ELECTION TO RELINQUISH 3-YEAR NOL CARRYBACK DOESN'T REQUIRE RELINQUISHING 10-YEAR CARRYBACK FOR SPECIFIED LIABILITY LOSS.

UIL Number(s) 0172.01-00

                                             Date: August 2, 1994

This is in response to your request on behalf of Taxpayer for a private letter ruling under sections 172(b)(3), 172(b)(1)(C), and 172(f) of the Internal Revenue Code of 1986 (Code). Specifically, you have requested a ruling that Taxpayer's election to relinquish the 3- year carryback period with respect to its consolidated net operating loss (CNOL) under section 172(b)(3) will not also require Taxpayer to relinquish the 10-year carryback period for Taxpayer group's specified liability loss under section 172(b)(1)(C).

Taxpayer is the common parent of a consolidated group of corporations filing consolidated returns on a calendar year basis. The consolidated group is primarily engaged in Business X. Each member of Taxpayer's consolidated group used the accrual method of accounting throughout the periods during which the acts or failures to act occurred giving rise to the liability for which amounts are allowable as a deduction in computing Taxpayer group's specified liability loss.

Taxpayer represents that for Tax year, the consolidated group has a CNOL that includes a specified liability loss. A significant portion of the specified liability loss is attributable to amounts described in section 172(f)(1)(B) of the Code.

Section 172(b)(1)(A) of the Code sets forth the general rule that a net operating loss (NOL) for any taxable year shall be an NOL carryback to each of the 3 taxable years preceding the taxable year of such loss and shall be an NOL carryover to each of the 15 taxable years following the year of the loss.

Section 172(b)(3) of the Code provides that any taxpayer entitled to a carryback period under section 172(b)(1) may irrevocably elect to relinquish the entire carryback period with respect to an NOL for any taxable year.

Section 172(b)(1)(C) of the Code states that in the case of a taxpayer that has a specified liability loss (as defined in section 172(f)) for a taxable year, the specified liability loss shall be an NOL carryback to each of the 10 taxable years preceding the taxable year of the loss.

Section 172(f)(1) of the Code provides, in general, that the term "specified liability loss" includes, to the extent the following amounts are taken into account in computing the NOL for the taxable year, any amount under section 172(f)(1)(A) allowable as a deduction under section 162 or 165 which is attributable to product liability or expenses incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of product liability. A specified liability loss also includes any amount under section 172(f)(1)(B) allowable as a deduction under Chapter 1 with respect to a liability that arises under a Federal or State law (deferred statutory loss) or out of any tort of the taxpayer (deferred tort loss) if: (i) in the case of a deferred statutory loss, the act (or failure to act) giving rise to such liability occurs at least 3 years before the beginning of the taxable year, or (ii) in the case of a deferred tort liability, the tort liability arises out of a series of actions (or failures to act) over an extended period of time a substantial portion of which occurs at least 3 years before the beginning of the taxable year.

Section 172(f)(2) of the Code limits the amount of the specified liability loss for any taxable year to the amount of the NOL for the taxable year. In addition, a deferred statutory or tort loss shall not be taken into account as a specified liability loss unless the taxpayer used an accrual method of accounting throughout the period or periods during which the act or failures to act giving rise to such liability occurred.

Section 172(f)(5) provides that for purposes of the carryback and carryover rules of section 172(b) a specified liability loss for any taxable year shall be treated as a separate NOL for such taxable year to be taken into account after the remaining portion of the N0L for such taxable year.

The special carryback rule for product liability losses was added to the Code by the Revenue Act of 1978, P.L. No. 95-600, and was effective for tax years beginning after September 30, 1979. The special carryback rule for deferred statutory or tort liability losses was added to the Code by the Tax Reform Act of 1984, P.L. No. 98-369, and was effective for taxable years beginning after 1983.

Section 11811(b) of the Revenue Reconciliation Act of 1990 (1990 RRA), P.L. No. 101-508, combined pre-1990 RRA section 172(j) (relating to product liability losses) with pre-1990 RRA section 172(k) (relating to deferred statutory or tort liability losses) into current section 172(f), which provides rules relating to specified liability losses.

Under section 11811(b)(2)(B) of the 1990 RRA, the portion of any loss that is attributable to a deferred statutory or tort liability loss (as defined in section 172(k) of the Code as in effect on the day before the date of the enactment of the 1990 RRA) cannot be carried back to any taxable year beginning before January 1, 1984.

Treasury Regulation Section 1.172-13, which was proposed on March 25, 1983, provides guidance with respect to the carryback of product liability losses. Section 1.172-13 was finalized on August 26, 1986, prior to the time that the 1990 RRA adopted the term "specified liability losses" for both product liability losses and deferred statutory or tort liability losses.

Section 1.172-13(c)(4) states that if a taxpayer sustains during the taxable year both an NOL not attributable to product liability and a product liability loss an election pursuant to section 172(b)(3)(C) (relating to election to relinquish the entire carryback period) does not preclude the product liability loss from being carried back 10 years under section 172(b)(1)(I) and paragraph (a)(1) of section 1.172-13.

Therefore, based on the facts and information submitted and the representations made, we conclude as follows:

An election to relinquish the 3-year carryback period with respect to a CNOL under section 172(b)(3) will not require Taxpayer to also relinquish the 10-year carryback period for a specified liability loss under section 172(b)(1)(C); however, under section 11811(b)(2)(B) of the 1990 RRA, Taxpayer cannot carry back the portion of a specified liability loss attributable to a deferred statutory or tort liability loss (as defined in section 172(k) of the Code as in effect on the day before the date of the enactment of the 1990 RRA) to any tax year beginning before January 1, 1984.

No opinion is expressed as to the amount of Taxpayer group's specified liability loss or the proper method to calculate the group's specified liability loss. Further, no opinion is expressed as to the tax treatment of the group's specified liability loss under any other sections of the Code or regulations not specifically set forth in the above ruling. For example, no opinion is expressed as to the tax treatment of the group's specified liability loss under the alternative minimum tax provisions, including to which tax years the loss is carried back.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this letter should be attached to the taxpayer's return for the taxable year that is covered by this ruling. A copy is enclosed for this purpose.

                                   Sincerely,