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Schedule J instructions were followed in the preparation and
filing of the 1998 and 1999 returns. Petitioner argues that
respondent is erroneously applying internal revenue regulations
for section 1301 that were promulgated after the returns in
question were filed. Petitioner argues, in effect, that
respondent is retroactively applying internal revenue regulations
to their 1998 and 1999 returns.
The promulgated internal revenue regulations under section
1301 do prohibit the double benefits realized by petitioners in
carrying back NOLs realized in base tax years in the section 1301
income-averaging process, receiving tax refunds from such
carrybacks, and then using the same NOLs as negative income in
the section 1301 income-averaging computations for later years.
Respondent contends that, for the 2 base years, 1995 and
1996, in which NOLs were realized and carried back to prior years
and for which tax benefits were received, in determining the tax
for 1998 and 1999 under section 1301, the taxable income of the
base years in that computation in which NOLs were carried back,
should be adjusted by adding back to the income of the base years
the amounts of the carried back NOLs. For example, the negative
taxable income of petitioners for 1995 was $121,767, of which the
NOL was $116,767. The $116,767 NOL was carried back to 1992 and
1993, which resulted in tax refunds for 1992 and 1993 taxes.
Because of the tax benefits realized by petitioners from the NOL
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