Ready, fire, aim - IRS Chief Counsel Advisory misses the mark in NOL carryforward position that controvenes the TCJA

Eversheds Sutherland (US) LLP

In CCA 201928014 (July 12, 2019), the IRS Office of Chief Counsel provides its view of the interplay between the net operating loss (NOL) carryover rules set forth in Internal Revenue Code (Code) § 172(b)(2) and the charitable contribution carryover rules set forth in § 170(d)(2)(B) in situations in which a taxpayer has NOLs arising in multiple taxable years.1 In short, the CCA:

  • incorrectly concludes that current Treasury regulations require, in situations in which a taxpayer has NOLs arising in multiple taxable years, that the amount of the NOL carryforward must be calculated under § 172(b)(2) using a “year-by-year” method rather than an “aggregate” method;
  • contains scant reasoning for its conclusion, and the authority that is cited, Treas. Reg. §1.172-6, is not relevant to the issue addressed in the CCA;
  • does not provide any explanation supporting the use of the year-by-year method following enactment of the Tax Cuts and Jobs Act of 2018, PL 115-97 (TCJA), in light of the permanent loss of NOLs that may result from use of that method for 2018 and later years (in contrast to the aggregate method, which does not result in a permanent loss of NOLs).


The taxpayer in the CCA had both charitable contribution and NOL carryovers from multiple taxable years. At issue was the treatment of such losses under sections 172(b)(2) and 170(d)(2)(B) and whether for purposes computing the NOL carryover amount in section 172(b)(2): (i) the calculation must be done separately for each taxable year from which an NOL arose (the “year-by-year” method); or (ii) the NOLs arising from multiple taxable years are aggregated (the “aggregate method”). 

Code § 172(a) generally allows a deduction in a given taxable year for the aggregate amount of NOL carryovers to that year. Section 172(b)(1) addresses the taxable years to which an NOL carryover is to be carried: generally, before the TCJA, a 2-year carryback and a 20-year carryforward and, post-TCJA, no carryback, but an indefinite carryforward. The amount of an NOL carryforward is calculated under § 172(b)(2). 

Under § 170(d)(2), charitable contribution deductions may be carried forward up to five taxable years. Under § 170(d)(2)(B), an adjustment is made to charitable contribution carryovers to the extent that the calculation of NOL carryovers in § 172(b)(2) would result in a possible “double benefit” for charitable contributions. With respect to the calculation under § 170(d)(2)(B)—the corresponding provision in § 170 to § 172(b)(2)—the IRS previously has concluded that the aggregate method is appropriate for a taxpayer with charitable contributions arising in multiple years. See Rev. Rul. 76-145, 1976-1 CB 88 (“The phrase ‘contributions made by a corporation in a taxable year’ contained in section 170(d)(2)(B)(i) of the Code, includes contributions carryovers to such year as well as contributions actually made during such year”).

The CCA concludes that section 172(b)(2) requires the taxpayer to use the year-by-year method. The use of the year-by-year method under these facts shifted more of the carryforward amounts to charitable contribution carryforwards and away from NOL carryforwards and, because charitable contribution carryforwards are limited to five taxable years, resulted in the expiration and loss of carryovers. 

Eversheds Sutherland Observation: Even if the year-by-year method were to be used for purposes of § 172(b)(2), neither the Code nor Treasury regulations provide guidance regarding the mechanics for that calculation, and different assumptions regarding the mechanics result in differing amounts of NOL and charitable contribution carryovers. 

Further, under the year-by-year method (as we understand it to be calculated under  third-party software used by the IRS), post-TCJA, NOL carryovers may be permanently lost (without any corresponding increase in charitable contribution or any other carryovers), which is at odds with the indefinite carryforward of NOLs provided for in the TCJA. The aggregate method does not create such a permanent loss of NOLs. 

CCA Analysis

Unfortunately, the CCA failed to include any analysis or support for its conclusion. Below is the entirety of the CCA’s reasoning in full:

Section 172(b)(2) requires a chronological, year-by-year, NOL absorption computation. Section 1.172-6 illustrates the year-by-year NOL absorption and carryover calculation. Applying an aggregate basis standard is incorrect. In determining modified taxable income, Taxpayer was required to take into account the Year 4 NOL carryover of Amount 7. The NOL to be absorbed (part of the Year 5 NOL carryover) is not taken into account in determining modified taxable income. Accordingly, the § 170(d)(2)(B) adjustment is Amount 8.

The conclusion of the CCA is incorrect. Nothing in § 172(b)(2) requires the year-by-year method and the CCA cites no authority providing otherwise. Moreover, Treas. Reg. § 1.172-6 does not address the methodology to be used for determining the amount of NOL carryover under § 172(b)(2) when a taxpayer has NOL carryovers arising in multiple taxable years. Rather, it provides an example of the mechanics of how NOL amounts are carried back and carried forward under the rules provided in Treas. Reg. § 1.172-4. The amounts of NOL carryovers in that example are simply included as a fact in the example—in other words, the example does not address the computation of NOL carryovers under § 172(b)(2).

Eversheds Sutherland Observation:  In addition to relying on a Treasury regulation that is irrelevant to the issue in the CCA, the CCA also suffers from several other deficiencies, including:  

  • The failure to acknowledge that neither the statutory provision nor the regulations thereunder address whether, for purposes of the calculation of the NOL carryover under § 172(b)(2), NOL carryforwards arising from multiple taxable years should be aggregated or determined on a year-by-year basis.
  • In the absence of statutory or regulatory guidance, the failure to articulate any policy basis supporting the year-by-year method.
  • The failure to recognize that the year-by-year methodology may result in the permanent loss of NOL carryforwards, notwithstanding the clear mandate of the TCJA to allow NOL carryforwards indefinitely. 

It is disappointing that the Service would publish a CCA that reaches a result with no real analysis that also fails to: (1) acknowledge that neither the year-by-year method nor the aggregate method for undertaking the calculation in § 172(b)(2) is mandated under § 172 or the regulations thereunder; (2) distinguish the use of the aggregate method for charitable contribution carryovers in Rev. Rul. 76-145, supra; (3) address the fact that the use of the year-by-year method could, post-TCJA, result in a permanent loss of NOL carryforwards, contrary to the clear mandate of the TCJA, whereas the aggregate method would not and, consequently, acknowledge that the aggregate method should be required given the clear mandate of the TCJA; and (4) recognize that the TCJA did not make any statutory changes to § 172 relevant to the use of the aggregate vs. year-by-year method that would support a different conclusion pre-TCJA regarding the availability of the aggregate method. 

Had the Service given these items appropriate consideration, there is no question the CCA would have reached a different result. Because the Treasury and IRS are currently working on regulatory guidance under section 172, there is still an opportunity to correct the erroneous result of this ill-conceived CCA.


1This Tax Alert focuses solely on Issue 1 of the CCA. Eversheds Sutherland has previously submitted a comment letter to Treasury and the IRS with respect to this issue.

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Eversheds Sutherland (US) LLP

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