporation (and its successor(s)) may not be included in any consolidated return filed by an affiliated group - or another affiliated group with the same common parent (or its successor(s)) for a period of 61 months beginning after its first taxable year in which it ceased to be a member of such affiliated group, provided such corporation - 1)was included in the consolidated return filed by the affiliated group, and 2)ceased to be a member of such [affiliated] group. *Assumes post-1984 original affiliation. 9

10 Five Year Reconsolidation Rule Section 1504(a)(3)(A) Paradigm Case Example 1 (Non-Reverse Acquisition) /31/ /31/2006 V=$110 P P X stock $10 P X $10 P stock V=$10 S1 X S1 X S1 X S2 S2 S2 X-S2 ceased to be a member of the P affiliated group at the close of 12/31/05. X-S2 cannot join in the filing of a consolidated return with the P group (or the affiliated group of which P is the common parent) until 1/1/11. 10

11 Five Year Reconsolidation Rule Section 1504(a)(3)(A) Paradigm Case Example 2 (Reverse Acquisition) /31/ /31/2006 V=$110 P $100 P X stock $100 V=$10 P X stock $100 P stock S1 X S1 X S1 X V=$100 S2 S2 X and S2 ceased to be members of the P affiliated group at the close of 12/31/05. S2 If acquisition of X by P is a reverse acquisition - the P group terminates; X group continues (with P as common parent). However, X-S2 cannot join in filing of a consolidated return with the X group (with P as C/P) until 1/1/11, because X previously joined in the filing of a consolidated return of an affiliated group having P as the common parent. Who may continue to file a consolidated return? See Rev. Rul (allowing P to continue filing consolidated return with S1). 11

12 Five Year Reconsolidation Rule Section 1504(a)(3)(A) Non-Paradigm Case (but interesting) Example 3 (Reverse Acquisition) /30/2005 6/30/ /31/2007 P P: Stand alone Non consolidated I X S Elects to file consolidated return x I P 91% P V=$110 V=$100 P X X stock $100 X X-S: Separate Return Filers X S S Acquisition of X by P is a reverse acquisition ( (d)(3)) P group terminates; X group continues (with P as common parent) Consolidated return is filed from 1/1/05 12/31/05, and includes X and S for entire year and P from 7/1/05 12/31/05 S Does section 1504(a)(3)(A) prevent X S from filing a consolidated return until 1/1/13? Is X the common parent of the consolidated return filing group from 1/1/05 6/30/05? 12

13 Waiver of Five Year Reconsolidation Rule Section 1504(a)(3)(B) The Secretary may waive the Section 1504(a)(3)(A) restriction on reconsolidation. Rev. Proc ( C.B. 959) Its purpose is to provide an automatic waiver of the Five Year Reconsolidation Rule in certain situations. Historically, waiver has been given by PLR; but waiver is automatic, provided - Taxpayer can satisfy the following representations: -Section 5.04 Representation: (a) where old group had, and new group has, same common parent, such common parent was not an S corp, D/E, REIT or RIC during disaffiliation period, (b) where old group and new group have different common parents, neither the old group common parent, nor the new group common parent was an S corp, D/E, REIT or RIC during disaffiliation period. Section 5.14 Representation: The disaffiliation and subsequent consolidation has not provided and will not provide a benefit of (1) a reduction in income, (2) an increase in loss, (3) any other deduction, credit, or allowance (a federal tax savings), that would not otherwise be secured or have been secured had the disaffiliation and subsequent consolidation not occurred, including but not limited to, the use of a net operating loss or credit that would have otherwise expired, or the use of a loss recognized on a disposition of stock of the deconsolidated corporation (or its predecessor). In determining whether the disaffiliation and subsequent consolidation provided, or will provide, a federal tax savings, the net tax consequences to all parties, taking into account the time value money, are considered. Taxpayer follows the procedures for notifying the Service that it is electing the availing itself of the automatic waiver.* * Note: Rev. Proc (which applies to electronic filers) allows for different procedure when applying for the waiver. 13

14 PLR (12/3/2010) Facts: Waiver of Five Year Reconsolidation Rule Section 1504(a)(3)(B) FP USP Sale of some USS stock - disaffiliates USS from USP group. FP USP Acquisition of some USS stock - reaffiliates USS with USP group Subs USS Subs USS Taxpayer requested and Service concluded that USP and USS will properly determine whether USS s disaffiliation in year 3 has not resulted, and will not result, in a federal tax savings (for purposes of 5.14 of Rev. Proc ), by looking to whether the disaffiliation and subsequent consolidation has not resulted, and will not result, in an overall net tax benefit that would not otherwise be secured, or have been secured had the disaffiliation and subsequent consolidation not occurred, even if a tax benefit results for one isolated year. Likely Case: Disaffiliation in year 1 caused a federal tax savings with a NPV = <100x Reaffiliation in year 2 caused a federal tax cost with a NPV = >100x 14

15 Treas. Reg. Section (h) Anti-Abuse Rule

16 Historic ILM Strategy (simplified) X X P&M activities P&M employees Subs Subs P3 > 21% Co-Op X is the common parent of a US consolidated group and a large retailer, operating in many locations X s general office, regional divisions, and retail stores historically performed procurement and merchandising ( P&M ) functions (e.g., negotiating and maintaining contracts, etc.) Promoter approached X, suggesting the implementation of the Strategy, which included the formation of a cooperative ( Co-Op ), to avoid certain state taxes and defer taxable income for federal tax purposes (provided Co-Op is not a member of the X consolidated group) P3 and Co-Op were formed and Co-Op issued shares to X, Subs, and partnerships owned by X group 16 members, including newly formed P3

17 ILM (cont d) 17

18 ILM (cont d) General operation of Subchapter T Taxable cooperative can avoid federal income tax on otherwise taxable income by distributing such income to its patrons A cooperative may claim a deduction in any taxable year for qualifying patronage dividends paid up to 8 ½ months following the close of that taxable year. 1382(b) Patronage distributions are included in taxable income of the patrons in the year of receipt Treatment of cooperatives and patrons within a consolidated group Timing rules of -13 apply to ensure single entity treatment of the cooperative and patron Under -13(c), the intercompany item of S (deduction of cooperative) would be taken into account in the same taxable year as the corresponding item of B (inclusion of taxable income by patron) Under -13(c), B (the patron) takes its corresponding item into account under its accounting method thus, application of Subchapter T rules to B would be unchanged Application of -13(c) results in the cooperative taking into account its patronage deduction one year later than generally required outside of consolidation See ILM

19 ILM (cont d) Analysis and Rulings Anti-avoidance rule of -13(h)(1) provides that: If a transaction is engaged in or structured with a principal purpose to avoid the purposes of [-13] (including, for example, by avoiding treatment as an intercompany transaction), adjustments must be made to carry out the purposes of [-13]. Emphasis Added IRS ruled that -13(h) applies, citing the following 5 facts: Promoter s presentation stresses state tax savings and deferral of federal income taxes X lacks legitimate non-tax business reasons for forming Co-Op outside of the X Group All patrons are members of the X Group X did not ask the promoter or anyone else to provide an opinion as to the business efficiency or viability of forming and operating a cooperative X Group significantly benefited from the one year tax deferral provided by Subchapter T» The 5 facts clearly demonstrate that X pursued the Strategy with a principal purpose of achieving deferral of taxation in the amount of the surcharge, less P&M employee wages, and the upcharge on the employee leasing Promoter s material, X s lack of relevant non-tax business reasons for interjecting P3 between Co-Op and the patrons, and the substantial tax savings obtained by the deferral of income show that avoidance of the application of -13 to the patronage distributions was a principal tactic underlying the Strategy 19

20 ILM (cont d) Analysis and Rulings (cont d) By transferring the store employees and the P&M employees to Co-Op, X consummated a transaction that produced abusive tax results (same services but greater cost due to the surcharge/upcharge) In connection with the formation of P3, Asset A and Asset B were contributed to P3 in order to make it appear to have a function separate from its role in the cooperative-piece of the Strategy but the sole purpose of P 3 formation and its interjection between certain X Group members and Co-Op was to prevent consolidation of Co-Op P3 conducted no substantial business operations during the years at issue P3 reported rental income and depreciation deductions on its tax return but did not report anything on its books Promoter presentation makes clear that the purposeful exclusion of Co-Op from the X Group was not a by-product of a business-driven structuring, but rather a key component of a plan whose goal was tax savings Given the facts presented, particularly the obviously tax-driven formation and interjection of P3 into the cooperative structuring, the Cooperative will be treated as a member of the Taxpayer Group, and the patronage dividends the Cooperative distributed to the members will be treated as intercompany transactions. Emphasis Added *** -See also ILM

21 ILM (cont d) Questions What is the rationale for the ruling? Is P3 treated as disregarded such that Co- Op was treated as directly owned by X Group members? For what purpose(s) will Co-Op be treated as a member of the X Group? For all purposes? Solely for purposes of the -13(c) timing rules with respect to the patronage dividends? Would -13(h) apply if P3 conducted substantial business operations and there were non-tax business reasons for P3? Or if Co-Op provided services to P3 for its benefit? Cf. Prop. Treas. Reg (h)(2), Ex. 2 Was application of Treas. Reg considered? How heavily did the presence of a promoter weigh in the ruling? Could -13(h) apply to override 1504(a)(3) if Co-Op had been a member of the X Group but was deconsolidated by reason of P3 s ownership of Co-Op? What does a principal purpose mean? Are favorable -13(h) rulings possible? See e.g., PLR Potential application of 7701(o)? Revisiting whether partnerships wholly owned by group members effectively break consolidation? 21

22 Section 382 and Consolidated Groups

23 Section 382 and Consolidated Groups Section 382 In General If Section 382 applies to a corporation (a loss corporation ), subject to certain adjustments, following an ownership change, certain net operating losses (NOLs) and built-in losses may only available to offset taxable income of the loss corporation in an amount equal to the fair market value of the loss corporation s stock multiplied by the long-term tax-exempt rate (the Section 382 limitation ). - There are exceptions to the general Section 382 limitation for corporations in bankruptcy or that are insolvent. I.R.C. 382(l)(5) and (6). In general, if a loss corporation has a net unrealized built-in loss ( NUBIL ) that exceeds a threshold amount, then built-in losses and built-in deductions recognized within the five-year period beginning on the date of the ownership change (the recognition period ) generally will be subject to limitation under Section 382 to the extent of the NUBIL. Alternatively, if a loss corporation has a net unrealized built-in gain ( NUBIG ) immediately before the ownership change, the Section 382 limitation during a taxable year during the recognition period is increased by the recognized built in gain ( RBIG ) for such taxable year to the extent of the NUBIG. - Notice provides two alternative methods - the Section 1374 Approach and the Section 338 Approach which identify built-in items by calculating the net amount of gain or loss that would be recognized in a hypothetical sale of the assets of a loss corporation immediately before the ownership change (the hypothetical sale model ). 23

24 Section 382 and Consolidated Groups Exceptions to Section 382 Section 382(l)(5) If Section 382(l)(5) applies then, generally, the ability of a loss corporation to use pre-change losses after an ownership change is not limited by Section 382. Section 382(l)(5) applies where: - (i) immediately before the ownership change, the loss corporation was under the jurisdiction of a court in a title 11 or similar case, and such ownership change was pursuant to a plan approved by the court, and - (ii) the pre-change shareholders and qualified creditors of the loss corporation own at least fifty percent of the voting power and value of the corporation s stock (or stock of a controlling corporation, if also in bankruptcy) after the change. I.R.C. 382(l)(5)(A); Treas. Reg (a). Section 382(l)(6) A corporation may elect not to apply Section 382(l)(5) (or the provision might not otherwise apply), in which case Section 382(l)(6) may still apply. I.R.C. 382(l)(5)(H). Section 382(l)(6) applies when an ownership change occurs pursuant to a plan of reorganization in a title 11 or similar case, and the transaction resulting in the ownership change is ordered by the court or is pursuant to a plan approved by the court. I.R.C. 382(l)(6); Treas. Reg (a), (j). - The regulations do not specifically require a stock for debt exchange or cancellation of debt. - For purposes of determining the Section 382 limitation under Section 382(l)(6), the value of the loss corporation is generally equal to the lesser of the fair market value of (i) the stock of loss corporation immediately after the ownership change, or (ii) the loss corporation s pre-change assets. Treas. Reg (j). 24

25 Section 382 and Consolidated Groups Application of Section 382 to Consolidated Groups General Treasury Regulations sections through contain general rules for the application of Section 382 to a consolidated group. These rules generally use a single entity approach (i.e., treat all members of a consolidated group as the loss corporation) to determine ownership changes and Section 382 limitations with respect to losses arising in non- separate return limitation years ( SRLYs ). When a loss group s common parent has an ownership change under Section 382, all the members of the loss group are treated as a single entity that has undergone an ownership change. Treas. Reg (b)(1)(i). - A consolidated group is a loss group for purposes of Section 382 if it (i) is entitled to use a non-srly NOL carryforward, (ii) has a consolidated NOL for the taxable year in which the common parent has an ownership change, or (iii) has a NUBIL. Treas. Reg (c). - As a result, the amount of consolidated taxable income for a post change year that may be offset by pre-change consolidated attributes shall not exceed the consolidated Section 382 limitation. Treas. Reg (a)(1). 25

26 Section 382 and Consolidated Groups Application of Section 382 to Consolidated Groups (Cont d) Built in Gains and Losses The determination whether a loss group has a NUBIG or a NUBIL is based on the aggregate amount of the separately computed NUBIG or NUBIL of each member of the group. Treas. Reg (g)(1). - All members of a loss group are taken into account in determining the presence of a NUBIG. - Treasury Regulations section (g)(2)(ii) provides rules for determining which members are members of the loss group for determining whether the loss group has a NUBIL. The separately computed NUBIG or NUBIL of each member of the group does not include any unrealized built in gain or loss on stock of another member included in the loss group (or an intercompany obligation). Treas. Reg (g)(1). 26

27 Section 382 and Consolidated Groups Application of Section 382 to Consolidated Groups (Cont d) Bankruptcy and Insolvency There is currently no regulatory authority with respect to the application of Section 382 to consolidated groups under the jurisdiction of a Court in a title 11 or similar case, including specifically whether Sections 382(l)(5) and (6) are applied on a single entity basis or on a separate entity basis (i.e., by treating only the bankrupt member as the loss corporation). - Treasury Regulation section reserves on the application of Section 382 to consolidated groups in title 11 or similar cases. - The preamble to the proposed consolidated Section 382 regulations note that [d]epending on the issue and the circumstances in which it arises, [Treasury Regulations section ] may adopt a single entity approach. 56 FR , 1991 C.B

28 Section 382 and Consolidated Groups PLR Facts and Representations Pre-Transaction Ownership Structure Parent (P) is the common parent of a consolidated group of corporations (the P Group ). On Date 1, P and Entity X (X), a disregarded entity of Y, a subsidiary of P (Y) filed for bankruptcy protection under Chapter 11. No other members of the P group filed for bankruptcy protection. On Date 2, the Bankruptcy Plan of Reorganization (the Plan ) became effective. The Plan provided generally that (i) P s old debt was exchanged for a combination of new debt and new stock and (ii) P s old stock was cancelled. Relevant Representations P emerged from protection under Chapter 11 pursuant to a plan (the Plan) that resulted in an ownership change within the meaning of Section 382. Immediately after Date 2, at least 50 percent of the value and voting power of the common stock of P was owned by qualified creditors of P as a result of being creditors of P immediately before the ownership change. The P Group is a loss group within the meaning of Treasury Regulations section (c)(1). All members of the P group were eligible to be included in the determination of whether the loss group has a NUBIL under Treasury Regulations section (g)(2)(ii) on Date 2. 28

29 Section 382 and Consolidated Groups PLR Rulings Issue #1 In the consolidated group context, are Sections 382(l)(5) and (6) applied on a consolidated, single entity basis? - In other words, do Sections 382(l)(5) and (6) eliminate or modify the Section 382 limitation applicable to the pre-change consolidated attributes of the loss group, regardless of whether the individual subsidiaries of the bankrupt corporate parent corporation are insolvent or under the jurisdiction of a court in a title 11 or similar case? Ruling Relevant to Issue #1 Unless the P Group elects to apply Section 382(l)(6), under Section 382(l)(5), there is no Section 382 limitation on pre-change losses or built in losses of the P Group (and each of its members) (emphasis added) as a result of the ownership change on Date 2. Alternatively, if the P Group elects to apply Section 382(l)(6) to the ownership change on Date 2, in computing its Section 382 limitation, the P Group takes into account the increase in the value of P resulting from the surrender or cancellation of P s creditors claims in the transaction under the rules provided in Treasury Regulations section

30 Section 382 and Consolidated Groups PLR Rulings (Cont.) Issue #2 Are undiscounted pre-discharge liabilities taken into account as amount realized for purposes of determining whether a corporation has a NUBIL or NUBIG? Liabilities immediately before the ownership change should be taken into account at their adjusted issue price regardless of whether they were subsequently discharged in whole or in part during the recognition period (which includes the change date) or thereafter. - If undiscounted pre-discharge liabilities are included as amount realized, this effectively allows built-in cancellation of indebtedness (COD) income to be taken into account as built in gain for purposes of calculating whether a loss corporation is in a NUBIL or NUBIG position. 30

31 Section 382 and Consolidated Groups PLR Rulings (Cont.) Example - Issue #2 Assume the following facts for determining whether a hypothetical loss corporation is in a NUBIL or NUBIG position under Notice Assets - $100 FMV - $100 adjusted tax basis Liabilities - $200 (undiscounted pre-discharge) If undiscounted pre-discharge liabilities are taken into account as amount realized pursuant to a hypothetical sale model, the loss corporation would have a $100 NUBIG ($200 amount realized minus $100 basis). This $100 built in gain is essentially the built-in COD This result occurs even if the liabilities are discharged in bankruptcy on the change date, and the COD is excluded from income, pursuant to Section 108. If, on the other hand, amount realized is capped at the fair market value of the loss corporation s assets, the loss corporation would have zero NUBIL/NUBIG ($100 amount realized would equal $100 basis). 31

32 Section 382 and Consolidated Groups PLR Rulings (Cont.) Query: Should built in COD always be taken into account in NUBIL/NUBIG? Example: At the time of an ownership change, Corp has one asset with a fair market value of $100 (and a tax basis of $200), liabilities of $200, and an NOL of $ After an ownership change, (i) Corp s existing NOL would be subject to the Section 382 limitation, and (ii) Corp can sell its asset and recognize the built in loss because it has no NUBIL ($200 amount realized equals tax basis of $200). - How would the results if Corp sold its asset immediately prior to the ownership change? Example: At the time of an ownership change, Corp has two assets one with a tax basis of $60 and a fair market value of $50 and another with a tax basis of $40 and a fair market value of $50 and liabilities of $ Corp has a NUBIG of $100 ($200 amount realized over $100 tax basis). Thus, if Corp sells the built in gain asset, it will be able to increase its Section 382 limitation by $10. - Does this result make sense if the NUBIG is all attributable to goodwill (discussed below) which may not actually have any value? 32

33 Section 382 and Consolidated Groups PLR Rulings (Cont.) Issue #3 Because you have a consolidated group, there are uncertainties as to how to both apply the hypothetical sale model for computing NUBIG/NUBIL, and omitting intercompany stock and debt. In particular, if the extent to which liabilities exceed value is a proxy for built-in COD that increases NUBIG or decreases NUBIL, you need a mechanism to ensure that such excess is reflected in the formula even where the debtors assets are intercompany stock and debt which is not part of the NUBIG/NUBIL determination. Treasury Regulations section provides that the amount realized in a Section 338 sale is allocated among the acquired corporation s assets in accordance with Treasury Regulations section to determine the amount for which each asset is deemed to have been sold. Treas. Reg (a). Generally, Treasury Regulations section provides that aggregate deemed sale price ( ADSP ) is allocated among six asset classes, Class I through Class VI, to the extent of the fair market value of the assets in each class. Any remaining ADSP (i.e., the residual amount) is then allocated to Class VII, comprised of goodwill and going concern value. 33

34 Section 382 and Consolidated Groups PLR Rulings (Cont.) Issue #3 The Ruling except as otherwise modified by Notice , the [P Group] may apply the principles for computing and allocating the aggregate deemed sale price under and to determine its amount realized on the hypothetical sale of all of its assets to a third party that assumed all of its liabilities. Amounts realized should be allocated to the stock and obligations of members of the [P Group] notwithstanding that gain or loss might not be taken into account under This ruling provides that, in allocating ADSP pursuant to Treasury Regulations section , a portion is allocated to the member s stock in subsidiaries, despite the fact that any gain or loss on that stock is not taken into account in the groups NUBIL/NUBIG calculation, pursuant to Treasury Regulations section (g)(1). - This ruling thus allows P (and the other members of the P Group) to allocate ADSP under a hypothetical sale model to goodwill to the extent that the amount of ADSP exceeds the fair market value of its assets. 34

35 Section 382 and Consolidated Groups PLR Rulings (Cont.) Example - Issue #3 Assume the following facts for determining whether the Parent Group, a loss group, is in a NUBIL or NUBIG position under Notice Parent Assets - Stock of Sub, a member of Parent Group Liabilities $25 FMV $50 adjusted tax basis - $75 (undiscounted pre-discharge) Sub Assets - Land (Class V) $25 FMV $50 adjusted tax basis Liabilities - None Parent s separately computed NUBIL/NUBIG - Parent would have ADSP of $75 (i.e., its liabilities) - $25 of ADSP would be allocated to Sub stock (not taken into account in calculating Parent s NUBIL/NUBIG) - The remaining $50 would be allocated to goodwill, which would have a $0 basis. - Thus, Parent would have a NUBIG of $50 Sub s separately computed NUBIL/NUBIG - Sub would have an ADSP of $25, or the fair market value of its assets. - Thus, Sub would have a NUBIL of ($25) Thus, total NUBIG/NUBIL for the P Group is $25 (or $50 + ($25)) (which mirrors a hypothetical single entity result) 35

36 Section 382 and Consolidated Groups Other Issues Definition of title 11 or similar case for purposes of Sections 382(l)(5) and (6) - Example Insurance companies Can t legally enter bankruptcy but instead enter state overview process (which may have several stages). At what point are they in a similar case? 36