IRS Finalizes Regs on Tentative Carryback Adjustments

The IRS on Monday released final regulations under IRC § 6411 providing guidance on the computation and allowance of tentative carryback adjustments (tentative refunds) (TD 9499). The final regulations finalize temporary regulations that were issued in 2007 (TD 9355) and are effective Aug. 24, 2010, the day they are scheduled to be published in the Federal Register. 

Generally, the regulations provide that the IRS can credit or reduce a tentative refund by unassessed liabilities determined in a notice of deficiency or identified in a proof of claim in a bankruptcy proceeding.

IRC § 6411(a) allows corporations to apply for a quick refund of taxes by carrying back a net operating loss (NOL), a net capital loss, or an unused business credit to a prior tax year for which taxes were paid, using Form 1139, Corporation Application for Tentative Refund. The taxpayer must file the Form 1139 within 12 months after the end of the tax year in which the NOL, net capital loss, or unused credit arose, and must file its income tax return for the tax year no later than the date it files Form 1139. 

Within 90 days of the date that the taxpayer files Form 1139, the IRS may make a limited examination of the application to discover omissions and computational errors and to determine the amount of the decrease in tax (that is, the refund). If the IRS finds no omissions or errors, the refund is applied against certain items, including any tax or installment “then due” from the taxpayer (section 6411(b)). Any amount not so credited is refunded to the taxpayer.

The final regulations provide that the IRS may credit or reduce the tentative refund by both assessed liabilities and also by certain unassessed liabilities, which the regulations count as “then due.” Specifically, under Treas. Reg. § 1.6411-3(d)(1)(iii) the tentative refund may be reduced by:

  • Unassessed liabilities determined in a statutory notice of deficiency;
  • Unassessed liabilities identified in a proof of claim filed in a bankruptcy proceeding; or
  • Other unassessed liabilities “in rare and unusual circumstances.”

The lone commenter on the regulations argued that only assessed liabilities can count as “then due” or due and payable for purposes of section 6411(b), but the IRS does not agree with this position.

The regulations do not define what would constitute “rare and unusual circumstances” for purposes of Treas. Reg. § 1.6411-3(d)(1)(iii). The preamble to the 2007 temporary regulations noted that the IRS intended to adopt procedures requiring IRS National Office review before a credit or reduction of a tentative refund by an unassessed liability that constitutes a rare and unusual circumstance.

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