Mitigation may not reach a duplicated NOL deduction

Plain-English summary

Chief Counsel considered whether the mitigation provisions in sections 1311 through 1314 could permit an assessment after a net operating loss deduction had effectively been allowed twice and the ordinary limitations period had closed. The advice found that the government could establish an otherwise uncorrectable error, a qualifying determination, and a double deduction within section 1312. It was uncertain whether the government could prove that the taxpayer maintained an inconsistent position that was adopted in the determination, as section 1311(b)(1) requires. The memorandum cautioned that mitigation is not a general equitable remedy and noted a one-year assessment period if the IRS chose to proceed.

Ruling snapshot

• Question: Could the IRS use the mitigation provisions to correct a duplicated net operating loss deduction after the normal assessment period closed?
• Outcome: advice given
• Key authorities: IRC §§ 1311, 1312, 1313, and 1314; Fruit of the Loom, Inc. v. Commissioner

Full text (IRS public release)

ID: CCA_2017011215300247
UILC: 1311.01-00

Number: 201710029
Release Date: 3/10/2017
From:
Sent: Thursday, January 12, 2017 3:30:02 PM
To:
Cc:
Bcc:
Subject: RE: Request for Assistance on NOL issue,

----------,

                    Congress delineated the specific requirements in sections 1311-

1314 to ensure that relief would be afforded only in limited circumstances. Because the
Service would be the party attempting to invoke the mitigation provisions, it would bear
the burden to prove that the following specific requirements have been met:

  1. An error must have occurred in a taxable year which cannot otherwise be corrected by
     operation of law;
  2. There was a determination for another year with respect to the item giving rise to the error;
  3. The determination was within one of the categories enumerated in section 1312 as a
     circumstance of adjustment; and
  4. The party who prevailed in the determination maintained a position that was adopted there and
     that was inconsistent with the erroneous treatment.

See Fruit of the Loom, Inc. v. Commissioner, 72 F.3d 1338, 1341-42 (7th Cir. 1996).

The Service is clearly able to meet its burden in proving the first three elements: (1)
petitioner was allowed to carryback the entire ------ NOL in ------ even though a portion
of that NOL had been carried over to the ------------------------------, and the ------ statutory
period is closed; (2) the court’s decision allowing carryback of the ------ NOL to ------ is a
determination under section 1313(a)(1); and (3) double allowance of a deduction is a
circumstance of adjustment under section 1312(2).

It is not clear that the Service could meet its burden in proving the fourth element. See
IRC § 1311(b)(1). By carrying over a portion of the NOL to ------, -------------------------------

---------. It would seem equitable for this to constitute the maintenance of an inconsistent
position by taxpayer because otherwise the Service is disadvantaged in making
adjustments to the earlier year if the error cannot be corrected in the later year. -----------

                                               2

----------------------------------------------------------------------------------. Nonetheless, the
mitigation provisions were not drafted to be a general equitable remedy. The specific
elements must be met and
.

                                                                       If the Service

does pursue mitigation as a basis for moving forward with an examination of the ----------
--------, we note that the Service has one year from the date of the determination (---------
----------) to make an assessment.

Please let us know if you have any questions.

Thanks,