North America: NOL carryback period waiver applies to certain specified liability losses

In brief

On 21 May 2021, the IRS released TAM 202120015, advising that a corporation that has elected to waive its right to carry back net operating losses under Code Section 172(b)(3) may not separately carry back a specified liability loss (other than a product liability loss) subject to an extended carryback period.



Section 172(c) defines a net operating loss (NOL) as the excess of deductions over gross income in a given taxable year, subject to certain adjustments. Section 172(b)(1)(A), as in effect before the Tax Cuts and Jobs Act of 2017 (TCJA), provides that an NOL arising in a taxable year beginning before January 1, 2018, must generally be carried back to each of the two years before the year of the NOL and then carried forward to each of the 20 years following the year of the NOL. Pre-TCJA section 172(b)(1)(C) provides an extended ten-year carryback period for specified liability losses (SLLs), to the extent they do not exceed the taxpayer’s NOL for the year. SLLs consist of product liability losses (PLLs) and deductible amounts in satisfaction of liabilities imposed under certain federal or state laws (e.g., those requiring the reclamation of land, remediation of environmental contamination, or payment under a workers compensation act). This second subgroup is sometimes referred to as “deferred statutory losses” a legacy term predating the Revenue Reconciliation Act of 1990 (“1990 RRA”) and its consolidated treatment of PLLs with that of deferred statutory losses under the umbrella term of SLLs.

Section 172(b)(3), which was unchanged by the TCJA, permits a taxpayer to make an irrevocable election “to relinquish the entire carryback period with respect to a net operating loss for any taxable year.” If such an election is made, the NOL may only be carried forward to reduce taxable income in years after the year in which the NOL arose. Separately, pre-TCJA section 172(f)(6) permits a taxpayer to elect to waive the pre-TCJA section 172(b)(1)(C) ten-year special carryback period for SLLs and to apply the standard two-year carryback period under pre-TCJA section 172(b)(1)(A), instead. Treas. Reg. § 1.172-13(c)(4) (“PLL Regulation”) provides that if in a given taxable year a taxpayer sustains both a PLL and an NOL not attributable to product liability, any election under section 172(b)(3) to relinquish the entire carryback period does not preclude the PLL being carried back ten years. Treas. Reg. § 1.172-13 was proposed in 1983 and finalized in 1986, years before the 1990 RRA consolidated treatment of PLLs with that of deferred statutory losses under the term SLLs. The PLL Regulation has not been updated since it was promulgated and therefore, it refers only to PLLs. Treas. Reg. § 1.1502-21(b)(3)(i) specifies the procedure by which a consolidated group can make the carryback waiver election under section 172(b)(3) to relinquish the entire carryback period with respect to a consolidated NOLs (CNOL) for any consolidated return year.

The IRS Advice

The taxpayer in TAM 202120015, the parent of a consolidated group, had made valid elections under section 172(b)(3) to waive the entire carryback period with respect to CNOLs incurred in certain pre-2018 taxable years. The taxpayer later discovered it had SLLs (including deferred statutory losses) for those years and sought to amend its returns for the relevant years to carry back these losses to the prior ten years pursuant to pre-TCJA section 172(b)(1)(C). The taxpayer stated that it had intended to waive only the general two-year carryback period for NOLs and not the extended ten-year carryback period for SLLs. The IRS disallowed the carryback with respect to deferred statutory losses, addressing each of the taxpayer’s arguments in turn before providing its own analysis. The taxpayer’s primary argument was that the IRS cannot inconsistently interpret the section 172(b)(3) carryback waiver provision as permitting the extended carryback period for one subgroup of SLLs, i.e., PLLs, but not the other subgroup of SLLs, i.e., deferred statutory losses. The IRS responded that because the PLL Regulation applies on its face only to PLLs, it is not inconsistent to decline to extend the same treatment to other SLLs.

Second, the taxpayer argued that section 172(f)(6), which allows taxpayers to elect to apply the standard two-year carryback period with respect to SLLs as opposed to the ten-year period, suggests that Congress intended each carryback period to be separately waivable. The IRS responded that Congress could have provided for the right to waive each carryback period separately in its entirety if that was its intent, but it did not do so in section 172(b)(3), which in the IRS’s view applies to all carryback periods for a given year’s NOL.

Third, the taxpayer argued that the PLL Regulation should be extended to all SLLs as a matter of administrative law and statutory construction. In Clark v. Martinez, 543 U.S. 371 (2005), the Supreme Court ruled that where a statute applies the same rule to different categories of subjects, an agency must apply its interpretations of the rule consistently to all categories because “[t]o give [the] same words a different meaning for each category would be to invent a statute rather than interpret one.” The taxpayer argued that because the extended carryback period and other operative rules of pre-TCJA section 172 made no distinction between PLLs and deferred statutory losses, Clark requires the IRS to apply the interpretive rule of the PLL Regulation consistently to all subcategories of SSLs. The IRS rejected this argument with little analysis, concluding that Clark does not apply to a “regulatory exception.”

Finally, the taxpayer argued that a second Supreme Court case, United Dominion Industries v. United States, 532 U.S. 822 (2001), requires the application of the PLL Regulation to deferred statutory losses. In that case, the Court formulated an exception to the canon of statutory interpretation that the mention of some implies the exclusion of others not mentioned. Where a regulation provides that a certain category of items be treated in a particular way, the omission of an item from that list implies that it should not be so treated only “if there was a good reason to consider the treatment of [that category] at the time the regulation was drawn.” On the other hand, “if there was no reason to consider [the treatment of that category] then, its omission would mean nothing at all.” Accordingly, the Court reasoned, where the statute interpreted by a regulation is subsequently amended to include a new category of items, the omission of that category from the original regulation is meaningless, and the issue is whether that omission was intentional or merely the result of a failure to update the regulation. Applying United Dominion to the case at hand, the taxpayer argued that the omission of deferred statutory losses from the PLL Regulation was merely the result of Treasury’s failure to update the regulations after the 1990 RRA amended the statute to combine the treatment of PLLs and deferred statutory losses. Accordingly, the taxpayer argued that the logic of the PLL Regulation should apply to the subsequently added category of deferred statutory losses as well as to PLLs. The IRS characterized this argument as supporting application of the legislative reenactement doctrine, which provides that Congress is deemed to approve agency pronouncements interpreting a statute when it reenacts the statute without substantial change. Given that Congress made many substantial, relevant changes following the promulgation of the PLL Regulation, including the addition of the SLL category, the IRS concluded that the legislative reenactment doctrine did not apply in this case. The IRS concluded the advice with an outline of its own argument that a section 172(b)(3) election waives all carryback periods, absent a regulatory exception. The IRS reasoned that because section 172(c) defines an NOL as the excess of all allowable deductions (including those attributable to SLLs) over gross income, there is only one NOL for a given year, and not a separate NOL for each type of loss which is subject to a special carryback period. Therefore, the general rule is that an election to relinquish “the entire carryback period with respect to a net operating loss” must apply to the single NOL arising in the applicable year, waiving all associated carryback periods. Under this interpretation, the PLL Regulation is a regulatory exception in the case of PLLs, but the general rule still applies to other SLLs. Further, the IRS noted that Treas. Reg. Section 1.1502-21(b)(3)(i), which sets out the procedure for a consolidated group to make the carryback waiver election, does not require the taxpayer to specify which carryback period it is waiving. This is consistent with the interpretation that an election under section 172(b)(3), by its terms, waives all carryback periods.


The unspoken tension in TAM 202120015 lies in how the taxpayer and the IRS characterize the PLL Regulation and its relation to the statute. The taxpayer apparently took the position that the statute is ambiguous as to the effect of a section 172(b)(3) election on the extended carryback period for SLLs and that the PLL Regulation is a regulatory interpretation of that statute in the context of PLLs. Now that the statute treats PLLs and deferred statutory losses identically, the taxpayer argued, the PLL Regulation should be applied consistently to other categories of SLLs under the principles of Clark and United Dominion. In contrast, the IRS views the PLL Regulation as a “regulatory exception” to a general rule which it apparently thinks is discernible from the statute. While some taxpayers and practitioners might question this characterization, and some prior guidance could be seen as somewhat inconsistent, TAM 202120015 accords with the IRS’s more recent guidance on the matter.

In PLR 9444020, the IRS relied on the PLL Regulation to rule that a consolidated group which had elected to waive the NOL carryback period under section 172(b)(3) was still entitled to the ten-year carryback period for SLLs. Without explicitly stating its reason for so ruling, the IRS noted that the PLL Regulation was proposed and finalized before the 1990 RRA adopted the term “SLL” for both PLLs and “deferred statutory or tort liability losses” (the predecessor of the deferred statutory losses at issue in the present TAM). Thus, it would appear that the IRS initially relied on some of the same arguments that it rejected when used by the taxpayer in TAM 202120015.

Nearly two decades later, the IRS reversed course when it again considered the effect of a section 172(b)(3) waiver on SLLs and other losses eligible for extended carryback periods. In CCA 201136024, the IRS first advised that the waiver applies to all carryback periods because there can be only one NOL per year. The IRS’s reasoning (based on the definition of “net operating loss”) was almost identical to that in TAM 202120015. In addition, the IRS acknowledged that pre-TCJA section 172(f)(5) provides that an SLL is “treated as a separate net operating loss,” to be taken into account after “the remaining portion of the net operating loss” for purposes of determining the order in which losses are absorbed in a carryback or carryover year. However, the IRS emphasized that this was an ordering rule only and that the use of the term “remaining portion” is consistent with the view that for all other purposes, an SLL is simply a portion of the year’s one NOL.

TAM 202120015 confirms that the IRS still considers the PLL Regulation to apply only to PLLs and not to other SLLs (or presumably to any other past or future classes of losses subject to special carryback periods). Taxpayers that have made a section 172(b)(3) election with respect to a pre-2018 tax year should be aware that the IRS may challenge an attempt to carry back any deferred statutory losses they later discover for such years. The result in TAM 202120015 will likely be less relevant from a planning perspective going forward because the TCJA eliminated the extended ten-year carryback period for SLLs discussed in the TAM. In addition, current section 172, as amended by the TCJA and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), does not provide for different carryback periods for different types of losses. Section 172(b)(1)(D) permits a five-year carryback period for all NOLs arising in 2018, 2019, and 2020. NOLs arising in taxable years beginning after December 31, 2020, generally cannot be carried back, except that sections 172(b)(1)(B) and (C) provide two-year carryback periods for farming losses and for losses of insurance companies other than life insurance companies. All of these carryback periods should be waived by a section 172(b) (3) election under the logic of TAM 202120015.

Notwithstanding the limited applicability of TAM 202120015 to NOLs arising after 2017, Congress has frequently revised section 172 in the past to create new special carryback periods and to retire them when no longer considered necessary. If NOL carrybacks of varying lengths are reintroduced in the future, taxpayers should be careful to consider whether waiving the general NOL carryback period will have the unintended consequence of waiving any special carryback periods as well.

This alert is part of the Tax News and Developments newsletter. See the other articles below:

Part 1 - North America: Residual Profits and Market Jurisdictions

Part 2 - International: G20 supports latest Pillar One and Pillar Two proposals

Part 3 - United States: Eleventh Circuit agrees that the Federal Circuit effectively has control over all overpayment interest suits

Part 4 - United States: Ninth Circuit reverses Tax Court’s use of substance-over-form doctrine in Mazzei

Part 6 - North America: Maryland Court of Appeals rules that Travelocity is not liable for Maryland sales and use tax prior to enactment of Maryland’s accommodations intermediary law

Part 7 - North America: IRS temporarily allows CFCs an automatic accounting method change to ADS

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