Individual Seeks Modification to NOL Guidance

CARES Act:
NOL Modification Guidance Needed

Background

• Sec. 2303 of H.R. 748, the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) modifies the net operating loss (NOL) provision in I.R.C. section 172 to allow corporations a five-year carry back of losses arising in tax years beginning in 2018, 2019, or 2020 and to allow the NOLs to fully offset taxable income. These changes will allow companies to utilize NOLs and amend prior year returns to provide critical cash flow liquidity during the COVID-19 emergency.

Problem

• Although the intent of the NOL provision is to provide critical cash to businesses immediately, it is unclear whether there is a mechanism to accomplish this objective for 2018 NOLs.

• Tax refunds to C corporations that exceed $5 million are subject to review by the Joint Committee on Taxation (JCT) under I.R.C. section 6405 and cannot be issued until the expiration of 30 days from the date a report of the refund is made by the IRS to the JCT.

• I.R.C. section 6411 allows corporations to obtain tentative refunds for a tax year by filing a Form 1139, but the deadline for filing the Form 1139 in I.R.C. section 6411 is 12 months following the expiration of the loss year. For 2018 calendar year taxpayers, that time has passed.

• The CARES Act appears to treat refunds for fiscal tax years ending in 2018 as tentative refunds that could be filed within 120 days of enactment, but this provision does not appear to extend such treatment to calendar year taxpayers.

• Thus, refund claims for NOLs for tax year 2018 may be subject to a 30-day delay from the date the IRS drafts a report and submits it to the JCT if the claims are not treated as tentative refunds under I.R.C. section 6411.

• Unless this issue is addressed, it is possible the JCT review requirement may inadvertently, and unnecessarily, frustrate the intent of Congress in enacting section 2303 of the CARES Act to provide immediate liquidity to hard-pressed businesses.

Solution

• Refunds under the CARES Act should be administratively deemed to be tentative refunds under I.R.C. section 6411 in order to be consistent with the intent of Congress to provide emergency relief during the COVID-19 crisis. And, the IRS should extend by six months the time under I.R.C. section 6411 for filing Form 1139 applications for tentative refunds based on NOL carrybacks from losses that arose in tax year 2018.

• The IRS has broad authority under I.R.C. section 6081 to grant an extension of time of up to six months for the filing of any return, declaration, statement, or other document required under the Internal Revenue Code or regulations. This authority to extend filing deadlines was exercised in several Notices in late 2001 and in 2002, after the September 11, 2001 terrorist attacks.