Statute of limitations does not preclude adjusting NOL carryover.

• Author: Cryan, Thomas M.
• Position: Net operating loss

In Letter Ruling 9504032, the IRS ruled that a taxpayer may recharacterize the events of a closed year to redetermine net operating losses (NOLs) available for future years. Under the facts in the ruling, the taxpayer sustained NOLS in year 1 and in several previous years. On the year 1 tax return, the taxpayer excluded cancellation of debt (COD) income from gross income and, under Sec. 108, correspondingly reduced its NOL carryforwards by the amount of the excluded COD income. In year 5, after the general statute of limitations (SOL) for year 1 had expired, the taxpayer filed an amended return for year 1 showing a greater NOL amount because the original return erroneously overstated the amount of COD income.

The Service considered whether the taxpayer may redetermine correct taxable income for a closed tax year to ascertain the amount of NOL coming from that closed year. In discussing the interaction of Secs. 172 and 6511, the IRS noted that a distinct step in the mechanics of computing an NOL under Sec. 172 for the current year is to separately determine how far each prior year's NOL may be carried and how much NOL has been absorbed in prior years. The Service also stressed the importance of recognizing that the determination of the NOL deduction only affects the tax liability of the year the...