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Firm Seeks Extension to Fix Glitch With NOL Provision in CARES Act

JAN. 13, 2021

Firm Seeks Extension to Fix Glitch With NOL Provision in CARES Act

DATED JAN. 13, 2021
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January 13, 2021

Mr. David Kautter
Assistant Secretary for Tax Policy
United States Department of Treasury
1500 Pennsylvania Ave. NW
Washington, D.C. 20220

Mr. Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Ave. NW
Washington, D.C. 20224

Mr. Michael J. Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, N.W.

Washington, D.C. 20224

Re: Using IRS Form 1139 to Claim 2018 Refundable Minimum Tax Credits

Dear Assistant Secretary Kautter, Commissioner Rettig, and Chief Counsel Desmond,

We are writing to request Treasury and the Internal Revenue Service's (“IRS”) assistance in addressing a glitch in the operation of the Net Operating Loss (“NOL”) provision in the CARES Act that we believe unintentionally reduces taxpayersʼ access to liquidity.

As you are aware, the CARES Act allowed taxpayers to carry back NOLs generated in 2018, 2019, and 2020 to the five years preceding the year that the loss was incurred. As a result, taxpayers may apply the loss to offset taxable income in those prior years resulting in a refund of taxes paid in such prior years. We understand that Congress enacted this change to provide taxpayers with additional liquidity to respond to the economic impacts resulting from COVID-19. Further, the IRS provides an “expedited” refund process through the use of Form 1139, Corporation Application for Tentative Refund, which provides taxpayers more immediate access to their refunds than the standard refund process of filing an amended income tax return on Form 1120-X, Amended U.S. Corporation Income Tax Return.

Some NOLs may be carried back to years when the Alternative Minimum Tax (“AMT”) was in effect, which may give rise to additional AMT liability in the carryback year. In these circumstances, a taxpayer may be eligible for Minimum Tax Credits (“MTCs”), which are refundable. For affected taxpayers, the majority of their refund resulting from the NOL carryback is likely to be attributable to MTCs, rather than regular tax liability.

While Congress appears to have anticipated this issue because the CARES Act permits taxpayers to claim an expedited refund of MTCs, the CARES Act may contain a drafting error because taxpayers whose NOLs arise in 2020 cannot use the expedited refund process. Under CARES, to claim an expedited refund of MTCs, a taxpayer must file Form 1139 by December 30, 2020. This deadline makes sense for NOLs generated in 2018 and 2019, but is problematic for calendar year taxpayers whose NOLs arise in 2020 because their tax year does not end until the following day (December 31,2020) and the IRS will only process an expedited refund once the relevant tax year ends and the tax return for that year has been filed. As a result, taxpayers whose NOLs arose in 2020 will not be able to use the expedited refund process and, instead, must file their 2020 tax return in 2021 and file amended tax return(s) for the carryback year(s). This process takes significantly longer than the expedited refund process, which is inconsistent with Congress's goal of quickly providing additional liquidity to taxpayers.

Based on our discussions with Congress, we understand that the language in the CARES Act was drafted to ensure that taxpayers could still use the expedited refund process for tax year 2018 (because the time for using the expedited refund process may have otherwise expired) and Congress did not consider the impact on taxpayers whose NOLs arose in 2020.

We believe that Treasury and IRS could address this glitch by exercising Treasury's statutory authority under Section 7508A of the Code to extend the deadline for filing an expedited refund claim to December 30, 2021. This would further Congress's goal to provide taxpayers with additional liquidity quickly, and would treat taxpayers whose NOLs arose in 2020 similarly to taxpayers whose NOLs arose in 2018 and 2019.

While there are multiple ways that Treasury could exercise its authority, we believe that it would be most expeditious for Treasury and the IRS to update the Frequently Asked Questions ("FAQs”) posted on the IRS website interpreting the NOL provisions in the CARES Act. A draft FAQ that addresses this glitch is attached to this letter for your consideration.

We thank you in advance for your consideration. Please let us know if there is anything that we can do to be of further assistance.

Best regards,

Baker & McKenzie LLP
Washington, DC

Encl.

cc:
Krishna Vallabhaneni, Tax Legislative Counsel
Brett York, Deputy Tax Legislative Counsel
Colin Campbell, Attorney-Advisor
Natasha Goldvug, Attorney-Advisor


Is there an extended deadline for a C corporation to file Form 1139 to claim its MTC refund and make an election under Section 53(e)(5) to recover 100% of its MTCs as refundable credits in its first taxable year beginning in 2018?

Yes. On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic (Emergency Declaration). The Emergency Declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).” Pursuant to the Emergency Declaration, this FAQ provides relief under section 7508A(a) of the Internal Revenue Code (Code) for C corporations (the Affected Taxpayer) claiming refunds of MTCs pursuant to section 2305 of the CARES Act that the Secretary of the Treasury has determined to be affected by the COVID-19 emergency.

Section 7508A provides the Secretary of the Treasury or his delegate (Secretary) with authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a Federally declared disaster as defined in section 165(i)(5)(A). Pursuant to section 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws.

The Secretary of the Treasury has determined that Affected Taxpayers filing applications for tentative refunds of MTCs on Form 1139 and electing under section 53(e)(5) to recover 100% of such refunds in their 2018 taxable years pursuant to section 2305 of the CARES Act are affected by the COVID-19 emergency for purposes of the relief described in this FAQ.

For an Affected Taxpayer, the December 30, 2020 due date for filing an application for a tentative refund of MTCs on Form 1139 for which a refund is due by reason of an election under section 53(e)(5) is automatically postponed to December 30, 2021. An election under section 53(e)(5) to claim 100% of an Affected Taxpayer's refundable MTCs in its first taxable year beginning in 2018 may be made on Form 1139 filed by the extended December 30, 2021 deadline. The Affected Taxpayer must include at the top of the form, “Electing to Take 100% Refundable Credit Amount in 2018 — per CARES Act Section 2305(b).”

No extension is provided in this FAQ for the payment or deposit of any Federal tax, or for the filing of any other Federal information return.

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