IRS Issues Guidance Regarding Net Operating Loss Carryback Waivers and Refunds Under the CARES Act

On April 9, 2020, the IRS issued:

• Rev. Proc. 2020-24, which provides guidance under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) relating to relinquishment of certain net operating loss (NOL) carrybacks, and
• Notice 2020-26, which extends the deadline for filing an application for a tentative carryback adjustment under Internal Revenue Code (“IRC”) §6411 regarding the carryback of an NOL that arose in a taxable year beginning during calendar year 2018 and ending on or before June 30, 2019.

On April 13, 2020, the IRS posted on its Website:

• New temporary procedures (effective April 17, 2020) for filing “tentative” tax refunds applications based on NOL carrybacks by faxing (100 page limit) (i) Form 1045 (individual, trust, and estate taxpayers) to 844-249-6237 and (ii) Form 1139 (corporation taxpayers) to 844-249-6236. For the IRS Guidance, see the FAQ website.

1. Background – 2020 CARES Act

Unless affirmatively waived, the CARES Act requires an NOL for any tax year beginning in 2018, 2019 or 2020 be carried back to each of the five taxable years preceding the taxable year of the NOL before it is carried forward. If the carryback of such NOLs is waived, the NOLs are carried forward to subsequent tax years to use against taxable income. The CARES Act also (i) provides special rules relating to an NOL carryback to a taxable year in which the taxpayer has included income under IRC §965 and (ii) permits an NOL arising in a taxable year beginning before and ending after January 1, 2018 to be carried back two years under the provisions existing prior to the pre-2017 Tax Cuts and Jobs Act. For more information, click here.

2. Rev. Proc. 2020-24

Rev. Proc. 2020-24 addresses: (1) waiving the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019; (2) excluding all IRC §965 income inclusion years from carryback of an NOL arising in a taxable year that begins in 2018, 2019, or 2020; and (3) making an application under IRC §6411(a) for an NOL arising in a tax year that began before January 1, 2018 and ended after December 31, 2017.

(a) Carryback Waiver of NOL Arising in Taxable Years Beginning in 2018 or 2019. Under IRC §172(b)(3), a taxpayer may make an irrevocable election to relinquish the entire carryback period for an NOL. Such waiver is due by the due date (including extensions) for filing the taxpayer’s return for the tax year in which the NOL arose. Rev. Proc. 2020-24 provides relief to taxpayer’s whose deadline to waive has passed by permitting a taxpayer to elect to relinquish the carryback of an NOL arising in taxable years beginning in 2018 or 2019 by attaching a separate statement to the taxpayer’s timely filed tax return (including extensions) for the first taxable year ending after March 27, 2020. The statement must state it is an election to apply §172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies.

(b) Election to Relinquish Carryback to Taxable Years with IRC §965 Income Inclusions. The CARES Act precludes a taxpayer from using an NOL carryback to offset the taxpayer’s income under IRC §965 (relating to the deemed repatriation by certain U.S shareholders’ of previously untaxed earnings of controlled foreign corporations in such shareholders’ last taxable year beginning before 2018). Further, the CARES Act provides a special carryback waiver rule whereby a taxpayer may elect to exclude from the five-year NOL carryback period any taxable year for which the taxpayer included a §965 income amount (although the waived §965 income inclusion years are counted towards the five years to which the NOL may be carried back).

Under Rev. Proc. 2020-24, this special carryback waiver to an IRC §965 income inclusion year of an NOL arising in taxable years (i) beginning in 2018 or 2019, must be made no later than the due date (including extensions) for filing the taxpayer’s tax return for the first taxable year ending after March 27, 2020 and (ii) beginning in 2020, must be made by the due date (including extensions) for filing the tax return for the taxable year in which the NOL arises. The special carryback waiver, which is irrevocable, is made on a statement included on the earliest filed (after April 9, 2020) of (1) the Federal income tax return reflecting the NOL; (2) the taxpayer’s claim for tentative carryback adjustment applying the NOL to a taxable year in the carryback period; or (3) the amended Federal income tax return applying the NOL to the earliest taxable year in the carryback period that is not a section 965 year. The statement must state (x) it is electing to apply §172(b)(1)(D)(v)(I) under Rev. Proc. 2020-24, (y) the taxable year in which the NOL arose, and (z) the taxpayer’s §965 years.

(c) Carryback of NOL Arising in a Taxable Year Beginning before January 1, 2018 and Ending after December 31, 2017. The CARES Act provides that NOLs arising in taxable years beginning before and ending after January 1, 2018 may be carried back two years under the provisions existing prior to the pre-2017 Tax Cuts and Jobs Act. Although the normal filing deadline has passed, Rev. Proc. 2020-24 provides that a tentative application for refund under IRC §6411(a) (Form 1139 for corporations; Form 1045 for non-corporations) for an NOL arising in a taxable year beginning before 2018 and ending after 2017 that is filed by July 27, 2020 will be deemed timely. Further, Rev. Proc. 2020-24 sets forth special rules relating to waiving or reducing a carryback period, or revoking an election to waive a carryback period, with respect to an NOL arising in a tax year beginning before 2018 and ending after 2017.

3. Notice. 2020-26

An application for a tentative tax refund currently must be filed within 12 months of the close of the taxable year in which the NOL giving rise to the refund arose. Notice 2020-26 grants a six-month extension of time to file tentative applications for refunds (Form 1045, and Form 1139) with respect to the carryback of a NOL that arose in a taxable year that began in calendar year 2018 and that ended on or before June 30, 2019. The top of the application form should include “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”

4. New Fax Procedures for Filing Tentative Carryback Applications

The normal tentative carryback adjustment procedure allows a taxpayer to obtain a “quick” tentative tax refund based on an NOL carryback. Form 1139 (Corporation Application for Tentative Refund) and Form 1045 (Application for Tentative Refund for individuals, trusts, and estates) are normally filed with the IRS by delivery through the mail delivery services to apply for such tax refunds. The IRS generally must process those refund claims within 90 days. Currently, all IRS service centers are closed because of the corona virus.

Due to the expected high number of NOL carryback refund claims, along with the anticipated IRS delays in processing such refunds, the IRS has temporarily allowed taxpayers to file tentative NOL carryback applications with the IRS by fax [(i) Form 1045 (individual, trust, and estate taxpayers) fax to 844-249-6237 and (ii) Form 1139 (corporation taxpayers) fax to 844-249-6236]. The IRS requests that during the corona pandemic taxpayers not mail such tentative carryback applications. This new procedure, which is effective April 17, 2020 (until further notice), only applies to claims filed on Form 1139 or Form 1045 (i.e., the new fax procedure does not apply to other refund claims, including filing Form 4466 (Corporation Application for Quick Refund of Overpayment of Estimated Tax)).

Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form.