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Part 8. Appeals

Chapter 17. Settlement Computations and Statutory Notices of Deficiency

Section 5. Special Computation Formats, Forms and Worksheets

8.17.5  Special Computation Formats, Forms and Worksheets

8.17.5.1  (11-02-2007)
Introduction to Special Computation Formats, Forms and Spreadsheets

  1. IRM 8.17.2, General Settlement and Rule 155 Computations, provides general procedures for Appeals Tax Computation Specialists (TCSs) and other technical Appeals employees who prepare settlement computations. This section covers instances where it is necessary to prepare settlement computations that include information or require the use of formats that differ from the normal formats used.

  2. This section also details the information to include on Form 5403 Instructions to APS Spreadsheet, referred to as Form 5403 Worksheet throughout this IRM section. See Exhibit 8.17.5-1 for an example of the Form 5403 Worksheet.

  3. Appeals Processing Services (APS) is responsible for completing Form 5403, Appeals Closing Record. The Form 5403 Worksheet helps APS with some of the entries involving technical issues. Complete the worksheet when a settlement computation is prepared.

  4. Many of the forms, worksheets and spreadsheets discussed in this section are found on the Appeals Tax Computation Specialists web site and/or the RGS web site. The RGS web site spreadsheets are also accessible through a link on the Appeals TCS web site.

  5. The following table gives a brief listing of where the forms are found.

    Form, Worksheet or Spreadsheet Appeals TCS
    Web Site    		 RGS
    Web Site
    Form 5403 Worksheet (fillable) X  
    IRC 6404(g) Worksheet X  
    Form 1914, Computation of Allowable MACRS-ACRS Depreciation Deduction X X
    Form 3621, Net Operating Loss Computation X  
    Form 3621-A, Computation of Net Operating Loss Deduction for Intervening Years Modifications X  
    Schedule A and B - Form 1045, Application for Tentative Refund (Individual NOL Worksheets) X X
    SRLY Worksheets X  
    Corporate NOL and NOL Deduction Spreadsheets   X
    Corporate Contribution Limitations Spreadsheet X  
    Individual Charitable Contribution Limitations Spreadsheet   X
    Life Insurance Taxable Income spreadsheet X  

  6. The following subsections describe the use of the forms, worksheets and spreadsheets in the preparation of settlement computations.

8.17.5.2  (11-02-2007)
Form 5403 Instructions to APS Spreadsheet

  1. The employee who prepares the settlement computations is responsible for completing the Form 5403 Worksheet at the time the computations are done. If a Counsel case is received with no worksheet, APS prepares a Request for Audit Work, Form 3608, requesting that TCS complete the Form 5403 Worksheet.

  2. Each spreadsheet has the capacity for three tax years but use additional spreadsheets if needed.

  3. Attach completed spreadsheets to the inside left flap of the administrative file folder.

  4. See Exhibit 8.17.5-1. for an example of the Form 5403 Worksheet. Show the following information on the worksheet:

    • IRC 6621(c)"Notice Date"

    • Reference numbers for Form 706 and Form 709

    • Ref. Number 886 amount

    • Ref. Number 887 amount

    • Ref. number 888 amount

    • FICA adjustments to tip income and railroad retirement tax

    • Self employment tax adjustments

    • Accumulated earnings tax

    • Personal holding company tax

    • Restricted interest provisions

    • Applicability of May/Sequa

    • Applicability of IRC 6404(g)

    • Additional entries, when required by written directives

    • Tax Liability Adjustment/Penalty (Item 12) - It is the responsibility of the TCS or Appeals technical employee who did the settlement computations to provide clear, concise settlement computations and when applicable, clearly marked overpayment or overassessments so APS easily identifies the amount that goes in Item 12.

  5. Form 5403 entries are used to update IDRS so the transcript of account reflects the correct information based on the Appeals computations. Always check a TXMODA, IMFOLR, or BMFOLR to see what amounts were posted for the various reference numbers. The transcript amounts for the reference numbers plus or minus the Form 5403 entries must equal the correct amount shown in the Appeals or Counsel computation.

8.17.5.2.1  (11-02-2007)
Interest 6621(c) Notice Date

  1. The definition of the 2% trigger date is the notice date plus 30 days. The employee who prepares the settlement computations provides the notice date, also called trigger notice. APS then adds 30 days to that date to arrive at the 2% trigger date.

  2. Attaching a copy of the letter to the worksheet is very beneficial for APS and is highly encouraged.

  3. See IRM 8.17.6, Interest Issues in Settlement Computations, for more information on computing the notice date.

8.17.5.2.2  (11-02-2007)
Reference Numbers for Estate and Gift Cases

  1. Provide the following reference numbers for Form 706 and Form 709.

    1. Ref. number 074 — Generation skipping tax for 8610 and subsequent years (MFT's 51 and 52)

    2. Ref. number 075 — IRC 4981A tax (MFT 52)

    3. Ref. number 076 — Net estate tax (MFT 52)

    4. Ref. number 077 — Net gift tax (MFT 51)

8.17.5.2.3  (11-02-2007)
Computation of Reference Number 886 - Taxable Income

  1. Corporations returns: Reference Number 886 is the total adjustment to taxable income. Transcripts for corporations can show negative taxable income amounts (amounts below zero).

  2. Individual returns: Reference Number 886 is the total adjustments to taxable income. Do not reduce the taxable income field on TXMODA or IMFOLR below zero.

    Note:

    A TXMODA does not show a zero when taxable income on a Form 1040 is zero or negative. There is no field for taxable income on the TXMODA. However, an IMFOLR does show taxable income when it is zero or negative.

  3. The following table provides four different scenarios of how Reference Number 886 is determined. Examples of how to compute the Reference Number 886 amount when taxable income is less than zero only apply for Form 1040 returns.

    IF THEN
    Taxable income is positive per the return, and positive in the Appeals or Counsel settlement Reference Number is amount of the adjustment to taxable income per the Appeals or Counsel settlement.
    Taxable income is positive per return, and negative per Appeals or Counsel settlement Reference Number is amount of adjustments necessary to reduce taxable income per return to zero. Figure 8.17.5-1.
    Taxable income is negative per return, and positive per Appeals or Counsel settlement Reference Number is amount of positive taxable income shown in the Appeals or Counsel settlement. Figure 8.17.5-2.
    Taxable incomes per return and per settlement are negative Reference Number is zero. Figure 8.17.5-3.

    Figure 8.17.5-1

    Positive Income per Return - Negative Income per Appeals Settlement

    Taxable income per return 2,000
    Adjustment to taxable income (3,000)
    Taxable income per Appeals settlement (1,000)
    ======
       
    Reference Number 886 amount (2,000)

    The taxable income field cannot be reduced below zero on the transcript, so the negative taxable income of $1,000.00 shown in the settlement is reflected as a zero on the transcript. Since the taxable income on the transcript is the amount per return of $2,000.00, an adjustment of ($2,000.00) results in a $0.00 TC 886 after the transaction posts to the module.

    Figure 8.17.5-2

    Negative Income per Return - Positive Income per Appeals Settlement

    Taxable income per return (1,000)
    Adjustment to taxable income 4,000
    Taxable income per Appeals settlement 3,000
    ======
       
    Reference Number 886 amount 3,000

    Again, the taxable income field cannot be reduced below zero on the transcript. So even though the taxable income per the return is (1,000.00), it is reflected as zero on the transcript. The revised taxable income per the settlement is $3,000.00. An 886 reference number adjustment of $3,000.00 increases the zero taxable income on the transcript by $3,000.00 and results in $3,000.00 taxable income shown on the module after the adjustment posts.

    Figure 8.17.5-3

    Negative Income per Return - Negative Income per Appeals Settlement

    Taxable income per return (6,000)
    Adjustment to taxable income 4,000
    Taxable income per Appeals settlement (2,000)
    ======
       
    Reference Number 886 amount 0.00

    Since taxable income can't be reduced below zero on the transcript, the return taxable income reflected on the transcript is zero, not ($6,000.00). The revised taxable income figure per settlement of ($2,000.00) is shown on the transcript as zero. So since the taxable income shown on the transcript is zero based on the return, and will remain zero, the 886 amount is zero.

  4. In the examples above, if prior adjustments to taxable income were assessed, use taxable income from the latest assessment rather than taxable income per the return. In addition, if the amount of taxable income shown on the transcript is not correct, use Reference Number 886 to correct it. Below is an example of a method of computation that accomplishes this and easily computes the correct Reference Number 886 adjustment for all situations:

    1. Taxable income per transcript.

    2. Taxable income per settlement.

    3. Reference Number 886 amount if line 2 is negative: Subtract the amount on line 1 from zero (TC 886 equals zero less line 1).

    4. Reference Number 886 amount if line 2 is positive: Subtract the amount on line 1 from the amount on line (2) (TC 886 equals line 2 less line 1).

8.17.5.2.4  (11-02-2007)
Computation of Reference Number 887 (Exemptions)

  1. This reference number reflects the change in the number of exemptions allowable. It does not reflect the adjustment to taxable income as a result of a change in the number of exemptions. Starting in 1991, the deduction for exemptions is reduced if adjusted gross income (AGI) is more than a certain amount. The computation of tax can reflect an adjustment for exemptions, and yet the total number of allowable exemptions per the return remains unchanged.

    1. If an exemption adjustment results only because of AGI changes, but the total number of exemptions remains the same as the return, no entry in Reference Number 887 is required on the Form 5403 Worksheet.

    2. However to assist APS and avoid confusion, enter zero as Reference Number 887 amount in these cases.

  2. Enter the amount of the adjustment to AGI. AGI can be reduced below zero on a transcript of account. If there is no change to AGI, no entry is required in Reference Number.

8.17.5.2.5  (11-02-2007)
Computation of Reference Number 888 (Adjusted Gross Income)

  1. Enter the amount of the adjustment to AGI which can be reduced below zero on a transcript of account.

  2. If there is no change to AGI, no entry is required.

8.17.5.2.6  (11-02-2007)
Unreported Tip Income (FICA)

  1. FICA adjustments due to tip income for returns filed after December 31, 1990 are transmitted on Form 5403 using the following reference numbers:

    1. Ref. 891 — Unreported tip income for the primary taxpayer.

    2. Ref. 892 — Unreported tip income for the secondary taxpayer.

    3. Ref. 898 — Unreported tip income for the primary taxpayer subject to Medicare tax.

    4. Ref. 899 — Unreported tip income for the secondary taxpayer subject to Medicare tax.

8.17.5.2.7  (11-02-2007)
Self Employment Tax Adjustments

  1. Use the following reference numbers to update self employment adjustments for returns posted after December 31, 1985 (as well as delinquent returns):

    1. Ref. 878 — Self employment income adjustment (primary taxpayer)

    2. Ref. 879 — Self employment income adjustment (secondary taxpayer)

    3. Ref. 889 — Change in self employment tax

    4. Ref. 895 — Self employment Medicare adjustment (primary taxpayer)

    5. Ref. 896 — Self employment Medicare adjustment (secondary taxpayer)

  2. The above reference numbers must be input on no change cases with a change to self employment income and/or self employment tax.

  3. If self employment income is less than $400:

    1. No entry is required for reference numbers.

    2. If the returns shows self employment income in excess of $400 but adjustments reduce it to an amount less than $400, enter whatever amount is needed to reduce the self employment income on the return to zero.

8.17.5.2.7.1  (11-02-2007)
Reference Numbers 878 and 879 (Self Employment Income)

  1. Use Reference Number 878 (primary taxpayer) and Reference Number 879 (secondary taxpayers) for the net increase or decrease to the self employment income.

  2. Starting in 1990, 92.35% of the self employment income is subject to self employment tax. Therefore, multiply the adjustment to self employment income by 92.35% to determine the reference number amount.

  3. The amount entered with Reference Number 878/879 cannot cause the taxpayer’s total self employment income to exceed the maximum amount subject to self employment tax.

  4. The reference number amount is the lesser of:

    1. Total adjustment to earnings subject to social security; or

    2. Amount that brings total earnings subject to social security to the maximum dollar limitation.

    Note:

    Remember earnings subject to social security are the amounts after the self employment income is multiplied by 92.35%. Also, the maximum earnings subject to social security must be reduced by social security wages and tips from Form W-2, and unreported tips from Form 4137.

8.17.5.2.7.2  (11-02-2007)
Reference Number 889 (Self Employment Tax)

  1. Use Reference Number 889 for the total adjustment to self employment tax.

  2. If both taxpayers on a joint return have self employment income adjustments, the net increase or decrease to this Reference Number must reflect the total self employment tax adjustment for both taxpayers.

  3. If Reference Number 878 or 879 is entered but there is no adjustment to self employment tax because the adjustments to income did not change the tax, enter a zero in Reference Number 889.

8.17.5.2.7.3  (11-02-2007)
Reference Numbers 895 and 896 (Self Employment Medicare)

  1. Starting in 1991, use Reference Number 895 (primary taxpayer) and Reference Number 896 (secondary taxpayer) for the net increase or decrease in self employment income subject to Medicare tax.

  2. There is currently no maximum limitation on self employment income subject to Medicare tax. There was a maximum limitation on self employment income subject to Medicare tax from 1991 through 1993; however, it was eliminated in 1994.

  3. 92.35% of self employment income is subject to the Medicare tax rate. Therefore, the adjustment to self employment income subject to Medicare tax must also be multiplied by 92.35% when computing the amount of the Reference Numbers.

8.17.5.2.8  (11-02-2007)
Reference Number 320 (Accumulated Earnings Tax)

  1. Because this is embedded in the body of the settlement computation and is seldom seen, provide the amount of the accumulated earnings tax in Reference Number 320.

  2. This requirement is valid for MFT 02 returns due prior to 1/1/86.

8.17.5.2.9  (11-02-2007)
Reference Number 321 (Personal Holding Company Tax)

  1. Because this is embedded in the body of the settlement computation and is seldom seen, provide the amount of the personal holding company tax in Reference Number 321.

  2. This requirement is valid for MFT 02 returns.

8.17.5.2.10  (11-02-2007)
Restricted Interest Provisions

  1. When a Form 2285, Restricted Interest Worksheet, is prepared for a tax year, annotate the applicable code section in the appropriate tax year column of the Form 5403 Worksheet.

  2. The annotation of the code section alerts APS to look for a Form 2285. See IRM 8.17.6 for detailed information on Form 2285.

8.17.5.2.11  (11-02-2007)
Applicability of May/Sequa

  1. Determine if May/Sequa is applicable when preparing the settlement computation. If it is, mark an "X" in the appropriate tax year column. The "X" alerts APS to look for the Form 2210 or Form 2220 Sequa Worksheet.

  2. See IRM 8.17.6, for detailed information on the Sequa worksheets.

8.17.5.2.12  (11-02-2007)
Applicability of IRC Section 6404(g)

  1. Identify IRC 6404(g) suspension periods by marking an "X" in each applicable tax year column. The "X" alerts APS to look for the Appeals IRC 6404(g) Worksheet.

  2. If IRC 6404(g) does not apply, notate why on the Form 5403 Worksheet.

    1. If the return was late filed, a notation similar to the following is sufficient: "IRC 6404(g) does not apply. The return was not timely filed."

    2. If IRC 6404(g) does not apply because notice was timely provided, use a notation similar to the following: "IRC 6404(g) does not apply. Timely notice was provided on (enter date)."

  3. See IRM 8.17.6, Interest Issues in Settlement Computations, for detailed information on IRC 6404(g). See IRM 8.19.3, Appeals Flow-Through Entity Handbook, Guidance for Appeals Officer, for more information about IRC 6404(g) notices involving TEFRA adjustments.

8.17.5.3  (11-02-2007)
Tentative Allowances and Other Carryback Claims

  1. Taxpayers may report a net operating loss or credit carryback loss as a tentative allowance on Form 1045 (individual) or Form 1139 (corporation). This is called a tentative allowance or tentative carryback.

    1. A tentative allowance is identified on an account module with TC 295. When this transaction code is present, either a Form 1045 (individuals) or a Form 1139 (corporations) was filed.

  2. Taxpayers may claim a net operating loss or unused credit carryback on an amended return using Form 1040X (individuals) or Form 1120X (corporation). This is called a claim for credit or refund.

    1. A claim for credit or refund is identified on the account module by TC 291 or TC 299. When this transaction code is present, either a Form 1040X (individual) or Form 1120X (corporation) was filed.

    2. Generally a TC 299 indicates the Form 1040X or Form 1120X was filed to carry back an unused loss or credit. A TC 291 may or may not be the result of the Form 1040X or Form 1120X being filed to carry back an unused loss or credit.

  3. Compliance usually secures Form 1045/1139 or Form 1040X/1120X and places it in the case file along with the return. If the form is not in the case file, take steps to secure a copy so an analysis can be made to determine what year the carryback originated and the amount of the carryback allowed.

  4. Prepare Form 2285, Restricted Interest Worksheet, when tentative allowances and other carryback claims are involved. See IRM 8.17.6, Interest Issues in Settlement Computations for additional information.

  5. Further discussions of tentative allowances (Form 1045/1139) and other carryback claims (Form 1040X/1120X) are found at IRM 8.17.4.12, Tentative Allowances and Other Carryback Claims In the Notice of Deficiency Statement.

8.17.5.3.1  (11-02-2007)
Settlement Computations with Tentative Allowances and Carryback Claims

  1. In non-docketed cases, the Appeals Officer determines whether the carryback shown in the tentative allowance or claim for credit or refund is allowed in the settlement computation.

  2. When the carryback is allowed, include a statement similar to the following in the blank space at the bottom of Form 3610:

    "The net operating loss deduction or other loss or credit carryback reflected herein which gave rise to the tentative allowance (or claim for credit or refund) of $________ is provisionally allowed and is subject to change upon examination of the returns of the loss year or unused credit year."

  3. When the carryback is not allowed, a recapture of the previously allowed tentative allowance or claim for credit or refund is needed. Follow the steps below:

    1. Do not decrease taxable income or alternative minimum taxable income by the net operating loss and/or capital loss carrybacks from the year giving rise to the tentative allowance or claim for credit or refund.

    2. Do not decrease tax liability by the credit carrybacks.

    3. Include the decrease in tax attributable to the tentative allowance (TC 295) or claim for credit or refund (TC 291 or TC 299) in the amount shown as"Tax per return or as previously adjusted" on Form 5278, Form 4549, etc.

    4. By including the TC 295 from the tentative allowance or TC 291/299 from the claim for credit or refund in the "Tax per return or as previously adjusted" amount, a recapture is automatically created in the bottom line deficiency or overassessment amount on the settlement computation.

8.17.5.4  (11-02-2007)
Partnership Adjustments in Settlement Computations

  1. See Exhibit 8.17.5-2. for an example of how Form 4605-A is used to show the adjustment to partnership ordinary income, long-term capital gains and losses, and contributions. Similar schedules might be necessary for such items as partnership IRC 1231 gains and losses, general business credit, etc. Form 886-S, Partners’ Share of Income, Deduction and Credits, and Form 886-Z(C), Partners or S Corporation Shareholders Shares Income (TEFRA cases), are designed for use in distributing partnership income, deductions and credits.

  2. Reconcile the "886-type" forms to the Schedule K-1’s. Make certain the percentage of profit column equals 100%. These forms serve as a corrected Schedule K-1’s and are used by Campuses to make the investors’ calculations. Therefore, include all flow-through information shown on the Schedule K-1 on the "886-type" forms whether adjusted or not.

  3. An alternative is to prepare the "886-type" form listing the adjusted issues only, and provide a statement at the bottom indicating all other issues remain the same as shown on the Schedule K-1 as filed.

8.17.5.5  (11-02-2007)
Small Business Corporation (Subchapter S) Adjustments

  1. Subchapter S adjustments to income are patterned along the lines of partnership adjustments. Use Form 4605-A, Examination Changes-Partnerships, Fiduciaries, Small Business Corporations, and Domestic International Sales Corporations for these adjustments. Also use, distribution schedules, Form 886-X and Form 886-Z(C) (TEFRA cases).

8.17.5.6  (11-02-2007)
TEFRA Partnerships and S Corporations

  1. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the Subchapter S Revision Act of 1982 established new unified procedures for examining certain partnerships and S corporations. As a result of this act, a separate set of procedures was established addressing the preparation of settlement computations for TEFRA partnerships and S Corporations.

    Note:

    TEFRA procedures do not apply to S corporations for tax years beginning after December 31, 1996.

  2. On most cases, the Appeals Officer or Counsel Attorney will indicate whether the case is TEFRA. When the information is not provided, see below:

    1. If the case was linked on the Partnership Control System (PCS), the Tax Computation Specialist will need to research an AMDISA to determine if the Partnership Investor Control File (PICF) Code contains one of the numbers listed in Document 6209, IRS Processing Codes and Information. The number 1 indicates that the case is a linked TEFRA key case and the number 2 indicates that the case is a linked non-TEFRA key case.

    2. If the case was not linked on the PCS, the Tax Computation Specialist should ask the Appeals Officer or Counsel Attorney whether the case is TEFRA.

  3. If TEFRA procedures apply, refer to the procedures in IRM 8.19, Appeals Flow-through Entity Handbook.

8.17.5.7  (11-02-2007)
Fiduciary Adjustment

  1. Form 886-W, Distribution of Beneficiaries’ Share of Income and Credit, is a distribution schedule of beneficiaries’ shares of income, credits, etc. Use either Form 4605-A or pattern a schedule to fit the needs of the case, when adjusting fiduciary income.

8.17.5.8  (11-02-2007)
Net Worth Method

  1. The net worth method of proving taxable income is based upon the theory that increases or decreases in a taxpayer’s net worth during a taxable period, adjusted for nontaxable expenditures and nontaxable income, must result from taxable income. This system verifies profit and loss statement through the balance sheet approach.

  2. A net worth computation consists of balance sheets for beginning and ending of each year involved, including reserves for depreciation and amortization. Asset values are listed at cost or at the taxpayer’s basis. The accounting method required by law or elected by the taxpayer is followed in the balance sheet. If a taxpayer reports and is permitted by law to report on the cash basis, items such as business accounts receivable and business accounts payable are not entered. On the other hand, if the accrual method applies, all assets and liabilities are entered. If a taxpayer is permitted and has elected to report on the installment basis, the element of unrealized gross profit is set up in the liability section of the balance sheet.

  3. When returns are filed on a fiscal year basis, conform the balance sheet dates to the same dates as the return.

  4. After net worth schedules or balance sheets are made for all years, determine the increase or decrease in net worth for each year. Adjust this increase or decrease by adding all nondeductible items and deducting all non-taxable items. The resulting figure is either adjusted gross income or taxable income, depending on whether or not allowable itemized (standard) deductions and deduction for exemptions are allowed in adjustments to net worth increase.

  5. IRM 4.10.4.6.7 provides additional details in addition to an example of the net worth computation.

8.17.5.9  (11-02-2007)
Source and Application of Funds Method

  1. The source and application of funds method is a variation of the net worth method and is simply the comparison of all known expenditures with all known receipts. Excess of expenditures, when reported adjusted gross income or net income is included among the sources, represents understated income. In this method enter only increases and decreases in assets and liabilities along with other non-deductible and non-taxable receipts. IRM 4.10.4 provides a detailed explanation of this procedure.

8.17.5.10  (11-02-2007)
Bank Deposits Method

  1. This method is based upon the assumption that outlays disclosed on the return were actually made; however, only two types of expenditures, check or cash, paid for these outlays. If cash paid them, then the source of that cash must be due to receipts if not accounted for from other funds. Computations by this method are best illustrated by the step-by-step explanation of IRM section 4.10.4.

8.17.5.11  (11-02-2007)
Capital Gains and Losses

  1. Devise a schedule to fit the needs of the issue or adjustment. For example, a schedule appropriate for installment sales under IRC 453(b) is totally inapplicable to a timber transaction under IRC 631. The tax return format of capital gains and losses, Schedule D, is an excellent guide for applying the law in effect for a given year.

8.17.5.12  (11-02-2007)
Depreciation Adjustments

  1. If the depreciation adjustment involves only one or two items, show the computation under the explanation of adjustments. However, if there are numerous adjustments, a separate schedule or exhibit may be needed to cover the depreciation computation with a short comment in the explanation of adjustments. Form 1914, Computation of Allowable MACRS-ACRS Depreciation Deduction may be used. This form is found on the Appeals TCS web site.

    1. Excel Form 1914 spreadsheets used to compute a variety of different types of depreciation are found on the RGS web site.

8.17.5.13  (11-02-2007)
Net Operating Losses

  1. IRC 172 provides that net operating losses may be carried back to prior years and forward to future years as deductions.

    1. Taxable years beginning on or before August 15, 1997: In general, net operating losses are carried back 3 years and forward 15 years. (However, there are exceptions to this rule. See IRM 21.5.9, Carryback Net Operating Loss (NOL), for further information.)

    2. Taxable years beginning after August 15, 1997: In general, net operating losses are carried back 2 years and forward 20 years. (However, see IRM 21.5.9, Carryback Net Operating Loss (NOL), for rules and exceptions.)

    3. Losses arising in 2001 and 2002: The Job Creation and Worker Assistance Act of 2002 added IRC 172(b)(1)(H) to retroactively provide a 5 year carryback period (from 2 years, or 3 years in certain cases) for net operating losses for any taxable year ending during 2001 and 2002. See IRM 21.5.9 for further information.

  2. Explain any adjustment to a net operating loss deduction in the settlement computation.

  3. See IRM 4.11.11, Net Operating Loss References, for a list of net operating loss references and resources.

8.17.5.13.1  (11-02-2007)
Regular Tax Net Operating Loss

  1. Individuals

    1. Form 3621, Net Operating Loss Computation, may be used to determine a net operating loss for the taxable year. Do not use Form 3621 if capital gains and losses are claimed on an individual income tax return, or allowed in the settlement computation, because it does not always compute the correct amount of net operating loss for individuals. Instead, use Schedule A of Form 1045, Application for Tentative Refund, which does correctly compute the amount of the net operating loss when capital gains and losses are allowable.

    2. Form 3621-A, Computation of Net Operating Loss Deduction for Intervening Years Modifications, is used to compute the net operating loss deduction allowable when a net operating loss is carried to another year. It also computes the remaining amount of net operating loss available to carry to other years. Schedule B of Form 1045, Application for Tentative Refund, may be used instead of Form 3621-A.

    3. Schedules A and B of Form 1045 are available in Excel spreadsheets on the Appeals TCS web site and the RGS web site. The file is labeled "Individual NOL Worksheets" .

    4. Schedules A and B of Form 1045 are also available in a fillable Adobe Acrobat form on the Electronic Publishing Catalog web site.

  2. Corporations

    1. Forms 3621 and 3621-A may be used to determine net operating losses and net operating loss deductions for corporate taxpayers.

    2. Excel spreadsheets for computing corporate net operating losses and net operating loss deductions worksheets are available on the RGS web site.

    3. Forms for SRLY computations are also found on the Appeals TCS web site.

8.17.5.13.2  (11-02-2007)
Alternative Minimum Tax Net Operating Loss

  1. The alternative minimum tax net operating loss is the regular tax net operating loss modified by the adjustments required under IRC 56 and IRC 58, and tax preference items under IRC 57.

  2. Use of the alternative minimum tax net operating loss deduction is limited to 90% of alternative minimum taxable income in the carryover or carryback years.

    1. For net operating loss (NOL) deductions attributable to NOL carrybacks arising in taxable years ending in 2001 and 2002, as well as NOL carryforwards to those taxable years, IRC 56(d)(1)(A), as amended by P.L. 107-147, IRC 102(c), allows the NOL to offset 100% of a taxpayer's alternative minimum taxable income.

  3. If a regular tax net operating loss is computed, consider whether or not an alternative tax net operating loss computation is applicable. When there is no alternative minimum tax Form 6251 or Form 4626 in the taxpayer's return, and the settlement results in a regular tax net operating loss, a computation of the alternative minimum tax net operating loss may be needed.

  4. Individual taxpayers - Schedule A Form 1045 Excel spreadsheets can also be used to compute the alternative minimum tax net operating loss. These Excel spreadsheets are available on the RGS web site in a file labeled "Individual NOL Worksheets" .

  5. The SRLY Excel spreadsheets located on the Appeals TCS web site can also be used for SRLY alternative minimum tax net operating loss computations.

8.17.5.14  (11-02-2007)
Charitable Contributions

  1. Sometimes complicated computations of limitations on contributions and contributions carryovers is needed.

  2. Schedules patterned along the line of schedules in the return may be used whenever appropriate for individuals and for corporations. See Exhibit 8.17.5-3 (Computation of Corporation Contribution Deduction and Carryovers) for details.

  3. A charitable contributions limitation worksheet for Form 1040 is found on the RGS web site.

8.17.5.15  (11-02-2007)
Claim of Right

  1. Certain computations are common to both corporate and individual taxpayers. See Exhibit 8.17.5-4 for an example of a computation of tax when the taxpayer restores an amount held under claim of right ( IRC 1341). Special computations may be necessary for income tax paid to a foreign country or U.S. possession ( IRC 27 and IRC 901).


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