Read today’s decision: Metro One [PDF 114 KB]
Generally, an alternative tax net operating loss (ATNOL) can be carried back two years, and carried forward to the next 20 years, but the ATNOL can offset only 90% of the AMTI for the year it is deducted.
Following the terrorist attacks of September 11, 2001, Congress enacted some incentive measures that included allowing ATNOLs from tax years ending during 2001 or 2002 to be carried back five years—rather than two years. The legislation also allowed carrybacks of ATNOLs from 2001 or 2002, and “carryovers” of ATNOLs into 2001 or 2002, to offset 100% of the AMTI in the year they is deducted.
The taxpayer in this case had an ATNOL for 2004 and carried it back two years, to 2002, but attempted to offset 100% of the AMTI in 2002.
The IRS determined for 2002 that the 90% limitation applied to the ATNOL, and reduced the amount of the carryback from 2004, creating a deficiency in tax (specifically, the alternative minimum tax (AMT)) for 2002.
In proceedings before the Tax Court, the taxpayer argued that the 2004 ATNOL was a “carryover” of the ATNOL, even though it was to an earlier tax year. The taxpayer contended in part that the technical reference to the use of an ATNOL in a later tax year is a “carry forward” and that “carryover” was a more general reference that included both carry backs and carry forwards of the ATNOL.
The Tax Court upheld the deficiency determination, finding that for the years at issue, section 56(a)(1) did not allow for a “carryover” of an ATNOL to a prior period because section 172 did not allow for a “carryover” of an NOL to a prior period. The court found, among other things, that the taxpayer’s interpretation would “create illogic” and that Congress had not intended the result the taxpayer has asserted.
Today, the Ninth Circuit affirmed, finding that the plain meaning of the term “carryovers” means net operating losses that are carried forward from one tax year to a subsequent tax year.
Noting that there are some limited situations in the Code in which a more expansive application of the term applies, the Ninth Circuit found no support for a more expansive application in the ATNOL context, and concluded that the plain meaning of “carryovers” is consistent with the purpose expressed in the limited legislative history.
Thus, the taxpayer could not use the ATNOL that was carried back to 2002 from a later year to invoke the relief under section 56(a)(1).
For one tax year ending or beginning in either 2008 or 2009, a taxpayer was provided the opportunity to elect to carry back its NOL, and its ATNOL for three, four, or five years, instead of two years. A taxpayer that made this election was also permitted to offset 100% of the AMTI in any tax year in which that ATNOL is carried, either as a carryback or as a carryover.
The Metro One decision would not affect this result—the statutory language dealing with the 2008 or 2009 ATNOL is different than the 2001 and 2002 rules, and the IRS agreed that the 100% AMTI relief for a 2008 or 2009 ATNOL applies to both carrybacks and carryovers.