Recent guidance affecting research credit carryforwards from closed years.

• Author: Hiromoto, Mike

Corporations that erroneously failed to claim general business credits, including the research credit, have long known it was possible to claim unused credits on a carryforward basis.

However, the application of that approach to flowthrough entities remained unclear until recently. The IRS in November 2015 issued a private letter ruling confirming that passthrough entities may claim unused credits on a carryforward basis. However, the IRS also recently promulgated final regulations that prohibit a taxpayer from increasing research credit carryforwards from closed years by electing the alternative simplified credit (ASC) method.

Adjusting General Business Credits

Generally, Sec. 6511(a) limits taxpayers to filing a claim for refund within the later of three years from the time the return was filed or two years from the time the tax was paid. As a result, a taxpayer generally loses the opportunity to claim a credit once the Sec. 6511(a) limitation period closes. However, with the issuance of Rev. Rul. 82-49, the IRS provided taxpayers with an avenue to claim a credit beyond the Sec. 6511 limitation period.

In Rev. Rul. 82-49, the taxpayer was a corporation founded in 1976. That year, it placed in service certain property that qualified for the former investment tax credit. However, the taxpayer erroneously failed to claim the tax credit. Additionally, the taxpayer could not use the entire investment credit generated in the initial year, and if the credit had been properly claimed, the taxpayer would have used the credit over the next three tax years. The taxpayer's failure to claim the credit continued for the next three tax years.

In reaching its decision in Rev. Rul. 82-49, the IRS relied primarily on Rev. Rul. 69-543, Rev. Rul. 81-88, and Mennuto, 56 T.C. 910 (1971). In Rev. Rul. 69-543, the taxpayer claimed the investment credit and carried forward a portion of the unused credit into three subsequent tax years. The IRS examined the taxpayer's subsequent returns after the assessment period for the initial year closed and determined that the taxpayer improperly claimed the investment credit in the closed year. The ruling stated that the IRS could disallow the investment credit carryovers to the open years and assess deficiencies even though the claim originated on a return from a closed year. In Mennuto, the Tax Court affirmed Rev. Rul. 69-543 and stated that "the critical element is that the deficiency being determined is for a year on...