Could a corporation carry later-year losses back to offset final prior-year Utah deficiencies, and did it have to pay the deficiencies before the loss years were audited?

Plain-English summary

Utah Private Letter Ruling 95-087 said the corporation could carry later-year losses back to offset income and deficiencies in earlier tax years.

The Commission required the amount of the carryback to be established through an upcoming audit of the loss years.

While that audit was pending, the corporation had to pay the existing deficiency assessments and interest.

After the audit, Utah would issue refunds to the extent the verified loss carrybacks offset taxes already paid.

A later response described a negotiated payment arrangement designed to allow time for the loss-year audit.

Procedural background

The corporation had timely filed returns for all relevant years.

Later-year returns showed losses. A separate audit changed some earlier reported loss positions into income positions and created prior-year deficiencies.

The taxpayer submitted carryback claims before the statutory notice of deficiency.

Its petition challenging the deficiency assessment was later dismissed, and the deficiencies became final.

The Commission treated the loss-carryback question as independent from the dismissed deficiency appeal.

Carrybacks were allowed

Based on the facts presented, the Commission said the company could carry the later-year losses back to offset income in the earlier years.

The Auditing Division had scheduled an audit of the loss years.

The Commission said that audit would allow the appropriate carryback.

Deficiencies and interest remained payable meanwhile

The Commission did not immediately net the reported losses against the final deficiencies.

It required the corporation to pay the assessed deficiencies and interest while the loss-year audit proceeded.

Once the audit determined the allowable losses, the Commission would issue refunds to the extent the carrybacks offset taxes paid.

Taxpayer objected to the sequencing

The corporation agreed with the availability of the carrybacks but objected to paying the full deficiencies first.

Its follow-up cited Utah Code section 59-7-108(14) (1990) and argued that the carrybacks were mandatory and should be applied immediately, subject to later audit adjustment.

Those arguments were the taxpayer's position, not a revised Commission holding.

Later payment arrangement

A later Commission letter confirmed discussions among the taxpayer, Auditing Division, and Collections Division.

The parties considered an installment arrangement during the next twelve months while the audit of the loss years continued.

The payment amount was tied in part to interest that would remain due even if the tax liability was fully offset by the losses.

The letter expressed optimism that the audit would progress far enough during the payment period to determine the effect of the carrybacks.

The official file does not present this arrangement as a general rule for other taxpayers.

Holding

Under the Commission's substantive opinion:

• The corporation could carry later-year losses back to the earlier years.
• The allowable amount would be established through audit.
• Existing deficiencies and interest had to be paid while the audit was pending.
• Refunds would follow to the extent verified carrybacks offset paid tax.
• The loss-carryback issue was independent of the dismissed deficiency appeal.
• A later case-specific collection arrangement did not replace the audit-and-refund framework.

What this means for you

Corporate tax departments

A substantive right to a carryback does not necessarily determine the timing of assessment collection, audit verification, or refund.

Tax controversy teams

Separate the merits of a loss claim from the finality of an earlier deficiency and from collection procedures.

Accountants and tax professionals

Verify current carryback availability, filing deadlines, payment requirements, interest, refund claims, audit procedures, and collection options.

Common questions

Q: Were the later losses available for carryback?

A: Yes, under the ruling.

Q: Were they applied immediately against the final deficiencies?

A: No. The Commission required audit verification first.

Q: Did the company have to pay the deficiencies while waiting?

A: Yes, including interest.

Q: What happened after the audit?

A: Utah would refund amounts to the extent the verified carrybacks offset taxes paid.

Q: Did the taxpayer agree with paying first?

A: No. It objected and argued for immediate offset.

Q: Was a payment plan discussed?

A: Yes, but the follow-up described a case-specific arrangement rather than a general rule.

Key source language

• Carryback right: “may carry back losses from tax years XXXXX through XXXXX to offset income for tax years XXXXX through XXXXX.”
• Audit treatment: “As part of the audit, the Auditing Division will allow for the appropriate carry back.”
• Interim payment: “In the meantime, XXXXX must pay the deficiencies, including interest”
• Refund: “the Commission will issue refunds to the extent that losses are carried back to offset taxes paid.”

Citations and references

• Utah Code Ann. § 59-7-108(14) (1990), cited in the taxpayer's follow-up

Source

• Landing page: Utah Private Letter Rulings
• Official ruling file: Utah PLR 95-087
• Date note: the official page labels responses dated December 14, 1995 and February 9, 1996; the page uses the initial substantive response date.
• Sequence note: the taxpayer's objection and later payment-arrangement letter are preserved in the same official file.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

95-087

Response December 14, 1995 and February 9, 1996

Request

November 3, 1995

Chairman

Utah State Tax Commission

210 North 1950 West

Salt Lake City, Utah 84134

Re: XXXXX v. Utah State Tax Commission

Dear XXXXX:

As a courtesy to you, I am enclosing a copy of a Complaint filed on behalf of XXXXX against the Tax Commission in the Third Judicial District Court of Salt Lake County.

The Complaint seeks an adjudication of an important and pressing issue for XXXXX. It was filed in response to a Tax Commission Order of XXXXX dismissing, without discussion or explanation, XXXXX� XXXXX, Request for Agency Action. Through the Request for Agent Action, XXXXX sought guidance on the availability of loss carry backs to offset deficiencies resulting from a formal adjudication of the prior years tax liabilities. Relevant to the inquiry are issues involving res judicata, statutes of limitation and the procedural steps required to be taken by a taxpayer.

While we would prefer to deal with the Tax Commission in briefing and discussing such issues, the Order formally eliminates that avenue to us. However, we informally appeal to you to meet with us and discuss the issues raised in our XXXXX Request for Agency Action. We are certainly prepared to seek a stay or continuance from the district Court if the Tax Commission is willing to consider our issues. On the other hand, if such discussions are deemed to be imprudent by the Tax Commission, the we will seek to have those issues addressed as provided in our Complaint.

I would be happy to meet with you or discuss by phone our perceived dilemma at your convenience, if you are so inclined.

Very truly yours,

XXXXX

December 14, 1995

XXXXX

RE: Advisory Opinion on behalf of XXXXX on loss carry backs to offset deficiencies in prior tax years.

Dear XXXXX,

You asked the Commission for guidance as to whether XXXXX� may carry back losses from the tax years XXXXX through XXXXX to offset deficiencies in tax years XXXXX through XXXXX. You raised this question in response to our order dismissing your client�s objections to the XXXXX deficiency assessment. However, the carry back issue is independent of that appeal, and we are treating your question as a separate request for an advisory opinion.

XXXXX timely filed returns for all tax years in question. Its original returns for XXXXX through XXXXX showed income in XXXXX and losses in XXXXX and XXXXX. XXXXX field timely claims to carry back the XXXXX and XXXXX losses to offset XXXXX income and to claim a refund of taxes paid. A subsequent audit of tax years XXXXX through XXXXX changed XXXXX� tax position for XXXXX and XXXXX from loss positions to income positions. This audit created the opportunity for XXXXX to carry back losses from XXXXX through XXXXX.

During the course of the XXXXX through XXXXX audit, XXXXX communicated with the Auditing Division regarding the carry back losses from XXXXX to XXXXX to offset income proposed by the audit. In the course of those discussions, XXXXX timely submitted claims to carry back XXXXX and XXXXX losses to offset the XXXXX, XXXXX and XXXXX deficiencies. The claims were transmitted by facsimile on XXXXX, prior to the issuance of the statutory notice of deficiency.

Upon receipt of the statutory notice of deficiency, XXXXX petitioned the Tax Commission for redeterminations. XXXXX� petition was later dismissed by order issued XXXXX and the deficiency assessment became final on that date. XXXXX has not yet paid the deficiencies determined by the audit.

Upon the facts described here, XXXXX may carry back losses from tax years XXXXX through XXXXX to offset income for tax years XXXXX through XXXXX. The Commission is aware that the Auditing Division has scheduled an audit in XXXXX to examine tax years XXXXX through XXXXX. As part of the audit, the Auditing Division will allow for the appropriate carry back. In the meantime, XXXXX must pay the deficiencies, including interest, assessed against it for tax year XXXXX through XXXXX. Upon conclusion of the upcoming audit, the Commission will issue refunds to the extent that losses are carried back to offset taxes paid.

If we can answer any other questions on this or other matters, please let us know.

For the Commission,

Alice Shearer

Commissioner

January 23, 1996

Alice Shearer, Commissioner

Utah State Tax Commission

210 North 1950 West

Salt Lake City, Utah 84134

Re: XXXXX Corporation - Advisory Opinion dated XXXXX

Dear Commissioner Shearer:

By letter dated XXXXX, (but not postmarked and mailed until XXXXX) you provided to XXXXX (XXXXX) an �Advisory Opinion on behalf of XXXXX-- Limitations on Loss Carry backs to Offset Deficiencies in Prior Tax Years� (Advisory Opinion). XXXXX would like to thank you for the Advisory Opinion and the guidance and clarification it provides.

XXXXX is pleased with your determination that its XXXXX losses are available to be carried back to offset the final deficiency assessments for XXXXX, XXXXX and XXXXX. However, XXXXX is disappointed that the loss carry backs will not be honored during the pendency of the examination and (possible adjudication) of tax years XXXXX. XXXXX believes the requirement to pay the deficiency assessment for tax years XXXXX, XXXXX and XXXXX without the benefit of its existing loss carry backs is tantamount to a denial of its carry back rights, and as applied against XXXXX, is unlawful, unfair and discriminatory.

First, for the years in question, Utah Code Ann. 59-7-108(14) (1990) provides that losses must be carried back three years. The provision is mandatory and no discretion appears to be granted either to the Tax Commission or the taxpayer in the application of the provision. The Advisory Opinion�s denial of the use of the loss carry backs by XXXXX appears to be a violation of this statute.

Second, XXXXX is unable to find any authority, statutory, or regulatory, which provides for the treatment specified in the Advisory Opinion. Further, XXXXX is unaware of any statute or regulation which grants the Tax Commission discretion to not follow the statutory provisions related to carry backs.

Third, XXXXX believes that the proper treatment is to apply the loss carry backs from XXXXX, XXXXX against the deficiency assessments for XXXXX, XXXXX and XXXXX as the statute requires. Of course, the years XXXXX are subject to audit and possible adjustments as a results of the audit. However, the completion of the proposed audit and the time required to adjudicate any adverse determinations may take years. It took nearly three years to get a final adjudication from the prior audit cycle. It is unfair for XXXXX to be denied its carry back claims for such lengthy periods of time.

Fourth, the Advisory Opinion states: �the carry back issue is independent of that appeal, and we are treating your question as a separate request.� If the loss carry backs are independent of the audit and appeal for the years to which such relate, they must certainly be independent of years yet to be examined. The claims should be independently treated.

Fifth, normally if a taxpayer files a claim for refund, the claim is honored and processed, subject to the Auditing Division�s later examination rights. The procedure prescribed in the Advisory Opinion treats XXXXX differently and discriminatorily from this norm. XXXXX requests the Tax Commission allow the loss carry backs to be processed to offset all or such portion of the deficiency assessments for XXXXX, XXXXX and XXXXX as the reported losses will property allow. When the audit for tax years XXXXX has finally been completed and any disagreements adjudicated, the appropriated adjustments, if any, can be made.

We request the opportunity to discuss this matter further to see if some reasonable accommodation can be made. If such is not possible, we must consider our option to proceed with the adjudication of the loss carry back issues in the action filed in the Third Judicial Court. Inasmuch as service of process for that action must occur by the end of February, we will call you within the next few days to follow up on our request.

Very truly yours,

XXXXX

February 9, 1996

XXXXX

Re: XXXXX Corporation

Dear XXXXX:

This letter will confirm our telephone conversation of XXXXX. During that conversation, we discussed your XXXXX letter to Commissioner Shearer and your XXXXX discussion with XXXXX of the Auditing Division.

As I mentioned on the telephone, the Auditing Division contacted XXXXX of the Collections Division last June to discuss your concerns regarding the payment of the full XXXXX - XXXXX deficiency prior to a determination of the proper amount of loss carry back from later years. At that time, the Auditing Division had calculated the amount of interest which XXXXX would owe even it its tax liability for the earlier years was completely offset by losses from the later years. The interest which would still be owed totaled approximately $$$$$. The Auditing Division asked XXXXX whether the Collections Division would be willing to accept payments totaling $$$$$ during the first year of a repayment arrangement. XXXXX had suggested to the Auditing Division that such an arrangement would be acceptable.

As we discussed this on the telephone, you expressed optimism that XXXXX would be willing to make payments totaling $$$$$ during the next twelve months, thus allowing time for the Auditing Division to complete its audit of the XXXXX loss years. It is my understanding that the Auditing Division will be conducting the audit of the later years in XXXXX.

You also advised me that you had recently spoken with XXXXX and that he had referred you to XXXXX as the collection agent who would be working on this case. XXXXX has also worked with XXXXX in connection with the payment arrangements we negotiated in the XXXXX case, Appeal No. XXXXX. It is my understanding that you will likely contact XXXXX to make satisfactory payment arrangements after reviewing this matter with your client.

I am hopeful that within the next twelve months, XXXXX and the Auditing Division will resolve the XXXXX audit years, or at least be far enough along in the process to determine the impact of loss carry backs to the earlier years. Given the payment arrangement which is in place for the XXXXX deficiency, and the willingness of the Collections Division to work with your client in setting up payment arrangements in this case as described above, I am optimistic that satisfactory arrangements for payment of the XXXXX-XXXXX deficiency can be made.

Please feel free to call me if you have any questions regarding this matter, or if I can be of any assistance in facilitating your discussions with the Collections Division.

Sincerely,

XXXXX