To Waive the Carryback of NOL, You Must Affirmatively Elect to Do So, the U.S. Court of Appeals for the 11th Circuit Warned

In a petition for review of a decision of the U.S. Tax Court (Mark Jasperson v. Commissioner of Internal Revenue), the U.S. Court of Appeals for the 11th Circuit warned taxpayers that in order to carry forward an NOL from a previous year:

• A taxpayer must first carryback the NOL two years from the loss year (code Section 172(b)(1)(A)(i)), and
• If the loss is not absorbed in the preceding two years, carryforward the remaining NOL to each year subsequent to the loss year up to twenty years until the taxpayer uses up the NOL (code Section 172(b)(1)(A)(ii)).

In order to waive the carryback requirement, the taxpayer must:

• Attach a statement to the tax return (or amended return) for the taxable year,
• Indicate the section under which the election is being made, the nature of the election, the period for which it applies, and the basis for entitlement for making the election (26 C.F.R. section 301.9100-12T(d)).

Another takeaway from the Court decision is that taxpayers should keep records relating to the net operating losses beyond the traditional three years statute of limitation period; three years may be 17 years too few if a net operating loss was sustained and is carried forward to future tax years. This is because the burden is on the taxpayer to “come forward with evidence to support his entitlement to a deduction and the amount of that entitlement”.

Please contact us to learn more about how the Court’s decision may affect your business’ income tax.