Statute of limitations does not preclude adjusting NOL carryover.In Letter Ruling 9504032, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. ruled that a taxpayer may recharacterize the events of a closed year to redetermine Verb 1. redetermine - fix, find, or establish again; "the physicists redetermined Planck's constant" ascertain, determine, find out, find - establish after a calculation, investigation, experiment, survey, or study; "find the product of two numbers"; "The physicist net operating losses Net operating losses Losses that a firm can take advantage of to reduce taxes. (NOLs) available for future years. Under the facts in the ruling, the taxpayer sustained NOLS in year 1 and in several previous years. On the year 1 tax return, the taxpayer excluded cancellation of debt (COD) income from gross income and, under Sec. 108, correspondingly reduced its NOL NOL - Never Offline carryforwards by the amount of the excluded COD income. In year 5, after the general statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought. Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law. (SOL) for year 1 had expired, the taxpayer filed an amended return Amended Return A return filed in order to make corrections to a tax return from a previous year. It can be used to correct errors and claim a more advantageous filing. Notes: An amended return is filed using Form 1040X. for year 1 showing a greater NOL amount because the original return erroneously overstated the amount of COD income. The Service considered whether the taxpayer may redetermine correct taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. for a closed tax year to ascertain the amount of NOL coming from that closed year. In discussing the interaction of Secs. 172 and 6511, the IRS noted that a distinct step in the mechanics of computing an NOL under Sec. 172 for the current year is to separately determine how far each prior year's NOL may be carried and how much NOL has been absorbed in prior years. The Service also stressed the importance of recognizing that the determination of the NOL deduction only affects the tax liability of the year the deduction is taken, not the year(s) from which the NOL is carried. The IRS concluded, therefore, that the fact that year 1 is a closed year is irrelevant, and that the issue of whether a year is open matters only for years to which the losses are carried. Beyond this ruling, it is important to note that the filing of an amended return to correct the amount of the loss in an earlier year is not mandatory. The carryover loss from year 1 could have been corrected and restated on the return on which the NOL deduction was claimed; see Rev. Rul. 82-49. Finally, taxpayers should not overlook that this is a two-edged sword. The Service also has the ability to redetermine the amount of an NOL sustained in a prior year, and thus could reduce the amount of an NOL deduction claimed on the current-year return, as long as that return is still open under the SOL. This underscores the need to keep records supporting NOL and other carryforwards until expiration of the limitations period for the year in which the carryforward is deducted. From Thomas M. Cryan, J.D., Washington, D. C. |
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