10-Year Carryback Period Does Not Apply to Taxpayer’s NOLs

Internal Revenue Service

In a legal memorandum, the IRS determined that the legislative reenactment doctrine does not permit a 10-year carryback of specified liability losses not attributable to product liability losses for a taxpayer that has waived the right to carry back its <a href="/research/federal/usc26/172#cpby-0000012" resolve="/lr/resolve/section-172b1c/cpby#cpby-0000012" title="section 172(b)(1)(C)">section 172(b)(1)(C)</a> net operating loss. Section 172(b)(1)(H) provides for a special 10-year carryback period for NOLs attributable to product liabilities of the taxpayer or expenses incurred in connection with investigating, opposing, or settling those liabilities. However, section 172(i)(3) allows a taxpayer with an NOL attributable to a product liability loss to waive the 10-year carryback period and use the carryback period for its NOLs that are not attributable to product liability losses. <a href="/research/federal/cfr26/1.172-13#cwht-0000028" resolve="/lr/resolve/reg-section-1172-13c4/cwht#cwht-0000028" title="Reg. section 1.172-13(c)(4)">Reg. section 1.172-13(c)(4)</a> specifies that the 10-year carryback period for product liability losses must be waived separately from the waiver of the carryback for NOLs that are not attributable to product liability. Accordingly, if a taxpayer sustains both a product liability loss and an NOL not attributable to product liability during the tax year, a <a href="/research/federal/usc26/172#cpby-0000035" resolve="/lr/resolve/section-172b3/cpby#cpby-0000035" title="section 172(b)(3)">section 172(b)(3)</a> election does not preclude the product liability loss from being carried back 10 years. Section 172(b)(1)(K) was added to provide for a special 10-year carryback period for deferred statutory or tort liability losses, which were later subsumed, along with product liability losses, into a new category known as specified liability losses. However, Congress did not revise the special waiver election for product liability losses to apply to deferred statutory or tort liability losses. Therefore, the special waiver election for product liability losses continued to apply only to product liability losses (and was moved to section 172(j)(3)). Section 172(f)(6) was also added, providing for an election to waive the special 10-year carryback for specified liability losses generally. That section is structured almost identically to the special waiver election for product liability losses under section 172(j)(3). The taxpayer is a U.S. corporation that incurred consolidated NOLs for two years but validly elected under <a href="/research/federal/usc26/172#cpby-0000035" resolve="/lr/resolve/section-172b3/cpby#cpby-0000035" title="section 172(b)(3)">section 172(b)(3)</a> to waive its two-year NOL carryback. The taxpayer later determined that a portion of its NOLs were actually specified liability losses that were not product liability losses. The taxpayer timely filed an amended return to carry those losses back 10 years, resulting in refund claims. The taxpayer explained that it had intended only to waive the general two-year carryback for NOLs provided by <a href="/research/federal/usc26/172#cpby-0000005" resolve="/lr/resolve/section-172b1a/cpby#cpby-0000005" title="section 172(b)(1)(A)">section 172(b)(1)(A)</a>, but not the 10-year carryback period for specified liability losses. Under the doctrine of legislative reenactment, administrative pronouncements are deemed to receive congressional approval whenever Congress reenacts an interpreted statute without substantial change. The taxpayer contended that the relevant administrative pronouncement is <a href="/research/federal/cfr26/1.172-13" resolve="/lr/resolve/reg-section-1172-13/cwht" title="reg. section 1.172-13">reg. section 1.172-13</a>, and the relevant reenacted provision is the special waiver election for specified liability losses (that is, section 172(j)(3) reenacted as section 172(f)(6)). The IRS disagreed, finding that “the legislative reenactment doctrine does not entail expansive reinterpretations or additions to the text of regulations, such as expanding the regulatory exception” under <a href="/research/federal/cfr26/1.172-13#cwht-0000028" resolve="/lr/resolve/section-1172-13c4/cwht#cwht-0000028" title="section 1.172-13(c)(4)">reg. section 1.172-13(c)(4)</a> from product liability losses to specified liability losses.

In a legal memorandum, the IRS determined that the legislative reenactment doctrine does not permit a 10-year carryback of specified liability losses not attributable to product liability losses for a taxpayer that has waived the right to carry back its section 172(b)(1)(C) net operating loss.

In a legal memorandum, the IRS determined that the legislative reenactment doctrine does not permit a 10-year carryback of specified liability losses not attributable to product liability losses for a taxpayer that has waived the right to carry back its section 172(b)(1)(C) net operating loss. Section 172(b)(1)(H) provides for a special 10-year carryback period for NOLs attributable to product liabilities of the taxpayer or expenses incurred in connection with investigating, opposing, or settling those liabilities. However, section 172(i)(3) allows a taxpayer with an NOL attributable to a product liability loss to waive the 10-year carryback period and use the carryback period for its NOLs that are not attributable to product liability losses. Reg. section 1.172-13(c)(4) specifies that the 10-year carryback period for product liability losses must be waived separately from the waiver of the carryback for NOLs that are not attributable to product liability. Accordingly, if a taxpayer sustains both a product liability loss and an NOL not attributable to product liability during the tax year, a section 172(b)(3) election does not preclude the product liability loss from being carried back 10 years. Section 172(b)(1)(K) was added to provide for a special 10-year carryback period for deferred statutory or tort liability losses, which were later subsumed, along with product liability losses, into a new category known as specified liability losses. However, Congress did not revise the special waiver election for product liability losses to apply to deferred statutory or tort liability losses. Therefore, the special waiver election for product liability losses continued to apply only to product liability losses (and was moved to section 172(j)(3)). Section 172(f)(6) was also added, providing for an election to waive the special 10-year carryback for specified liability losses generally. That section is structured almost identically to the special waiver election for product liability losses under section 172(j)(3). The taxpayer is a U.S. corporation that incurred consolidated NOLs for two years but validly elected under section 172(b)(3) to waive its two-year NOL carryback. The taxpayer later determined that a portion of its NOLs were actually specified liability losses that were not product liability losses. The taxpayer timely filed an amended return to carry those losses back 10 years, resulting in refund claims. The taxpayer explained that it had intended only to waive the general two-year carryback for NOLs provided by section 172(b)(1)(A), but not the 10-year carryback period for specified liability losses. Under the doctrine of legislative reenactment, administrative pronouncements are deemed to receive congressional approval whenever Congress reenacts an interpreted statute without substantial change. The taxpayer contended that the relevant administrative pronouncement is reg. section 1.172-13, and the relevant reenacted provision is the special waiver election for specified liability losses (that is, section 172(j)(3) reenacted as section 172(f)(6)). The IRS disagreed, finding that “the legislative reenactment doctrine does not entail expansive reinterpretations or additions to the text of regulations, such as expanding the regulatory exception” under reg. section 1.172-13(c)(4) from product liability losses to specified liability losses.

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10-Year Carryback Period Does Not Apply to Taxpayer’s NOLs