Availability of 10-year carryback should be considered in light of IRS's ruling position.

• Author: Conjura, Carol

In Letter Ruling 9441020, the IRS determined that specified liability losses under Sec. 172(f) included losses incurred due to state tax assessments, the interest on such assessments and the interest on Federal tax deficiencies. Under Sec. 172(f), specified liability losses may be carried back 10 years, rather than the three years generally allowed for net operating losses (NOLs). To date, the definition of such losses has received little analysis and the Service's ruling illustrates its potential breadth. Refunds attributable to specified liability losses for the 1991 calendar year generally must be claimed by Sept. 15, 1995.

Under Sec. 172(f), "specified liability losses" are the sum of three types of deductible losses: (1) product liability losses, (2) losses due to liabilities arising under Federal or state law and (3) losses due to liabilities arising out of torts. The amount of specified liability losses eligible for 10-year carryback is the lesser of this sum and the total NOL for the year. Tort liability losses and losses due to liabilities incurred under state or Federal law may not be carried back to tax years beginning before Jan. 1, 1984. Sec. 172(f) and Regs. Sec. 1.172-13 generally provide:

* Product liability losses do not include losses incurred under warranty theories, nor do they include amounts paid for insurance against product liability risks. To elect 10-year carryback treatment for product liability losses, the taxpayer must have terminated operation or production of the subject product and the injury must have occurred after such termination.

* The act (or failure to act) giving rise to losses due to liabilities arising under Federal or state law must have occurred at least three years before the tax year, and the taxpayer must have been using the accrual method of accounting at the time.

* Tort liability losses must have arisen out of a series of actions (or failures to act) over an extended period of time, a substantial portion of which occurred at least three years before the tax year, and the taxpayer must have been using the accrual method of accounting at the time.

Expansive interpretation

Aside from these limitations, the scope of Sec. 172(f) is relatively undefined. This is especially true with respect to what qualifies as a loss arising under Federal or state law. The IRS illustrated the potential breadth of this definition in Letter Ruling 9441020, in which a taxpayer requested a ruling as to whether...