Section 172(b)(1)(A) provides that Net Operating Losses (NOLs) may generally be carried back two years and carried forward 20 years. The alternative minimum tax NOL cannot exceed 90 percent of alternative minimum taxable income (AMTI), determined without regard to the alternative minimum tax NOL deduction (AMTNOL).1 When only 90 percent of the NOL is carried back, a taxpayer must pay tax on its residual AMTI with the tax paid creating a credit carryforward in the years subsequent to the year to which the NOL is carried back.
Under tax legislation enacted during the economic downturn, eligible taxpayers were allowed to carry back NOLs incurred in taxable years ending after December 31, 2007, and beginning before January 1, 2010 for an extended five-year carryback period.2 The same provision of the American Recovery and Reinvestment Tax Act of 2009 also permitted eligible taxpayers to offset 100 percent of AMTI with an AMTNOL.3 Because of this provision, an AMTNOL not fully utilized after the five-year carryback period remains exempt from the 90 percent limitation and may be carried forward to entirely offset AMTI in future tax years. Additionally, IRS guidance provided that companies without taxable income could participate in the five-year NOL carryback by carrying back a 2008 or 2009 NOL to loss years, and then carrying the NOLs forward with the ability to offset 100 percent of AMTI in future years.4
Section 172(b)(2) provides that the entire amount of the NOL for any taxable year must be carried to the earliest of the taxable years to which the loss may be carried. The portion of the NOL that is carried to each of the other taxable years is the excess, if any, of the amount of the NOL over the sum of the taxable income for each of the earlier taxable years to which the NOL may be carried. The taxable income for the earlier years is computed with modifications specified in Section 172(b)(2). One of those modifications is that the NOL deduction for a prior taxable year does not include the loss year NOL or NOLs from any years after the loss year. Accordingly, generally NOLs are absorbed chronologically, i.e., NOLs from earlier years are absorbed before NOLs from later years. The issue with regard to the AMTNOLs is that some taxpayers have taken the position that the residual 10 percent of AMTI could be offset with AMTNOLs that are being carried forward from the five-year carryback and thus able to offset 100 percent of the AMTI.
Field Service Memorandum 20144201F
Many taxpayers took advantage of the special provision and carried either 2008 or 2009 NOLs to cleanse them of the 90 percent AMT offset provision. On October 21, 2014, the IRS released a Field Service Memorandum (Memorandum) discussing the ordering rules for applying AMTNOLs and in particular AMTNOLs that are being carried forward that can offset 100 percent of AMTI as a result of the five-year carryback.5 Specifically, the Memorandum addresses whether AMTNOL carrybacks and carryovers from years with respect to which a taxpayer made a valid five-year carryback election could be absorbed after all other AMTNOL carrybacks or carryovers have been applied, regardless of when those AMTNOLs were generated. The Memorandum concludes AMTNOLs must be applied under the normal NOL ordering rules, where the oldest NOLs are offset against AMTI in their entirety regardless of whether they are subject to the 90 percent limitation. The Memorandum goes on to say that Section 56 does not contain any provisions that set forth different rules except Section 56(d)(1)(B)(ii) which modifies the absorption or "ordering" rules of Section 172(b)(2) "to take into account the 90 percent limitation."
For example, assume that a taxpayer has AMTI of $10 million in 2010 with AMTNOL carryovers of $10 million from 2007, $10 million from 2008, and $1 million from 2009. The AMTNOL in 2009 was carried back 3 years and are "cleansed." The taxpayer cannot first use the cleansed $10 million AMTNOL from 2008 to offset 100 percent of AMTI. The taxpayer must first use the $10 million AMTNOL from 2007 which can only offset 90 percent of the AMTI.
The Memorandum refers to articles written by practitioners that state or infer that five-year carryback created a new set of ordering rules, in which the AMTNOL generated in a five-year carryback year must be used after all other available AMTNOLs, regardless of when those AMTNOLs arose to effectively eliminate any remaining AMTI. The IRS disagrees with the commentators and concludes that the Code neither directs nor permits taxpayers to use five-year carryback AMTNOLs after AMTNOLs that are incurred in years after the five-year carryback year.
The Memorandum provides one example of an exception to this rule where a taxpayer comes into existence in 2008. For 2008, the taxpayer has an AMTNOL of $200, and for 2009, the taxpayer has a AMTNOL of $100 (carryback year). In 2010, the taxpayer has positive AMTI, before any AMTNOL deduction, of $100. In this case, only $90 of the 2010 AMTI can be offset by the 2008 AMTNOL. The only AMTNOL that can offset the remaining $10 of 2010 AMTI is the 2009 AMTNOL which is not subject to the 90 percent limitation.
Pepper Perspective
The Field Service Advice seems to make it clear that a taxpayer can’t leapfrog or pick and choose which AMTNOLs can be used to offset future AMTI. AMTNOLs must follow the same chronological ordering rules as NOLs. Importantly, the example in the Memorandum makes it clear that the residual AMTI that is not offset by the AMTNOL from an older year can still be offset with an AMTNOL that was carried back as part of the special five-year carryback and is now being carried forward. This seems consistent with how the Section 382 rules can also create pooling of NOLs that are used to offset future taxable income. Under those 382 rules, oldest NOLs offset taxable income first to the extent they are not limited under Section 382. If the limited NOLs cannot fully offset taxable income due to their limitation, a loss corporation can utilize new NOLs to the extent they are not limited under Section 382.
Endnotes
1 See Section 56(d)(1).
2 See Section 1211 of the American Recovery and Reinvestment Tax Act of 2009, Div. B of Pub. L. No. 111-5, 123 Stat. 115 and Worker, Homeownership, and Business Assistance Act of 2009 (Pub. L. No. 111-92), which amended sections 172(b)(1)(H). The five-year extended carryback was not allowed for taxpayers that participated in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343, 10/3/08), including taxpayers who participated in the Troubled Asset Relief Program.
3 See Section 172(b)(1)(H)(i).
4 See Notice 2010-58, 2010-37 IRB 326 (August 8, 2010). Specifically, Question 11 states," Q-11. A taxpayer incorporates in 2006 and adopts a calendar taxable year. The taxpayer has NOLs in 2006, 2007, 2008, and 2009. May the taxpayer make the WHBAA election to carry back its 2009 NOL to the 3 preceding taxable year for the purpose of not being subject to the 90 percent limitation on deducting the ATNOL from 2009? A-11. Yes. The taxpayer has 3 preceding taxable years to which to carry back its 2009 NOL, even though each of the taxable years preceding 2009 has a loss and none of the NOL is used in those years. Any 2009 NOL that is unused in the taxable years preceding 2009 also is not subject to the 90% limitation when applied to taxable years after 2009. [Emphasis Added]."
5 Field Service Memorandum 20144201F (October 21, 2014).
