Apparently, having the Avengers on your team is no deterrent to the IRS.

In a recent (July 21) decision, the IRS went up against the Avenger’s former employer – Marvel Entertainment Group (note: Disney’s owned Marvel since 2009) and came away the winner. Fortunately, the decision relates to a pre-2004 regulation, so the decision is more noteworthy for the numerous corny Avengers-related wisecracks (not found here) that are guaranteed to result (and the amount of money Marvel will have to pay) than future legal impact.

So what did Marvel do that put into the IRS’ sights? Back in 1997 and 1998, Marvel filed consolidated tax returns, then reorganized. As part of the reorg, a large amount of debt was canceled in each of four subsidiaries – Marvel, Fleer, Malibu and Heroes. How much? Try $171 million. Under Section 108(b)(2)(A) requires the reduction of “tax attributes” if you’re excluding canceled debt from income, and Marvel was, so Marvel reduced tax attributes – in this case, each subsidiary’s Net Operating Loss – accordingly.

The IRS disagreed. According to the IRS, the place to do the reduction was at the consolidated level, not the entity level, which had a significant impact on income. Without getting too technical, by reducing each subsidiary’s Net Operating Loss by an allocation of the total canceled debt, Marvel was able to carry forward $47 million in losses. Under the IRS’ method, Marvel would have only been able to carry forward $15 million. So when the Tax Court, relying on United Dominion v. United States (532 U.S. 822 (2001)) among other cases, agreed with the IRS, it impacted Marvel’s net operating loss carryforwards for 1997 and 1998 significantly, which in turn, affected Marvel’s 2003 and 2004 tax returns (obviously, the NOLs carried forward for a while). The end result? A $2.1 million and $14.45 million tax bill for 2003 and 2004, respectively.

Ouch. Looks like Jarvis won’t be getting that upgrade this year, Tony.

For more info, see Marvel v. Commissioner (145 T.C. No. 2, July 21, 2015)