Lack of limitation period on certain adjustments affirmed in recent decision.

• Author: Fernandez, Lewis J.

A tax attribute carried over from a prior tax year may need to be adjusted because of overlooked or misstated deductions or credits. IRS guidance allows both the IRS and taxpayers to adjust net operating losses (NOLs) and credit carryovers from both open and closed tax years.

For example, in Rev. Rul. 81-88 the taxpayer carried back an NOL from 1977 to 1974, 1975, and 1976. However, for 1974 an unclaimed deduction barred by the period of limitation on refund claims resulted in an NOL for that year. The IRS held that the taxpayer could carry the 1974 loss forward and apply it as an adjustment decreasing taxable income for 1975, prior to applying the 1977 NOL carryback to 1975.

Supreme Court Precedent

The principle discussed in Rev. Rul. 81-88 and utilized to allow the adjustment in otherwise closed years is based on the Supreme Court's opinion in Lewis, 284 U.S. 281 (1932). In that case, the IRS had examined the taxpayer's return and assessed a deficiency. The taxpayer paid the deficiency and made a claim for refund. The IRS disallowed the claim and issued a revised computation that allowed some previously disallowed deductions but determined a greater tax liability than was indicated prior to the refund claim being made.

The Supreme Court held that the IRS has authority in acting on a claim for refund to redetermine tax after the limitation period on assessment had run. The court stated that a refund claim involves a redetermination of the entire tax liability and that, while no new assessment can be made after the limitation period expires, the taxpayer is not entitled to a refund unless there has been an overpayment of tax.

R.H. Donnelley

A recent opinion filed by the U.S. District Court for the Eastern District of North Carolina illustrates that the principle set forth in Lewis applies even for the limitation period on assessment for the year in which excess carryback credits arise.

In R.H. Donnelley Corp., No. 5:08-cv-501 (E.D.N.C. 1/29/10), appeal docketed, No. 10-1365 (4th Cir. 4/1/10), the taxpayer timely filed a consolidated tax return for its 1994 tax year. Examining the 1994 return, the IRS did not determine any tax deficiencies prior to expiration of the limitation period on assessment. Subsequently, the taxpayer filed refund claims for its 1991 and 1992 tax years. The claim for refund for the 1991 tax year was based on unused research credits from the 1994 year; the claim for refund for the 1992 tax year was based on unused...