Limits on Refunds for NOL Carrybacks

If a taxpayer files an amended return to claim a deduction rather than a credit for foreign taxes paid, and the deduction creates a net operating loss (NOL) for the year, is the taxpayer subject to a three-year or a 10-year limitations period for obtaining a refund of an overpayment that is created by an NOL carryback?

Refunds on Amended Returns

A taxpayer that elected on its originally filed tax return to claim a foreign tax credit under Sec. 901(a) may file an amended return and change the credit to a deduction under Sec. 164(a)(3). The amended return must be filed within the 10-year period described in Sec. 6511(d)(3)(A) or within the period set forth in Sec. 6511(c) if the limitations period on assessment has been extended by agreement; see Regs. Sec. 1.901-1(d).

Under Sec. 6511(d)(2)(A), a claim for credit or refund based on an NOL carryback must be filed within three years of the return’s due date (without extensions) for the loss year. If an amended return is timely filed to claim a deduction rather than a credit for foreign taxes paid, and the deduction creates an NOL for a year that is outside of Sec. 6511(d)(2)(A)’s three-year look-back period, the question arises whether refund of an overpayment based on a carryback of the NOL is time-barred.

Unless the taxpayer makes a timely election under Sec. 172(b)(3) to waive an NOL carryback, an NOL must be carried back and then carried forward. For NOLs incurred in tax years beginning after Aug. 5, 1997, the NOL is carried back to each of the two tax years preceding the tax year of the loss, and is then carried forward to each of the 20 tax years following the tax year of the loss; see Sec. 172(b)(1). (Note: Taxpayers that elected to forgo carrying back an NOL incurred in a tax year ending in calendar-year 2001 or 2002 could elect prior to Oct. 31, 2002 to carry back the loss five years. Taxpayers that would ordinarily use the two-year carryback period for an NOL incurred in a year ending in either 2001 or 2002 were required to carry back the loss five years unless they elected out of the extended carryback period prior to Oct. 31, 2002; see. Rev. Proc. 2002-40.)

IRS Position

The IRS has not ruled formally on whether a refund of an overpayment based on an NOL reported on an amended return filed timely under Sec. 6511(d)(3)(A) can nevertheless be time-barred under Sec. 6511(d)(2)(A). Field Service Advice (FSA) 979A, however, states, “[o]n its face, section 6511(d)(2)(A) would preclude the…refund claim because the claim relates to a NOL carryback and it was filed after [the date prescribed by Sec. 6511(d)(2)(A)]. However, colorable arguments exist that section 6511(d)(3)(A) is the controlling statute in this situation.” The FSA focuses on the clause “overpayment attributable to any taxes paid or accrued to any foreign country” in Sec. 6511(d)(3)(A) and references several reported opinions that construe broadly the term “attributable to”; see First Chicago Corp., 742 F2d 292 (7th Cir. 1984), rev’g 80 TC 648 (1983) (statutory deficiency notice mailed in 1978 was timely for tax year 1972, because a notice was mailed within three years of the date the 1974 return was filed and deficiency was based on adjustment to credit carryback from 1974); Jones, 71 TC 391 (1978) (taxpayer allowed to use 1971 NOL carryback to reduce 1968 tax liability, even though 1971 year closed after IRS disallowed use of 1970 NOL carryback, because 1971 NOL was “part of the statutory machinery generally making losses applicable to the year at issue”); and Herman Bennett Co., 65 TC 506 (1975) (“attributable to” language of second clause of Sec. 6501(j) is satisfied when adjustment may be traced directly to the carryback). The FSA concludes by stating, “[t]he ‘attributable to’ approach effectively looks through the adjustment to the character of the instigating event. Here, the NOL carryback was triggered by the change in the foreign tax credit election; therefore, under this view, section 6511(d)(3)(A) determines the timeliness of the refund.”

The FSA ultimately rejects the “look through” analysis of these reported opinions, however, and concludes that the three-year limitations period in Sec. 6511(d)(2)(A) controls whether a claim for refund based on a newly arising NOL is timely: “The theoretical problems encountered with the correlative adjustment and attribution approaches and the need for finality in statute of limitation matters lead us to conclude that the preferable primary position in this case is that section 6511(d)(2)(A) is the controlling statute of limitations in this situation.” The Service’s position raises the question whether administrative convenience is sufficient to reject the look-through analysis that finds support in Tax Court and appellate court cases. Further, the reported opinions cited above arguably would require the Service to construe broadly the phrase, “[i]f the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country...” in Sec. 6511(d)(3)(A). Accordingly, the IRS should reconsider its position that the three-year limitations period determines whether an overpayment can be refunded if a taxpayer incurs an NOL after it files an amended return to claim a deduction rather than a tax credit for foreign taxes paid.

From Kevin Curran, J.D., LL.M., Washington, DC