New developments: short-period losses, tax accrual workpapers and more.

• Author: Josephs, Stuart R.
• Position: Federal Tax

Rev. Proc. 2003-34, IRB 2003-18, May 5, 2003, provides new liberalized carryback rules for short-period losses.

Background: Rev. Proc. 2002-37 provides the exclusive procedures for certain corporations to obtain automatic approval to change their tax years. Rev. Proc. 2002-39 provides the general procedures to obtain IRS consent to adopt, change or retain a tax year where the taxpayer does not qualify for automatic approval.

Sec. 6.08 of Rev. Proc. 2002-37 provided, as a term and condition for automatic approval, that a corporation generally cannot carry back a short-period net operating loss (NOL) or capital loss (CL)--the "Original Carryhack Term and Condition."

However, this term and condition was not imposed if the NOL or CL was either $50,000 or less or resulted from a short period of nine months or longer and was less than the NOL or CL for the 12-month period beginning with the first day of the short period.

Sec. 5.04(6) of Rev. Proc. 2002-39 also imposed this Original Carryback Term and Condition for prior IRS approval of tax year changes.

Modified Canyback Term and Condition: The IRS determined that the purpose of the Original Carryback Term and Condition would not be frustrated if the exception to that term were expanded to include short periods of less than nine months, provided that the short-period NOL or CL were less than the NOL or CL for the 12-month period beginning with the short period's first day.

Therefore, Rev. Proc. 2003-34 modifies Rev. Proc. 2002-37, Sec. 6.08, and Rev. Proc. 2002-39, Sec. 5.04(6), so that a short-period NOL or CL must be carried back if it is either (a) $50,000 or less; or (b) less than the NOL or CL (respectively) generated for the full 12month period beginning with the short period's first day. However, the taxpayer must wait for this 12-month period to expire to determine eligibility for Modified Term and Condition (b).

Of course, a taxpayer that can carry back an NOL, but does not wish to do so, must make a timely election to waive the entire carryback period under IRC Sec. 172(b)(3)--or have in place an election under Regs. Sec .1.1502-21(b)(3)(ii)(B) regarding waiver of carryback of NOLs attributable to a consolidated group member acquired from another consolidated group.

Other Rules: Rev. Proc. 2003-34, Sec. 5, contains optional terms and conditions for taxpayers with prior accounting period changes. Sec. 6 sets forth procedures for electing Sec. 5's optional terms and conditions. Effective...