T.C. Memo. 1999-378
UNITED STATES TAX COURT
JOHN M. HARDING AND MARY J. HARDING, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3527-98. Filed November 16, 1999.
John Harding and Mary Harding, pro sese.
Kelly A. Blaine, for respondent.
MEMORANDUM OPINION
GERBER, Judge: Respondent determined a $11,231 income tax
deficiency for petitioners’ 1991 tax year. The case was
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submitted fully stipulated under Rule 122.1 On their 1994 income
tax return, petitioners attempted to waive the carryback of their
claimed net operating loss (NOL). Petitioners now claim their
attempt was without effect. The question we consider is whether
petitioners properly elected to waive the carryback of an NOL
under section 172(b)(3) and whether that election is binding.
Background--Petitioners resided in Yorba Linda, California,
at the time their petition was filed in this case. Petitioners
filed a timely 1991 joint Federal income tax return reflecting a
$11,231 income tax liability. Petitioners filed a timely 1994
joint Federal income tax return containing the following
statement:
The above named taxpayer incurred a net operating loss
in the taxable year ending December 31, 1994 and is
entitled to a three-year carryback period with respect
to that loss under Code Section 172(B)(1) of the
Internal Revenue Code.
Pursuant to Code Section 172(B)(3), the taxpayer hereby
elects to relinquish the entire carryback period with
respect to the net operating loss incurred in the
taxable year ending December 31, 1994.
Prior to filing their 1994 return, petitioners had claimed a
NOL for their 1993 taxable year that had been carried back to
their 1991 tax year and caused the elimination of their 1991
income tax liability. After petitioners had filed their 1994
1
All Rule references are to this Court’s Rules of Practice
and Procedure and all section references are to the Internal
Revenue Code, in effect for the taxable year in question.
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return, respondent examined petitioners’ 1993 return and
disallowed the 1993 NOL, resulting in an income tax deficiency
for 1991 in the amount of the original $11,231 liability.
Discussion--Petitioners now claim that the election made on
their 1994 return not to carry their 1994 NOL back 3 years was
ambiguous and/or invalid. Section 172(a) permits the carryover
and carryback of NOL deductions. Section 172(b)(1)(A)(i)2
permitted the carryback of an NOL deduction to the preceding
3 taxable years. Taxpayers were also permitted to elect to waive
or relinquish the carryback deduction and only carry forward
their NOLs. See sec. 172(b)(3). The Secretary promulgated the
following regulation concerning taxpayers’ elections to waive NOL
carrybacks:
[The election] shall be made by a statement attached to
the return (or amended return) for the taxable year.
The statement required when making an election pursuant
to this section shall indicate the section under which
the election is being made and shall set forth
information to identify the election, the period for
which it applies, and the taxpayer’s basis or
entitlement for making the election.
Sec. 301.9100-12T(d), Temporary Proced. & Admin. Regs., 42 Fed.
Reg. 1470 (Jan. 7, 1977).
Petitioners’ statement on their 1994 return contains no
ambiguity about their intent to “relinquish the entire carryback
2
For purposes of this case involving a 1994 net operating
loss and a 1991 taxable year, we consider sec. 172(b)(1)(A)(i)
prior to its being amended by the Taxpayer Relief Act of 1997,
Pub. L. 105-34, sec. 1082(a)(1) and (2), 111 Stat. 950.
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period with respect to the net operating loss incurred in the
taxable year ending December 31, 1994.” The only questionable
aspect about petitioners’ statement is that they referred to
section 172(B)(3) instead of section 172(b)(3). The use of the
upper case “B”, however, does not create confusion as to their
intentions or as to other possible alternatives that may have
been available under section 172. In all other respects, the
statement made by petitioners, as part of their 1994 return,
meets the statutory and regulatory requirements.
Several cases have considered the effectiveness of
taxpayers’ elections to waive NOL carrybacks. It has been held
that the essence of section 172(b)(3)(C) is that a “taxpayer
unequivocally communicates his election and binds himself to his
decision concerning the best use of his net operating loss.”
Young v. Commissioner, 783 F.2d 1201, 1206 (5th Cir. 1986).
Elections made in compliance with the regulatory procedures or
requirements have been held to be binding. In Santi v.
Commissioner, T.C. Memo. 1990-137, it was held that the following
statement was sufficient to waive the carryback and permit the
carryover of the taxpayer’s NOL deduction: “Taxpayer elects to
carry net operating loss over under I.R.C. 172(b)(2)(C).” In
that case, even though the taxpayer’s statement identified the
wrong portion of section 172, the Court interpreted the statement
in the context of the entire return and held that the waiver was
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valid. Likewise, in Carlstedt Associates, Inc., v. Commissioner,
T.C. Memo. 1989-27, the following statement was found to be
unequivocal and a binding election: “IN ACCORDANCE WITH CODE
SECTION 172(b) TAXPAYER HEREBY ELECTS TO RELINQUISH THE ENTIRE
CARRYBACK PERIOD WITH RESPECT TO THE CURRENT NET OPERATING LOSS.”
In Powers v. Commissioner, 43 F.3d 172 (5th Cir. 1995), affg. in
part, revg. in part and remanding 100 T.C. 457 (1993), however,
the Court of Appeals for the Fifth Circuit held that referencing
a Code section other than section 172 served to make a taxpayer’s
election ineffective. In Powers, the taxpayer referenced section
56(b)(3)(C), and no reference was made to section 172. The Court
of Appeals for the Fifth Circuit observed in Powers that Santi v.
Commissioner, supra, was distinguishable because the taxpayer
there referred to section 172. See Powers v. Commissioner, supra
at 178 n.7. By the same token, petitioners’ case may be
distinguished from Powers.
In a case involving a section 172(b)(3)(C) election and the
taxpayers’ attempt to split “regular NOLs” and “alternative
minimum tax NOLs”, we held that the taxpayers’ election was
unambiguous on its face and binding, even though the taxpayers
may have intended to make the election for only one type of NOL.
Miller v. Commissioner, 104 T.C. 330 (1995), revd. 99 F.3d 1042
(11th Cir. 1996). The Court of Appeals for the Eleventh Circuit
reversed, holding that the taxpayers were attempting an election
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to split the NOLs because they used the word “loss” instead of
“losses” which was inconsistent with the election of both types
of NOL. In reaching its holding, the Court of Appeals looked to
extrinsic evidence outside of the taxpayers’ statement on their
return. The Court of Appeals considered subsequent amended
returns, expert testimony on the meaning of the term “net
operating loss”, and the intent of the taxpayers’ return
preparer. Miller v. Commissioner, 99 F.3d 1042 (11th Cir. 1996),
revg. 104 T.C. 330 (1995).
With that backdrop, we hold that petitioners’ 1994 election
was valid and binding, and that it precludes their current
attempt to carry back the 1994 NOL deduction to 1991. There is
no ambiguity as to petitioners’ intentions or extrinsic evidence
showing that petitioners intended not to waive the carryback of
their 1994 NOL. To the contrary, at the time of filing their
1994 return, petitioners had applied their 1993 NOL to eliminate
their 1991 tax liability. We recognize petitioners’ dilemma
caused by the post-1994 disallowance of their 1993 NOL deduction,
which in turn led to respondent’s determination of a 1991 income
tax deficiency. However, the statute recites that such an
election, once made, is irrevocable. See sec. 172(b)(3).
To reflect the foregoing,
Decision will be entered
for respondent.
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