Waiving the NOL carryback also waives the 10-year carryback for non-product specified liability losses

Plain-English summary

Under the version of IRC § 172 in effect before the 2017 Tax Cuts and Jobs Act, certain "specified liability losses" (SLLs) could be carried back 10 years instead of the ordinary 2 years. SLLs came in two flavors: product liability losses (PLLs) and deferred statutory or tort liability losses (DSTLLs). A corporate group that had elected to waive its ordinary NOL carryback later reclassified part of its losses as DSTLLs and filed refund claims trying to carry those back 10 years, arguing that a general carryback waiver does not reach the special 10-year SLL carryback. It relied on the "legislative reenactment doctrine," which presumes Congress adopts existing agency interpretations when it re-enacts a statute unchanged, pointing to a 1986 regulation that lets PLLs keep their 10-year carryback despite a general waiver. This Chief Counsel Advice concludes the doctrine does not help the taxpayer: the 1986 regulation addressed only PLLs, never DSTLLs, so a general carryback waiver does waive the 10-year carryback for DSTLLs. Chief Counsel Advice is internal legal guidance to IRS field personnel and binds no one.

Ruling snapshot

• Question: Does the legislative reenactment doctrine let a taxpayer who waived its NOL carryback still carry back non-product specified liability losses (DSTLLs) for 10 years?
• Outcome: Advice (no; the general carryback waiver waives the 10-year carryback for DSTLLs)
• Key authorities: IRC § 172(b)(1)(C), (b)(3), (f); Treas. Reg. § 1.172-13; Lorillard v. Pons; Cottage Savings v. Commissioner; United Dominion Industries v. United States

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 202219015
       Release Date: 5/13/2022
       CC:ITA:B04
       POSTF-121337-21

UILC: 172.00-00

date: February 14, 2022

 to:   Richard A. Rappazzo
       Area Counsel, Area 4
       (Large Business & International)
       Attention: Michael R. Connelly

from: Stephen J. Toomey /s/ SJT
Senior Counsel, Branch 4
(Income Tax & Accounting) CC:ITA:04

subject: Doctrine of Legislative Reenactment

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       LEGEND

        Taxpayer    =   ---------------------------------------------------
        Year 1      =   -------
        Year 2      =   -------
        Year 3      =   -------
        Year 4      =   -------
        Year 5      =   -------
        Date 1      =   ---------------------
        $A          =   --------------
        $B          =   ----------------
        $C          =   -----------------

       ISSUE

       Whether, in the present case, the legislative reenactment doctrine permits a 10-year
       carryback of specified liability losses not attributable to product liability losses for a

POSTF-121337-21 2

taxpayer that has waived its right to carry back its net operating loss (NOL) under
section 172(b)(1)(C) of the Internal Revenue Code (Code).

CONCLUSION

In the present case, the legislative reenactment doctrine does not permit a 10-year
carryback of specified liability losses not attributable to product liability losses for a
taxpayer that has waived its right to carry back its NOL under section 172(b)(1)(C) of
the Code.

FACTS

Taxpayer is a U.S. corporation that is the parent of an affiliated group that files a
consolidated federal income tax return. In both Year 3 and Year 4, Taxpayer incurred
consolidated net operating losses (“NOLs”) of approximately $A each year. In filing its
returns, Taxpayer validly elected to waive its 2-year NOL carryback with an election
statement under section 172(b)(3) of the Code and § 1.1502-21(b)(3)(i) of the Income
Tax Regulations (Treas. Reg.).

In Year 5, Taxpayer determined that $B and $C of its Year 3 and Year 4 NOLs,
respectively, were actually specified liability losses (“SLLs”) as it was defined at that
time under section 172(f)(1) of the Code; specifically, they were SLLs that were not
product liability losses (“PLLs”) (see below for additional explanation of those terms). As
such, in Date 1, Taxpayer timely filed a Form 1120-X for Year 1 and Year 2 to carry the
SLLs (specifically, SLLs that were not PLLs) back 10 years to Year 1 and Year 2,
resulting in refund claims for those years. In the explanation of the claim, Taxpayer
stated that, when originally filing its Year 3 and Year 4 returns, it had intended only to
waive the general two-year carryback for NOLs provided by section 172(b)(1)(A), but
not the 10-year carryback period for SLLs provided by section 172(b)(1)(C).

LAW AND ANALYSIS

History of Relevant Provisions

In 1976, Congress added section 172(b)(3) to the Code, which allows any taxpayer
entitled to a carryback period under section 172(b)(1) to "elect to relinquish the entire
carryback period with respect to a net operating loss for any taxable year” (the “General
Carryback Waiver”).

In 1978, Congress added section 172(b)(1)(H) to the Code, which provides for a special
10-year carryback period for NOLs attributable to product liabilities of the taxpayer or
expenses incurred in connection with investigating, opposing, or settling such liabilities
(i.e., PLLs). Congress also added section 172(i)(3) (the “PLL Special Waiver
Election”), which allows a taxpayer entitled to the 10-year carryback under section
172(b)(1)(H) (i.e., PLLs) to determine the carryback period for PLLs without regard to
POSTF-121337-21 3

such provision. Thus, section 172(i)(3) allows a taxpayer with an NOL attributable to a
PLL to waive the 10-year carryback period and use the carryback period for non-PLL
NOLs for its NOLs attributable to PLLs.

In 1984, Congress added section 172(b)(1)(K) to the Code, which provides for a special
10-year carryback period for deferred statutory or tort liability losses (“DSTLLs”).
Broadly, DSTLLs were defined as the lesser of (A) the NOL for such year, exclusive of
any foreign expropriation losses and PLLs, or (B) NOLs incurred “with respect to a
liability which arises under a Federal or State law or out of any tort of the taxpayer.”
With the addition of the DSTLL category, Congress did not revise the section 172(i)(3)
PLL Special Waiver Election to apply to DSTLLs. As such, the PLL Special Waiver
Election continued to only apply to PLLs (and was moved to section 172(j)(3)).

In 1986, Treasury promulgated Treas. Reg. § 1.172-13. Treas. Reg. § 1.172-13(a)(1)
states that “unless an election is made pursuant to paragraph (c) of this section, in the
case of a taxpayer which has a product liability loss […] for a taxable year beginning
after September 30, 1978 […] the product liability loss shall be a net operating loss
carryback to each of the 10 taxable years preceding the loss year” (emphasis added).
Treas. Reg. § 1.172-13(c)(1) - (2) provides for the manner of making the election
described in the PLL Special Waiver Election to waive the 10-year carryback that a
taxpayer is entitled to as a result of incurring a PLL. Finally, Treas. Reg. § 1.172-
13(c)(4) states that “if a taxpayer sustains during the taxable year both a net operating
loss not attributable to product liability and a product liability loss […], an election
pursuant to section 172(b)(3)(C) (an election to relinquish the entire carryback period)
does not preclude the product liability loss from being carried back 10 years under
section 172(b)(1)(I) and paragraph (a)(1) of this section” (emphasis added).

Treas. Reg. § 1.172-13(c)(4) specifies that the 10-year carryback period for PLLs must
be waived separately from the waiver of the carryback for non-PLL NOLs. In the
preamble to the final regulations, it notes that Treas. Reg. § 1.172-13(c)(4) was added
to clarify the relationship between the PLL Special Waiver Election and the election
under 172(b)(3)(C) by providing that the latter election does not preclude a product
liability loss from being carried back ten years. T.D. 8096, 1986-2 C.B. 39 (1986). No
analogous rule was promulgated with respect to DSTLLs, which, as noted, was an
existing category at the time of promulgation of Treas. Reg. § 1.172-13. Further, the
DSTLLs provisions did not include a rule analogous to the PLL Special Waiver Election

In 1990, Congress added section 172(b)(1)(C) to the Code, which brought PLLs and
DSTLLs under a new umbrella category known as specified liability losses or SLLs,
defined in section 172(f). Section 172(f)(1)(A) provides the definition of PLLs, and
section 172(f)(1)(B) provides the definition of DSTLLs. Section 172(f)(6) was also added
which provided for an election to waive the special 10-year carryback for SLLs generally
(i.e., losses under section 172(b)(1)(C)) (the “SLL Special Waiver Election”). Section
172(f)(6) is structured nearly identically to the PLL Special Waiver Election of section
172(j)(3). See below for a side-by-side comparison:
POSTF-121337-21 4

   Section 172(j)(3) / PLL Special Waiver Election: Any taxpayer entitled to a 10–
   year carryback under subsection (b)(1)(H) from any loss year may elect to have
   the carryback period with respect to such loss year determined without regard to
   subsection (b)(1)(H). Such election shall be made in such manner as may be
   prescribed by the Secretary and shall be made by the due date (including
   extensions of time) for filing the taxpayer's return for the taxable year of the net
   operating loss. Such election, once made for any taxable year, shall be
   irrevocable for that taxable year.

   Section 172(f)(6) / SLL Special Waiver Election: Any taxpayer entitled to a 10-
   year carryback under subsection (b)(1)(C) from any loss year may elect to have
   the carryback period with respect to such loss year determined without regard to
   subsection (b)(1)(C). Such election shall be made in such manner as may be
   prescribed by the Secretary and shall be made by the due date (including
   extensions of time) for filing the taxpayer's return for the taxable year of the net
   operating loss. Such election, once made for any taxable year, shall be
   irrevocable for that taxable year.

The entire SLL carryback framework was subsequently eliminated by the Tax Cuts and
Jobs Act of 2017.

Doctrine of Legislative Reenactment

Under the doctrine of legislative reenactment, administrative pronouncements are
deemed to receive congressional approval whenever Congress reenacts an interpreted
statute without substantial change. Lorillard, Div. of Loew’s Theatres, Inc. v. Pons, 434
U.S. 575 (1978); Helvering v. R.J. Reynolds Tobacco Co., 306 U.S. 110 (1939). Here,
Taxpayer argues that the relevant administrative pronouncement is Treas. Reg. §
1.172-13 and the relevant “reenacted” statute is the SLL Special Waiver Election (i.e.,
section 172(j)(3) of the Code reenacted as section 172(f)(6)).

In Lorillard, Congress had adopted a new law incorporating sections of a prior law that
had long been interpreted as containing a jury trial requirement for certain discrimination
claims. The Supreme Court held that “Congress is presumed to be aware of an
administrative or judicial interpretation of a statute and to adopt that interpretation when
it re-enacts a statute without change” and when “Congress adopts a new law
incorporating sections of a prior law, Congress normally can be presumed to have had
knowledge of the interpretation given to the incorporated law, at least insofar as it
affects the new statute.” Id. at 580-581.

In Casey v. Commissioner, 830 F.2d 1092 (10th Cir. 1987), a Treasury Regulation
interpreted a Code provision dealing with the deductibility of sales taxes. At the time of
the promulgation of the Regulation, the provision specified that the sales tax deduction
only applied with respect to tangible personal property. The Regulation reiterated that
POSTF-121337-21 5

understanding by defining sales tax for those purposes as “a tax imposed upon persons
engaged in selling tangible personal property, or upon the consumers of such property
[…].” A subsequent amendment to the Code provision omitted the specific language
regarding tangible person property. In holding that the Regulation’s definition of sales
tax was still applicable, the court said that “[w]hen Congress is, or should be, aware of
an interpretation of a statute by the agency charged with its administration, Congress'
amendment or reenactment of the statutory scheme without overruling or clarifying the
agency's interpretation is considered as approval of the agency interpretation.” Id. at
1095.

In another case, Cottage Savings Association v. Commissioner, 499 U.S. 554 (1991),
the Supreme Court held that there was a “material difference” requirement for
dispositions of property to constitute a realization event for tax purposes. The Court
found this in part by noting that section 1001 of the Code had been interpreted to
include the material difference requirement through all its historical iterations, as well as
in Treas. Reg. § 1.1001-1. The Court stated that “Treasury regulations and
interpretations long continued without substantial change, applying to unamended or
substantially reenacted statutes, are deemed to have received congressional approval
and have the effect of law.” Id. at 561.

In United Dominion Industries, Inc. v. U.S., 532 U.S. 822 (2001), in discussing the
treatment of PLLs in the consolidated return context, the Court stated that the omission
of PLLs from the list of items requiring consolidated treatment in the 1966 consolidated
return regulations lacks significance, as the advent of PLLs and their 10-year carryback
period was not until 1978. Per the Court, "the issue, then, is the significance, not of
omission, but of failure to include later: has the significance of the earlier regulation
changed solely because the Treasury has never amended it, even though PLL is now a
separate carryback? We think that is unlikely." Id. at 836.

Analysis

Taxpayer notes that, under the doctrine of legislative reenactment, "as described by the
Supreme Court in Lorillard v. Pons, [434 U.S. 575 (1978)] the legislative canon provides
that when Congress substantially reenacts statutory text that has previously been the
subject of judicial or administrative interpretation it is presumed to have adopted such
prior interpretations of the reenacted text."

Taxpayer argues that when Congress created the SLL category in 1990 - pulling in the
PLL and DSTLL definitions under its umbrella and creating the SLL Special Waiver
Election - it adopted the 1986 Treasury Regulations with respect to the entire SLL
category, including DSTLLs. Specifically, Taxpayer purports that Congress adopted the
Treas. Reg. § 1.172-13(c)(4) interpretation of the PLL Special Waiver election when
enacting the similarly worded SLL Special Waiver Election, thus requiring a taxpayer to
make such an election according to the procedures prescribed in Treas. Reg. § 1.172-
POSTF-121337-21 6

13(c)(1) - (2) in addition to an election under section 172(b)(3)(C) in order to waive the
10-year carryback period for any DSTLLs.

However, the logic underlying the legislative reenactment doctrine undermines
Taxpayer’s argument. The 1986 Treasury Regulations explicitly created a carryback
waiver framework that by its terms only applied to one of the future subcategories of
SLLs: PLLs. DSTLLs existed but did not have an analogous regulatory provision. Treas.
Reg. § 1.172-13(c)(4) explicitly states that an election under section 172(b)(3)(C) to
waive the general NOL carryback does not have the effect of waiving the special 10-
year carryback for PLLs. Instead, the taxpayer must first make an election in the
manner prescribed by Treas. Reg. § 1.172-13(c)(1) - (2) to waive the 10-year carryback.
Congress later enacted the SLL Special Waiver Election to apply to SLLs, which
included PLLs and DSTLLs. However, to the extent that there was an administrative
interpretation of the SLL Special Waiver Election, it was only applicable with respect to
PLLs, as that is the only category of losses addressed by Treas. Reg. 1.172-13.
DSTLLs existed when that Regulation, titled “Product Liability Losses”, was
promulgated. As noted, Taxpayer argues that the relevant legislative reenactment was
the SLL Special Waiver Election. By “reenacting” the PLL Special Waiver Election as
the SLL Special Waiver Election, Taxpayer asserts that Congress adopted the
interpretation of that provision contained in Treas. Reg. § 1.172-13(c)(4) with respect to
all sub-categories of SLL, including DSTLLs.

However, Taxpayer’s argument misidentifies what was reenacted for purposes of the
legislative reenactment doctrine. The SLL Special Waiver Election was enacted in
connection with the creation of a new category of NOLs in section 172(b)(1)(C), which
included DSTLLs. While the PLL and DSTLL categories were indeed reenacted by their
incorporation into the SLL category, that latter category (SLLs) is itself a new statutory
provision. As the SLL Special Waiver election applies to the new SLL provision, the two
provisions considered in conjunction are new provisions. As such, it is clear that there is
no “interpretatio[n] long continued without substantial change, applying to [an]
unamended or substantially reenacted statut[e].” Cottage Savings at 561. Instead, there
is a new statute that incorporates two categories previously subject to distinct
administrative interpretations: (i) PLLs, which were subject to the 1986 interpretation
contained in Treas. Reg. § 1.172-13; and (ii) DSTLLs, which Treasury may be
presumed for these purposes to have been intentionally excluded from that interpretive
framework. To the extent that part (i) can be said to include the new SLL Special Waiver
Provision, it is only to the extent that the SLL Special Waiver Provision is applicable to
PLLs. See Casey at 1095.

Contrary to the position of Taxpayer, the legislative reenactment doctrine does not entail
expansive reinterpretations or additions to the text of regulations, such as expanding the
regulatory exception under Treas. Reg. § 1.172-13(c)(4) from PLLs to SLLs. This
understanding is supported by the Supreme Court’s view of the legislative reenactment
doctrine, which it has held to be applicable when Congress “re-enacts a statute without
change.” Lorillard at 580.
POSTF-121337-21 7

Citing United Dominion, Taxpayer notes that that "when Congress adds a new category
to a preexisting statute, existing IRS regulations apply to the new category, even though
the IRS has not updated the regulations to reflect the new category." The DSTLL
category was not new, however; it was merely folded into a new part of section 172.
DSTLLs were not a new category at any point relevant for Taxpayer's argument. The
category of DSTLLs post-dated PLLs but pre-dated the PLL regulations. And each of
those pre-dated the 1990 amendment which added the SLL category. If Congress “can
be presumed to have had knowledge of the interpretation given to the incorporated
law”1, that included the knowledge that Treasury had excluded DSTLLs from Treas.
Reg. § 1.172-13 and effectively chose not to include language that would have brought
DSTLLs under the same waiver framework as PLLs.

Please call Jonathan Dunlap at (202) 317-5350 if you have any further questions.

1
Lorillard at 581.