Closed year NOL may be increased if carryover year is open.

Recent Letter Ruling 9504032 provides that a taxpayer with a net operating loss (NOL) carryover generated in years for which the statute of limitations (SOL) on assessment is closed may increase the amount of the NOL as long as the SOL is open for the year the NOL is used. This ruling ratifies a long-held view of many practitioners and is consistent with analogous authorities, such as Rev. Rul. 82-49.

The IRS concluded that the fact that the NOL year is closed for SOL purposes is irrelevant; the relevant limitations periods are (or will be) those for the years to which the losses are carried and used as NOL deductions. This ruling provides parity in this area, since the Service has consistently held that an NOL carryover deduction could be reduced, despite the SOL for assessment having expired for the NOL year; see Rev. Rul. 56-285.

It is reasonable to extend this principle to other tax attribute carryovers, such as tax credits (e.g., general business credits). Note that an amended return for the year the NOL or credit arises does not need to be filed to effectuate a revision to the carryover amount. The carryover schedule should, however, show the carryover amount as last reported, a brief explanation of the adjustment being made and the revised carryover amount.

Planning point: A review of NOL carryovers might prove especially beneficial to taxpayers undergoing an IRS exam. Preexamination year NOLS (to which the SOL on assessment has expired) that are claimed as deductions in a year under examination should be carefully analyzed for possible upward adjustments. A taxpayer would then be able to use an increase in an NOL (or credit) carryover to offset potential adjustments made by the Service for a year under examination.