New IRS Guidance on Obtaining Refunds for Net Operating Loss Carrybacks, Corporate AMT Carryforward Credits and Filing Amended Returns for Partnerships

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In a previous post to the Liskow website, we advised clients and friends that the CARES Act, P.L. 116-136, enacted modifications to the rules for the use of net operating losses (“NOLs”) and corporate alternative minimum tax carryforward credits (“AMT Carryforward Credits”) for tax years beginning after December 31, 2017 and before January 1, 2021.  See, J. Bradford and J. Birdsong, CARES Act Makes Significant Changes to Four Key Business Tax Provisions Enacted in the Tax Cuts and Jobs Act of 2017.[1]  The Internal Revenue Service (“IRS”) now has published guidance on how refunds attributable to the newly-permitted 5-year carryback of NOLs in section 172 of the Internal Revenue Code (the “Code”) and the accelerated use of AMT Carryforward Credits in section 53(e) of the Code can be obtained.  The IRS also has published guidance allowing business entities classified as partnerships for federal income tax purposes to file amended partnership income tax returns, including Form 1065 and Schedule K-1, to help individual and corporate taxpayers who are partners in those partnerships take advantage of changes in the federal income tax law enacted in the CARES Act.

First, IRS Notice 2020-26 confirms that corporations can file Form 1139 – Corporation Application for Tentative Refund (“Form 1139”) to obtain a tentative refund for a prior tax year to which an NOL is carried back pursuant to the new carryback rules.  Form 1139 also is to be used to obtain a tentative refund attributable to implementing the new accelerated use of AMT Carryforward Credits.  Individuals can file Form 1045 – Application for Tentative Refund (“Form 1045”) to obtain a tentative refund for a prior tax year to which an NOL is carried back.  The IRS has announced on its website that beginning on April 17, 2020, pursuant to temporary procedures, corporate taxpayers may file Form 1139 and supporting schedules, up to 100 pages maximum, by faxing the submission to (844) 249-6236.  Individual taxpayers may file Form 1045 and supporting schedules, up to 100 pages maximum, by faxing the submission to (844) 249-6237.  Mailing of either submission is discouraged due to delays in mail processing.

Since both Form 1139 and Form 1045 are otherwise required to be filed within 12 months of the close of the taxable year in which the NOL arose, IRS Notice 2020-26 also provides a 6-month extension of time to file either form for taxpayers who have NOLs that arose in a taxable year that began during calendar year 2018 and that ended on or before June 30, 2019.  The notice states that with respect to AMT Carryforward Credits, section 2305(d) of the CARES Act authorizes a corporation to file an application for a tentative refund of any amount for which a refund with respect to a tax year beginning in 2018, provided that the application is filed prior to December 31, 2020.  Accordingly, the IRS is not offering a further extension of time to file Form 1139 to obtain a refund attributable to the accelerated use of these credits.

The CARES Act recognized that the 5-year carryback of NOLs incurred during tax years 2018, 2019 and 2020 could be disadvantageous to some taxpayers, and so provided three sets of elections for such taxpayers in its amendments to section 172 of the Code.  Revenue Procedure 2020-24 provides guidance with respect to each of these sets.

First, new section 172(b)(3) provides for an irrevocable election to waive application of the carryback rules to each of tax years 2018 and 2019.  Revenue Procedure 2020-24 provides that this election is to be made no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for its first tax year ending after March 27, 2020 (which should mean the 2020 tax year for calendar year taxpayers) and should be made by attaching to its federal income tax return a separate statement for each of the tax years 2018 and 2019 for which the taxpayer intends to make an election.  The election statement must provide that the taxpayer is electing to apply section 172(b)(3) under Revenue Procedure 2020-24 and the tax year for which the statement applies.

Next, recall that section 965 was amended by the Tax Cuts and Jobs Act of 2017 as a part of the reform of taxation of foreign source income to require a US shareholder in a “deferred foreign income corporation” to include in the US shareholder’s income for its last tax year beginning before January 1, 2018 the accumulated post-1986 deferred foreign income of such foreign corporation as determined either on November 2, 2017 or December 31, 2017 (generally each such year a “Section 965 Year”).  Section 965(n) allows the taxpayer to elect to exclude such income from the determination of the amount of its NOL for such tax year and from the determination of the amount of taxable income for such year that may be reduced by NOL carrybacks or carryforwards to such Section 965 Year.

The CARES Act provides that if an NOL is carried back to a Section 965 Year, the taxpayer is treated as having made the section 965(n) election.  But the CARES Act allows the taxpayer, by way of new section 172(b)(1)(D)(v)(I) of the Code, to elect to exclude all Section 965 Years from the 5-year NOL carryback period (applicable to NOLs arising in tax years 2018, 2019 and 2020) in lieu of making the general section 172(b)(3) irrevocable election to waive application of the NOL carryback rules to each of the tax years 2018 and 2019.  Per new section 172(b)(1)(D)(v)(II), for an NOL arising in tax year 2018 or 2019, this election must be made by the due date, including extensions, for filing the taxpayer’s federal income tax return for the first taxable year ending after March 27, 2020.  For an NOL arising in tax year 2020, the election must be made by no later than the due date, including extensions, for filing the taxpayer’s federal income tax return for tax year 2020.

Revenue Procedure 2020-24 provides that to make the election to exclude a Section 965 Year from the 5-year carryback period, the taxpayer must attach an election statement to the earliest filed after the revenue procedure’s April 9, 2020 effective date of: (1) the federal income tax return for the taxable year in which the NOL arises; (2) the taxpayer’s application for tentative refund on Form 1139 or Form 1045; and (3) the amended federal income tax return applying the NOL to the earliest taxable year in the carryback period that is not a Section 965 Year.

Finally, the CARES Act amendments to section 172 of the Code provided special rules for NOLs arising in a tax year beginning before January 1, 2018 and ending after December 31, 2017.  First, an application for a tentative refund filed on Form 1139 or Form 1045 with respect to the carryback of an NOL arising during such tax year will be considered timely if filed not later than the date that is 120 days after the enactment of the CARES Act.  Second, with respect to elections to forgo any carryback of NOLs, reduce any period to which an NOL may be carried back or revoke any election made under 172(b) to forgo any carry back of such an NOL, those elections will be considered timely made if made not later than the date that is 120 days after the date of the enactment of the CARES Act.

Revenue Procedure 2020-24 clarifies that the cut-off date for making elections for such a tax year is July 27, 2020.  A taxpayer must file these elections when it files its federal income tax return by attaching the statement required to make the election with “Filed pursuant to Rev. Proc. 2020-24” at the top of the amended return, Form 1139 or Form 1045 that contains only the taxpayer’s name, address, and taxpayer identification number.  The statement  required to make the election must specify the section of the Code under which the election is being made, and must set forth appropriate information to identify the election, the period for which it applies, and the taxpayer’s basis and entitlement to make the election.

Revenue Procedure 2020-23 addresses how business entities classified as partnerships for federal tax purposes can file amended partnership income tax returns for taxable years 2018 and 2019.  Recall that prior to the CARES Act, partnerships subject to the new partnership audit rules included in the Bipartisan Budget Act of 2015 (“BBA”) were precluded from filing amended returns and could only obtain the tax benefits of an amended return by filing an Administrative Adjustment Request (“AAR”) pursuant to section 6227 of the Code.  But the CARES Act recognized that the requirement of filing of an AAR and having it processed by IRS examination would delay the CARES Act tax relief otherwise made available to individual and corporate taxpayers.  Accordingly, the CARES Act allows partnerships to file amended returns for 2018 and 2019 to take advantage of the CARES Act tax provisions like the relaxing of the restrictions on the deductibility of business interest expense and to claim any other deductions that were not claimed in the original partnership return.  Amended Schedules K-1 will pass those increased deductions on to the partners of the partnership, who will use those deductions in their own returns.

Revenue Procedure 2020-23 provides that a BBA partnership that has filed its partnership income tax return (Form 1065) and all required Schedules K-1 for taxable years beginning in 2018 or 2019 prior to the issuance of the revenue procedure may file a timely amended Form 1065 for each of those two tax years with the “Amended Return” box checked and furnish amended Schedules K-1 to its partners.  Each amended Form 1065 must clearly indicate the application of this revenue procedure and must include the words “FILED PURSUANT TO REV PROC 2020-23” at the top of the form and attached a statement with the same notation to each amended Schedule K-1 sent to its partners.  The amended Form 1065 may be filed electronically to accelerate processing.  Special rules are included in the revenue procedure for BBA partnerships that already are under examination for tax years 2018 or 2019 or that already have filed an AAR for one or both of those tax years.

[1] We update our prior article to note that the CARES Act also included a provision that allows a corporation to elect to claim the entire amount of refundable AMT Carryforward Credits in its 2018 tax year, rather than spreading the refund over tax years 2018 and 2019.  We also update to note that the AMT Credit Carryforward applies only to corporations so that individual taxpayers are not directly impacted by this provision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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