Advice on assessing a deficiency tied to an NOL carryback

Plain-English summary

Chief Counsel advised that the IRS could assess a deficiency for an earlier year even though the ordinary assessment periods for that year and an intervening year had expired. The deficiency arose after a net operating loss carryback reduced foreign tax credits that had been carried back to the earlier year. Because the loss year was extended by agreement, the advice concluded that the earlier deficiency was attributable to the loss carryback and could be assessed under section 6501(h). The memorandum relied on First Chicago Corp. v. Commissioner, 742 F.2d 1102 (7th Cir. 1984), for the principle that a deficiency may be attributable to a carryback when it can be traced to that carryback.

Ruling snapshot

• Question: Could the IRS assess an earlier-year deficiency attributable to a net operating loss carryback after the ordinary assessment periods expired?
• Outcome: Advice given
• Key authorities: IRC § 6501(a), (c)(4), and (h); First Chicago Corp. v. Commissioner, 742 F.2d 1102 (7th Cir. 1984)

Full text (IRS public release)

ID: CCA_2010012614520652 Number: 201008044
Release Date: 2/26/2010
Office: --------------
UILC: 6501.01-00

From: -----------------------
Sent: Tuesday, January 26, 2010 2:52:10 PM
To: -----------------------
Cc:
Subject: RE: Statute FTC Carryback

I've reviewed your question regarding the period of limitations on assessment. The facts as I understand them are as follows:

Year 5 - taxpayer has an NOL, which it carried back to Year 3.
Year 3 - taxpayer had foreign tax credits, which it carried back to Year 1. The NOL carryback adjustments in Year 3 reduce the amount of FTC that can be carried back to Year 1, creating a deficiency for Year 1.

The period of limitations on assessment for Year 5 has been extended under section 6501(c)(4), however, the period of limitations under section 6501(a) for Years 1 & 3 has expired. Your question is whether the Service can still validly assess the Year 1 deficiency.

Answer: Yes, this principal is well established. Under section 6501(h), "in the case of a deficiency attributable to the application to the taxpayer of a net operating loss carryback...such deficiency may be assessed at any time before the expiration of the period within which a deficiency for the taxable year of the net operating loss...which results in such carrback may be assessed." Since Year 5, the loss year, is clearly extended by agreement, the question is whether the Year 1 deficiency is "attributable to" the NOL carryback. In First Chicago Corp. v. Commissioner, 742 F.2d 1102 (7th Cir. 1984), the Seventh Circuit, reversing the Tax Court's majority decision and adopting the dissenting opinion as its own, generally states that a deficiency is attributable to a carryback if it can be traced to the carryback even if the carryback adjustment triggers a different tax mechanism. In First Chicago, the carryback adjustment from 1974 to 1971 resulted in an income adjustment in 1971 which in turn reduced a carryover to 1972. The Court stated that the resulting 1972 deficiency was attributable to the carryback from 1974 to 1971. Here, similiarly, the NOL carryback from year 5 to year 3 triggers the adjustment of allowable foreign tax credits, reducing the amount available to be carried back to Year 1.

Hopefully this answers your question. Please contact me with any further questions or comments.

Thank you