CCA: Loss carrybacks do not revive barred overpayment items

Plain-English summary

Chief Counsel advised that a loss carryback does not allow a taxpayer to recover an overpayment attributable to other items that are barred by the statute of limitations. A refund or credit is limited to the overpayment attributable to the loss carryback plus amounts otherwise available under the general three-year and two-year rules. The memorandum also states that the Service may defeat a claimed loss-carryback overpayment by establishing an undiscovered deficiency or showing that the loss was fully absorbed in an earlier carryback year. It rejects using an unclaimed deduction barred by the limitations period to increase the net operating loss available for a later year.

Ruling snapshot

• Question: Can a loss carryback increase an overpayment by reviving otherwise barred items or deductions?
• Outcome: Advice given
• Key authorities: IRC § 6511; Treas. Reg. § 6511(d)-2(a)(3); Rev. Rul. 81-88, 1981-1 C.B. 585; Lewis v. Reynolds.

Full text (IRS public release)

ID: CCA_2012032112445722 Number: 201215008
Release Date: 4/13/2012
Office: --------------
UILC: 6511.03-02

From: -----------------------------
Sent: Wednesday, March 21, 2012 12:44:58 PM
To: ------------------------------
Cc:
Subject: RE: Barred Overpayments

In cases where a claim involves an overpayment based not only on a loss carryback but on another adjustment as well, and the claim with respect to the other items is barred, the mere fact that the claim is based on the carryback of a loss does not permit a barred item to increase the amount of the overpayment. Treas. Reg. section 6511(d)-2(a)(3).

If the claim is based on both a loss carryback and other items, credit or refund cannot exceed the amount of the overpayment attributable to the loss carryback and the amount that would otherwise be refunded under the general three-year and two-year rules.

Under the rationale of Lewis v. Reynolds, the Service may defeat a claimed overpayment based on a loss carryback by establishing a previously undiscovered deficiency, or by showing that the carryback could have been entirely absorbed by adjustment to income in a carryback year that preceded the year of the claimed overpayment. Some have argued that by analogy, a taxpayer should be permitted to utilize an unclaimed deduction barred from refund by expiration of the SOL to reduce the amount of the NOL consumed in a carryback year, and as a result, a barred unclaimed deduction should increase the amount of the available NOL in the next year. The Service does not accept this view and contends that the loss carryback is the first adjustment to taxable income, and any barred adjustment decreasing taxable income is used only to offset barred adjustments increasing taxable income. See Rev. Rul. 81- 88, 1981-1 CB 585 (In determining the amount of an overpayment of income tax from a net operating loss carryback that may be refunded or credited, the taxable income of the first carryback year should not be reduced by the amount of an unclaimed deduction that is barred by the expiration of the period of limitations. If an adjustment for a barred deduction in the first carryback year results in a net operating loss for that year, that net operating loss may be carried forward and applied as an adjustment decreasing the taxable income of the next open carryback year prior to applying the net operating loss carryback.