IRS Chief Counsel - Interplay of 5-year NOL carryback election and one-time deduction of 85% CFC dividends 

August 6: The IRS today posted a Chief Counsel Advice memorandum* concerning the interplay of the elective 5-year net operating loss (NOL) carryback under section 172(b)(1)(H) (available in 2008 or 2009) and the one-time elective deduction of 85% of certain controlled foreign corporation (CFC) dividends under section 965, which was available in 2004 or 2005. AM 2013-004 (release date August 2, 2013; dated July 26, 2013).

The NOL carryback under this election to the fifth preceding tax year was limited to 50% of the taxable income for the carryback year. However, the NOL carryback could not offset the nondeductible portion of the CFC dividends.


Furthermore, the nondeductible portion of the CFC dividends was not to be taken into account in determining under section 172(b)(2) how much of the NOL carryback would be available in the fourth preceding tax year, after the deduction in the fifth preceding year.


In AM 2013-004 [PDF 72 KB], the IRS advises how it will coordinate these rules:


  • Taxable income for the fifth preceding tax year includes the nondeductible CFC dividends for purposes of applying the 50% limitation on deductibility of the NOL carryback.
  • The amount of the absorption under section 172(b)(2) of the NOL in the fifth preceding tax year is the lesser of: (1) 50% of the amount of modified taxable income for the tax year; or (2) the amount of modified taxable income for the tax year reduced by the amount of nondeductible CFC dividends for that year.

While section 965 and the 5-year NOL carryback have expired, the IRS recognized that questions about their interplay could be present in taxpayer examinations and appeals for many years to come.


*The memorandum is legal advice, signed by executives in the National Office of the Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The memo is issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. It is not to be used or cited as precedent.




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