IRS Issues Procedures for Waiving NOL Carrybacks

(Parker Tax Publishing April 2020)

As a result of changes made by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to the net operating loss (NOL) rules in Code Sec. 172, the IRS issued procedures that describe how and when to (1) file an election to waive an NOL carryback; (2) file an election to exclude Code Sec. 965 years from an NOL carryback period; and (3) file elections under the CARES Act special rule concerning NOLs arising in tax years beginning before January 1, 2018, and ending after December 31, 2017. Rev. Proc. 2020-24.

Background

For a tax year beginning before January 1, 2021, Code Sec. 172(a)(1) was amended by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to allow a deduction for the tax year equal to the aggregate of the net operating loss (NOL) carryovers and carrybacks to the tax year. For any tax year beginning after December 31, 2017, and before January 1, 2021, the CARES Act amended Code Sec. 172(b)(1) to provide that an NOL must be carried back to each of the five tax years preceding the tax year of the NOL (i.e., the tax years in the carryback period for the NOL). A taxpayer entitled to a carryback period under Code Sec. 172(b)(1) can make an irrevocable election under Code Sec. 172(b)(3) to relinquish the carryback period for an NOL for any tax year. If an NOL is carried back to any Code Sec. 965 year (relating to years of deferred foreign income corporations), then the taxpayer is treated as having made the election under Code Sec. 965(n) to waive the carryback with respect to each such Code Sec. 965 year.

Observation: Taxpayers may want to waive an NOL carryback, and instead carry it forward, if the taxpayer expects future tax rates to be higher than the tax rates in the years to which the carryback applies. Additionally, it could depend on the taxpayer's expected cash flow in the current year versus a future year. A cost benefit analysis should be prepared if there is any question as to the year that would benefit most from an NOL carryback or carryforward.

Code Sec. 172(b)(3) provides that a taxpayer may waive the carryback period. There are two special rules for elections under Code Sec. 172(b)(3). The first rule allows a taxpayer with one or more Code Sec. 965 years to elect, in lieu of the election under Code Sec. 172(b)(3), to exclude all Code Sec. 965 years from the carryback period for an NOL. The second rule provides that a taxpayer must make an election under Code Sec. 172(b)(1)(D)(v)(I) or Code Sec. 172(b)(3) to exclude Code Sec. 965 years from or waive, respectively, the carryback period for an NOL arising in a tax year beginning in 2018 or 2019 by the due date, including extensions of time, for filing the taxpayer's federal income tax return for the first tax year ending after March 27, 2020 (i.e., the date of enactment of Code Sec. 172(b)(1)(D)).

Code Sec. 965 and the regulations thereunder generally require the subpart F income of a deferred foreign income corporation to be increased for the last tax year of such corporation that begins before January 1, 2018, by the greater of the accumulated post-1986 deferred foreign income of such corporation as of November 2, 2017, or December 31, 2017, and for certain taxpayers to include in gross income their pro rata share of the increase in subpart F income of the deferred foreign income corporation. Code Sec. 965(n) and Reg. Sec. 1.965-7(e) allow a taxpayer to make an election for a tax year to not take into account Code Sec. 965(a) inclusions, reduced by Code Sec. 965(c) deductions, and associated Code Sec. 78 gross-ups in determining the taxpayer's (1) NOL deduction under Code Sec. 172 for the tax year, or (2) taxable income for the tax year (computed without regard to the deduction allowable under Code Sec. 172) that may be reduced by NOL carryovers or carrybacks to the tax year under Code Sec. 172.

Code Sec. 6411(a) allows a taxpayer to file an application for a tentative carryback adjustment of the tax for a prior tax year affected by an NOL carryback. The application must be filed on or after the date of filing for the return for the tax year of the NOL from which the carryback results and within a period of 12 months after that tax year or, for any portion of a business credit carryback attributable to an NOL from a subsequent tax year, within a period of 12 months from the end of the subsequent tax year. Code Sec. 6411(b) provides a 90-day period during which the IRS will make a limited examination of the application to discover omissions and errors of computation and determine the amount of the decrease in tax attributable to the carryback. The IRS may disallow, without further action, any application that contains errors of computation that cannot be corrected within the 90-day period or that contains material omissions. The decrease in tax attributable to the carryback is applied against unpaid amounts of tax. Any remainder of the decrease is credited or refunded within the 90-day period.

The CARES Act provides a special rule for NOLs arising in tax years which begin before January 1, 2018, and end after December 31, 2017. Under that special rule, applications under Code Sec. 6411(a) with respect to such NOLs are treated as timely filed if filed no later than July 25, 2020. Additionally, elections to forgo or reduce the carryback of such NOLs, or elections to revoke any such prior elections, are treated as timely made if made no later than July 25, 2020.

Rev. Proc. 2020-24

In mid-April, the IRS issued Rev. Proc. 2020-24 to provide guidance for taxpayers that want to (1) elect under Code Sec. 172(b)(3) to waive the carryback period for an NOL arising in a tax year beginning in 2018 or 2019; (2) elect under Code Sec. 172(b)(1)(D)(v)(I) to exclude all Code Sec. 965 years from the carryback period for an NOL arising in a tax year that begins in 2018, 2019, or 2020; or (3) make an application under Code Sec. 6411(a) for an NOL arising in a tax year that began before January 1, 2018, and ended after December 31, 2017.

With respect to elections to waive a carryback under Code Sec. 172(b)(3) for NOLs arising in tax years beginning in 2018 or 2019, the election must be made no later than the due date, including extensions, for filing the taxpayer's federal income tax return for the first tax year ending after March 27, 2020. A taxpayer must attach to its federal income tax return filed for the first tax year ending after March 27, 2020, a separate statement for each of tax years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply Code Sec. 172(b)(3) under Rev. Proc. 2020-24 and the tax year for which the statement applies. Once made, the election is irrevocable.

Similar rules are also provided for taxpayers making elections to exclude Code Sec. 965 years from the carryback period, as well as for consolidated groups wishing to waive the NOL carryback rules.

Rev. Proc. 2020-24 provides that taxpayers with an NOL arising in a tax year that began before January 1, 2018, and ended after December 31, 2017, who make an application under Code Sec. 6411(a) on either Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund, with respect to a carryback of such NOL will be treated as having timely filed if the application is filed no later than July 27, 2020. Similarly, elections for such tax years with an NOL to waive any carryback period, to reduce any carryback period, or to revoke any election made under Code Sec. 172(b) to waive any carryback period will be treated as timely filed if filed no later than July 27, 2020.

Compliance Tip: A taxpayer may file such elections where the taxpayer files its federal income tax return by attaching the statement required to make the election, with "Filed pursuant to Rev. Proc. 2020-24" at the top, to an amended return, Form 1045, or Form 1139 containing only the taxpayer's name, address, and taxpayer identification number. The statement required to make the election must indicate the section under which the election is being made and must set forth information to identify the election, the period for which it applies, and the taxpayer's basis and entitlement to make the election.

According to the IRS, taxpayers with NOLs arising in tax years beginning after December 31, 2017, should consult Notice 2020-26 for procedures on how to file applications under Code Sec. 6411(a) for tax years that may otherwise be outside of the period for filing such applications.

For a discussion of the rules relating to carrybacks for NOLs in tax years beginning after 2017, see Parker Tax ¶99,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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