Consider protective claims for refund when IRS liberalization possible.

When the IRS issues proposed regulations for taxpayers to follow in preparing income tax returns, a protective claim for refund may be appropriate, if the Service liberalizes its position at a later time and the statute of limitations would, in the absence of filing such claim, bar a claim for refund attributable to the change.

For example, under Prop. Regs. Sec. 1.1502-21, the IRS would limit the use of net operating loss carry-overs of a purchased subsidiary in a consolidated return effective for acquisitions after Jan. 28, 1991, to the extent of the lesser of the separate return limitation year (SRLY)amount or the Sec.

382 limitation amount. The Treasury Department is presently considering whether to apply the SRLY limitation if Sec. 382 applies. If this decision is ultimately made, a taxpayer that had previously filed a 1991 return limiting the use of a loss carryover to the SRLY amount would have retroactively benefited from such relaxation of the regulations. However, since that decision may not be made for some time, taxpayers might consider filing a protective claim for refund to preserve this potential advantage. If the Treasury Department decides to make this change fin late 1995, for example), the absence of the filing of a protective claim could bar the taxpayer from claiming the benefit produced by the changed regulations. From E. Daniel Lejghtman, Esq., Cooper Industries, Inc., Houston, Tex.