For corporations looking to take advantage of the 2020 Tax Code changes by carrying back a net operating loss (NOL), consideration must be given to time limitations on refund claims set forth in section 6511. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided for a five-year carryback period for NOLs arising in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021. While the general limitation for taxpayers to claim overpayments is typically three years, a special extended limitation period for claiming overpayments related to refunds “attributable to” NOL carrybacks exists. The IRS, in Chief Counsel Memorandum 202023006 (the Memorandum), provides assistance on determining when a refund claim may be eligible for the special limitation period under section 6511(d)(2).
In the facts of the Memorandum, a taxpayer generates an NOL in Year 11 related to a product-liability loss, eligible to be carried back 10 years under a now-repealed provision of section 172, which provided for a ten-year carryback period for such NOL. In Year 12, the taxpayer files an amended Year 1 return to carryback its Year 11 NOL. As a result, the taxpayer triggered an alternative minimum tax (AMT) liability in Year 1 and, in-turn, generates a minimum tax credit (MTC) which was carried forward to Year 3, the first year the MTC could be utilized. In Year 12, the taxpayer also files a refund claim for the Year 3 overpayment generated after utilizing the MTC. The Taxpayer acknowledges that the general three-year limitation period for claiming a refund from Year 3 had expired, however the Taxpayer believes such Year 3 refund claim was “attributable to” the carryback of the Year 12 NOL to Year 1 and should therefore qualify for the special limitation period under section 6511(d)(2)(A). The IRS concludes that, given these facts, the Year 3 refund claim was in fact attributable to the NOL carryback and was therefore timely filed under section 6511(d)(2).
In general, section 6511(a) requires taxpayers to file a claim for a credit or refund of overpayment of tax by the later of (i) three years from the time the return was filed or (ii) two years from the time the tax was paid. Section 6511(d) provides for a number of exceptions to the general three3-year period. One such exception exists for refunds attributable to NOL carrybacks under section 6511(d)(2)(A). If a claim for a credit or refund is related to an overpayment attributable to an NOL carryback, the limitation period shall be the later of (i) three years after the due date (including extensions) of the return for the taxable year of the NOL resulting in the carryback or (ii) six-months after the expiration of the extended assessment period pursuant to an agreement under section 6501(c)(4).
In the Memorandum, the IRS acknowledges the term “attributable to” is not defined by the Tax Code nor the regulations. The IRS goes on to describe three possible interpretations. The first would interpret the term “attributable to” as only including overpayments immediately caused by the tax attributes (the immediate cause approach). A second interpretation would broaden the term to include overpayments attributable to any tax attributes (i.e. an MTC generated by carrying back an NOL) to which the overpayment could be traced (the tracing approach). Lastly, a third interpretation would include overpayments attributable to the initial tax attribute that started the chain of causation (the originating cause approach). In reaching its conclusion, the IRS relied primarily upon case law1 as well as the legislative history of sections 6511(d) and 6501(h).
The IRS goes on to acknowledge only one case directly deals with the question of the scope of the term “attributable to” as it applies to section 6511(d)(2). In Marshalltown Savings and Loan Assn. v. United States, 92-1 USTC P50,100 (S. D. Iowa 1991), in 1987, the taxpayer carried back a 1985 NOL to 1979 under the former section 172. As a result of the carryback, an investment credit on the 1979 tax return was freed up, which the taxpayer wished to carry forward to the 1980 tax year and generate a refund. The general limitation period for claiming a refund for the 1980 taxable year had expired and the taxpayer relied upon the special limitation under section 6511(d)(2) in filing the refund claim. In Marshalltown, the Court held that the claim for the overpayment on the 1980 return after applying the carry forward of the freed up investment credit was “attributable to” the 1985 NOL and was therefore covered by the special limitation under section 6511(d)(2).
By applying the rationale of Marshalltown as well as the IRS’ own interpretation of the legislative history that Congress intended the term “attributable to” to include any overpayment that can be traced to the NOL carryback, the IRS embraced the broader tracing approach for interpreting the term “attributable to” as used in section 6511(d)(2). This comes as welcome relief to taxpayers filing NOL carryback claims as a result of the CARES Act. The Memorandum makes clear that refund claims for tax attributes freed up or created by the carry back of an NOL, up to five years under the CARES Act, should not be limited to the general three-year limitation under section 6511(a), but rather fall under the special limitation of section 6511(d)(2).
Given the complexities of the corporate tax rules and refund claim filing procedures, corporations should consult with their tax advisors regarding NOL carryback claims and computations.
For analysis of the CARES Act and other COVID-19 related materials affecting businesses, please visit the Coronavirus Resource Center and Coronavirus Tax Relief Resource Center.
1See Marshalltown Savings and Loan Assn. v. United States, 92-1 USTC P50,100 (S. D. Iowa 1991), Trusted Media Brands, Inc. v. United States, 2017-2 USTC P50, 359 (S.D.N.Y. 2017), aff’d, 899 F.3d 175 (2d Cir. 2018), Electrolux Holdings, Inc. v. United States, 491 F.2d 1327 (Fed. Cir. 2007), First Chicago Corp. v. Commissioner, 742 F.2d 1102 (7th Cir. 1984), rev’g 80 T.C. 648 (1983), Herman Bennett Co. v. Commissioner, 65 T.C. 506 (1975)