By Open Weaver Banks and Pilar Mata

The Indiana Department of Revenue ruled that a limited liability corporation (LLC) that elected to be taxed as a corporation was entitled to use net operating loss (NOL) deductions generated by its former members. The NOLs in question were generated in tax years 2003, 2005, and 2007 by two C corporations that were members of the LLC. During these years, the LLC had elected to be treated as a pass- through entity for tax purposes. In 2009, the members and the LLC reorganized so that the LLC was the surviving entity, and the LLC made an Internal Revenue Service election to be taxed as a C corporation. The Department ruled that the LLC was entitled to claim the NOL deductions resulting from its members’ losses on the LLC’s 2010 and 2011 returns. The Department reasoned that, under federal law, a deemed liquidation occurred when the LLC elected to be taxed as a corporation. As a result, for federal purposes, the LLC was allowed to carry over the pre-acquisition NOLs of its former members under I.R.C. § 381(c)(1)(A). Since the Department follows Internal Revenue Code guidelines on the treatment of NOLs, the Department concluded that the LLC was allowed to carry forward and utilize its pre-acquisition NOLs on its Indiana gross income tax returns for the 2010 and 2011 tax years, subject to the Department’s verification of the amount of the NOLs. Indiana Letter of Finding 02-20130190 (Oct. 1, 2014)