Opinion ID: 1918302
Heading Depth: 3
Heading Rank: 1

Heading: Federal taxation of partnerships and affiliated corporations.

Text: We begin our analysis with a brief examination of the relevant federal tax structure and the manner in which the District tax law differs. The federal Internal Revenue Code of 1986, 26 U.S.C. § 1 to § 9722 (1998) (IRC), [3] defines income tax in Subtitle A, Chapter 1, Subchapter A, which establishes a separate tax for individuals (Part I) and for corporations (Part II). See IRC §§ 1, 11. An affiliated group of corporations have the option of combining their incomes and deductions in a single return. See IRC § 1501. Under these so-called consolidated returns, losses incurred by some affiliated members may be used to offset the income of other affiliated members. See 26 C.F.R. § 1.1502-11 (2000). [4] The way in which partnerships are treated within the federal framework is addressed in Subchapter K of the IRC. This subchapter provides that businesses taking the partnership form are treated as pass-through entities for their principals. See IRC §§ 701-02. Pass-through enterprises are those for which losses or gains are not recognized by the entities themselves, but are allocated to the incomes of the organizations' owners in their capacity as individual taxpayers. These partnerships are nonetheless required to file informational returns under the IRC indicating business performance. See IRC § 6031(a). Net operating loss deductions are generally covered under IRC § 172. That section defines an NOL as the excess of deductions allowed over gross income. See IRC § 172(c). Subsection (a) of that section defines an NOL deduction as the combined net operating loss carry-backs and net operating loss carry-forwards allowed for any particular taxable year. At the times relevant to these appeals, net operating losses incurred in one tax year could generally be carried back three years, while such losses could be carried forward up to fifteen, see IRC § 172(b)(1)(A), [5] although bad debt losses of commercial banks could be carried back as many as ten years or forward as many as five, see IRC § 172(b)(1)(D). Because partnerships are treated as pass-through entities, and pay no taxes as such, NOL deductions are inapplicable to a partnership's federal informational return. See IRC § 703(a)(2)(D). Nonetheless, a partnership's informational return discloses the fact and amount of any actual net operating loss, and any such loss may be passed through to the individual tax payers and offset against other income or to be used as a deduction in a prior or subsequent return. See IRC §§ 172, 6031(a); 26 C.F.R. § 1.702-2. In the context of the consolidated return of affiliated corporations, NOL deductions are, like income and other losses, treated on a consolidated basis. See 26 C.F.R. §§ 1.1502-11(a)(2), -21(b). Similar to a partnership's informational return, however, each member of a group filing a consolidated return must report its separate respective taxable income and losses, and losses of one member may offset the income of another within a given year. See 26 C.F.R. § 1.1502-75(j). In addition, both consolidated net operating losses (as reported in a consolidated return), and net operating losses of individual affiliated member corporations which arose in years where separate returns were filed, may provide the basis for a consolidated net operating loss deduction on a consolidated return. See 26 C.F.R. § 1.1502-21(a).