CCA 200851066: No deficiency means no notice, so put the expenses in the report with a warning attached

Plain-English summary

Three sentences answering an examiner who has adjustments to make and no way to make them formally. The problem is structural, and the solution is a note in the file.

The Service's usual route for a proposed income tax adjustment is a notice of deficiency, the statutory notice under section 6212 that gives the taxpayer the right to petition the Tax Court before paying. That notice depends on a deficiency existing. Where the taxpayer's losses and deductions are large enough that disallowing the disputed expenses still leaves no tax owed for the year, there is nothing to assess and no notice to send. The return is oversheltered: the adjustment is real but the year absorbs it.

Section 6234 is the provision built for that situation in the partnership context, allowing a declaratory judgment proceeding on the treatment of items where a return is oversheltered and no deficiency results. The writer's conclusion is that the provision forbids a notice of adjustment here, and that no statutory notice can issue either, because there is no deficiency. Both formal instruments are off the table, which leaves the examiner with a finished examination and no document to close it with.

The practical answer is to preserve the position rather than assert it. The expenses can go into the revenue agent's report, the written record of the examination and its adjustments, with a note that they will be disallowed if they are later used as part of a net operating loss carried forward into a future year. That is where the money actually is. An unused loss does not disappear; it moves forward to offset income in a later year, and it is in that later year, when the loss finally shelters something, that the disallowance can be made and a deficiency can exist. The report becomes the record that the Service examined these expenses and did not accept them, so the later examiner is not starting cold.

The release does not explain why section 6234 forbids a notice of adjustment on these facts, and it gives no citation for the calculations named in the subject line. The reasoning behind the conclusion is not in the document.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "carryfoward" for carryforward; "stat notice" and "RAR" left in their working shorthand; and the subject line "Munro Calculations /Over sheltered Return Questions" with its spacing and split word as written.

Ruling snapshot

• Question: Can a notice of adjustment or a statutory notice of deficiency issue where the return is oversheltered, and how should the examiner handle the disputed expenses?
• Outcome: Advice given. Neither notice can issue: section 6234 forbids a notice of adjustment in this case, and no statutory notice can be issued because there is no deficiency. The expenses may be included in the revenue agent's report, noting that they will be disallowed if used as part of a net operating loss carryforward in a future year.
• Key authorities: IRC section 6234; IRC section 6212, by way of the release's classification and its reference to a statutory notice.

Full text (IRS public release)

ID: CCA_2008092509562451 Number: 200851066
Office: ---------------------------- Release Date: 12/19/2008

UILC: 6212.00-00

From: --------------------
Sent: Thursday, September 25, 2008 9:56:28 AM
To: ------------------------
Cc:
Subject: RE: Munro Calculations /Over sheltered Return Questions

Section 6234 forbids a notice of adjustment in this case and no stat notice can be issued because there is
no deficiency. However, you can include these expenses in your RAR, noting that the expenses will be
disallowed if they are used as part of an NOL carryfoward in a future year.