IRS Clarifies Ordering Rules for Alternative Tax NOLs

Editor: Greg A. Fairbanks, J.D., LL.M.

Gains & Losses

Certain public analyses of the amendments to Sec. 56(d) have claimed that the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA), P.L. 111-92, has created new ordering rules for absorbing alternative tax net operating losses (ATNOLs) that allow WHBAA-year ATNOLs (as defined below) to be used after all other available ATNOLs are used, regardless of when they arose. In response, the IRS issued Field Attorney Advice (FAA) 20144201F (released Oct. 17, 2014), clarifying its view that the amendment to Sec. 56(d) made by the WHBAA did not create new ordering rules for absorbing ATNOLs.

General Rules for NOLs

Sec. 172(a) allows taxpayers a deduction for net operating losses (NOLs) when computing their taxable income. Under Sec. 172(b)(1)(A), taxpayers may generally carry back an NOL to each of the two tax years preceding the year of the NOL (carryback period) and carry over an NOL to each of the succeeding 20 tax years (carryover period).

On Nov. 6, 2009, the WHBAA amended Sec. 172(b)(1)(H) to allow taxpayers to make an election for an NOL incurred in either 2008 or 2009 (WHBAA election) to extend the normal two-year carryback period to up to five years, subject to certain limitations. Sec. 172(b)(1)(H)(v) allowed certain eligible small business taxpayers (as defined in Sec. 172(b)(1)(H)(v)(ll)) to make a WHBAA election for NOLs incurred in both 2008 and 2009.

Sec. 172(b)(2) provides that the entire amount of the NOL for any loss year must be carried to the earliest of the tax years to which such loss may be carried. The portion of such NOL that can be carried to each of the other tax years is the excess, if any, of the amount of such NOL over the sum of the taxable income for each of the prior tax years to which such NOL may be carried. The taxable income for any such prior tax year is computed (1) with certain modifications specified in Sec. 172(b)(2)(A); and (2) by determining the amount of the NOL deduction without regard to the NOL for the loss year or any tax year thereafter. Thus, NOLs are generally absorbed chronologically (i.e.,NOLs from earlier years are absorbed before NOLs from later years).

General Rules for ATNOLs

Sec. 56(a)(4) allows taxpayers an ATNOL deduction (ATNOLD) when computing their alternative minimum taxable income (AMTI). Sec. 56(d)(2) provides that the amount of the ATNOL is equal to the NOL modified by certain adjustments. Sec. 56(d)(1)(A) provides that the amount of the ATNOLD is equal to:

1. The ATNOL attributable to years other than a year in which a WHBAA election was made, limited to 90% of AMTI (90% limitation), plus
2. The ATNOL attributable to a year in which a WHBAA election was made, limited to AMTI minus the amount from 1 (WHBAA-year ATNOL).

Thus, WHBAA-year ATNOLs are not subject to the 90% limitation.

Sec. 56 does not specify the carryback period, the carryover period, or whether ATNOLs are absorbed chronologically. Instead, Sec. 56(d)(1)(B)(ii) states “appropriate adjustments in the application of section 172(b)(2) shall be made to take into account the limitation of subparagraph (A).” Since its enactment, Sec. 56(d)(1)(B)(ii) has provided that any portion of an ATNOL that cannot be used in a particular year due to the 90% limitation may be carried over to other tax years.

FAA 20144201F

In FAA 20144201F, the IRS noted that Sec. 56(d)(1)(B)(ii) is the only statutory authority for altering the application of Sec. 172(b)(2) to ATNOLs. In addition, the IRS noted that the WHBAA did not amend Sec. 172(b)(2) or 56(d)(1)(B)(ii); it amended Sec. 56(d)(1)(A)(ii). The Joint Committee on Taxation’s technical explanation of the WHBAA (JCX-44-09) explained that the 90% limitation for ATNOLDs is suspended with respect to any portion of the ATNOLD that is a WHBAA-year ATNOL. It did not provide that WHBAA-year ATNOLs are absorbed after all other ATNOLs. The “Present Law” section of the Joint Committee report stated that “NOLs offset taxable income in the order of the taxable years to which the NOL may be carried,” citing Sec. 172(b)(2) as support.

In light of the statutory scheme of NOLs and ATNOLs and the lack of evidence that Congress intended to change how NOLs and ATNOLs are absorbed, the IRS ruled that all ATNOLs, including WHBAA-year ATNOLs, must be absorbed chronologically. As a result, taxpayers may not absorb WHBAA-year ATNOLs after all other available ATNOLs are used, regardless of when the ATNOLs arose.

Application of FAA 20144201F

The following examples illustrate the IRS’s view in FAA 20144201F:

Example 1: Corporation X has an ATNOL from 2008 of $100, an ATNOL from 2009 of $200, and an ATNOL from 2010 of $100. X made an election under Sec. 172(b)(1)(H) to carry the 2009 ATNOL back five years. X did not use the 2009 ATNOL, however, in any of the carryback years and consequently carried it forward to 2010 and then 2011.

In 2011, X had AMTI, before any ATNOLD, of $300. Based on the IRS’s view under FAA 20144201F, X would apply the ATNOLs as follows:

• First, X must consider its oldest ATNOL, from 2008, for which no WHBAA election was made. The $100 ATNOL from 2008 does not exceed 90% of the 2011 AMTI, or $270. As a result, X can offset the 2011 AMTI by $100 related to the 2008 ATNOL.
• Second, X must consider the next oldest ATNOL, from 2009. X made a WHBAA election for the $200 ATNOL from 2009, which is therefore not subject to the 90% limitation. As a result, X can offset the 2011 AMTI by $200 related to the 2009 ATNOL.

Thus, X’s 2011 AMTI, after the ATNOLD, is zero. In addition, X will have an ATNOL carryover of $100 related to the 2010 ATNOL.

Note that if X had not made a WHBAA election for the ATNOL in 2009, X’s 2009 ATNOL would have been subject to the 90% limitation; 90% of the 2011 AMTI is $270. X has already offset $100 related to the 2008 ATNOL. As a result, X could offset the 2011 AMTI by only $170 related to the 2009 and 2010 ATNOLs. Thus, X’s 2011 AMTI, after the ATNOLD, would have been $30.

Example 2: Consider the same facts as Example 1, except that in 2011 X had AMTI, before any ATNOLD, of $400.

Based on the IRS’s view under FAA 20144201F, X would apply the ATNOLs as follows:

• First, X must consider its oldest ATNOL, from 2008, for which no WHBAA election was made. The $100 ATNOL from 2008 does not exceed 90% of the 2011 AMTI, or $360. As a result, X can offset the 2011 AMTI by $100 related to the 2008 ATNOL.
• Second, X must consider the next oldest ATNOL, from 2009. X made a WHBAA election for the $200 ATNOL from 2009, which is therefore not subject to the 90% limitation. As a result, X can offset the 2011 AMTI by $200 related to the 2009 ATNOL.
• Third, X must consider the next oldest ATNOL, from 2010. The $100 ATNOL from 2010 is subject to the 90% limitation; 90% of the 2011 AMTI is $360. X has already offset $300 ($100 related to the 2008 ATNOL and $200 related to the 2009 ATNOL). As a result, X can offset the 2011 AMTI by only $60 related to the 2010 ATNOL.

As a result, X’s 2011 AMTI, after the ATNOLD, is $40. In addition, X will have an ATNOL carryover of $40 related to the 2010 ATNOL.

Note that the IRS’s view in FAA 20144201F of the ATNOL ordering rules affects the amount of ATNOL that can be used in this example. If the 2009 ATNOLs for which a WHBAA election had been made could be used last, X’s AMTI in 2011 after ATNOLs would have been zero.

EditorNotes

Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or greg.fairbanks@us.gt.com.

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.