10-year carryback for certain NOLs.Sec. 172 (f) provides a 10-year carryback period for "specified liability losses." To the extent it does not exceed the net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. (NOL NOL - Never Offline ) for the year, a "specified liability loss" consists of: [] Deductions allowable under Sec. 162 or 165 attributable to product liability, or expenses incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of product liability; and [] Any other Federal income tax deduction Tax deduction An expense that a taxpayer is allowed to deduct from taxable income. tax deduction See deduction. with respect to a liability that arises -- under a Federal or state law (e.g., environmental cleanup or workmen's compensation Workmen's Compensation n. a former name for Workers' Compensation before the unisex title of the acts was adopted. ) in connection with an act (or failure to act) that occurred at least three years before the beginning of the tax year, or -- out of any tort (e.g., patent infringement patent infringement n. the manufacture and/or use of an invention or improvement for which someone else owns a patent issued by the government, without obtaining permission of the owner of the patent by contract, license or waiver. ) of the taxpayer in connection with a series of actions (or failures to act) over an extended period of time a substantial portion of which occurs at least three years before the beginning of the tax year. Letter Ruling 9441020 may suggest a broader scope of application for Sec. 172 (f) than most practitioners previously envisioned. In addition to the costs of litigating product liability claims, and the costs of other liabilities other liabilities Small and relatively insignificant liabilities. For financial reporting purposes, firms often combine small liabilities into this single category rather than listing each liability separately. arising under Federal or state laws for matters occurring at least three years before the tax year, the riding held that specified liability losses included: 1. allowable deductions for interest expense resulting from Federal tax deficiencies relating to tax years at least three years prior to the tax year; and 2. assessments of state tax and related interest expense attributable to tax years at least three years prior to the tax year. Example: ABC ABC in full American Broadcasting Co. Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928. Company has an NOL of $50,000 in 1994. During 1994, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. examined ABC's 1990 Federal income tax return. ABC also underwent a state sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. examination for 1990. The examinations concluded in 1994, with ABC paying $10,000 in additional Federal income tax for 1990, and $9,000 in interest on the deficiency. It also paid $25,000 in state sales tax, including interest. Per the rationale of Letter Ruling 9441020, ABC must carry $34,000 ($9,000 $25,000) of its $50,000 NOL back to 1984. This ruling suggests that practitioners may want to review their clients' NOLs with a more expansive view of what costs might fall within Sec. 172(f)'s 10-year carryback provisions. If an item constitutes a specified liability loss, the 10-year carryback period is the one that applies unless the taxpayer affirmatively elects to forgo it. Accordingly, the Service could challenge the application to the third preceding year (or subsequent years) of an amount that should have been carried back to the tenth preceding year. Thus, a taxpayer with expenses relating to these items in a loss year will want to carry them back 10 years, or, on a timely filed return, affirmatively elect not to. The 10-year carryback can result in the recapture of taxes paid at much higher rates than currently apply to taxable income. |
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