Plumb v. Comm'r of Internal Revenue

• Decision Date: 12 December 1991
• Docket Number: Docket No. 25344-89.
• Citation: 97 T.C. No. 44,97 T.C. 632
• Parties: RAY PLUMB, JR., AND JACQUELYN PLUMB, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

97 T.C. 632

97 T.C. No. 44

RAY PLUMB, JR., AND JACQUELYN PLUMB, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25344-89.

United States Tax Court

Filed December 12, 1991.

Ts sustained net operating losses (NOLs) and alternative minimum tax NOLs in 1984 and 1985. In each of their tax returns for those years, they stated “Taxpayers elect to forego [sic1 the carryback period for the REGULAR NOL in accordance with sec. 172(b)(3)(C) and will carry forward this NOL.” Ts filed applications for the tentative refunds resulting from the carryback of their alternative minimum tax NOLs from 1984 and 1985 to 1983. Ts did not seek any refunds relating to the carryback of the regular NOLs they sustained in 1984 and 1985.

HELD, the regular and alternative tax net operating loss deductions are governed by a single carryback period, to which only a single election made under sec. 172(b)(3)(C) [now sec. 172(b)(3)] may apply.

HELD FURTHER, Ts effectively communicated their intent to make an election which was unavailable to them, and which was therefore invalid. Accordingly, they are entitled, indeed required, to carry back their alternative minimum tax NOLs before carrying them forward, but at the same time they are similarly required to carry back their regular NOLs prior to carrying them forward. Sec. 172(b)(2). Bruce Locke, Lawrence Sherlock, and L. Don Knight, for the petitioners.

M. Kathryn Bellis, for the respondent.

OPINION

RAUM, JUDGE:

The Commissioner determined a deficiency in petitioners' income tax for their 1983 taxable year in the amount of $311,657. At the time petitioners filed the petition herein, they resided in Houston, Texas. This case was submitted on a stipulation of facts and exhibits. Petitioners attempted in their 1984 and 1985 returns to make an election under section 172(b)(3)(C) [now 172(b)(3)] of the Code ¹ to relinquish the carryback period for only the REGULAR net operating losses sustained in those years. The deficiency rests upon the Commissioner's refusal to permit petitioners to carry back the alternative minimum tax net operating losses. The issues for decision may be formulated in terms of (1) whether the section 172(b)(3)(C) election relates to a single carryback period applicable to both the regular tax and the alternative minimum tax, rather than to two carryback periods, so that an effective election thereunder would of necessity preclude any carryback of net operating losses of both types, and (2) whether, if there was only a single carryback period applicable to both types of net operating losses, the attempted limited election here was ineffective, so that petitioners would therefore be entitled, indeed required, to carry back their alternative minimum tax net operating losses but would also be required to carry back their regular net operating losses prior to carrying them forward.

Petitioners timely filed an income tax return for 1983 on which they reported liability for the alternative minimum tax in the amount of $403,862. In 1984, petitioners sustained a net operating loss (NOL) of $544,066 and an alternative minimum tax NOL of $541,343. Petitioners' timely filed tax return for 1984 contained the statement that “Taxpayers elect to forego [sic] the carryback period for the REGULAR NOL in accordance with section 172(b)(3)(C) and will carry forward this NOL.”

On April 24, 1985, the Commissioner received from petitioners a copy of Form 1045, entitled “Application for Tentative Refund.” This form showed the computations underlying the alternative minimum tax NOL of $541,343 sustained by petitioners in 1984. It also indicated that the carryback of the 1984 alternative minimum tax NOL to 1983 would entitle petitioners to a refund of $108,269 for 1983. There is no dispute that they received a refund in this amount. Petitioners did not seek a refund relating to a carryback of the regular NOL. Instead, they carried this NOL over to 1985 and claimed it as a deduction for that year.

In 1985, petitioners sustained a net operating loss of $1,021,804 and an alternative minimum tax net operating loss of $1,016,940 as indicated by their timely filed income tax return for that year. Their 1985 return contained the statement that “Taxpayers elect to forego [sic] the carryback period for the REGULAR NOL in accordance with section 172(b)(3)(C) and will carry forward this NOL to subsequent years.” Petitioners applied for a tentative refund of $203,388 based on the carryback of the 1985 alternative minimum tax NOL to their 1983 taxable year. There is no dispute that they received a refund in this amount. Petitioners did not seek a refund relating to a carryback of their regular NOL. Instead, they carried this loss over to 1986 and claimed it as a deduction in that year. ²

The Commissioner subsequently determined that petitioners' “1984 and 1985 alternative minimum tax net operating losses are not allowed in computation of 1983's alternative minimum tax because elections to relinquish each of the carrybacks were made in accordance with Internal Revenue Code section 172(b)(3)(C).” He therefore determined a deficiency of $311,657 in petitioners' 1983 tax, which was equal to the sum of the two refunds petitioners had previously received in respect of that year.

At issue is the effect of petitioners' attempt under section 172(b)(3)(C) to relinquish the entire carryback period with respect to their regular NOL for the taxable year while at the same time preserving the right to carry back the alternative minimum tax NOL for the same year. The case involves the interplay between the section 172 NOL carryback and carryover provisions and the section 55 alternative minimum tax. In considering the problem, it may be helpful to examine briefly the history of sections 172 and 55.

The deductions for net operating losses were introduced into our revenue law in 1939 for carryovers and in 1942 for carrybacks. ³ These provisions have been amended from time to time, both before and after being incorporated into the 1954 Code as section 172. Among the amendments, both the carryback and carryover periods have been lengthened. As applicable to the taxable period herein, the carryback period was 3 years and the carryover period was 15 years. Sec. 172(b)(1)(A) and (B). Pertinent portions of section 172 as they apply to this taxable period are set forth in the margin. ⁴

Section 172(a) grants a net operating loss deduction for a taxable year in an amount equal to the sum of the NOL carryovers and carrybacks to that year. Section 172(b)(2) establishes the manner in which NOLs are carried backward and forward from the year in which they were incurred. In general, the NOL is required to be carried back to the earliest available year of the carryback period, and then (to the extent not absorbed) to be carried over successively to the next year or years all the way through the remainder of the carryback period and the full carryover period until completely absorbed. ⁵ In terms of the present case, the taxable year is 1983, and we are here concerned with carrybacks to 1983 from 1984 and 1985.

A taxpayer may elect to relinquish the carryback period with respect to the loss sustained in a given year. Sec. 172(b)(3)(C). If the taxpayer so elects, he does not carry back the net operating loss sustained in that year to any year in the carryback period, and no part of such loss is allowed as a deduction in any year in that period. Accordingly, no part of the net operating loss is absorbed by taxable income in the carryback period. The entire NOL is instead carried forward to the earliest year in the carryover period. Sec. 172(b)(2). An election under section 172(b)(3)(C) is irrevocable, and applies to all of the carryback years relating to the loss year for which the election is made. Sec. 172(b)(3)(C).

Section 55 imposes an alternative minimum tax (AMT) on noncorporate taxpayers. It did not come into our law until 1978, when it was added to the Code by the Revenue Act of 1978, Pub. L. 95-600, sec. 421, 92 Stat. 2871. Nothing therein dealt with alternative minimum tax NOLs. It was not until 1982 that section 55 was amended to provide for carrybacks and carryovers of alternative minimum tax NOLs. See Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 201, 96 Stat. 411. Pertinent provisions of section 55 as thus amended by TEFRA are set forth in the margin. ⁶

As applicable to the taxable period before us, section 55(a) provides that the alternative minimum tax is equal to 20 percent of so much of the “alternative minimum taxable income” as exceeds an exemption amount, less the regular tax for the year. It is at this point that section 55 interacts with section 172, because section 55(b) defines alternative minimum taxable income as adjusted gross income (determined without regard to the section 172 deduction) as modified in several respects, one of which involves the “alternative tax net operating loss deduction.”

Section 55(d)(1) states that “The term ‘alternative tax net operating loss deduction’ means the net operating loss deduction allowable for the taxable year under section 172,” subject to the exceptions contained in section 55(d)(1)(A) and (B). This definition thus requires that the amount of the alternative minimum tax NOL deduction for a particular taxable year must equal the amount of the regular NOL deduction for that year, except to the extent that subparagraphs (A) and (B) of section 55(d)(1) require a difference between the two amounts. Neither of these provisions, however, states or implies that a separate carryback period exists with respect to the alternative minimum tax NOL. Indeed, subparagraphs (A) and (B) of section 55(d)(1) do not relate in any way to the existence or length of the carryback period, or to the section 172(b)(3)(C) election to relinquish such a period. ⁷ We find no basis for according different treatment to an alternative...