822
OCTOBER TERM, 2000
Syllabus
certiorari to the united states court of appeals for the fourth circuit
No. 00-157. Argued March 26, 2001—Decided June 4, 2001
Under the Internal Revenue Code of 1954, a "net operating loss" (NOL) results from deductions in excess of gross income for a given year. 26 U. S. C. § 172(c). A taxpayer may carry its NOL either backward or forward to other tax years in order to set off its lean years against its lush years. § 172(b)(1)(A). The carryback period for "product liability loss[es]" is 10 years. § 172(b)(1)(I). Because a product liability loss (PLL) is the total of a taxpayer's product liability expenses (PLEs) up to the amount of its NOL, § 172(j)(1), a taxpayer with a positive annual income, and thus no NOL, may have PLEs but can have no PLL. An affiliated group of corporations may file a single consolidated return. § 1501. Treasury Regulations provide that such a group's "consolidated taxable income" (CTI), or, alternatively, its "consolidated net operating loss" (CNOL), is determined by taking into account several items, the first of which is the "separate taxable income" (STI) of each group member. In calculating STI, the member must disregard items such as capital gains and losses, which are considered, and factored into CTI or CNOL, on a consolidated basis. Petitioner's predecessor in interest, AMCA International Corporation, was the parent of an affiliated group filing consolidated returns for the years 1983 through 1986. In each year, AMCA reported CNOL exceeding the aggregate of its 26 individual members' PLEs. Five group members with PLEs reported positive STIs. Nonetheless, AMCA included those PLEs in determining its PLL for 10-year carryback under a "single-entity" approach in which it compared the group's CNOL and total PLEs to determine the group's total PLL. In contrast, the Government's "separate-member" approach compares each affiliate's STI and PLEs in order to determine whether each affiliate suffers a PLL, and only then combines any PLLs of the individual affiliates to determine a consolidated PLL. Under this approach, PLEs incurred by an affiliate with positive STI cannot contribute to a PLL. In 1986 and 1987, AMCA petitioned the Internal Revenue Service for refunds based on its PLL calculations. The IRS ruled in AMCA's favor, but was reversed by a joint congressional committee that controls refunds exceeding a certain thresh-
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