Rev. Rul. 89-78

1989-1 C.B. 80, 1989-25 I.R.B. 5.

                       Internal Revenue Service

                                 Revenue Ruling

            NET OPERATING LOSS DEDUCTION; CARRYBACKS AND CARRYOVERS

                            Published: June 19, 1989

Section 172. - Net operating Loss Deduction, 26 CFR 1.172.4: Net operating loss carrybacks and net operating loss carryovers.

(Also Section 593: 1.593-1.)

  Net operating loss deduction; carrybacks and carryovers. For purposes of section 172(b)(1)(L) of the Code, (1) a taxpayer must be an organization to which section 593 applied in the year that the net operating loss was incurred, and (2) the relevant version of section 593 is former section 593, as in effect during the loss year.

ISSUES

  For purposes of section 172(b)(1)(L) of the Internal Revenue Code, (1) when must a taxpayer be an organization to which section 593 applies; and (2) which version of section 593 (former section 593 or section 593 as amended by the Tax Reform Act of 1986) applies.

FACTS

  SITUATION 1. Corporation X files its federal income tax return on a calendar year basis. X came into existence on January 1, 1982, as a financial institution described in section 582(c)(5) of the Code but, during that year, was not an organization to which former section 593 applied. X incurred a net operating loss (NOL) in 1982, a portion of which it had not yet deducted by the end of 1987. X had taxable income in 1988 and, throughout the year, was an organization to which section 593 as amended applied.

  SITUATION 2. The facts concerning corporation Y are the same as those concerning X in Situation 1 except that in 1982, Y was an organization to which former section 593 of the Code applied. Throughout that year, however Y was not an organization to which section 593 as amended would have applied if the amendment had been effective that year.

LAW AND ANALYSIS

  Section 593 of the Code effective for taxable years beginning after December 31, 1986, applies to any cooperative bank without capital stock organized and operated for mutual purposes and without profit, any domestic building and loan association and any mutual savings bank thereinafter referred to collectively as thrift institutions, provided that the thrift institution meets the 60- percent asset test of section 7701(a)(19)(C). Former section 593, effective for taxable years beginning before January 1, 1987, applies to the same thrift institutions, but without the section 7701(a)(19)(C) limiting proviso.

  Section 582(c)(5) of the Code refers to certain financial institutions, which include (but are not limited to) thrift institutions described in section 593.

  Section 172(a) of the Code provides that there shall be allowed as a deduction for the taxable year an amount equal to the aggregate of (1) the NOL carryovers to such year, plus (2) the NOL carrybacks to such year. Section 172(b)(1)(A) provides the general rule that an NOL for any taxable year shall be an NOL carryback to each of the 3 taxable years preceding the taxable year of such loss. Section 172(b)(1)(B) provides the general rule that an NOL for any taxable year ending after December 31, 1975, shall be an NOL carryover to each of the 15 taxable years following the taxable year of such loss.

  Section 172(b)(1l)(F) of the Code provides that an NOL incurred in any of the taxable years beginning after December 31, 1975, and before January 1, 1987, in the case of a financial institution to which section 582(c)(5) applies (a 'financial institution'), shall be an NOL carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be an NOL carryover to each of the 5 taxable years following the taxable year of such loss.

  By amending section 172(b)(1)(F) of the Code to read as described above, section 903 of the Tax Reform Act of 1986 (the Act), 1986-3 (Vol. 1) C.B. 300, removed, for loss years beginning after December 31, 1986, the special rule granting financial institutions an NOL carryback to the preceding 10 taxable years and an NOL carryover to the succeeding 5 taxable years.

  Thus, for losses incurred in taxable years beginning after December 31, 1986, financial institutions generally are subject to the rule in section 172(b)(1)(A) and (B) of the Code, which permits taxpayers to carry NOLs back to the preceding 3 taxable years and forward to the succeeding 15 taxable years. However, section 172(b)(1)(L), as added by section 903(b)(1) of the Act, and as redesignated by section 1009(c)(1) of the Technical and Miscellaneous Revenue Act of 1983, provides a transition rule for thrift institutions.

  Section 172(b)(1)(L) of the Code provides that, in the case of an organization to which section 593 applies, an NOL for any taxable year beginning after December 31, 1981, and before January 1, 1986, shall be an NOL carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be an NOL carryover to each of the 8 taxable years following the taxable year of such loss. Thus, section 172(b)(1)(L) extends the NOL carryforward period with respect to certain NOLs from 5 taxable years to 8 taxable years.

  The statute is silent both as to when the taxpayer must be an organization to which section 593 of the Code applies and as to which version of section 593 (before or after the 1986 amendment) is relevant. The legislative history accompanying the Act indicates congressional concern with NOLs incurred by thrift institutions, partly as a result of deregulation, during the early 1980s. The Senate Finance Committee believed that the limited transition period was appropriate as thrift institutions recovered from the change in the regulatory rules that caused the NOLs. Thus, the Finance Committee report supports the conclusion that to be entitled to the 3-year extension of the NOL carryforward period, the taxpayer must have been an organization to which section 593 applied in the loss year. The same legislative intent also supports the conclusion that former section 593, as effective during the loss year, is the relevant version of section 593. See S. Rep. No. 313, 99th Cong., 2d Sess., 289 (1986), 1986-3 (Vol. 3) C.B. 289; 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. H-335 (1986), 1986-3 (Vol. 2) C.B. 335.

  Section 172(b)(1)(L) of the Code therefore extends for 3 years the NOL carryforward periods of those taxpayers that incurred NOLs in taxable years beginning after December 31, 1981 and before January 1, 1986, provided that those taxpayers were organizations to which former section 593 applied in the loss year.

  SITUATION 1. Section 172(b)(1)(L) of the Code does not apply to X, because in 1982, the loss year, X was not an organization to which former section 593 applied. Section 172(b)(1)(F) determines the carryforward period for X's 1982 NOL. Thus, X's 1982 NOL is subject to a 5-year carryfoward under section 172(b)(1)(F) rather than an 8 year carryforward under section 172(b)(1)(L). The unused portion of X's 1982 NOL expires at the end of X's 1987 taxable year.

  SITUATION 2. Section 172(b)(10(L) of the Code applies to Y and allows Y to carry forward to 1988 its entire 1982 NOL. Because Y was an organization to which former section 593 applied in 1982, the loss year, Y qualifies for the 3- year extension of the NOL carryfoward period under section 172(b)(1)(L). Y's 1982 NOL does not expire at the end of its 1987 taxable year.

HOLDING

  For purposes of section 172(b)(1)(L) of the Code, (1) a taxpayer must be an organization to which section 593 applied in the taxable year that the NOL was incurred; and (2) the relevant version of section 593 is former section 593, as in effect during the loss year.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Roy A. Hirschhorn of the Office of Chief Counsel (Corporate). For further information regarding this revenue ruling contact Mr. Hirschhorn on (202) 566-3354 (not a toll-free call).

Rev. Rul. 89-78, 1989-1 C.B. 80, 1989-25 I.R.B. 5.