Mitigation may permit NOL carryback refunds for closed years

Plain-English summary

Two taxpayers carried net operating losses forward without electing to waive the required carryback periods. Examination of an open year uncovered the errors, but the earlier years that should have received the losses were already closed. Chief Counsel concluded that the closed-year requirement for mitigation was met and that disallowing the carryforwards while denying the proper carrybacks would create the double disallowance described in Section 1312(4). The required determination did not yet exist, but the parties could create one through a qualifying closing agreement or a denied refund claim. The additional timing condition was met because the refund years were still open when the taxpayers first claimed the deductions in the later years. Mitigation therefore could allow the carrybacks if a qualifying determination were obtained, limited to the amount of the double disallowance.

Ruling snapshot

• Question: Could the mitigation provisions permit NOL carryback refunds for closed years after improper carryforwards were disallowed?
• Outcome: Advice given; mitigation could apply if the parties first obtain a qualifying determination.
• Key authorities: IRC §§ 1311, 1312(4), 1313(a), and 6511(d)(2)

Full text (IRS public release)

ID:         CCA_2018011912500346
UILC:       1311.02-00

Number: 201823004
Release Date: 6/8/2018
From:
Sent: Friday, January 19, 2018 12:50:03 PM
To:
Cc:
Bcc:
Subject: RE: Mitigation Issue


--------,

You asked whether the mitigation applies to allow taxpayers to claim refunds by
carrying back certain NOLs to closed years (------- and -------) when examination of an
open year (-------) leads to the disallowance of a carryforward of a different NOL and
revealed the taxpayers’ errors in carrying forward the NOLs without making the election
to waive the carryback period. The facts, as we understand them, are as follows.

------------------------------- had NOLs in taxable years -------, ------- and -------. It failed to
make an election to forego the carryback period and instead carried the ------- and -------
NOLs to ------- and then carried the ------- NOL to -------. In examining the ------- tax
year, the revenue agent discovered that the ------- NOL should have been carried back
first to -------, and then any excess carried forward to -------. To determine the correct
amount, however, the revenue agent had to correct the NOL deduction taken in -------,
which should have been carried back to ------- and -------. The result is that, if all the
errors were corrected, the taxpayer would have an overpayment in -------, -------, and
-------, and a deficiency in -------.

----------------- had NOLs in taxable years ------- and -------. It failed to make an election
to forego the carryback period and instead carried the ------- NOL to ------- and ------- and
then carried the ------- NOL to -------. In examining the ------- tax year, the revenue agent
discovered that the ------- NOL should have been carried back to -------. In order to
determine the correct calculations, the revenue agent corrected the NOL from -------,
that should have been carried back to ------- and -------, with the remainder carrying
forward to -------. The result for ------------ is that, if all the errors were to be corrected,
there is an overpayment in ------- and ------- and deficiencies in -------, -------, and -------.

In order for mitigation to apply, (1) correction in the error year is barred by a law or rule
of law, (2) there is a determination as defined under section 1313(a), (3) there is a
circumstance of adjustment as defined under section 1312, and (4) there is a condition
necessary for adjustment as defined under section 1311(b). The “error” referred to is
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the failure to carry back the taxpayers’ NOL losses and the failure to file an election to
forego the carryback period.

Here, the first requirement, a correction in the error year is barred by a law or rule of
law, is met. For both taxpayers, tax years ------- and earlier are closed, and those are
the years in which the error would need to be corrected.

The second requirement is not currently met, however, the parties can satisfy this
requirement if the parties execute a closing agreement or other agreement meeting the
requirements of section 1313(a). Alternatively, this requirement would be met if the
taxpayers filed a refund claim, and it was denied, for the ------- tax year based on the ----
------- NOL carryback. The statute of limitations regarding the carryback of NOLs is
governed by 6511(d)(2), which states that in lieu of the normal 3 year period of
limitation, when the claim for credit or refund relates to an NOL carryback, the period
shall be three years from the time prescribed for filing the return for the taxable year of
the NOL. In short, the relevant statutes are the years in which the NOLs occurred,
rather than the years for which the carryback results in a refund.

This situation meets the circumstance of adjustment as described in section 1312(4), a
double disallowance of a deduction under section 1312(4). Exam proposes to disallow
the carryforward of the ------- NOLs to ------- and although the carryback of the -------
NOLs is allowed, a refund for ------- would not be allowed because the NOL from -------
for ------------ and the NOLS from ------- and ------- for -------------- were also improperly
carried forward without waiving the carryback period. When those NOLs are disallowed
in the refund claim for the ------- tax year, it would result in a double disallowance
because the ------- and ------- years are closed for both ------------ and --------------.

In order for mitigation to apply for circumstances described in section 1312(4), the
resulting refund must not have been barred by any law or rule of law at the time the
taxpayer first maintained that it was entitled to such deduction for the taxable year to
which the determination relates. I.R.C. § 1311(b)(2)(B).

------------------ filed its ------- income tax return, carrying forward the ------- NOL, on
--------------------------. The statute of limitation to file a refund for -------------- ------- income
tax year expired on ------------. Thus, the ------- tax year was open when ---------------- first
maintained it was entitled to the ------- NOL deduction, and mitigation could apply to
allow ------------ to carryback its ------- NOL to -------. The amount subject to recovery
using mitigation is limited to the amount of the double disallowance, in this case
-------------, the amount of the ------- NOL.

-------------- filed its ------- income tax return, carrying forward the ------- and ------- NOLs
on ------------------------. The statute of limitations to file a refund for ----------------- -------
and ------- income tax years expired on ------------ and --------------, respectively, so both
years were open when -------------- first maintained it was entitled to the ------- and -------
NOL deductions. Thus, mitigation could apply to allow -------------- to carryback its -------
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NOL to ------- and its ------- NOL to -------, if a determination were to exist with respect to
----------------- ------- income tax year.

Please feel free to contact me if you have any questions. Thank you.

-------


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