Rev. Rul. 70-286

Advice has been requested regarding the proper treatment, under the circumstances described below, of a deduction originating from a loss incurred in a short taxable period that resulted from a change in accounting period.

The taxpayer received permission to change his accounting period from a fiscal year ended September 30, 1966, to a calendar year ending December 31, 1966. The taxpayer's operations for the short period October 1, 1966 to December 31, 1966, resulted in a loss of 20x dollars. As a condition to the change, such loss was to be allocated over the ten-year period immediately following the short period. See Rev. Proc. 66-6, C.B. 1966-1, 615.

In the taxable years ended December 31, 1967, and December 31, 1968, the taxpayer had taxable income (before deducting one-tenth of the loss incurred in the short period) of 4x and 3x dollars, respectively. Such amounts were in excess of one-tenth of the loss reflected in the short period. However, in the taxable year ended December 31, 1969, the taxpayer had taxable income (before deducting one-tenth of the short period loss) of less than 2x dollars, thus creating an unused excess of the one-tenth deduction allowable in the taxable year ended December 31, 1969. The specific question presented is the proper treatment of such unused excess.

The requirement, pursuant to Revenue Procedure 66-6, that a taxpayer, in lieu of a net operating loss carry-back, deduct the amount of the short period loss ratably over the ten-year period following the short period is imposed in order to eliminate any distortion of income. This requirement was not intended to prevent a taxpayer from deriving the full benefit from the net operating loss incurred in the short period. Such loss loses its identity as such and becomes an ordinary deduction in arriving at the taxable income for each of the succeeding ten years to the extent of one-tenth of the loss incurred in the short period.

Accordingly, the excess of the one-tenth deduction allowable in the taxable year ended December 31, 1969, over the taxable income of that year before deducting such one-tenth becomes a net operating loss for such year and it is subject to the provisions of section 172 of the Internal Revenue Code of 1954 and the regulations thereunder.