Rev. Rul. 88-88

1988-2 C.B. 354, 1988-41 I.R.B. 10.

                       Internal Revenue Service

                                 Revenue Ruling

               NOTICE OF DEFICIENCY; NET OPERATING LOSS CARRYBACK

                          Published: October 11, 1988

SECTION 6213. - RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX COURT, 26 CFR 301.6213-1: Restrictions applicable to deficiencies; petition to Tax Court

(Also Sections 6212, 6411, 7405; 301.6212-1, 1.6411-3.)

  Notice of deficiency; net operating loss carryback. The Service may not determine a deficiency and thus mail a valid notice of deficiency to a taxpayer with respect to the amount attributable to the disallowance of a net operating loss carryback if a prior notice of deficiency for amounts unrelated to the carryback had previously been mailed and the taxpayer had petitioned the Tax Court for a redetermination of that deficiency.

  A corporation filed its calendar year 1984 income tax return on March 15, 1985, and paid all tax due. After an examination, the Service determined a deficiency in the corporation's 1984 taxes and mailed the company a deficiency notice. The company petitioned

the Tax Court.

  While the company's Tax Court case was pending, it filed its 1987 return on March 15, 1988, showing a net operating loss (NOL). The company then sought to carry back the NOL to the 1984 tax year and applied for a tentative refund under section 6411. The Service allowed the adjustment and refunded the requested amount to the corporation. Later, the Service determined that the corporation had not incurred a loss for 1987, and that the refund relating to 1984 had been erroneous.

  ISSUE. At issue is how the Service may assess the taxes due and attributable to the disallowance of the NOL carryback.

  HOLDING. The Service has held that, though it is barred by section 6212(c) from determining an additional deficiency for 1984, it may, under section 6213(b)(3), summarily assess the amounts attributable to the NOL carryback that were previously refunded under section 6411. In the alternative, it may sue to recover the erroneous refund under section 7405.

  ANALYSIS. The Service explained that once it has determined a deficiency and the taxpayer has petitioned the Tax Court, the Service is barred from determining an additional deficiency with respect to the same tax and the same year as that under the Tax Court's consideration. Additional deficiencies arising from mathematical or clerical errors are permitted to pierce this general bar.

  The Service concluded, though, that section 6213(b)(3) allows it to 'assess amounts arising out of excessive tentative carryback adjustments, without regard to the abatement provisions in section 6213(b), as if those amounts were mathematical or clerical errors.' The Service cited Midland Mortgage Co. v. Commissioner, 73 T.C. 902 (1980), in support of the proposition for summary assessment. The Service also cited the later case, Midland Mortgage Co. v. United States, 576 F.Supp. 101 (W.D. Okla. 1983), in noting that even if the Service issues a second deficiency notice, which is invalid due to the original notice, the taxpayer's filing of a Tax Court petition with respect to the second deficiency notice does not bar the Service from correcting its error and summarily assessing the tax. The Service noted, but did not elaborate on, its option for suing for the return of the erroneous refund.

                                     ISSUE

  If in response to a notice of deficiency a taxpayer had petitioned the Tax Court for a redetermination of the deficiency, and an unrelated tentative net operating loss carryback was refunded under section 6411 of the Internal Revenue Code for the same tax year, how may the Internal Revenue Service assess amounts attributable to a disallowance of the tentative net operating loss carryback?

                                     FACTS

  X corporation filed Form 1120, U.S. Corporation Income Tax Return, for calendar year 1984 on March 15, 1985, and paid all tax due. The Service examined X's return and in 1985 mailed a notice of deficiency with respect to X's 1984 tax year. X timely filed with the Tax Court a petition for redetermination of the deficiency. While the case was pending with the Tax Court, X filed Form 1120 for calendar year 1987 on March 15, 1988, showing a net operating loss. X then filed Form 1139, Corporation Application for

Tentative Refund, claiming a tentative adjustment of tax for 1984 resulting from a carryback of the 1987 loss. The Service allowed that adjustment and refunded the amount claimed to X. The Service later determined that X had not, in fact, incurred a loss for 1987 and that the refund with respect to 1984 was erroneous.

                                LAW AND ANALYSIS

  Section 6211(a) of the Code defines the term deficiency as the amount by which the amount of tax exceeds the excess of the sum of the amount shown as tax by the taxpayer upon the return plus the amounts previously assessed (or collected without assessment) as a deficiency over the amount of rebates.

  Section 6212(a) of the Code authorizes the Service to mail a notice of deficiency to a taxpayer when a deficiency is determined. Under section 6212(c), if a notice of deficiency is mailed and the taxpayer files a timely petition with the Tax Court, the Service is barred from determining an additional deficiency for the same taxpayer for the same tax and year except as provided in section 6213(b)(1), relating to mathematical or clerical errors, except as provided in section 6214(a), relating to assertion of greater deficiencies before the Tax Court, and except in other situations not relevant here.

  Section 6213(a) of the Code bars the Service from assessing tax if a Tax Court petition has been filed and the decision of the Tax Court has not yet become final.

  Section 6213(b)(1) of the Code authorizes the Service to assess mathematical and clerical errors. Although notice to the taxpayer is required, the notice is not considered to be a notice of deficiency.

  Under section 6213(b)(2) of the Code, upon the request of the taxpayer the Service must abate such an assessment and follow deficiency procedures in order to reassess the amount due.

  Section 6411(a) of the Code allows taxpayers to apply for tentative carryback adjustments of tax for years affected by net operating loss carrybacks and various other carrybacks ('carryback years'). The application must be made within 12 months of the end of the year in which the net operating loss occurred ('loss year'). Under section 6411(b), the Service may make a limited examination of the application for errors and omissions and must refund or credit the decrease in tax attributable to the carryback, if any, within the period specified in that section. Under section 6511(d)(2)(B)(ii), the refund or credit may be made or allowed even if it would otherwise have been prevented under section 6512(a) by the fact that a petition for the carryback year was filed with the Tax Court. See section 301.6511(d)-2(b)(1) of the Regulations on Procedure and Administration.

  Section 6213(b)(3) of the Code authorizes the Service to assess amounts arising out of excessive tentative carryback adjustments, without regard to the abatement provisions in section 6213(b), as if those amounts were mathematical or clerical errors.

  Section 6214(a) of the Code provides that, except as provided in section 7463, relating to disputes involving $10,000 or less, the Tax Court has jurisdiction to redetermine the correct amount of the deficiency even if that amount is greater than the amount in the notice of deficiency, if claim is asserted at or before the hearing or rehearing.

  Section 6501(a) of the Code provides the general rule that tax must be assessed within 3 years after the return was filed.

  Section 6501(h) of the Code sets forth an exception to the general rule by providing that deficiencies attributable to the application of a net operating loss carryback may be assessed at any time before the expiration of the period of limitations for assessment of tax for the loss year.

  Under section 6501(k) of the Code (formerly designated section 6501(m)), when as a result of a net operating loss carryback an amount has been applied, credited, or refunded under section 6411, the period of limitations for assessment with respect to the year to which the loss is carried back is extended to include any time for which tax may be assessed under section 6501(h), provided that the amount that can be assessed solely by reason of section 6501(h) may not exceed the amount applied, credited, or refunded under section 6411, reduced by the amount assessable solely by reason of section 6501(h).

  Section 6503(a)(1) of the Code suspends the running of the period of limitations for assessment for the period of time in which the Service is barred from assessing a deficiency under section 6213(a), plus 60 days.

  Section 7405 of the Code provides that any portion of tax that has been erroneously refunded may be recovered by civil action. Section 6532(b) provides that, in general, a suit for erroneous refund must be begun within 2 years after the making of the refund.

  Under the statutory scheme described above, the Service starts the process of assessing a deficiency of tax described in section 6211 of the Code by mailing a notice of deficiency to the taxpayer before the expiration of the period of limitations for assessment. Once the notice is mailed, the Service may assess the tax only after the expiration of the period for petitioning the Tax Court or, if the taxpayer files a petition, after the Tax Court decision is final. Because of this bar to assessment, the running of the period of limitations for assessment is suspended by section 6503(a). Once a petition is filed with the Tax Court, section 6212(c) bars the Service from determining additional deficiencies, except in the limited situations described in that section.

  In general, the Service has three options to recover tax due when a net operating loss is carried back and an excessive tentative refund is made under section 6411 of the Code. First, it can follow normal deficiency procedures by mailing a notice of deficiency and allowing the taxpayer to petition the Tax Court for a redetermination of the deficiency. Second, it can institute a civil suit to recover an erroneous refund under section 7405. Third, it can summarily assess the tax under section 6213(b)(3). Because of the limited examination of applications for a tentative refund under section 6411, section 6213(b) provides a summary procedure to restore the Service and the taxpayer to the same position occupied before approval of the application. See H.R. Rep. No. 849, 79th Cong., 1st Sess. 25 (1945), 1945 C.B. 566, 583.

  The Service may not, however, follow deficiency procedures to recover an excessive carryback refund if a notice of deficiency was previously issued with respect to a deficiency in the carryback year and the taxpayer timely filed a petition with the Tax Court for redetermination of that deficiency. In this situation, deficiency procedures are unavailable because of the bar in section 6212(c) of the Code to the determination of any additional deficiencies. In such a case, the Service must summarily assess under section 6213(b)(3) or sue for return of an erroneous refund. See Midland Mortgage Co. v. Commissioner, 73 T.C. 902 (1980).

  Moreover, if a subsequent notice is erroneously sent in such a situation, the subsequent notice is invalid. Because such a notice is invalid, the filing of a Tax Court petition with respect to it does not stop the running of the period of limitations under section 6503(a) of the Code within which the Service may correct this error and summarily assess the tax. See Midland Mortgage Co. v. United States, 576 F.Supp. 101 (W.D. Okla. 1983).

  In many situations involving an ongoing Tax Court proceeding, the Service may be able to assert an additional claim in the proceeding in order to contest the correctness of the tentative carryback allowance. See section 6214(a) of the Code. Asserting an additional claim in such a case, however, may entail a number of administrative disadvantages for the Service. For these reasons, the Service will generally proceed by means of summary assessment under section 6213(b)(3), or suit for return of erroneous refund, instead of asserting an additional claim.

                                    HOLDING

  The Service may not mail a second notice of deficiency to the taxpayer with respect to the amount attributable to disallowance of the carryback because a notice of deficiency for amounts unrelated to the carryback had previously been mailed and the taxpayer had petitioned the Tax Court for a redetermination of that deficiency. The Service may, however, under section 6213(b)(3) of the Code, summarily assess amounts attributable to a net operating loss carryback that were previously refunded under section 6411. The Service may also recover the amount refunded by instituting a suit to recover an erroneous refund.

  The holding also applies to credit carrybacks that may be claimed under section 6411(a) of the Code.

                              DRAFTING INFORMATION

  The principal author of this revenue ruling is Mary Jane Kossar of the Individual Tax Division. For further information regarding this revenue ruling contact Ms. Kossar on (202) 566-4751 (not a toll- free call).

Rev. Rul. 88-88, 1988-2 C.B. 354, 1988-41 I.R.B. 10.