Special limitation periods for carryback assessments.

• Author: Smith, Annette B.

If a net operating loss (NOL) or capital loss has been carried back on Form 1120X, Amended U.S. Corporation Income Tax Return, Sec. 6501(h) provides that a deficiency in tax attributable to the carryback can be assessed based on the limitation period for the year of the loss, rather than on the limitation period for the carryback year. Sec. 6501 (j) provides the same rule in the case of business credit carrybacks.

If an NOL, capital loss, or business credit carryback has instead been carried back on Form 1139, Corporation Application for Tentative Refund, Sec. 6501(k) provides a rule that is somewhat more favorable to the IRS. The limitation period within which the IRS can assess a deficiency for the carryback years still is determined by reference to the limitation period for the year of the loss or credit, but the deficiency does not have to be attributable to the carryback. Instead, the deficiency can result from general adjustments to the carryback year itself; however, the amount of the deficiency that can be assessed is limited to the amount of the tentative allowance received by the taxpayer. If the deficiency in the carryback year is attributable to both the carryback and current-year adjustments, Sec. 6501(k) provides that the portion attributable to the carryback is assessed first (see the example in Regs. Sec. 301.6501(m)-l(a)(2)).

Impact of Carryback Method

A common perception is that claiming a carryback refund on Form 1120X results in less exposure to the taxpayer, since once the normal limitation period on assessment for the carryback year has expired, the only deficiency that can be assessed for that year is one attributable to the loss or credit carryback. While as a technical matter that observation is correct, as a practical matter the outcome for the taxpayer is likely to be the same regardless of how its loss or credit is carried back. This is because:

* In almost all cases the IRS considers the merits of a carryback claim filed on Form 1120X before it issues the requested refund; and

* The IRS may reduce or eliminate such refund based on the Lewis v. Reynolds doctrine.

In Lewis v. Reynolds, 284 U.S. 281 (1932), the Supreme Court held that the ultimate question presented in a refund claim is whether the taxpayer has overpaid its tax. The IRS may therefore reconsider...