Limits on refunds for NOL carrybacks.

• Author: Curran, Kevin
• Position: Net operating loss

If a taxpayer files an amended return to claim a deduction rather than a credit for foreign taxes paid, and the deduction creates a net operating loss (NOL) for the year, is the taxpayer subject to a three-year or a 10-year limitations period for obtaining a refund of an overpayment that is created by an NOL carryback?

Refunds on Amended Returns

A taxpayer that elected on its originally filed tax return to claim a foreign tax credit under Sec. 901(a) may file an amended return and change the credit to a deduction under Sec. 164(a)(3).The amended return must be filed within the 10-year period described in Sec. 6511(d)(3)(A) or within the period set forth in Sec. 6511(c) if the limitations period on assessment has been extended by agreement; see Regs. Sec. 1.901-1(d).

Under Sec. 6511(d)(2)(A), a claim for credit or refund based on an NOL carryback must be filed within three years of the return's due date (without extensions) for the loss year. If an amended return is timely filed to claim a deduction rather than a credit for foreign taxes paid, and the deduction creates an NOL for a year that is outside of Sec. 6511(d)(2)(A)'s three-year look-back period, the question arises whether refund of an overpayment based on a carryback of the NOL is time-barred.

Unless the taxpayer makes a timely election under Sec. 172(b)(3) to waive an NOL carryback, an NOL must be carried back and then carried forward. For NOLs incurred in tax years beginning after Aug. 5, 1997, the NOL is carried back to each of the two tax years preceding the tax year of the loss, and is then carried forward to each of the 20 tax years following the tax year of the loss; see Sec. 172(b)(1). (Note: Taxpayers that elected to forgo carrying back an NOL incurred in a tax year ending in calendar-year 2001 or 2002 could elect prior to Oct. 31, 2002 to carry back the loss five years. Taxpayers that would ordinarily use the two-year carryback period for an NOL incurred in a year ending in either 2001 or 2002 were required to carry back the loss five years unless they elected out of the extended carryback period prior to Oct. 31,2002; see. Rev. Proc. 2002-40.)

IRS Position

The IRS has not ruled formally on whether a refund of an overpayment based on an NOL reported on an amended return filed timely under 8ec. 6511(d)(3)(A) can nevertheless be time-barred under Sec. 6511(d)(2)(A). Field Service Advice (FSA) 979A, however, states," [o]n its face, section 6511(d)(2)(A) would preclude the...