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years to allow tax refunds as a result of the negative income of
such years in the income-averaging computation.
Respondent points out that, in the notices of deficiency to
petitioner for 1998 and 1999, respondent has allowed petitioner
the benefit of income averaging and, for the 2 base years having
negative taxable income, 1995 and 1996, has included the negative
income for these 2 years in the income-averaging computation, but
only to the extent that the negative income of such base years
was not part of the NOLs that were carried back to prior years.
In effect, the income-averaging computation by respondent in the
notices of deficiency include only, as negative income, the
exemptions claimed for 1995 and 1996 that were not part of the
NOLs.
Respondent argues, however, that, when a base year involves
an NOL that is carried back to a earlier year, and a tax benefit
is realized by the taxpayer from that carryback, section 1301 is
not intended to recognize, in the income-averaging process, the
NOL of such base year or years because of the tax benefits
received in the carrybacks.
Respondent agrees that the internal revenue regulations
issued pursuant to the current version of section 1301 were
published on January 8, 2002, and, therefore, were not in effect
when petitioners filed their 1998 and 1999 income tax returns.
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