Category: Tax Returns, Examinations & IRS Procedures; Deductions & Credits
Subject: Net Operating Loss Carryovers
Title: Proper Treatment of NOL Carryovers
IRC Sections: 172(b)
Filename: 1372.html
Date Produced: 06/98

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Background
Taxpayer suffered a net operating loss for calendar year 1991. The loss was correctly carried back against the income of 1988 through 1990. The loss remaining after the carryback was not properly applied against the taxable incomes of 1992 through 1994.

Issues
Is it necessary to reduce the amount of NOL available to tax year 1995 by the incomes of 1992 through 1994 even though no NOL deduction was claimed for those years?

Answers
The income of 1992 through 1994 reduces the amount of NOL available for carryover to 1995.

Discussion
Section 172(b) prescribes the utilization order for NOL's. The statute in effect for the years in question requires carryback to the preceding three tax years followed by carryover to each of the following fifteen years. The courts have been consistently strict about forcing taxpayers to follow the utilization order set forth in the statute. See, for example, Leitgen v. Comr., 82-2 USTC ¶9553, aff'g 42 TCM 1130. It seems clear to me that to allow the taxpayer to ignore the incomes of 1992 through 1994, even through oversight, is to allow the taxpayer to prescribe his own carryover period contrary to that established by the statute. Since the statute requires the loss to be carried over to the years 1992 through 1994, then any available NOL is just another deduction available to the taxpayer in those years. It seems to me highly illogical that the taxpayer would be able to preserve for future years an NOL that would have been absorbed by the taxable income of a year to which the statue requires the loss to be carried.

The case law is replete with examples in which the taxpayer failed to carry the net operating loss back to previous years (without the proper election to forgo the carryback period) and then attempted to carry the whole loss forward to subsequent years. The courts have strictly adhered to the position that unless the taxpayer can prove that the NOL would not have been absorbed by the taxable income in the prior years (irrespective of the fact that no carryback was actually claimed), then no carryover is allowed. See, example, Garner v. Comr., 42 TCM 1881.

The regulations reinforce the conclusion. Reg. Section 1.172-4(b)(2) addresses the portion of the NOL available for carryover as follows.

The portion of the loss which shall be carried over to any of such several taxable years subsequent to the earliest year is the excess of such net operating loss over the sum of the taxable incomes (computed as provided in Section 1.172-5) for all of such several taxable years preceding such subsequent taxable year.

In other words, the amount of NOL absorbed by the various intervening tax years is based on the amount of taxable income existing in such intervening tax years. It is the mere existence of intervening year taxable income that drives absorption rather than the actual deduction of some portion of the total NOL.