- 4.11.11 Net Operating Loss Cases
- 22.214.171.124 Net Operating Loss References
- 126.96.36.199 Overview for Net Operating Loss (NOL)
- 188.8.131.52 Proper Use of the Net Operating Loss Deduction (NOLD)
- 184.108.40.206 NOL Workpapers
- 220.127.116.11 PenaltiesNOL Carrybacks and Carryovers
- 18.104.22.168 Statute of Limitations for Assessment
- 22.214.171.124 Form 5344, Examination Closing Record, Procedures
- 126.96.36.199 Form 5346, Examination Information Report, Procedures
- 188.8.131.52 Effects on Other Areas Including Ordering Rules
- 184.108.40.206.1 Business Credits
- 220.127.116.11.2 Corporate Capital Loss Carrybacks
- 18.104.22.168.3 Alternative Tax Net Operating Loss Deduction (ATNOLD)
- 22.214.171.124.3.1 Computation of Alternative Tax NOL Deduction (ATNOLD)
- 126.96.36.199.4 Restricted Interest
- 188.8.131.52.5 Self-Employment Tax Cases
- 184.108.40.206 Requesting a Refund
- 220.127.116.11 Election to Forgo Carryback
- 18.104.22.168 Filing Status Changes
- 22.214.171.124 Carryforwards
- 126.96.36.199 Joint Committee
- 188.8.131.52 NOL and Carryover Losses Passive Activity Loss (PAL) Issue
- 184.108.40.206 NOL Carrybacks or Other Deductions Involving Court Ordered Restitution
- 220.127.116.11 NOL Carrybacks From Investment Theft Losses
Part 4. Examining Process
Chapter 11. Examining Officers Guide (EOG)
Section 11. Net Operating Loss Cases
February 13, 2014
(1) This transmits a revised IRM 4.11.11, Examining Officer's Guide (EOG), Net Operating Loss Cases.
(1) Minor editorial changes have been made throughout this IRM. Website addresses, legal references, and IRM references were reviewed and updated as necessary. Significant changes to this IRM are reflected in the table below:
|IRM 18.104.22.168||Updated and expanded net operating loss (NOL) references.|
|IRM 22.214.171.124||Added additional information on what constitutes an NOL.|
|IRM 126.96.36.199 (1)||Added information regarding the effect of an NOL on other return items.|
|IRM 188.8.131.52 (6)||Added references to numerous laws, revenue rulings, and revenue procedures effecting NOLs.|
|IRM 184.108.40.206||Expanded the discussion on NOL workpaper documentations.|
|IRM 220.127.116.11||Added additional information to address and reference IRC 6676 penalty impact.|
|IRM 18.104.22.168||Expanded the guidance regarding the impact of an NOL on statute of limitations.|
|IRM 22.214.171.124||Expanded the discussion on Form 5344, Examination Closing Record.|
|IRM 126.96.36.199||Expanded the discussion on Form 5346, Examination Information Report.|
|IRM 188.8.131.52||Expanded the discussion on the effect of NOL carrybacks and carryforwards to various areas including the ordering rules when computing taxable income.|
|IRM 184.108.40.206.3.1||Added this section to provide guidance on the computation of the alternative tax NOL deduction (ATNOLD).|
|IRM 220.127.116.11||Expanded the discussion on requesting a refund due to an NOL carryback or carryforward.|
|IRM 18.104.22.168||Expanded the discussion on forgoing an NOL carryback.|
|IRM 22.214.171.124||Added this section to address passive active loss (PAL).|
|IRM 126.96.36.199||Added this section to address court ordered restitution.|
|IRM 188.8.131.52||Added this section to address investment theft losses including Ponzi schemes.|
Director, Examination Policy SE:S:E:EP
The references for net operating loss cases are as follows:
Form 895, Notice of Statute Expiration
Form 1040, U.S. Individual Income Tax Return
Form 1040X, Amended U.S. Individual Income Tax Return
Form 1045, Application for a Tentative Refund
Form 1116, Foreign Tax Credit
Form 1120, U.S. Corporation Income Tax Return
Form 1120X, Amended U.S. Corporation Income Tax Return
Form 1139, Corporation Application for Tentative Refund
Form 4564Information Document Request
Form 4684, Casualties and Thefts
Form 5344, Examination Closing Record
Form 5346, Examination Information Report
Form 6251, Alternative Minimum Tax Individuals
Form 9984, Examining Officer's Activity Record
IRC 39, Carryback and Carryforward of Unused Credits
IRC 56, Alternative Minimum Tax (AMT)
IRC 58, Denial of Certain Losses—[AMT]
IRC 59, Other Definitions and Special Rules—[AMT]
IRC 165, Losses
IRC 170, Charitable, Etc., Contributions and Gifts
IRC 172, Net Operating Loss Deduction
IRC 469, Passive Activity Losses and Credits Limited
IRC 1202, Partial Exclusion for Gain From Certain Small Business Stock
IRC 1212, Capital Loss Carrybacks and Carryovers
IRC 1341, Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right
IRC 1402, Definitions, (Self—Employment Income)
IRC 6411, Tentative Carryback and Refund Adjustment
IRC 6201, Assessment Authority
IRC 6501, Limitations on Assessment and Collection
IRC 6511, Limitations on Credit or Refund
IRC 6601, Notice or Regulations Requiring Records, Statements and Special Returns
IRC 6676, Erroneous Claim for Refund or Credit
IRC 7602, Examination of Books and Witnesses
IRC 7701, Definitions IRM Exhibit 4.10.4-6—Auditing Net Operating Loss Deductions (NOLD)
IRM 184.108.40.206.2, Carryback Claim
IRM Exhibit 4.4.12-6, Item 44 and 45, NOL Information Examples
IRM 4.10.5, Required Filing Checks
IRM 220.127.116.11.2, Adjustments to Net Operating Loss
IRM 4.27.1, Bankruptcy Petitions Filed after 93079
IRM 4.36.3, Joint Committee Procedures, Examiner’s Responsibilities
IRM 18.104.22.168.4, Penalty Handbook—Carrybacks and Carryovers
IRM 20.2.8, Interest—Restricted Interest
IRM 20.2.9, Interest on Carryback of Net Operating Loss
IRM 21.5.9, Carrybacks
Pub 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts
Pub 542, Corporations
Rev. Proc. 2009-19, 26 CFR 601.105 Examination of Returns and Claims for Refund, Credit or Abatement; Determination of Correct Tax Liability
Rev. Proc. 2009-20, 26 CFR 601.105 Examination of Returns and Claims for Refund, Credit or Abatement; Determination of Correct Tax Liability
Rev. Proc. 2009-26, 26 CFR 601.105 Examination of Returns and Claims for Refund, Credit or Abatement; Determination of Correct Tax Liability
Rev. Proc. 2009-52, 26 CFR 601.105 Examination of Returns and Claims for Refund, Credit or Abatement; Determination of Correct Tax Liability
Rev. Proc. 2011-58, 26 CFR 601.105 Examination of Returns and Claims for Refund, Credit or Abatement; Determination of Correct Tax Liability
Rev. Rul. 56-285, 1956-1 C.B. 134
Rev. Rul. 75-368, 1975-2 C.B. 480 Joint Return Following Separate Returns; Limitation Period
Rev. Rul. 77-225, 1977-2 C.B. 73 Charitable contribution; Carryover of Improper Deduction; Limitation Period
Rev. Rul. 80-6, 1980-1 C.B. 295 Joint Return; Net Operating Loss for Separate Return Year
Rev. Rul. 81-88, 1981-1 C.B. 585 Sec. 6511 Limitations on Credit or Refund
Rev. Rul. 87-44, 1987-1 C.B. 3
Rev. Rul. 2009-9, 26 CFR 1.165-8 Theft Losses
Treas. Reg.1.46-2, Carryback and Carryover of Unused Credit
Treas. Reg. 301.6501(m)-1, Tentative Carryback Adjustment Assessment Period
Treas. Reg. 301.6511(d)-2(a) (3), Period of Limitation on Filing a Claim
Treas. Reg. 301.9100-2(b), Automatic Six Months Extension
Treas. Reg. 301.9100-12T, Various Elections Under the Tax Reform Act of 1976
Due to fluctuations in income and expenses, a taxpayer can have substantial profits in one year and losses in another. With this in mind, the relief provisions of IRC 172 were enacted for business income and loss.
IRC 172 provides that an NOL may be carried back to prior years or carried forward to future years as deductions, thereby preserving the economic impact of the loss.
IRC 172(a) provides that there shall be allowed as a deduction for the taxable year an amount equal to NOL deduction which is the NOL carryovers to such year, plus the NOL carrybacks to such year.
Net operating loss (NOL)–This is the excess of the deductions allowed over the gross income. An NOL can lower taxes in an earlier year that may provide for a refund of taxes already paid. These deductions must relate to a trade or business, work as an employee, or casualty or theft. Any NOL remaining after applying the NOL to preceding years may be carried forward and lower taxes in a later year. The taxpayer must use the NOL before applying unused credit. See IRM 22.214.171.124.14Carryback Net Operating Loss (NOL).
A taxpayer who has an overpayment of tax as a result of an NOL can file an application or claim, also referred to as a tentative (TENT) carryback refunds or restricted interest (RINT) claims for adjustment or refund. The tax year in which the loss occurred is the loss year. The tax year the loss is applied is the gain year. NOLs are normally carried back two years and then forward 20 years. Although the acronym RINT means restricted interest, an actual restriction of interest by way of TC 34X is seldom required. See IRM 21.5.9, Carrybacks and IRM 126.96.36.199.3, Special Carryback/Carryforward Periods.
An NOL, a capital loss (corporation only), and certain nonrefundable unused tax credits can be carried back to the two years preceding the loss year and carried over to the 20 succeeding tax years. See IRC 172 (b)(1)(A) and IRM 188.8.131.52.14(9), Carryback Net Operating Loss (NOL), for additional information.
IRM 184.108.40.206, Carryback Overview, provides an overview for the following:
General carryback rules and procedures
Tentative (TENT) carryback refunds
Restricted interest (RINT) claims
Taxpayers eligible for carrybacks
A list of return types that are filed for carrybacks
Publications and instructions for carrybacks
After a reorganization or other change in corporate ownership, the use of certain carryforwards may be limited or prohibited under IRC 382.
Over the last decade there have been numerous laws effecting the NOL rules. IRM 21.5.9 has sections (starting at IRM 220.127.116.11.14.1) detailing aspects of these NOL sections. Some of these laws and sections are as follows:
IRM 18.104.22.168.14.1, Net Operating Loss (NOL) Carrybacks/Job Creation and Worker Assistance Act of 2002
IRM 22.214.171.124.14.2, Gulf Opportunity Zone Act of 2005 (GO Zone)—Net Operating Losses
IRM 126.96.36.199.14.3, Kansas Disaster Area (PL 110-234) — Net Operating Losses
IRM 188.8.131.52.14.4, Midwestern Disaster Area (PL 110-343, Section 702)—Net Operating Losses
IRM 184.108.40.206.14.5, National Disaster Relief Act (PL 110-343, Section 708)—Net Operating Losses
IRM 220.127.116.11.14.6, American Recovery and Reinvestment Act of 2009 (PL 111-5, Section 1211)—Net Operating Losses
IRM 18.104.22.168.14.7, Worker, Homeownership, and Business Assistance Act of 2009 (PL 111-92, Section 13)—Net Operating Losses
It is important to ensure the NOLD receives the proper tax treatment because of the potential impact that the NOLDs may have on multiple year returns. A key element of the process is the correct determination of the loss year's NOL and computation of the NOLD. Form 3621, Net Operating Loss Computation, and Form 3621-A, Computation of Net Operating Loss Deduction, may be used by examiners to assist in the process. Schedules A and B of Form 1045, Application for Tentative Refund, can also be used to compute the individual NOL and NOL carryback/carryover amount. These forms may be included as supporting schedules in the examiner's workpapers.
In general, the NOL will be carried back (NOL carryback) and then carried forward. See special elections below for exception. NOLs are generally generated from the following sources:
Deductions from trade or business
Deductions for business-relates expenses as an employee
Deductions for casualty and theft losses
Deduction for losses from a partnership or S corporation. Individuals can use apportioned shares of partnership/corporate business income and loss to calculate their individual NOL
NOL deductions may have an effect on the following areas depending on the year of the tax return. The list below is not all inclusive.
Income averaging for farmers and fishermen—When an NOL occurs in a year after a taxpayer has income averaged and the NOL is carried back to a base period year or years, base period income is decreased which decreases averaged income.
Retirement income credit (credit for qualified retirement savings contributions) —Schedule R for the elderly and the permanently and totally disabled.
Foreign tax credit—Form 1116, Foreign Tax Credit.
Alternative minimum tax—Form 6251Alternative Minimum Tax—Individuals.
Items computed based on AGI.
In addition to the above forms, examiners should include in their workpapers a spreadsheet analysis covering the loss year and any carryover/carryback year(s) to which the loss is carried. The spreadsheet should begin with taxable income per return or as previously adjusted and conclude with the proposed deficiency or overassessment.
A workpaper or schedule should be prepared for charitable contribution carryovers and the alternative minimum tax net operating loss deduction.
Every case should have a complete summary of all carryback and carryover items. The following is a listing of items requiring a summary when they are applicable:
Net operating losses
Foreign tax credit
General business credit
Alternative tax net operating losses
Prior year minimum tax credit
IRC 6676 calls for a civil penalty on erroneous claims for refund or credit unless it is shown that the claim has a reasonable basis.
See IRM 22.214.171.124.4, Carrybacks and Carryovers, for additional guidance on penalty applicability.
See IRM 126.96.36.199, IRC 6676—Erroneous Claim for Refund or Credit Penalty, for Potential Application of This Penalty in NOL Carryback or Carryover Adjustment Situations.
The period of limitations on assessment in carryback years can be different from the general period of limitations on assessment. See IRC 6501, Assessment Statute of Limitations Controls, and IRM 188.8.131.52.2.8.1, Net Operating Loss (NOL) Carryback or Capital Loss Carryback.
IRC 6501(a) provides that a tax generally must be assessed within three years after the filing of the return. If a deficiency exists on a tax module that is not attributable to a carryback allowance (net operating loss carryback, capital loss carryback, credit carryback) on the same tax module, the statutory period of time to make the assessment is generally the later of the following:
3 years from the return due date,
3 years from the date the return was filed, or
Exceptions found under IRC 6501(c).
IRC 6501(h) and IRC 6501(k) provide exceptions to this general rule with respect to NOL carrybacks. If a deficiency exists on a tax module that is attributable to a carryback allowance (net operating loss carryback, capital loss carryback, credit carryback) on the same tax module, the statute for assessment of the deficiency generally is the later of the following:
3 years from the due date of the loss year return in which the carryback allowance originated,
3 years from the date the loss year return—in which the carryback allowance originated—was filed, or
Exceptions found under IRC 6501(c).
Under IRC 6501(h), a deficiency in the gain year resulting from an NOL carryback may be assessed at any time before the assessment statute expiration date (ASED) of the loss year. However, IRC 6501(h) only extends the ASED for deficiencies attributable to the NOL carryback deduction and provides exceptions to this general rule with respect to NOL carrybacks. See IRM 25.6.23, Examination Process—Assessment Statute of Limitations Controls.
M Corporation claims an NOL of $50,000 for tax year 2010 and files a Form 1120X to carry back the loss to its 2008 tax year. In 2011, M receives a refund of $10,000 for 2008 attributable to the carryback. In 2013, it is determined that the amount of the NOL for 2010 is $30,000, rather than $50,000, and that the correct refund for 2008 attributable to the carryback should have been $6,000, rather than $10,000. Assuming that M filed its 2010 return timely, the Service has until March 15, 2014 to assess the excessive amount refunded attributable to the NOL carryback, i.e., $4,000 ($10,000, the original amount refunded due to the NOL, minus $6,000, the amount the Service should have refunded after accounting for the NOL).
Under IRC 6501(k) if an NOL carryback results in a tentative carryback allowance per IRC 6411, the ASED for assessing the deficiency in the gain year is extended to include the applicable period in IRC 6501(h). If the ASED under IRC 6501(h) is still open to assess deficiencies in the gain year attributable to the carryback, the assessment period also is still open to assess a deficiency in the gain year that is unrelated to the carryback. The amount that may be assessed, however, is limited to the amount applied, credited, or refunded under IRC 6411, less any amount the Service may assess under IRC 6501(h).
The assessable amount may not exceed the amount of the carryback minus any amount already assessed under IRC 6501(h).
M Corporation claims an NOL of $50,000 for tax year 2010 and files an application per IRC 6411 for a carryback adjustment of its tax for 2008. In 2011, M receives a refund of $10,000 attributable to the carryback. In 2013, the Service determines that the correct amount of the NOL for 2010 is $30,000, rather than $50,000, and that the correct refund for 2008 attributable to the carryback should have been $6,000, rather than $10,000. In addition, the Service determines that M had an additional deficiency of $8,000 for 2008 due to its failure to report certain income on its 2008 return. Assuming that M filed its 2010 return timely under IRC 6501(h), the Service has until March 15, 2014, to assess the excessive carryback amount refunded, i.e., $4,000 ($10,000 the original amount refunded, minus $6,000, the amount the Service should have refunded after accounting for the NOL). Under IRC 6501(k), the Service may also assess on or before March 15, 2014, $6,000 of the $8,000 deficiency due to M’s failure to include certain income on its 2008 return ($10,000, the amount refunded under IRC 6411, minus $4,000, the amount that may be assessed under IRC 6501(h), solely by reason of the excess carryback).
Regular statute open in carryback year—If the regular statute of limitations under IRC 6501(a) has not yet expired for the carryback year, a decision should be made on Form 9984, Examiner's Activity Record, (and/or supporting workpapers) documenting as to whether the normal statute will be protected or the carryback statute will be controlling.
A deciding factor in determining whether to use an alpha statute or the original statute is if there are 180 days left on the statute. If there are more than 179 days left on the statute, the examiner will use the original statute date. If there are fewer than 180 days left on the statute, the examiner will use the alpha statute described in IRM 25.6.23. If the normal statute will not be protected, the statute should be updated to BB and the decision not to protect the normal statute documented on Form 895. See IRM Exhibit 25.6.23-3 (21), Instructions for Updating the Statute on AIMS.
Adjustments can be made for the purpose of determining how much of a net operating loss may be carried over and deducted in a subsequent year. The authority for doing so is IRC 7602(a) which states, "For the purpose of ascertaining the correctness of any return, ...the Secretary is authorized to examine any books, papers, records, or other data which may be relevant or material to such inquiry."
Substantiation of the net operating loss deduction must satisfy IRC 6001. IRS can look at records as far back as is necessary in order to determine the correct amount of the NOLD being utilized in the current year and subsequent years. Copies of tax returns are not proof nor are accountants’ workpapers. In Owens v. Commissioner, T.C. Memo 2001-143, the Court concluded that "Although each of the returns for 1990, 1991, and 1992 shows a loss attributable to petitioners’ Schedule C business, petitioners failed to introduce any evidence establishing the loss claimed in each of those returns. The returns for 1990 through 1992 constitute nothing more than the position of petitioners that they had the respective losses claimed in those returns."
A carryover from a carryback year with barred items provides for the carryover of the correct taxable income. In essence, errors in a closed year are corrected for purposes of determining the taxable income of an open year.
For the application of this rule to the year that an NOL should have arisen except a now barred deduction was not claimed by the taxpayer, see Situation 2 of Rev. Rul. 81-88, 1981-1 CB 585 (a taxpayer who failed to take a deduction of $220x in a closed year in which it had $100x of taxable income could use the $220x to generate an NOL carryforward of $120x).
For the application of this rule to the year that an NOL arose, but a now barred deduction was overstated, see Rev. Rul. 56-285, 1956-1 CB 134 (an NOL carryover to an open year was reduced by the amount of erroneous excess depreciation a taxpayer had claimed in the closed loss year).
Exceptions to the rule above are as follows:
Do not use the correct taxable income when the IRC or Treas. Regs. specifically requires a timely act as a condition to allowing a particular tax treatment in a closed year.
Carryback to an otherwise closed year in which the taxpayer failed to claim a deduction. A barred deduction is not taken into account in determining the amount of the carryback used in the closed year; therefore, more of the NOL must be applied than would be the case if the correct taxable income was taken into account. This result is based on Treas. Reg. 301.6511(d)-2(a)(3). Consequently, the barred deduction does not reduce the amount carried over to the year after that closed year (i.e., the correct taxable income is not applied for this purpose either). See Rev. Rul. 81-88, 1981-1 CB 585 Situation 1 and the following example.
XYZ Corporation filed its 2009 return timely, reporting taxable income of $100,000 and tax of $40,000. No extensions were filed and the IRC 6501(a) statute for 2009 expired on March 15, 2013. XYZ Corp. filed its 2011 return timely, in which a net operating loss of $165,000 was reported. On June 1, 2013, an 1120X was filed by XYZ to carry back the 2011 loss to 2009. On September 8, 2013, an audit of XYZ for taxable years 2009 through 2011 revealed that XYZ had failed to claim $20,000 in deductions on its 2009 return. No other adjustments were discovered during the audit. XYZ will receive a refund of the $40,000 in tax for 2009. The net operating loss carryover to 2010 will be $65,000 ($165,000 - $100,000). The $20,000 unclaimed deduction cannot increase the amount of the refund in 2009 nor will it impact the amount of the NOL carryover to taxable year 2010.
Carefully input the proper amounts and transaction codes on Form 5344.
Item 12, Tax, Penalty, and Interest Adjustments—If a portion of the adjustment is due to a carryback multiple entries may be required in Block 12.
The transcript shows a TC 295 for $20,000 (abatement resulting from a tentative allowance). The revenue agent report (RAR) shows $15,000 of the tentative is disallowed. The RAR also shows an adjustment of $5,000 that is not attributable to the carryback. Item 12 should reflect a TC 308 (deficiency assessment generating an assessment of interest from the computation included with the entry) of $15,000 and a TC 300 (deficiency assessment) of $5,000 and a restricted interest RAR should tie to the $5,000 for a total of $20,000.
Item 44, NOL Carryforward Disallowed Amount—This item is used if all or part of an NOL carryforward is disallowed and the carryforward year return is not picked up for examination (return not due). See IRM 4.4.12AIMS/Processing Handbook—Examined Closings, Surveyed Claims, and Partial Assessments, specifically IRM 184.108.40.206.56, Item 44: NOL C/F Disallowed Amount, and IRM Exhibit 4.4.12-6, Item 44 and 45, NOL Information Examples, for examples.
Item 45, NOL Indicator—This item is entered whenever an NOL return (taxable income line is less than zero) was audited. See IRM 220.127.116.11.57, Item 45: NOL Indicator, and IRM Exhibit 4.4.12-6.
Form 5346, Examination Information Report, is used by examiners when it is determined that a related tax return should be considered for examination. When examination adjustments are made that reduce or eliminate the amount of NOL being carried over to subsequent years not yet filed, Form 5346 should be completed by the examiner and submitted to planning and special programs (PSP). This is important since it safeguards against the possibility of taxpayers claiming unallowable losses in future unfiled years.
There is a requirement to offset all taxable income in a carryback year before applying the carryback to other years including years subsequent to the loss year. IRC 172(b)(2) states, "the entire amount of the NOL for any taxable year (referred to in this section as the 'loss year') shall be carried to the earliest of the taxable years to which (by reason of IRC 172(b)(1)) such loss may be carried. There is normally a two year carryback. The portion of such loss which shall be carried to each of the other taxable years shall be any excess of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried."
Aside from modifications required under the law, the only exception to this is if there was a Worker, Homeownership, and Business Assistance Act (WHBAA) of 2009 election (now expired) under IRC 172(b)(1)(H) and the taxpayer elected a 5-year carryback. In this case, the NOL carried back 5 years can only offset 50 percent of taxable income and alternative minimum taxable income can only be offset by 50 percent in the fifth preceding year.
An NOL carryback may necessitate a recomputation of tax liability for the carryback year. Typical deductions that may require recomputation include itemized deductions based on adjusted gross income (AGI). Any credits that are based on or limited by the amount of tax must also be refigured.
The credit ordering rules can be complicated. The examiner must establish the correct taxable income before applying any credits or capital loss carrybacks, etc. There would have to be regular tax before application of any credits. For example, if the current year return has no regular tax (before credits), there would be a carryback of the credit to the taxable year preceding the unused credit year and a carryover of the credit with a 20 year carryover period for general business credits. See IRC 39(a)(1) and IRM 18.104.22.168.5, Carryback Credits Ordering Rule.
Never recompute charitable contributions when there is an NOL carryback. The amount of charitable contribution deduction is impacted by an NOL carryover only. See Treas. Reg. 1.170-2(a) which provides that the deduction under IRC 170 is computed without regard to any NOL carryback to the taxable year under IRC 172. The same rule applies to corporate taxpayers. Regarding the interaction between NOLs and charitable contributions, refer to IRC 172(d)(1), IRC 170(d)(2), Treas. Reg. 1.170A-10 (for individuals), and Treas. Reg. 1.170A-11 (for corporations).
See Notice 89-3, 1989-1 CB 623, IRC 170(d)(1)(B), and Treas. Reg. 1.170A-10 regarding the following:
Ordering rules for the allocation of net operating losses, overall foreign losses, and separate limitation losses.
The recapture of overall foreign losses and separate limitation losses.
The allocation of U.S. source losses.
For taxable years beginning after 12/31/97, the general business credit is carried back one year per IRC 39(a)(1). The statute of limitations will be governed by the year in which the NOL arose. See IRC 6511(d)(4).
Where there is an NOL carryback that reduces regular tax liability in the carryback year to the point where there are unused credits, certain credits (such as general business credits or foreign tax credits) must be carried back before any carryforward of the credits.
A corporation may carry back a capital loss to each of the three years preceding the loss year. Any excess may be carried forward for five years following the loss year. However, the amount which can be carried back is limited to an amount that does not cause or increase an NOL in the carryback year. The entire amount of any net capital loss must be carried to the earliest of the taxable years to which such net capital loss may be carried. Special limitations exist for foreign corporation of losses and carrybacks that result in net operating losses.
See IRC 1212(a)(1), Treas. Reg. 1.1212-1(a)(3)(ii), and IRM 22.214.171.124.26, Net Capital Loss (NCL)—Corporations—Carryback/Carryforward Limitations.
When computing alternative minimum tax (AMT), the regular NOLD must be substituted with ATNOLD. ATNOLD is equal to the regular NOLD with modifications.
First, adjustments must be made to the NOL as provided in the following:
IRC 57 (items of tax preference)
Second, ATNOLD is limited to 90% of alternative minimum taxable income in the carryover or carryback years in general.
Various legislative acts over the last several years have allowed for certain NOLs to offset 100 percent (instead of 90 percent) of the taxpayer’s alternative minimum taxable income (AMTI). Some of these legislative acts:
The Job Creation and Workers Assistance Act of 2002
Gulf Opportunity Zone Act of 2005 (GO Zone)
Kansas Disaster Net Operating Losses (2008)
Midwest Disaster Net Operating Losses (2008)
National Disaster Relief Act of 2008
The American Recovery and Reinvestment Act of 2009
The Worker, Homeownership, and Business Assistance Act of 2009
Information on these legislative acts can be found in specific subsections of this IRM. Also see IRM 126.96.36.199.17, Carryback Net Operating Loss (NOL) Affecting Alternative Minimum Tax (AMT).
ATNOLD: To figure the amount of the recomputed AMT NOL that can be carried to another year, the recomputed loss is subtracted from the alternative minimum taxable income (as modified under the NOL rules) for the carryover year. This rule is applied even if the taxpayer is not subject to alternative minimum tax in that year.
Beginning in 1987 the ATNOLD is figured differently than in past years.
Make the adjustments to the NOL computed for regular tax purposes with the adjustments provided in IRC 56 and IRC 58 and reduced by the items of tax preference determined under IRC 57 (but only to the extent that the item increased the NOL for the year for regular tax purposes). See IRC 56(d) (2).
After making the above calculations, the amount of the NOLD that may be deducted in a carryback or carryover year may not exceed 90% of the alternative minimum taxable income for that year, as figured before the NOL deduction.
In years that the taxpayer does not have an alternative minimum tax liability, the taxpayer must still reduce his ATNOL by 90% of the taxpayer’s alternative minimum taxable income for that year. For this purpose, alternative minimum taxable income is the amount arrived at on line 6, Form 6251. See IRC 56(d)(1)(a). The amount of ATNOL carryforward for tax years beginning before 1987 that may be deducted in tax years beginning after 1986 may not exceed 90% of his alternative minimum taxable income for that year.
For more detailed information on these adjustments, refer to Pub 536, Net Operating Losses for Individuals, Estates and Trust and instructions for Form 6251, Alternative Minimum Tax—Individuals.
In general, interest on a refund is allowed and paid under IRC 6611(a) from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days. IRC 6611(f) provides special rules for computing interest on refunds attributable to NOL carrybacks. If any overpayment results from an NOL carryback, the overpayment is deemed not to have been made prior to the filing date for the taxable year in which such NOL arises. For this purpose, the term "filing date" means the last date prescribed for filing the return of tax imposed by subtitle A for the taxable year (determined without regard to extensions). Because these special rules modify the normal overpayment interest rules, the interest is commonly referred to as "restricted interest" .
Cases involving NOL carrybacks must be identified on Form 3198, Special Handling Notice, as restricted interest cases.
Form 2285, Concurrent Determinations of Deficiencies, is prepared where there is a combination of restricted adjustments and general adjustments in a given tax year. An example of this would be where there is an NOL carryback from 2011 to 2009–this is purely a restricted adjustment. However, if changes are made to the taxable income of the carryback year that have nothing to do with the NOL carryback, these are general adjustments. General adjustments generate interest calculations based upon IRC 6601. Restricted adjustments involving refunds are calculated using IRC 6611 while any deficiency impacting restricted adjustments are calculated using IRC 6601(d).
See IRM 20.2.8, Interest—Restricted Interest, and IRM 20.2.9, Interest on Carryback of Net Operating Loss.
If a taxpayer's tax liability is reduced due to an NOL carryback, the taxpayer may request a refund or credit or a tentative refund. Upon receipt of any claim or tentative carryback, the examiner should verify and update the statute of limitations with consideration of the source year return statute and the potential for use of alpha statutes under IRM 25.6.23. Also, the examiners should request a transcript of account before preparing the examination report to verify the correct statute and determine if the refund has already been made.
A request for refund or credit can be accomplished by a taxpayer filing Form 1040X (individuals) or Form 1120X (C Corporation). See IRC 6511(a).
A claim for refund generally must be filed within 3 years from the time the return was filed (including extensions). However, if a refund is attributable to an NOL carryback, a claim for refund can be filed within 3 years of the due date (including extensions) of the NOL source year return. Carryback allowances are generally processed with a transaction that contains an INT-CMPTN-DT (e.g., TC 295, 299, 305, 309).
IRC 6511(d)(2), Special Period of Limitation With Respect to Net Operating Loss or Capital Loss Carrybacks, is an additional provision. The taxpayer may file a claim if either the statute under IRC 6511(a) or IRC 6511(d)(2) is open.
Form 1045 (individuals) or Form 1139 (corporations) are application forms used to file for a tentative refund.
An application for tentative refund must be filed within 12 months following the end of the loss year. Action must be taken by the Service on the application within 90 days of the filing of the Form 1045 or Form 1139. See Treas. Reg. 1.6411-3(a).
Tentative carryback refunds are considered "tentative refunds" and subject to regular report writing procedures. The deficiency procedure does not apply to assessments arising from tentative carryback allowances. See IRC 6213(b)(3).
The filing of Form 1045 or Form 1139 does not constitute a claim for credit or refund upon which the taxpayer may file suit in court, if it is rejected by the Commissioner. A tentative allowance can generally be identified on a transcript by the posting of a TC 295.
A taxpayer can elect to forgo the carryback period. See IRC 172(b)(3). The election must be made by the due date (including extensions) for filing the return for the loss year. Taxpayers usually attach a statement to the filed tax return notifying the Service that the taxpayer has elected to forgo the carryback period.
When a taxpayer claims an NOL during audit that was not previously claimed, the taxpayer’s option to forgo carrying the NOL forward will most likely be unavailable. The IRC 172(b)(3) election to waive carryback must be made by the due date, including extensions, for filing the taxpayer’s return for the taxable year in which the NOL arises.
The election under IRC 172(b)(1)(H) to carry an NOL back 3, 4, or 5-years is generally unavailable to taxpayers because, as of March 2011, the due date for making this election has passed.
If the IRC 172(b)(3) election is not timely made, the NOL must generally be carried back 2 years per IRC 172(b)(1)(A)(i). However, IRC 172(b)(1) allows for different loss carryback periods for casualty, theft, farms, specified liabilities, applicable NOLs.
Once the election is made to forgo the carryback, it is generally irrevocable. An exception to this is when new legislation specifically allows taxpayers to revoke the election, such as the provision in the American Recovery and Reinvestment Act (ARRA) 2009, section 1211, which allowed taxpayers until April 17, 2009, to revoke a prior election to waive the carryback period. See IRM 188.8.131.52.14.6.5, Revocation of Prior Election to Waive the Carryback Period Under Section 172(b)(3).
If a taxpayer did not make the election to forgo the carryback period and just carried the NOL forward, the examiner should disallow such carryover. However, if the NOL year statute is still open, the loss can still be carried back by the taxpayer via Form 1120X or Form 1040X or by the IRS if the examination includes the carryback year(s).
If both the NOL year and the carryback year statute of limitations have expired, the NOL cannot be carried back for a refund. However, a taxpayer must calculate the "correct" application of NOL to prior years’ taxable income in compliance with IRC 172(b)(2). Only the excess of the NOLD over the taxable income in those carryback years can be carried forward and utilized.
Any corporation can ask for Treas. Reg.1.6164-1 Extension of Time for Payment of Taxes by Corporations Expecting Carrybacks relief. Under 172, a loss must generally be carried back. Only if an election is made under IRC 172(b)(3) is a taxpayer permitted to carry forward without first carrying back. See Farmer v. Commissioner, TC Memo 1998-327 in which the Tax Court disallowed a claimed NOL carryover where the taxpayer did not first carryback the NOL and did not file an election to forego the carryback period under IRC 172(b)(3). The Tax Court’s analysis relied entirely upon the statute, IRC 172.
No application for consent to revoke will be accepted until the permanent regulations are issued. An election to forgo the carryback period applies to both the regular tax NOL and the AMT NOL. See Rev. Rul. 87-44, 1987-1 CB. 3, and Plumb v. Commissioner, 97 T.C. 632, 638, 1991.
NOLs incurred in years when the taxpayers were not married to each other can only be applied against the separate income of the spouse who generated the loss. In other words, an NOL sustained by one spouse before marriage cannot be carried over to offset the other spouse’s income on a joint return; it can only be applied against the income of the spouse who incurred the loss. See Calvin v. United States, 354 F.2d 202 (10th Cir. 1965).
Losses incurred and carried back by a spouse after a divorce or the death of a spouse can only be applied against the separate income of the spouse who incurred the loss even if the taxpayers filed joint returns in the year to which the loss is carried. See Zeeman v. United States, 395 F.2d 861 (2nd Cir. 1968).
A spouse who did not incur the loss may claim a refund if his or her share of the joint tax was reduced by the other spouse's NOL.
When the amount of an NOLD is material, it constitutes a large, unusual, or questionable (LUQ) item under the auditing standards. This is especially true if the NOLD was generated from the same business that gave rise to an adjustment for unreported taxable income in the current year under examination.
It is important to determine the correct taxable income in the source year as well as all of the earlier years that gave rise to the NOL carryforward (NOLD). The Service may redetermine correct taxable income in a closed year in order to ascertain either the amount of an NOL, or the amount of an NOL that is absorbed in the closed year for purposes of determining the correct net operating loss deduction for an open year. The authority for doing so is IRC 7602(a), which states, "For the purpose of ascertaining the correctness of any return, …the Secretary is authorized to examine any books, papers, records, or other data which may be relevant or material to such inquiry."
The examiner will determine the amount of NOLD allowed upon examination of the facts and records provided. The taxpayer is required to maintain such records as will allow the examiner to verify the accuracy of the deduction. If the taxpayer declines to produce the records or the records are unavailable, the examiner may disallow the entire NOLD for lack of substantiation.
Copies of tax returns are not proof, nor are accountant's workpapers. See Owens v. Commissioner, T.C. Memo 2001-143 (2001).
The 2011 year is under examination. The return reflects a $320,000 NOL carryforward from 2007. The 2007 statute is closed, but in reviewing the taxpayer’s financials and the 2007 return, it was determined the taxpayer took a large deduction for an ordinary loss. The loss appeared nondeductible based on facts uncovered in the 2011 examination and prior year financials. The NOL originated from a related party loan. The examiner requested evidence to support the following:
Existence of a true debtor creditor relationship between the related parties
Substantiation of an actual economic outlay
Substantiation that the alleged loan was uncollectible
Substantiation that the alleged loan was not a capital investment
Since sufficient information was not submitted to support the NOL carryforward created from the business bad debt, the carryforward into the current year was reduced.
The consideration of the 2007 issue is not an audit of 2007 and a 2007 revenue agent report (RAR) is not required. In this example, the examiner simply requested verification of the NOL carryforward deduction reflected on the 2011 return and examined the components of the NOL deduction. The examiner's analysis of this deduction is similar to any other line items an examiner selects for verification on a return.
The 2012 Form 1120 is under examination. The 2007 through 2012 years have NOLs plus a large NOL carryforward is reflected on the 2012 year. All returns were timely filed. The examiner finds the taxpayer is claiming significant amounts of personal expenses in various corporate expense accounts. The disallowance of these expenses results in the 2012 NOL turning into positive taxable income. However, the NOL carryforward eliminates the 2012 current taxable income resulting in no tax due. The examiner picks up 2010 and 2011 and discovers the same problem with the same expense accounts. Inspection of the 2007 through 2010 returns reveal the same types of expense accounts; however, the statutes are closed for 2007, 2008, and 2009.
The examiner requests supporting documentation (i.e., books and records for the source years) via Form 4564Information Document Request (IDR) for the NOL carryforward from 2007, 2008, and 2009. The IDR submitted to the taxpayer stated, "The expenses were adjusted by $XXXX in 2012, 2011 and 2010. Those adjustments exceeded the NOLs shown on the returns as filed. The 2007, 2008, and 2009 returns show the same expense categories in similar amounts with similar NOLs in each year. In order to substantiate that the carryover deduction from those years are allowable, please provide the appropriate 2007, 2008, and 2009 general ledger pages for those expenses along with the supporting documentation for any allowable expenses."
Since no documentation was provided to support the NOL carryforwards from 2007, 2008, and 2009, they were disallowed.
See IRM 4.36.1 through IRM 4.36.5 for Joint Committee procedures for refunds of $2 million or more.
Rentals or businesses in which the taxpayer does not materially participate are examples of passive activities.
IRC 469(b) provides that a PAL generally cannot be carried back. It can only be carried forward. A PAL is not an NOL subject to carryback. A PAL does not become an NOL until it is no longer subject to the IRC 469 limitations. For example, a loss will become an NOL in the following instances:
IRC 469(g): Allowable loss triggered via an entire disposition to an unrelated party in a fully taxable transaction.
IRC 469(i): Allowable loss offset for rental real estate (to the extent of the allowable $25,000 offset).
Whether held individually, in a corporation, or in a trust, a passive loss generally cannot be carried back.
On disposition of a passive activity, the Service can make adjustments to prior year suspended PALs from this activity that were incorrectly computed in closed tax years. Similarly, if there is an NOL, credit, or capital loss carryover, the Service can adjust suspended passive losses that were incorrectly computed in barred years.
IRC 6501 provides the general rule regarding the period of limitations for assessing tax. Rev. Rul. 81-88 refers to Treas Reg 301.6511(d)-2(a)(3) that states that if a claim is for an overpayment based both on an NOL carryback and on other items, some of which are barred by a statute of limitations, the computation of any overpayment for the carryback year begins first by calculating the tax attributable to allowable items not barred by a statute of limitations. However, if the claim relates to barred items that decrease taxable income, the first adjustment is the net operating loss carryback.
Thus, PAL carryovers that were incorrectly computed in prior years but impact the current year tax can be adjusted. On a fully taxable disposition of a passive activity to an unrelated party, IRC 469(g) allows PAL suspended losses to be triggered. The triggering of these losses can create an NOL that can be carried back. On any NOL carryback, IRC 6501(h) indicates that the statute on the carryback years is governed by the loss year. Furthermore, in the carryback years, the Service can disallow unrelated deductions up to the refund amount generated by the loss carryback. Thus, unrelated passive losses could also be adjusted.
NOL carrybacks or carryovers and other deductions in a tax period for which an amount of restitution was ordered and assessed pursuant to IRC 6201(a)(4)(A) reduce a taxpayer's civil tax liability for that tax period.
Such deductions, however, do not in any way affect the Service's assessment or collection of the amount of restitution itself. The Service must collect the entire amount ordered as restitution under IRC 6201(a)(4)(A) regardless of whether the civil tax liability for the same period is less than the amount ordered as restitution under IRC 6201(a)(4)(A).
An investor is entitled to an investment theft loss, which is an ordinary loss, if the requirements of Rev. Rul. 2009-9 or Rev. Proc. 2009-20, as modified by Rev. Proc. 2011-58, also frequently referenced as "safe harbor" , are satisfied. Refer to IRM 184.108.40.206.48.2, Claims due to Ponzi Schemes, for further information about the requirements for claiming investment theft losses. An investment theft loss may result in an NOL. The carryback period for an NOL resulting from an investment theft loss is generally 3 years. Refer to IRM 220.127.116.11.14.6 and subsequent sections, American Recovery and Reinvestment Act of 2009—Net Operating Losses, to determine if Rev. Proc. 2009-19, Rev. Proc. 2009-26 or Rev. Proc. 2009-52 applies for extended carryback period.
A specified fraudulent arrangement is an arrangement in which a party (the lead figure):
Receives cash or property from investors;
Purports to earn income for the investors;
Reports income amounts to the investors that are partially or wholly fictitious;
Makes payments, if any, of purported income or principal to some investors from amounts that other investors invested in the fraudulent arrangement; and
Appropriates some or all of the investors' cash or property.
The fraudulent investment arrangement described in Rev. Rul. 2009-9 is a specified fraudulent arrangement.
A ponzi scheme is a scheme in which the party perpetrating the fraud does the following:
Receives cash or property from investors;
Purports to earn income for the investors and reports to the investors income amounts that are wholly or partially fictitious;
Makes payments, if any, of purported income or principal to investors from cash or property that other investors invested in the fraudulent arrangement; and
Criminally appropriates (the party perpetrating the fraud) some or all of the investors' cash or property.