The IRS has released field attorney advice (FAA 20144201F) clarifying the ordering rules for alternative tax net operating losses (ATNOLs), including ATNOLs from years in which a taxpayer made a valid election under Section 172(b)(1)(H) for an extended carryback of 2008 and 2009 losses (WHBAA election).

Section 172 generally allows taxpayers computing their regular income tax liability to take a deduction for NOLs. Under section 172(b)(1)(A), taxpayers may carry back a NOL to the two preceding years and carry it forward for succeeding 20 taxable years. Under the WHBAA election, a taxpayer could extend the normal two-year carryback period to a period of up to five years. Under Section 172(b)(2), NOLs from earlier years are absorbed before NOLs from later years.

Section 56(a) allows taxpayers an alternative tax net operating losses deduction (ATNOLD) when computing their alternative minimum tax liability. The amount of the ATNOLD, generally, may not exceed 90% of alternative minimum taxable income (AMTI). The 90% limitation, however, doesn't apply to an ATNOL related to a WHBAA election. In other words, a taxpayer may offset 100% of AMTI with an ATNOL related to a WHBAA election.

Section 56 doesn't specify the carryback period or whether ATNOLs are absorbed chronologically. Instead, Section 56(d)(1)(B)(ii) states "appropriate adjustments in the application of Section 172(b)(2) shall be made to take into account the limitation of subparagraph (A)." Historically, Section 56(d)(1)(B)(ii) has provided that any portion of an ATNOL that cannot be used in a particular year because of the 90% limitation may be carried over to other taxable years.

In FAA 20144201F, the IRS noted that Section 56(d)(1)(B)(ii) is the only statutory authority for altering the application of Section 172(b) to ATNOLs. In addition, the IRS noted that Section 172(b)(1)(H) didn't make any changes to Section 56(d)(1)(B). As a result, the IRS ruled that ATNOLs, including those related to WHBAA elections, must be absorbed chronologically. As a result, taxpayers may not absorb ANTNOLs related to WHBAA elections until all other ATNOLs have been absorbed.

For example, consider a corporation that has an ATNOL from 2008 of $100, an ATNOL from 2009 of $200 and an ATNOL from 2010 of $100. The corporation made the election under Section 172(b)(1)(H) related to the ATNOL in 2009 to carry it back five years. It did not use the 2009 ATNOL of $200, however, in any of the carryback years, and consequently carried it forward to 2010 and then 2011.

In 2011, the corporation had AMTI, before any ATNOLD, of $400. It would apply the ATNOLs, as follows:

  • First, it must consider its oldest ATNOL, from 2008, for which no WHBAA election was made. The $100 ATNOL from 2008 doesn't exceed 90% of the 2011 AMTI, or $360. As a result, it can offset the 2011 AMTI by $100 related to the 2008 ATNOL.
  • Second, it must consider the next oldest ATNOL, from 2009. It made a WHBAA election for the $200 ATNOL from 2009, which is therefore not subject to the 90% limitation. As a result, it can offset the 2011 AMTI by $200 related to the 2009 ATNOL.
  • Third, it must consider the next oldest ATNOL, from 2010. The $100 ATNOL from 2010 is subject to the 90% limitation. 90% of the 2011 AMTI is $360. The corporation has already offset $300 ($100 related to the 2008 ATNOL and $200 related to the 2009 ATNOL). As a result, it can offset the 2011 AMTI by only $60 related to the 2010 ATNOL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.