10-year carryback for certain NOLs.

• Author: O'Connor, Eileen J.
• Position: Net operating losses

Sec. 172 (f) provides a 10-year carryback period for "specified liability losses." To the extent it does not exceed the net operating loss (NOL) for the year, a "specified liability loss" consists of:

[] Deductions allowable under Sec. 162 or 165 attributable to product liability, or expenses incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of product liability; and

[] Any other Federal income tax deduction with respect to a liability that arises

-- under a Federal or state law (e.g., environmental cleanup or workmen's compensation) in connection with an act (or failure to act) that occurred at least three years before the beginning of the tax year, or

-- out of any tort (e.g., patent infringement) of the taxpayer in connection with a series of actions (or failures to act) over an extended period of time a substantial portion of which occurs at least three years before the beginning of the tax year.

Letter Ruling 9441020 may suggest a broader scope of application for Sec. 172 (f) than most practitioners previously envisioned. In addition to the costs of litigating product liability claims, and the costs of other liabilities arising under Federal or state laws for matters occurring at least three years before the tax year, the riding held that specified liability losses included:

1. allowable deductions for interest expense resulting from Federal tax deficiencies relating to tax years at least three years prior to the tax year; and

2. assessments of state tax and related interest expense attributable to tax years at least three years prior to the tax year.

Example: ABC Company has an NOL of $50,000 in 1994. During 1994, the IRS examined...