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a base year's taxable income may be negative but amounts,
such as a net operating loss or certain capital losses, that
may be deducted in one or more other taxable years in the
form of a carryover or carryback must be added back in
computing negative taxable income. The Schedule J for years
after 1999 includes worksheets and instructions for
determining negative taxable income for purposes of the
income averaging computation. [T.D. 8972, 2002-1 C.B. 443,
445.]
These provisions are obviously in accordance with certain
concerns Congress had in the enactment of the present version of
section 1301 to prevent an unfair exploitation in the use of
income averaging. This concern is reflected in the conference
report on the legislation that became section 1301 from the
following pertinent language of that report:
It is expected that such regulations will deny the multiple
application of items that carryover from one taxable year to
the next (e.g., net operating loss or tax credit
carryovers). [H. Conf. Rept. 105-220 at 509 (1997), 1997-4
C.B. (Vol. 2) 1457, 1979.]
To be sure, the proposed and final regulations on section
1301 had not been released at the time petitioners filed their
1998 and 1999 income tax returns, and petitioners cannot be held
to those regulations. Nonetheless, the statute and the
legislative history suggest explicitly that Congress did not
intend that taxpayers availing themselves of the benefits of
income averaging under section 1301 should be allowed, in the
averaging computation, to include negative income of base years
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