When a company has a net operating loss they can carry that loss backward and forward for so many years and apply it against profits in those years to avoid taxes. If another company were to buy them that company may be able to use those net operating losses.

Jess410 is right. Company A has profit of $1 million. It buy's company B which has a loss of $800,000. The two companies are consolidated and report net income of $200,000 and pay much less tax that would be paid by A if it had not bought B.

If B has losses of $1.4 million, consolidating creates a net loss of $.4 million and no tax. There may be a loss carryback to get tax refunds by offsetting the net loss against earlier income of A.

For example, "This particular loophole bizarrely allowed profitable American firms to enjoy a large tax break by buying the losses incurred by Eskimo-owned companies in Alaska."

(The Economist, June 26, 2003)