HBM Holdings Co. v. Commissioner: Tax Court Rejects $30M in NOL Carryovers Due to SRLY Rules

The $30 Million Mistake: How a Deemed Liquidation Cost HBM Holdings Its NOL Carryovers

In a 2026 Tax Court ruling (HBM Holdings LLC v. Commissioner, T.C. Memo. 2026-12), the court denied HBM Holdings’ attempt to use $108 million in Delavau Holdings’ net operating loss (NOL) carryovers to offset $30 million in taxable income for its consolidated group. The court applied the SRLY rules (Separate Return Limitation Year rules), which restrict NOLs from being used to offset income earned by unrelated entities in prior years. The decision underscores the Tax Court’s strict adherence to consolidated return regulations, rejecting HBM’s aggressive tax planning and affirming the IRS’s authority to enforce these limitations. The ruling highlights a key takeaway: courts will not bend tax rules to accommodate complex corporate transactions, even when they involve deemed liquidations or successor corporations.

Background: The Transactions and Dispute

In 2012, Mississippi Lime Co. (MLCO) acquired Delavau Holdings, LLC for $78 million. Delavau carried forward $78 million in NOL carryovers at the time of acquisition.

In 2014, HBM Holdings was formed via an F reorganization (a type of corporate restructuring under Section 368(a)(1)(F)), electing S corporation status (a tax election allowing pass-through taxation under Section 1362). MLCO became a wholly owned subsidiary of HBM, and Delavau’s stock was distributed to HBM. HBM also elected to treat MLCO as a QSSS (Qualified Subchapter S Subsidiary, a disregarded entity under Section 1361(b)(3)(B)(ii)).

On June 30, 2018, HBM revoked its S corporation election, effective July 1, 2018. Delavau then filed an entity classification election to be disregarded as a separate entity from HBM, effective July 1, 2018. This election triggered a deemed liquidation of Delavau into HBM under Treasury regulations.

The parties agreed that Section 332 (a tax provision allowing tax-free liquidations of subsidiaries) and Section 381 (a tax provision allowing successor corporations to inherit tax attributes like NOLs) applied to the deemed liquidation. Under Section 381(a)(1), HBM succeeded to Delavau’s tax attributes, including $108 million in NOL carryovers. The transaction was not a reverse acquisition (a type of acquisition where the acquirer becomes a subsidiary of the target).

On July 1, 2018, HBM formed a consolidated group with MLCO, Aerofil Technologies, FLCO, Inc., and Schafer Industries, Inc. The group claimed CNOL deductions (consolidated net operating loss deductions) for 2018–2021 based on Delavau’s NOL carryovers. The IRS denied these deductions, citing SRLY rules (Separate Return Limitation Year rules), leading to the Tax Court dispute.

Legal Dispute: SRLY Rules and NOL Carryovers

The IRS and HBM disputed whether Delavau’s NOL carryovers could offset the HBM consolidated group’s income. The IRS argued SRLY rules under Treas. Reg. § 1.1502-21 barred use of Delavau’s NOLs, as they arose in years when Delavau was not part of the HBM group. HBM advanced two theories to bypass SRLY limitations: the "lonely parent rule" (a provision allowing certain NOLs to be used if the predecessor was part of a prior affiliated group) under Treas. Reg. § 1.1502-1(f)(2)(i) and the SRLY subgroup rules (allowing NOLs to offset income within a subgroup of entities) under Treas. Reg. § 1.1502-21(c)(2)(i).

HBM claimed the lonely parent rule applied because Delavau’s deemed liquidation under Section 332 transferred NOLs to HBM under Section 381(a). The IRS countered that the rule does not apply to predecessors under Treas. Reg. § 1.1502-1(f)(4), arguing Delavau’s NOLs remained subject to SRLY restrictions.

HBM also argued the Founding Members constituted an SRLY subgroup, allowing NOLs to offset subgroup income. The IRS rejected this, asserting the Founding Members had never been part of a prior affiliated group, leaving no subgroup to which NOLs could attach.

The Court's Verdict: SRLY Rules Prevail

In HBM Holdings LLC v. Commissioner, T.C. Memo. 2026-12 (July 15, 2026), the Tax Court rejected HBM’s arguments that Delavau’s NOL carryovers could offset the consolidated group’s income.

The court held four dispositive conclusions:

1. Delavau was a predecessor of HBM under Treas. Reg. § 1.1502-1(f)(4), as its deemed liquidation under Section 332 qualified as a Section 381 transaction. The court rejected HBM’s temporal argument, finding no textual basis in the regulation for applying definitions as of the transaction date.
2. The "lonely parent rule" under Treas. Reg. § 1.1502-1(f)(2)(i) did not apply to Delavau’s NOLs, as Delavau was never part of a prior affiliated group.
3. The Founding Members did not constitute an SRLY subgroup under Treas. Reg. § 1.1502-21(c)(2)(i), as they had never been part of a prior affiliated group together.
4. The SRLY NOL limitation under Treas. Reg. § 1.1502-21(c) barred use of Delavau’s NOL carryovers, as they could only offset Delavau’s separate taxable income, which was zero in the years at issue.

The Tax Court’s decision in HBM Holdings marks a significant exercise of judicial power over the IRS’s administrative discretion, particularly in its refusal to bend the SRLY rules to accommodate HBM’s aggressive tax planning. By insisting on the plain meaning of the regulations and rejecting HBM’s temporal and structural arguments, the court reaffirmed the primacy of the SRLY framework in consolidated return cases. The ruling sends a clear message to taxpayers and practitioners: the Tax Court will not rewrite the consolidated return regulations to achieve a desired tax result, even in complex corporate transactions involving deemed liquidations and NOL carryovers.