Certain recipients of federal emergency assistance (TARP funds) and their affiliates are ineligible for expanded carryback relief under the November Act. Additionally, special rules—not covered here—apply to NOLs of life insurance companies and corporations filing consolidated returns.
An ESB is a corporation, partnership, or sole proprietorship that has $15,000,000 or less in average annual gross receipts over a three-year period, determined after aggregating gross receipts of certain related persons and applying other special rules adopted from the gross receipts test of Code Section 448(c)(1) (which relates to restrictions on use of the cash method of accounting). In the case of a partnership or S corporation, although the election to use expanded carryback relief is made at the partner or shareholder level, the gross receipts test itself is applied at the partnership or S corporation level. In Rev.Proc. 2009-26, 2009-19 IRB 935 (April 24, 2009), IRS ruled that for purposes of expanded carryback relief the three-year period for averaging gross receipts includes the year in which the NOL arises (the loss year). The gross receipts test is applied by aggregating gross receipts of all persons treated as a single employer under Code Sections 52(a) or (b) or 414(m) or (o), and by eliminating gross receipts from transactions between the persons being aggregated. “Gross receipts” are reduced by returns and allowances and, where capital or Section 1231 assets are sold, by the adjusted basis of the property sold (per Temp.Treas.Reg.Sec. 1.448-1T(f)(iv)). Special rules apply to short taxable years, entities with less than a three-year history, and predecessor businesses.
The most important difference in treatment between ESBs and non-ESBs is that “applicable net operating losses” from two tax years of an ESB—but only one tax year of a non-ESB—can qualify for expanded carryback relief. An “applicable net operating loss” is the NOL for a tax year that ends after December 31, 2007, and begins before January 1, 2010. Thus a calendar year taxpayer with 2008 and 2009 NOLs attributable to an ESB may carry back each NOL to a period of up to five years (subject to different filing deadlines as explained below). In contrast, a calendar year taxpayer with 2008 and 2009 NOLs from a non-ESB who elects expanded carryback relief must choose between the two years. Under the first example, a further difference is that the 2008 ESB NOL that is carried back to the fifth preceding tax year (under the February Act) is not subject to the limitation under the November Act that prevents an applicable NOL from offsetting more than 50% of taxable income in the fifth preceding year.
Not surprisingly, an election to use expanded carryback relief applies for purposes of both the regular tax and the alternative minimum tax (AMT). An important benefit of expanded carryback relief under the November Act, however, is that it is not subject to the rule that would otherwise prevent an AMT NOL from offsetting more than 90% of AMT income in a carryback year.
An election to use expanded carryback relief pursuant to the November Act is normally made by attaching to the taxpayer’s original or amended return for the loss year a statement that includes the following information:
That the taxpayer is electing to apply Section 172(b)(1)(H) of the Internal Revenue Code under Rev. Proc. 2009-52;
That the taxpayer is not a TARP recipient nor, in 2008 or 2009, an affiliate of a TARP recipient; and
The length of the NOL carryback period that the taxpayer elects (3, 4 or 5 years).
The taxpayer must also file a copy of the election statement with the return that applies the NOL to the carryback year (e.g., the Form 1045, Application for a Tentative Refund, for the carryback year). The election must be made by the due date (including extensions) for filing the return for the taxpayer’s last tax year that begins in 2009; the same deadline applies to the applicable Form 1045. Once made, the election is irrevocable. If the election amends a previous carryback claim or application (e.g., the taxpayer carried back the applicable NOL on a previously-filed Form 1045), the election must so state. Note, however, that the prior carryback of an ESB NOL pursuant to the February Act cannot be amended. Section 4.01(4) of Rev.Proc. 2009-52 provides an alternate procedure for making the Section 172(b)(1)(H) election, which is similar to the primary procedure but does not require that the election statement be filed with the return for the loss year.
If a taxpayer has previously waived carrybacks from the loss year under Code Section 172(b)(3) and is now revoking that waiver, the taxpayer must also file a statement indicating that it is revoking the NOL carryback waiver and is electing to apply Section 172(b)(1)(H). The November Act permits such a revocation for a tax year that ended before the November 6, 2009, date of enactment. Filing of the revocation election involves much the same procedure, information, and time limits as those that apply to the election of expanded carryback relief. The revocation applies for both regular tax and AMT purposes.
A carryback election under the February Act may be made by filing Form 1045, Application for a Tentative Refund (or other applicable form applying the extended carryback), within six months of the extended due date for filing the taxpayer’s return for the year of the “applicable 2008 net operating loss”. Under the February Act, a fiscal year taxpayer may elect to treat as its “applicable 2008 net operating loss” the NOL for its tax year that begins in 2008 (rather than its tax year that ends in 2008). In this regard, see Rev.Proc. 2009-26, 2009-19 IRB 935 (April 25, 2009), which continues to provide procedures for electing carrybacks under the February Act. Making a timely election under the February Act for an ESB NOL preserves the possibility of claiming expanded carryback relief for two loss years—one under the February Act and one under the November Act.
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