NOL carrybacks and carryovers: action may be required by Oct. 31, 2002.

May's California CPA, Page 34, discussed the 2002 Tax Act, and stated that "The new law temporarily extends the general NOL carryback period from two to five years for NOLs arising in tax years ending in 2001 and 2002 .... A taxpayer can irrevocably elect to waive the five-year carryback period, in the manner prescribed by the IRS, by the loss year return's due date (including extensions). If this election is made, the existing rules apply to the NOL."

Under existing Sec. 172(b)(3), a taxpayer may irrevocably elect to waive an NOL carryback period. Several readers inquired regarding the effect of the new law if this election had been made.

Rev. Proc. 2002-40, IRB 2002-23, June 10, 2002, favorably answers this and other questions on implementing the NOL rules in the new law.

TAXPAYERS THAT ELECTED TO WAIVE THE CARRYBACK PERIOD

Any taxpayer that previously elected to waive the NOL carryback period for any tax year ending in 2001 or 2002 may revoke this election and apply the new five-year carryback period by following the procedures described below by Oct. 31, 2002. This revocation also will apply for AMT purposes.

If such a taxpayer does not want to revoke the previous election and use the five-year carryback period, no additional form or statement need be filed. Unless the taxpayer follows the procedures described below, the previous election applies as well to waive the five-year carryback period.

TAXPAYERS THAT APPLIED THE TWO-YEAR CARRYBACK PERIOD

A taxpayer that previously filed an application for a tentative carryback adjustment, whether or not acted upon by the IRS, or an amended return using a two-year carryback period for an NOL incurred in a tax year ending in 2001 or 2002, did not elect to waive the five-year carryback period, and now wants to use the five-year carryback, may do so by following the procedures described below by Oct. 31, 2002. Any amendment of a previous refund claim also will apply for AMT purposes.

Unless the taxpayer follows the procedures described below, the taxpayer will be considered to have elected to waive the five-year carryback in favor of the two-year carryback period.

OTHER TAXPAYERS

This situation applies to a taxpayer that:

* Filed a federal income tax return for a tax year ending in 2001 or 2002;

* Did not elect to waive the carryback period in general for an NOL incurred in such year; and

* Did not previously file an application for a tentative carryback adjustment or an amended return using the two-year carryback period for the NOL.

Such a taxpayer may apply the two-year instead of the five-year carryback period, by following the procedures described below by Oct. 31, 2002.

If such a taxpayer does not follow these procedures to apply the two-year carryback period, the five-year carryback period will automatically apply by operation of law.

PROCEDURES

What Forms to File: A taxpayer that previously elected to waive the carryback period or applied the two-year carryback period, as discussed above, and now wants to use the five-year carryback period must file the appropriate form using the five-year carryback period.

A taxpayer that neither elected to waive the carryback period nor applied the two-year carryback period, as discussed above, that wants to relinquish the five-year carryback period, and thus retain the ability to use the two-year carryback period, must file the appropriate form using a two-year carryback period--even if no refund or change in tax liability is shown on the form.

The appropriate forms are:

* For corporations: Form 1139, Corporation Application for Tentative Refund, or Form 1120X, Amended U. S. Corporation Income Tax Return.

* For individuals: Form 1045, Application for Tentative Refund, or Form 1040X, Amended U. S. Individual Income Tax Return.

* For estates or trusts: Form 1045 or amended Form 1041, U.S. Income Tax Return for Estates and Trusts.

Note: The current versions of Forms 1139 (revised Sept. 2000) and 1045 (2001) provide for a three-year carryback. As of June 5, the IRS' Western Area Forms Distribution Center did not know if and when these forms will be revised to reflect the five-year carryback period.

Labels: A taxpayer that previously elected to waive the carryback period and now wants to use the five-year carryback period should type or print across the top of the appropriate form: "Revocation of NOL carryback waiver pursuant to Rev. Proc. 2002-40."

A taxpayer that previously applied the two-year carryback period and now wants to use the five-year carryback period should type or print across the top of the appropriate form: "Amended refund claim pursuant to Rev. Proc. 2002-40."

Deadline: Any form filed pursuant to Rev. Proc. 2002-40 must be filed by Oct. 31, 2002.

CONSOLIDATED GROUPS

Special rules apply to consolidated groups; see temporary and proposed regulations (T.D. 8997 and Reg-122564-02, respectively) published May 31, 2002.

Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at [phone] or [e-mail].