Judge Rose E. (“Cracklin'”) Jenkins gives the Separate Returns Limitation Year (SRLY) rules, with their lonely parent exception and their application to an F reorg where a Section 382 loss corporation is brought onboard and then Section 332-liquidated into a directly wholly-owned subsidiary S Corp of a later-unelected consolidated group a thorough workout in HBM Holdings Company, 167 T. C. 6, filed 7/27/26.

The consols want to take the losses of the loser into the consolidated returns for the three (count ’em, three) years at issue. IRS says the SRLY rules keep the losses with the loser.

Here’s the plan.  “Effective July 1, 2018, HBM ceased to be an S corporation pursuant to a revocation of its S corporation election filed pursuant to section 1362(d)(1)(A). Accordingly, the QSSS status of four of its subsidiaries—MLCO, Aerofil Technologies (Aerofil), FLCO, Inc. (FLCO), and Schafer Industries, Inc. (Schafer)[Founding Members]—ceased, effective July 1, 2018. In addition, Delavau [loser] filed an entity classification election pursuant to Treasury Regulation § 301.7701-3(c) to be disregarded as separate from HBM, effective July 1, 2018. Under Treasury Regulation § 301.7701-3(g)(1)(iii), this election caused Delavau to be deemed to liquidate into HBM at the close of business on June 30, 2018. The parties agree that sections 332 and 381 apply with respect to this deemed liquidation. Under section 381, HBM succeeded to, and was required to take into account, Delavau’s NOL carryovers, which amounted to $108 million at the time of liquidation. The parties agree that the deemed liquidation was not a reverse acquisition within the meaning of Treasury Regulation § 1.1502-1(f)(3).” 167 T. C. 6, at p. 3.

To keep a consolidated group from roping in a loser and using those NOLs to write off their own income, the NOLs are available only for years the loser is in the group; the old stuff are SRLYs (Separate Return Limitation Years). There can be subgroups, some but not all of the members of the consol, and they can use the NOLs. “However, under the ‘lonely parent rule,’ an SRY [Separate Return Year]  of ‘the corporation which is the common parent for the consolidated return year to which the tax attribute is to be carried’ is not an SRLY. There are two exceptions to the lonely parent rule, which respondent acknowledges are not relevant here. The lonely parent rule allows the common parent to apply NOL carrybacks or carryovers from its SRYs without regard to the SRLY NOL limitation.” 167 T. C. 6, at p. 5. (Citation omitted).

One exception, irrelevant here, is detailed at 167 T. C. 6, at p. 5, footnote 4, but I’ll spare you. 

Clear? Thought not. But Judge Jenkins knocks out the NOL carryforward anyway. Delavau is a predecessor of HBM, as HBM says, but that doesn’t help them.

” The Delavau NOLs all arose in tax years of Delavau for which it filed a separate return, i.e., its SRYs. See Treas. Reg. § 1.1502-1(e). Because it is a predecessor of HBM, its SRYs constitute SRLYs under the general SRLY definition. See id. para. (f)(1). None of the three SRLY exceptions applies with respect to the Delavau SRYs because Delavau is a predecessor that was never a member of the group. See id. subpara. (2). Accordingly, the Delavau SRYs are SRLYs.” 167 T. C. 6, at p. 10. (Footnote omitted).

And subgrouping doesn’t help either.

“…petitioner misunderstands the purpose of the SRLY subgroup rules. Their purpose is not to aggregate income from ‘related’ entities in general; it is to preserve aggregation for continuously affiliated corporations. The SRLY subgroup rules provide a narrow exception to the SRLY limitation designed to preserve ‘single entity’ treatment for members that move together from one affiliated group to another. See Consolidated Returns—Limitations on the Use of Certain Losses, Deductions and Credits, 56 Fed. Reg. 4228, 4229–30 (Feb. 4, 1991). If not for the SRLY subgroup rules, an NOL carryover carried from the former group by one member would no longer be permitted to offset the income of the other member, even though the two members had been continuously affiliated with each other. Id. at 4229. However, continuous affiliation is a key requirement.” 167 T. C. 6, at p. 12.

So HBM can’t hang on to Delavau’s losses, because HBM had no separate-entity income during years at issue and the others in this conglomerate weren’t there with Delavau.

“…,a consolidated group is generally permitted CNOL [Consolidated NOL] deductions on the basis of NOL carryovers of a member (including potentially the member’s predecessors and successors) arising in an SRLY only to the extent of the group’s consolidated taxable income attributable to that member. See Treas. Reg. § 1.1502-21(a)(1), (c)(1)(i), (f)(1). Because HBM had no taxable income on a separate entity basis for its short tax year ending December 31, 2018, through the 2021 tax year, its NOL carryovers arising in an SRLY cannot be taken into account in the HBM group’s CNOL deductions for the years at issue. And because the Founding Members  do not constitute an SRLY subgroup, their taxable income cannot be taken into account in determining the amount of NOL carryovers included in the CNOL deduction. Accordingly, because the Delavau NOL carryovers arose in an SRLY, they cannot be included in the HBM group’s CNOL deductions for the years at issue. Therefore, the CNOL deductions claimed by the HBM group for the years at issue are not allowed.” 167 T. C. 6, at pp. 12-13.

As Mark Twain remarked “Well you’ve got to admire men that deal in ideas of that size and can tote them around without crutches.” Judge Rose E. (“Cracklin'”) Jenkins is the equal of all of them.