## Facts

- Wolter Construction Company was a closely held corporation formed in 1968 and owned by two individual shareholders.
- River Hills Golf Club, Inc. was formed in 1968 and initially was owned by individuals who overlapped with Wolter’s shareholders.
- In 1969 and 1970, River Hills issued additional shares to Wolter in exchange for Wolter’s cancellation of River Hills’ debts.
- In October 1969, Wolter acquired about 38.02% of River Hills’ stock through a debt cancellation of roughly $18,000.
- In March 1970, Wolter increased its ownership to 80% by canceling additional River Hills debt of about $117,400, creating an affiliated group eligible to file consolidated returns under I.R.C. § 1504(a).
- River Hills incurred net operating losses (NOLs) in 1968, 1969, and a short taxable year in early 1970 (before affiliation).
- For 1970 and 1971, Wolter and River Hills filed consolidated returns and deducted about $125,255.43 of River Hills’ pre-affiliation NOL carryovers.
- River Hills had no income in 1970 or 1971; the deductions effectively offset Wolter’s income.
- The IRS disallowed using River Hills’ pre-affiliation NOLs against Wolter’s income, limiting the NOLs to River Hills’ income (which was zero), and issued deficiencies.
- The Tax Court sustained the Commissioner; Wolter appealed.

## Issues

1. Whether, on consolidated returns, a parent may use a subsidiary’s pre-affiliation NOLs to offset the parent’s income when the subsidiary has no post-affiliation income.
2. Whether common ownership by individuals before the 80%-ownership threshold can permit use of a “common parent/common control” theory to treat pre-affiliation losses as available to the consolidated group.

## Decision

- The Sixth Circuit affirmed the Tax Court.
- River Hills’ pre-affiliation NOLs were deductible only against River Hills’ own income in consolidated years.
- Because River Hills had no income in 1970 or 1971, no portion of its pre-affiliation NOLs could reduce Wolter’s taxable income on the consolidated returns.
- The court rejected Wolter’s reliance on a “common parent/common control” argument as inconsistent with § 1504(a)’s statutory ownership test.

## Legal Principles

- An “affiliated group” for consolidated return purposes arises only when the parent satisfies the 80% stock-ownership requirement of I.R.C. § 1504(a).
- Under consolidated return regulations applicable to the years at issue, a subsidiary’s pre-affiliation NOLs remain attributable to that subsidiary and generally may offset only that subsidiary’s post-affiliation income, not other members’ income.
- Common individual ownership or control before statutory affiliation does not substitute for the ownership thresholds Congress set for consolidated filing eligibility.
- Regulatory limits on using pre-affiliation losses prevent acquisition-based use of losses to shelter unrelated income of profitable group members.

## Conclusion

The court held that River Hills’ losses incurred before Wolter reached 80% ownership could not be used to offset Wolter’s income on consolidated returns; those losses were usable only against River Hills’ own post-affiliation income, and River Hills had none in the relevant years.


Wolter Constr. Co. v. Comm’r of Internal Revenue, 634 F.2d 1029 (6th Cir. 1980)