I:16-60 Sandra and John, unrelated individuals, own all of Alpha and Beta corporation stock.

John owns 60% of Alpha stock and 40% of Beta stock. Sandra owns 40% of Alpha stock and 60% of Beta stock. For five years, Alpha has conducted manufacturing activities and sold machine parts primarily in the eastern United States. Alpha reported $75,000 of operating profits in each of the last two years. Alpha’s operating profits are expected to grow to $150,000 during the next five years. Alpha still has $100,000 of NOLs that must be used before it incurs federal income tax liability.

One-fourth of Alpha’s output is sold to Beta, which is attempting to establish a market niche for reselling Alpha products in the southwestern United States. In the start-up phase of this effort, Beta incurred $200,000 of NOLs. Under the sales arrangement with Alpha, the best that Beta can hope to do in the short run is break-even.

What suggestions can you offer Sandra and John about the short-term possibility of offsetting Alpha and Beta’s NOLs against the profits that Alpha expects to earn and minimizing their overall tax liabilities if both businesses become profitable? Sandra has specifically asked about merging the two companies into a single entity so that the losses of one entity can offset the profits of the other and defer federal income taxes. Sandra indicates that the two companies were created for non-tax reasons. The operating situation has changed, and according to Sandra, now may be the time to consolidate the entities. John is not sure that combining the two businesses is a good idea.