Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-96

1965-1 C.B. 126

IRS Headnote

For purposes of determining the portion of a net operating loss to be carried to the second preceding taxable year, the taxable income of the third preceding taxable year should be reduced by the amount of an unclaimed deduction, even though such deduction is barred by the statute of limitations.

Full Text

Rev. Rul. 65-96

Advice has been requested whether, for purposes of determining the portion of a net operating loss to be carried to the second preceding taxable year, the taxable income of the third preceding taxable year should be reduced by the amount of an unclaimed deduction, even though such deduction is barred by the statute of limitations.

M corporation reports its income on a calendar-year basis. In its return for 1958, filed on March 15, 1959, M failed to claim an allowable deduction for depletion. The period during which M might have filed a claim for refund with respect to the unclaimed deduction expired on March 15, 1962. In 1961 M sustained a net operating loss which it treated as a carryback, in accordance with the provisions of section 172 of the Internal Revenue Code of 1954, to its profitable taxable years ending in 1958, 1959, and 1960. M's 1961 return was filed on April 1, 1962. A subsequent audit of M's returns revealed its failure to claim the deduction for depletion in its return for 1958.

A situation similar to that in the instant case was presented to the United States Court of Claims in the case of Springfield Street Railway Company v. United States, 312 Fed. (2d) 754 (1963).

In that case a railway corporation was held entitled to reduce its income for 1953 by the amount of an unclaimed deduction, which was barred by the statute of limitations, in order to determine the correct amount of the net operating loss carryback from 1955 which was available for 1954. In support of its holding, the court cited Revenue Ruling 218, C.B. 1953-2, 176. That Ruling holds that, in determining the net income for 1947 against which a net operating loss carryback from 1949 may be applied, such 1947 income must first be reduced by an available but unclaimed net operating loss carryover from 1946, even though the period in which a timely claim for refund or credit of 1947 tax (based on the net operating loss carryover from 1946) has expired. See also Revenue Ruling 56-285, C.B. 1956-1, 134, and Phoenix Coal Co., Inc., v. Commissioner, 231 Fed. (2d) 420 (1956).

The court in the Springfield case stated that, while the situation therein differed from the example in Revenue Ruling 218 in two minor respects, it was applying the same principle in its decision, that is, that deductions which were allowable if taken, but which are now barred by the statute of limitations, still have to be considered as having been taken when applying a carryback loss.

After careful consideration of the reasoning contained in the Springfield case, the Internal Revenue Service has concluded that that case will be followed in similar situations.

Accordingly, it is held that, for purposes of determining the portion of M's 1961 net operating loss to be carried to its taxable year 1959, its taxable income for 1958 should be reduced by the amount of its unclaimed deduction for depletion for that year, even though such deduction is barred by the statute of limitations.