Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-59

1979-1 C.B. 209

Section 11
Section 172
Section 541
Section 545

IRS Headnote

Personal holding company; net operating loss carryback. A personal holding company that incurred a net operating loss in its preceding taxable year may use the loss in computing the tax imposed by section 541 of the Code, even though it carried back the loss to an earlier year for purposes of computing its normal corporate income tax; Rev. Rul. 63-109 amplified.

Full Text

Rev. Rul. 79-59

ISSUE

Can a personal holding company use its preceding taxable year's net operating loss in computing the personal holding company tax under section 541 of the Internal Revenue Code of 1954, even though it already carried back this loss to an earlier taxable year, for purposes of computing its normal corporate income tax?

FACTS

The taxpayer, a domestic corporation, sustained a net operating loss in taxable year 1976 that it carried back to 1973. In taxable year 1977, the taxpayer had taxable income and was subject to the personal holding company tax under section 541 of the Code.

In computing its personal holding company tax for taxable year 1977, the taxpayer used the 1976 net operating loss.

LAW AND ANALYSIS

The applicable sections of the Code and Income Tax Regulations are 11, 63, 172, 541, 545, and 1.545-2(d).

Section 11 of the Code imposes a tax and a surtax on the taxable income of all corporations. Section 63 defines taxable income as gross income less the deductions allowed by chapter 1 of the Code, relating to normal taxes and surtaxes. Section 172 allows as a deduction the aggregate of net operating loss carryovers and net operating loss carrybacks.

Section 541 of the Code imposes a tax on undistributed personal holding company income (as defined in section 545). Under section 545(b)(4) and section 1.545-2(d) of the regulations, the net operating loss deduction provided in section 172 is not allowed in determining undistributed personal holding company income, but a deduction is allowed for the amount of the net operating loss (as defined in section 172(c)) for the preceding taxable year, computed without the deduction provided in part VIII (section 241 and following, except section 248), of subchapter B of chapter 1 of the Code.

Rev. Rul. 63-109, 1963-1 C.B. 111, concerns a corporation that, prior to 1961, was taxable solely under section 11 of the Code. Beginning with 1961, the corporation became a personal holding company taxable under section 541. For taxable year 1962, the corporation sustained a net operating loss that, for purposes of computing the tax imposed by section 11, it treated as a carryback pursuant to section 172.

Rev. Rul. 63-109 holds that sections 11 and 541 of the Code impose two separate and distinct taxes. The tax imposed by section 11 is applicable both before and after qualification as a personal holding company. It is imposed on taxable income, as defined by section 63, and is computed by allowing certain deductions, including the section 172 net operating loss deduction. The additional tax imposed by section 541 on undistributed personal holding company income is computed without regard to the section 172 net operating loss deduction, although a deduction is allowed with respect to a net operating loss sustained in the preceding taxable year. Section 545(b)(4) specifically privodes that this deduction is for the "amount of" the prior year's "net operating loss (as defined in section 172(c)," modified only as further specified in section 545(b)(4).

Because the taxes imposed by sections 11 and 541 of the Code are separate and distinct taxes that are computed independently of one another, and because the deduction provided for in section 545(b)(4) is in the "amount of" the prior year's net operating loss, a deduction is allowed for a preceding year's net operating loss in computing undistributed personal holding company income even though that net operating loss was part of a net operating loss deduction that was carried back to a prior taxable year for purposes of section 11.

HOLDING

A personal holding company can use its preceding year's net operating loss in computing the personal holding company tax under section 541 of the Code, even though it carried back this loss to an earlier year for purposes of computing its corporate normal income tax and surtax. This conclusion would be the same whether or not the corporation was subject to tax under section 541 in the year to which, for purposes of computing the tax under section 11, the net operating loss was carried.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 63-109 is amplified.