IRS Provides Guidance on Expanded Net Operating Loss Carryback Election

Tax Alert
11.30.09

On November 20, 2009, the Internal Revenue Service ("IRS") released Revenue Procedure 2009-52, 2009-49 I.R.B., implementing recent Congressional action providing an extended carryback period for net operating losses ("NOLs") incurred during the economic downturn. The ability to carry back NOLs for up to five years makes available a much needed source of immediate cash for all businesses, regardless of size.

Rev. Proc. 2009-52 provides guidance pursuant to the Worker, Homeownership, and Business Assistance Act of 2009 (Pub. L. No. 111-92) (the "Act"), which amended sections 172(b)(1)(H) and 810(b) of the Internal Revenue Code (the "Code"). Specifically, the new "section 172(b)(1)(H) election" permits taxpayers to elect to carry back certain NOLs for a period of three, four, or five years, as opposed to the two-year carryback period normally available. The provision applies an optional carryback period of four or five years to losses from operations of life insurance companies.

Relief Provided

The relief provided under the Act is similar to relief provided by the American Recovery and Reinvestment Tax Act of 2009 ("ARRA"), enacted earlier this year, except that the section 172(b)(1)(H) election is not limited to eligible small businesses ("ESBs"). Under the Act, a taxpayer may make the expanded election for any "applicable net operating loss." The Act defines this term to mean the taxpayer’s NOL for a taxable year ending after December 31, 2007, and beginning before January 1, 2010. The election is irrevocable and may be made for only one taxable year. The NOL relief, however, does not apply to taxpayers who received benefits under the Emergency Stabilization Act of 2008 (i.e., TARP recipients) or to members of such a taxpayer’s affiliated group.

For those taxpayers who elect to carry back NOLs to the fifth prior taxable year, the Act limits the loss to 50 percent of the taxpayer’s taxable income for the carryback taxable year. For this purpose, taxable income is calculated without regard to the NOL for the loss year or any subsequent taxable year. NOLs in excess of this limitation are not disallowed permanently, but instead may be carried to later taxable years. This limitation does not apply to elections made under the ARRA (i.e., ESBs may carry an unlimited amount of NOLs to their fifth preceding taxable year). Further, in the case of a carryback of an alternative tax NOL, the 50 percent limitation is applied separately based on the alternative minimum taxable income.

Revenue Procedure 2009-52

Rev. Proc. 2009-52 outlines the specific time and manner by which taxpayers may make a section 172(b)(1)(H) election.1 Under these procedures, the term "taxpayer" includes an affiliated group filing a consolidated return, and applicable NOLs include consolidated NOLs. Additionally, the common parent of the affiliated group is responsible for making the election.

Taxpayers have two options for making a section 172(b)(1)(H) election. First, taxpayers may attach a statement to their federal income tax return (or amended return) for the taxable year in which the applicable NOL arises. The election statement must be filed on or before the due date (including extensions) for filing the return for the taxpayer’s last taxable year ending in 2009. The statement must specifically state that the taxpayer is making a section 172(b)(1)(H) election under Rev. Proc. 2009-52, note the length of the NOL carryback period (3, 4, or 5 years), and contain a declaration that the taxpayer was neither a TARP recipient nor an affiliate of a TARP recipient in 2008 or 2009. The election statement also must be attached to the taxpayer’s claim for tentative carryback adjustment (Form 1139 for corporations).

Alternatively, the taxpayer may make the section 172(b)(1)(H) election by attaching the election statement to the form the taxpayer files applying the NOL carryback period the taxpayer elects (for example, Form 1139 for corporations). The content requirements of the election statement are the same as under the first option, as is the filing deadline -- the form must be filed on or before the due date (including extensions) for filing the return for the taxpayer’s last taxable year beginning in 2009. The time for the taxpayer to claim a tentative carryback adjustment on Forms 1045 and 1139 is extended to match this time period.

Taxpayers that previously filed an application for a tentative carryback adjustment may use either option above in order to amend the previous carryback claim. Such an amendment also applies to a carryback of any alternative tax NOL for the same taxable year. Further, the amendment applies regardless of whether the IRS has acted upon the previous application, except that such relief is inapplicable for those eligible small businesses that filed a prior election under the ARRA.

The revenue procedure also provides guidance for taxpayers who are revoking a prior election to forgo the carryback period for an applicable NOL for a taxable year ending before November 6, 2009. The taxpayer must note the revocation on the election statement along with the information listed above. The due date for filing the revocation is the same as that noted above. Finally, as is true for filing an amendment to a carryback claim, the revocation applies to a carryback of any alternative tax NOLs for the same taxable year.

Implications

Rev. Proc. 2009-52 is entirely procedural. The Treasury Department and the IRS have indicated that additional guidance is forthcoming, providing more substantive guidance regarding the section 172(b)(1)(H) election. In the meantime, taxpayers are advised to keep a number of considerations in mind.

First, the section 172(b)(1)(H) election affects only NOL carrybacks. It has no impact upon the rules governing carrybacks of other items, such as capital losses under section 1212.

Second, carrying NOLs back to earlier taxable years is an opportunity to quickly generate infusions of much-needed cash, but may adversely affect other tax benefits that have been claimed in earlier taxable years. For example, because the domestic production deduction of section 199 is limited by the taxpayer’s taxable income for the year, reducing taxable income in earlier years through an NOL carryback may reduce or eliminate the taxpayer’s section 199 deduction for the carryback year(s). Because section 199 is not just a timing provision, the tax benefit will be lost permanently by reason of the NOL carryback.

Third, many taxpayers are planning to file their 2009 federal income tax returns as quickly as possible (many as early as January 2010) in order to request a "quickie refund" of the overpayments in earlier years created by the section 172(b)(1)(H) election. A number of federal tax elections and administrative procedures are keyed to the date on which the taxpayer files its original tax return. For example, taxpayers seeking to make an "automatic" accounting method change under Rev. Proc. 2008-52 must attach Form 3115 to the original income tax return for the year of change. As another example, taxpayers generally may accelerate deductions under the "recurring item exception" of section 461(h)(3) only if economic performance with respect to the liability occurs prior to the date on which the taxpayer files "a timely (including extensions) return for that taxable year." Likewise, a variety of other elections require attaching statements to the taxpayer’s original tax return for the year.

It is unlikely that most corporate taxpayers will be in a position to comply with these procedural requirements at the time original returns are filed in early 2010. Although nearly all taxpayers filing their 2009 returns early in order to request a "quickie refund" plan to file a superseding return prior to the extended September 15 due date for calendar-year corporations, the number, nature, and timing of the original and superseding returns generated by section 172(b)(1)(H) elections undoubtedly will spawn a number of administrative wrinkles for both taxpayers and the IRS. As such, taxpayers should keep in mind that the section 172(b)(1)(H) election can be made for NOLs arising in either 2008 or 2009.

1 The procedures for making an election to carry back losses from operations of a life insurance company are identical to those applicable to NOLs.

For additional information regarding the section 172(b)(1)(H) election, please contact any of the following members of the Miller & Chevalier tax department:

Marc Gerson, mgerson@milchev.com, 202-626-1475

James Atkinson

Dwight Mersereau

Mary Prosser

Don Rocen

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