IRS Updates Guidance on ARRT2009 Net Operating Loss Deductions

After Congress passed the special net operating loss election in the American Recovery and Reinvestment Tax Act of 2009 back in February, the IRS issued Revenue Procedure 2009-19 informing qualified taxpayers how to go about electing the special 3, 4 or 5 year net operating loss carrybacks. The IRS has now revised that guidance in Revenue Procedure 2009-26, providing a simplified method for electing to carry back the loss. The guidance also outlines the application of the rules to passthrough entities and their owners.

The IRS notes that it has been receiving filings that did not comply with the formal election procedures outlined in Revenue Procedure 2009-19, attributing this fact to the issuance of this guidance during tax season (on March 16 to be exact). The new Revenue Procedure keeps the old election as one option, but adds a simpler option of simply filing a carryback claim (1045, 1139 or amended return) by date required by statute for this special election to be made. Note that this date will be October 15 for individual taxpayers, and for most taxpayers will be earlier than the latest date normally available to file an application for tentative refund (which is one year after the year end for the return giving rise to the NOL).

The ruling clarifies that an election to carry the regular net operating loss back also operates to carry the alternative tax NOL back to the same starting year.

The ruling explains how to apply these rules to passthroughs as well. The issue of whether a loss qualifies for special carryback is determined at the entity level for the passthrough and not at the individual equity holder level. Such entities are tested for meeting the $15 million revenue test, subject to aggregation with other entities under the rules of §448(c)(2). In the first example the IRS gives, a partner holds a 40% interest in three partnerships that have gross receipts of $10 million, $12 million and $14 million respectively. However, the partnership do not have any linkage that would trigger aggregation under §448(c)(2), so the individual partner could carry back the loss. The actual election to carry back to an alternative year is made by the individual partner (or, in the case of an S corporation, the shareholder).

However, in example 2 the IRS changes the facts so that these entities are under common control within the meaning of §52(b)(1), a fact that would trigger aggregation of the entities for the gross receipts test per §448(c)(2). In that case, their aggregate average gross receipts would exceed $15 million and none of the loss would be eligible to be carried back.

In the case of a holder of an interest in an ESB eligible passthrough, the loss that can be carried back is limited to the lesser of:

• Taxpayer’s items of income, gain, loss or deduction that are allowed in calculating the taxpayer’s applicable 2008 NOL that come from partnerships, S corporations or proprietorships that qualify as ESBS or

• The taxpayer’s NOL for the year in question computed under the standard rules for computation of a net operating loss

Arizona did not include conformity with these changes in the recently passed conformity legislation, and as of now we don’t have specific guidance on how to handle this for Arizona purposes. But clearly Arizona does not, for the moment, allow 3, 4 or 5 year carrybacks for individuals (corporations have not been allowed to carryback losses under prior law, and that doesn’t seem likely to change regardless of what happens for individual taxpayers).

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