Rev. Rul. 64-146

Advice has been requested as to the year in which earnings and profits should be adjusted because of a right accruing to a corporation for refund of Federal income taxes paid in prior years, resulting from a carryback of a net operating loss sustained in a current year.

A corporation, using the accrual method of accounting, sustained a net operating loss for the year 1960. The corporation filed a timely claim for refund of its Federal income taxes paid for the years 1958 and 1959, based on the carryback of the loss it sustained for the year 1960.

Revenue Ruling 6, C.B. 1953-1, 120, holds that, in determining the `section 102 net income' of a corporation which keeps accounts and files returns on the accrual method of accounting, an adjustment in Federal income tax liability for the taxable year 1950, resulting from a net operating loss carryback from the taxable year 1951, should not be reflected in the tax deduction provided by section 102(d)(1)(A) of the Internal Revenue Code of 1939, for the reason that the event which fixed the right of the taxpayer to a reduction in income tax liability and a refund of a portion of the income tax accrued and paid for the taxable year 1950 did not occur until the close of the year 1951, when the amount of the net operating loss for such year (1951) became definite and certain. Also, see Mimeograph 6444, C.B. 1949-2, 11.

The reasoning expressed in Revenue Ruling 6 is applicable to the issue here involved. In this case, the event which fixed the corporation's right to a refund of income taxes paid for 1958 and 1959 occurred at the close of the year 1960, when the amount of the net operating loss for that year became definite and certain. The corporation could not have foreseen with certainty that a net operating loss for the year 1960 would become the basis of a claim for refund of taxes paid for the years 1958 and 1959, prior to the end of the year in which the loss occurred.

In the instant case, it is held that, in the computation of earnings and profits for dividend purposes under section 312 of the Code, the amount of the claim for refund of taxes paid for the years 1958 and 1959 is reflected in the current year earnings and profits for the year 1960.