State income tax carryback refund claims usually are not accruable.

• Author: Sevier, Gail W.

On July 21, 1993, the Tax Court awarded legal fees to the taxpayer in Yapp Corporation (Spray Rite Service Corporation), TC Memo 1993-323, holding that the Service was not reasonably justified in litigating the substantive case (reported at TC Memo 1992-348). The case involved an Illinois state income tax refund claim filed in coordination with a Federal income tax refund claim. The state claim carried back a 1987 operating loss carryback and was filed Nov. 14, 1988; the refund, however, was not received until 1990. The taxpayer had previously filed a carryback in 1986 from 1985 to 1984 and received that refund in 1986. A second carryback to 1984 of a 1986 loss was filed in 198 7 and received in 1989.

The IRS relied on the all events rule of Regs. Sec. 1.451-1(a) to contend that the 1984 state income tax refund should be accrued into income of the 1987 loss year. Although not noted in the decision, the Service had previously concluded in Rev. Rul. 65-190 that a New York state net operating loss carryback refund claim should be accrued in the loss year even though, under Rev. Rul. 62-160, the interest on the state income tax refund should not be accrued until the year the refund claim was allowed. Similarly, in Rev. Rul. 69-372, the IRS had concluded that a net operating carryback refund claim of Colorado state income...