All That Glitters Is Not Deductible

BY EDWARD J. SCHNEE

The Tenth Circuit Court of Appeals upheld a district court’s ruling that a company could not carry back a loss because the statute of limitations had passed.

Taxpayers that incur net operating losses are permitted under IRC § 172 to carry them back two years and forward 20 years. A carryback of 10 years is allowed for “specified liability losses,” which include those arising from certain statutory environmental requirements of mining, oil drilling and nuclear power generation, specifically including land reclamation. Section 6511(d)(2)(A) limits the time for filing these amended returns to within three years of the due date of the return that had the net operating loss.

Gold mining company Barrick Resources had net operating losses in tax years 1997 and 1998. In 2001, the company timely filed amended returns for 1994 and 1995 carrying back the losses but without specifically explaining that they stemmed from land reclamation costs. In 2002, Barrick realized that part of the loss qualified for the 10-year carryback. It filed amended returns for 1991 and 1992 and received a refund. The following year, it filed yet another amended return for 1991 carrying back more of the reclamation costs from 1997 and 1998. The government denied this refund and demanded return of the earlier refund as paid in error. Both sides filed motions for summary judgment in federal district court in Utah.

Barrick argued that its 2002 and 2003 filings were not new claims but amendments of its 2001 amended return—like those the Supreme Court in U.S. v. Andrews (19 AFTR 1243 (1938)) and the Tenth Circuit in U.S. v. Ideal Basic Industries (22 AFTR2d 5438 (1969)) held were amendments or amplifications of pending timely refund claims and thus considered timely, even though the three-year period elapsed in the meantime. But, the district court held, and the Tenth Circuit affirmed, Barrick’s claim was distinguished by not mentioning a specified liability loss in its 2001 amendments. The courts also rejected Barrick’s contention that its designation of a “reclamation and closure” line item under “other costs” on its Schedule A of Form 1120X in that initial set of amended returns constituted sufficient notice of a specified liability loss for land reclamation.

The Tenth Circuit went on to reject the Eleventh Circuit’s decision in Mutual Assurance Inc. v. U.S. (76 AFTR2d 95-5132). In it, the Eleventh Circuit allowed an extension to amend a refund claim that had already been paid. According to the Barrick court, the extension applies only to claims that are still pending.

Barrick illustrates that taxpayers cannot necessarily expect further amendments of pending refund claims to keep the statute of limitations open, especially if the reason for those amendments deviates from the original issues. Also, to take advantage of the 10-year carryback for specified liability losses, taxpayers must clearly invoke the provision, which also covers losses arising from product liability claims and workers’ compensation payments.

Barrick Resources (USA) Inc. v. U.S., 101 AFTR2d 2008-2656

By Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accountancy and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.

©2008 AICPA

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