Internal Revenue Service
Revenue Ruling
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smRev. Rul. 61-20
1961-1 C.B. 248
Sec. 172
Sec. 641
Sec. 642
Sec. 643
Sec. 662
Sec. 6511
IRS Headnote
The net operating loss carryback allowable to an estate under section 642(d) of the Internal Revenue Code of 1954 has the effect of reducing the distributable net income of the estate for the prior taxable year to which the net operating loss is carried, thereby permitting the estate beneficiary to recompute his tax liability for such prior year based upon the revised distributable net income of the estate after allowance of the net operating loss deduction. Any resulting overpayment of taxes may be refunded to the beneficiary provided the refund is allowed or a claim for refund or credit is timely filed by the beneficiary within the period prescribed by section 6511(b)(2) of the Code.
Full Text
Rev. Rul. 61-20
Advice has been requested whether the net operating loss carryback allowed to an estate under section 642(d) of the Internal Revenue Code of 1954 reduces the distributable net income of the estate, thereby permitting a beneficiary to recompute his Federal income tax liability for the year to which the net operating loss is carried and, if so, whether the beneficiary is allowed the extended period of time provided by section 6511(d)(2) of the Code in which to file a claim for refund for such year.
In 1955, the taxpayer received a distribution from an estate which he properly included in gross income to the extent of his part of the distributable net income of the estate for such year. In 1957, the estate sustained a net operating loss. The estate carried the net operating loss back to 1955 which resulted in a decrease of its distributable net income for that year. The beneficiary recomputed his tax liability for 1955 based upon his portion of the distributable net income of the estate for such year as revised and filed a claim for refund based upon his taxable income as revised.
Section 642 of the Internal Revenue Code of 1954 provides, in part, as follows:
(d) NET OPERATING LOSS DEDUCTION.-The benefit of the deduction for net operating losses provided by section 172 shall be allowed to estates and trusts under regulations prescribed by the Secretary or his delegate.
Section 172 of the Code provides, in effect, that there shall be allowed as a deduction for the taxable year an amount equal to the aggregate of the net operating loss carryovers to such year plus the net operating loss carrybacks to such year.
Under the provisions of section 662(a) of the Code, the income from an estate for a taxable year, which is to be included in the gross income of the beneficiary, is limited by the amount of the distributable net income of the estate as finally determined for such year.
Section 643(a) of the Code provides, in part, that distributable net income means, with respect to any taxable year, the taxable income of the estate computed with certain modifications. None of the modifications is concerned with the net operating loss deduction.
Section 641(b) of the Code provides, in part, that the taxable income of an estate or trust shall be computed in the same manner as in the case of an individual, exceept as otherwise provided in Part 1 of Subchapter 5, relating to estates, trusts, beneficiaries and decedents.
Thus, it is evident that, in the case of an estate or trust, a net operating loss deduction is taken into account in determining taxable income of the estate or trust which, when further modified to the extent provided in section 643(a) of the Code, results in distributable net income.
In Amy C. Mellott, et al. v. United States , 257 Fed.(2d) 798, certiorari denied, 358 U.S. 864, the beneficiaries of an estate sought to offset income received from the estate in 1949 with a carryback of a net operating loss of the estate for its taxable year ended in 1950. The court held that, since net operating losses may be carried back only by the taxpayer who sustained such losses, the beneficiaries of the estate could not utilize a net operating loss sustained by the estate for the purpose of reducing their otherwise taxable income.
In Agness Sargent v. United States , 48 American Federal Tax Reports 1969, 55-1 U.S. Tax Cases 9424, a trust sustained a net operating loss in the year 1947 which it carried back to 1945. The income beneficiary of the trust filed a claim for refund for taxes paid on the difference between the amount originally reported as income from the trust and the amount reported as income of the trust after the net operating loss was carried back. The United States District Court for the Southern District of California held that the net operating loss carryback of the trust had no effect on the amount distributable to the beneficiary in such prior year under the terms of the governing instrument or the applicable laws of the State and, therefore, had no effect on the amount taxable to the beneficiary.
Although a taxpayer who qualifies under the provisions of section 642(h) of the Code may receive a direct benefit with respect to the net operating loss carryover of an estate or trust upon its termination, no provision of the Code allows the taxpayer to receive a direct benefit with respect to a net operating loss carryback of an estate or trust. However, section 643(a) of the Code does not require that the taxable income of an estate or trust be modified by the elimination of the net operating loss deduction in arriving at the distributable net income of the estate or trust. Thus, the estate or trust income taxable to the beneficiary is limited by the amount of the distributable net income determined by taking into account the net operating loss deduction. Therefore, a net operating loss carryback of an estate or trust may result in an indirect benefit to the beneficiary by reducing the distributable net income of the estate or trust.
The instant case is not inconsistent with the Mellot and Sargent cases. In each of those cases, the years involved were governed by the Interanl Revenue Code of 1939. Under the 1939 Code, the beneficiaries of the estate, in each case, were not permitted to utilize the net operating loss sustained by the estate for the purpose of otherwise reducing taxable income. However, the 1954 Code first introduced the concept of `distributable net income' into the law. Since the 1954 Code is applicable in the instant case, the estate income which is taxable to the beneficiary is limited by the amount of the distributable net income of the estate even though the amount distributable to the beneficiary under the terms of the governing instrument or the applicable local law was not decreased by the net operating loss. There was no such limitation under the 1939 Code.
Section 6511(a) of the Code provides, in part, that unless a claim for credit or refund is filed within three years from the time the return was filed, or within two years from the time the tax was paid, whichever is later, no credit or refund shall be allowed or made after the expiration of such period.
Section 6511(d)(2) of the Code provides, in part, that in the case of an overpayment attributable to a net operating loss carryback, in lieu of the three-year period of limitation the period shall be the later of that period which ends with the expiration of the 15th day of the 40th month following the end of the taxable year of the net operating loss which results in such carryback or the period which ends with the expiration of the period prescribed in section 6511(c) pertaining to an extension of the period for assessment of tax.
H.R. Report No. 849, 79th Cong., C.B. 1945, 586, indicates that section 322(b)(b) of the Internal Revenue Code of 1939, the counterpart of section 6511(d)(2) of the 1954 Code, was added to the 1939 Code to remedy the inadequacy of the prior provisions in the way of providing relief for a taxpayer who, because of the normal three-year period, had insufficient time to file a claim for credit or refund for an overpayment attributable to a net operating loss carryback. This provision is remedial in nature and, as such, calls for a liberal construction in order to effectuate the purpose of the legislation behind it.
Accordingly, it is held that the net operating loss carryback allowable to an estate under section 642 of the Code has the effect of reducing the distributable net income of the estate for the prior taxable year to which the net operating loss is carried, thereby permitting the estate beneficiary to recompute his tax liability for such prior year based upon the revised distributable net income of the estate after allowance of the net operating loss deduction. Any resulting overpayment of taxes may be refunded to the beneficiary provided the refund is allowed or a claim for credit or refund is timely filed by the beneficiary within the period prescribed by section 6511(d)(2) of the Code.