A Dream Come True!
Carrying Back NOLs Further Than Two Years
June, 2016
The following post is based materials I presented to the National Association of Bankruptcy Trustees at their Spring Meeting in Atlanta this past April.
NOLs can generally be carried back two years for the recovery of income taxes paid.1 What many do not know is that the are exceptions to this two year rule which allow NOLs to be carried back 3, 5 or even 10 years. Many of these exceptions are specifically targeted to energy companies, which could use a break these days.
Losses related to product liability claims can apply to business in all industries. I recently worked on carry back claims for a compounding pharmacy that sold tainted medication. We were able to recover millions in tax refunds to compensate the victims.
The product liability rules could also apply to manufacturing companies for all kinds of products that cause harm.
TEN YEARS – SPECIFIED LIABILITY LOSSES
“Product liability and expenses incurred in the investigation or settlement of, or opposition to, product liability claims, or
An act (or failure to act) that occurred at least 3 years before the beginning of the loss year and resulted in a liability under a federal or state law requiring:
- Reclamation of land,
- Dismantling of a drilling platform,
- Remediation of environmental contamination, or
- Payment under any workers compensation act.”2
Also: Nuclear power plant decommissioning.
There are special rules for waiving the 10-year carryback – see IRC section 172.
1 Internal Revenue Code (“IRC”) section 172(b)(1)(A)(i). Note there are exceptions – i.e. REITs may not carry back NOLs.
2 IRC section 172(b)(1)(C); Net Operating Losses (NOLs) for Individuals, Estates, and Trusts (for preparing 2015 returns), Publication 536, Department of the Treasury, Internal Revenue Service, February 11, 2106 at 4.
Product liability losses, along with the expense related to those losses (such as legal costs, investigatory costs, settlement expenses) include damages resulting from:
Physical injury or emotional harm, or damage to or loss of the use of property on account of any defect in any product which is manufactured, leased, or sold by the accrual basis taxpayer, but only after the taxpayer completed or terminated operations with respect to such product.3
Product liability losses do NOT include contract liabilities – claims related to warranty theories for repairs or to replace property or claims arising with respect to services performed by the taxpayer.4
USING TORT TRUSTS TO MAXIMIZE THE CARRYBACK RELATED TO PRODUCT LIABILITY LOSSES
When a taxpayer has liabilities arising from claims related to its product, those liabilities may take years to investigate, litigate and quantify. As the years drag on, profitable years start to drop off the timeline for eligibility for carryback. One solution is to accelerate the deduction related to product liability losses by establishing a tort trust. Contributions of cash or other property to the trust satisfy the economic performance requirements for immediate deduction. The resulting losses (limited to overall loss) can then be carried back ten years by the taxpayer.
There are complex rules related to setting up these trusts, and once payment is made to the trusts, funds cannot be returned to the taxpayer.5
3 Treasury Regulation section 1.172-13(b)(2)(1).
4 Treasury Regulation section 1.172-13(b)(2).
5 IRC section 468B.
OTHER EXTENDED CARRYBACK PROVISIONS
THREE YEARS – ELIGIBLE LOSS
An “Eligible Loss” can be carried back three years. An Eligible Loss is that part of the overall NOL that is due to a casualty or theft, or is “attributable to a federally declared disaster for a qualified small business or certain qualified farming businesses.”6
FIVE YEARS – FARMING BUSINESS AND QUALIFIED DISASTER LOSSES
Farming Losses
The farming portion of the NOL may be carried back five years. The farming loss is the lesser of:
- “The amount that would be the NOL for the tax year if only income and deductions attributable to farming businesses were taken into account, or
- The NOL for the tax year.”7
There are special requirements to waive the five year carryback related to farming losses.
Qualified Disaster Losses
The portion of the NOL related to qualified disaster losses may also be carried back five years. Such losses are the lesser of:
“1. The sum of:
- a Any losses attributable to a federally declared disaster and occurringbefore January 1, 2010, in the disaster area, plus
- b Any qualified disaster expenses that were allowable under section 198A(even if you did not choose to treat those expenses as deductions in thecurrent year), or
2. The NOL for the tax year.”8
6 IRC section 172(b)(1)(E); Net Operating Losses (NOLs) for Individuals, Estates, and Trusts (for preparing 2015 returns), Publication 536, Department of the Treasury, Internal Revenue Service, February 11, 2106, at 3.
7 IRC section 172(b)(1)(F); Net Operating Losses (NOLs) for Individuals, Estates, and Trusts (for preparing 2015 returns), Publication 536, Department of the Treasury, Internal Revenue Service, February 11, 2106 at 3.
8 IRC section 172(b)(1)(J); Net Operating Losses (NOLs) for Individuals, Estates, and Trusts (for preparing 2015 returns), Publication 536, Department of the Treasury, Internal Revenue Service, February 11, 2106 at 3; Memorandum 201136024, Office of Chief Counsel, Internal Revenue Service, September 9, 2011, at 1.
By, Elisa M. Sartori, CPA, CIRA
Greenridge Financial Services LLC
Woburn, Massachusetts
(781) 569-5069
esartori@greenridgeservices.com