IRS clarifies ordering rules for alternative tax NOLs.

• Author: Angstadt, Brian
• Position: Net operating losses

Certain public analyses of the amendments to Sec. 56(d) have claimed that the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA), RL. 111-92, has created new ordering rules for absorbing alternative tax net operating losses (ATNOLs) that allow WHBAA-year ATNOLs (as defined below) to be used after all other available ATNOLs are used, regardless of when they arose. In response, the IRS issued Field Attorney Advice (FAA) 20144201F (released Oct. 17, 2014), clarifying its view that the amendment to Sec. 56(d) made by the WHBAA did not create new ordering rules for absorbing ATNOLs.

General Rules for NOLs

Sec. 172(a) allows taxpayers a deduction for net operating losses (NOLs) when computing their taxable income. Under Sec. 172(b)(1)(A), taxpayers may generally carry back an NOL to each of the two tax years preceding the year of the NOL (carryback period) and carry over an NOL to each of the succeeding 20 tax years (carryover period).

On Nov. 6, 2009, the WHBAA amended Sec. 172(b)(1)(H) to allow taxpayers to make an election for an NOL incurred in either 2008 or 2009 (WHBAA election) to extend the normal two-year carryback period to up to five years, subject to certain limitations. Sec. 172(b)(1)(H)(v) allowed certain eligible small business taxpayers (as defined in Sec. 172(b)(1)(H)(v)(11)) to make a WHBAA election for NOLs incurred in both 2008 and 2009.

Sec. 172(b)(2) provides that the entire amount of the NOL for any loss year must be carried to the earliest of the tax years to which such loss may be carried. The portion of such NOL that can be carried to each of the other tax years is the excess, if any, of the amount of such NOL over the sum of the taxable income for each of the prior tax years to which such NOL may be carried.

The taxable income for any such prior tax year is computed (1) with certain modifications specified in Sec. 172(b)(2) (A); and (2) by determining the amount of the NOL deduction without regard to the NOL for the loss year or any tax year thereafter. Thus, NOLs are generally absorbed chronologically (i.e., NOLs from earlier years are absorbed before NOLs from later years).

General Rules for ATNOLs

Sec. 56(a)(4) allows taxpayers an ATNOL deduction (ATNOLD) when computing their alternative minimum taxable income (AMTI). Sec. 56(d)(2) provides that the amount of the ATNOL is equal to the NOL modified by certain adjustments. Sec. 56(d)(1)(A) provides that the amount of the ATNOLD is equal to:

1. The ATNOL...