United States

Giving to charity bites taxpayer in the NOL…IRS issues CCA 201928014

TAX ALERT  | 

The IRS in CCA 201928014 opined that in determining the amount of charitable carryover available in a subsequent tax year, it was necessary for a taxpayer to calculate its adjustment to its charitable carryover on a chronological, year-by-year basis as illustrated under Reg. 1.172-6. Moreover, to the extent an adjustment is made, the taxpayer must reduce its current year excess contributions before it reduces its charitable carryover starting with the oldest carryover.

The taxpayer (Taxpayer) under examination is a C corporation with several years of NOL and charitable carryovers to use in the tax year at issue, Year One. A portion of the charitable carryovers was set to expire in Year One. In addition to its charitable carryover, Taxpayer had made additional charitable contributions in Year One.

Taxpayer generated taxable income in Year One before taking into account its NOL carryover. Taxpayer’s NOL carryover exceeded its taxable income. As a result, Taxpayer had a NOL carryover available for the subsequent tax year. Moreover, Taxpayer was not able to use its expiring charitable carryovers in Year One and had excess contributions in Year One to carry forward.

The CCA addressed two issues:

  1. How to calculate the charitable contribution carryover adjustment under section 170(d)(2)(B).
  2. The order in which a corporate taxpayer should reduce its charitable contributions and charitable carryovers in making the adjustment.

Applicable law

Section 170 allows a taxpayer to take a deduction for charitable contributions made during a given tax year that is limited to 10% of the taxpayer’s taxable income (10% limit) after applying any NOL carryover (but without regard to carrybacks). Where the amount of the charitable contributions exceed the 10% limit, the excess contributions may be carried forward for up to five subsequent tax years. In a year where a NOL is absorbed, section 170(d)(2)(B) requires that a corporate taxpayer reduce its charitable carryover to the extent that such excess reduces modified taxable income (as computed under section 172(b)(2)) and, in effect, increases a NOL carryover under section 172 to a succeeding taxable year. The purpose of the adjustment is to eliminate a potential double tax benefit of taking into account twice a deduction for charitable contributions made in a given tax year.

In calculating the modified taxable income (MTI) under section 172(b)(2), the taxpayer may adjust for excess contributions (and carryovers) up to the 10% limit, which may be more than the charitable deduction allowed in the current year. This would have the effect of increase the amount of NOLs available in a subsequent tax year. However, the taxpayer does not actually deduct those excess contributions for tax purposes. Thus, without the adjustment under section 170(d)(2)(B), in addition to an increased NOL carryover, the taxpayer would retain the use of the excess contributions that were used to reduce MTI but that were not otherwise deducted under section 170.

Reg. 1.170A-11(c)(2) provides an example of how the adjustment under section 170(d)(2)(B) is calculated. However, it does not address how to calculate the adjustment and reduce its excess contributions where there are carryovers from multiple years. Taxpayer asserted that it should be allowed to adopt any reasonable method in complying with section 170(d)(2)(B). Relying of Rev. Rul. 76-145 for the proposition that carryovers from multiple years are co-equal and fungible, Taxpayer calculated the adjustment on an aggregate basis and then reduced its expiring charitable carryovers first. However, Chief Counsel suggests that sections 170 and 172 should be read in conjunction and that the correct method is the chronological, year-by-year method prescribed under section 172(b)(2). Further, in making the adjustment, the current year excess contributions should be reduced first because it is those amounts that trigger the adjustment under section 170(d)(2)(B). Then, to the extent that the adjustment exceeds the current year excess contributions, charitable carryovers are reduced starting with the oldest carryovers.

In its advice, Chief Counsel provided a simple example to illustrate the application of these principals.

In 2017, X Corp has a NOL carryover of $5,000 and a charitable carryover of $300 available for its current tax year, which included:  

 

NOLs

Charitable

2012

100

150

2013

1,500

 

2017

 

120


X Corp’s NOL carryover exceeds its taxable income of $1,000 for 2017. Thus, like Taxpayer, X Corp. had a NOL carryover for 2018 and was unable to deduct any charitable contributions it made in the 2017 or any of its charitable carryover. Though X Corp. could not take a charitable deduction in 2017, it still needs to take into account those charitable amounts for purposes of calculating its MTI and determine its charitable carryover to 2018. The example lays out the following illustrative calculations:

Sec. 170 TI = $1,000 (2017 TI) - $100 (2012 NOL) = $900

10% Charitable deduction for MTI = $900 x 0.10 = $90

Sec. 172 MTI = $900 - $90 = $810

NOL carryover to 2018 = $1500 (2013 NOL) - $810 = $690

Note that without the $90 charitable deduction taken for purposes of calculating MTI, the NOL carryover to 2018 would only have been $600.Thus, the amount of the NOL carryover to 2018 is increased by $90 under sec. 172(b)(2). As a result, the excess charitable contributions of $120 is reduced by $90 and only $30 of the 2017 excess contributions is carried over to 2018. The charitable contribution adjustment eliminates the duplicated benefit of the $90 increase in NOL carryover and the availability of $90 of charitable carryover to a subsequent tax year that would have been generated by the same $90 of charitable contributions made.

The Taxpayer argued that Rev. Rul. 76-145 supported their position that any reasonable method of reduction should be available. However, Chief Counsel further stated that the method used (as illustrated above) is not inconsistent with Rev. Rul. 76-145 because the facts in that ruling are distinguishable. In that ruling, the increase in the NOL carryover available in the subsequent tax year under section 172(b)(2) was equal to the total amount of excess contributions and charitable carryovers eliminating any charitable carryover for the subsequent tax year. It was this elimination that chief counsel opined was the distinguishing factor in the taxpayer’s fact pattern and the revenue ruling.

Conclusion

Taxpayers who have both charitable contribution carryovers and NOLs in a given year should ensure they are applying the correct ordering rule in computing the taxable income, as well as determining the amount of charitable contribution carryover and NOL carryover. Based on Chief Counsel’s position in the CCA, the IRS will not allow reasonable methods, but will force the year-by-year method in order to ensure no double tax benefit arises.

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