CASUALTY LOSSES EFFECTS ON TAXES

The following is a brief overview of casualty losses and how they might impact your tax return. The information provided is by no means complete; contact this office for further details.

Casualty Loss Definition - A casualty refers to the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

·    A sudden event is one that is swift, not gradual or progressive.

·    An unexpected event is one that is ordinarily unanticipated and unintended.

·    An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Disaster Losses - Disaster losses are casualty losses that occur in a geographical area that has been declared a disaster region by the President of the United States. Generally, casualty losses must be taken in the year in which they occur. However, if the casualty occurs in a designated disaster region, the losses can be taken either in the year of the loss or in the year prior to the loss. The decision as to when to take the loss depends upon a number of factors and should be carefully analyzed in order to determine which year is most beneficial for the taxpayer. Factors to consider include:

·    The tax brackets for each year - From purely a tax standpoint, each year should be carefully examined in order to determine which will provide the greatest overall tax benefit without wasting other tax benefits.

·    The need for immediate cash - The primary purpose of the special rules allowing the casualty loss to be claimed on the prior year’s return is to provide taxpayers access to a tax refund without needing to wait - often many months -to file their return for the year of the loss.

·    Self-Employment tax - Self-employed taxpayers will also need to consider whether to take a business casualty loss that affects inventory in the current or prior year since the loss can offset the self-employment tax as well as income taxes.

·    Whether the loss will be used up - If the casualty loss is not fully used up in the year in which it is first deducted, it can create a net operating loss (NOL). An NOL can be taken back to prior years or carried forward to future years and used as a deduction on carryback or carry-forward returns. If such an NOL is considered, care should be taken to analyze the benefit from the potential loss carryback versus carrying the loss forward.

Net Operating Loss - Generally, taxpayers may carry their net operating loss back 2 years and forward 20 years until it is used up. NOLs resulting from casualties may, by election, be carried back 3 years.

Determining the Loss - Generally, the deductible loss is the lesser of the cost or fair market value of each item lost in the casualty. Once the loss is determined for each individual item, those amounts are added together to determine the total loss for each separate casualty event.

Business or Personal Casualty - Casualty losses are categorized as either business or personal casualty losses. Business losses are fully deductible without limitations, whereas personal casualty losses are first reduced by $100 for each event, after which the total of all of the events for the year is reduced by 10% of your annual income (AGI). In addition, for personal casualty losses, you must itemize your deductions in order to take advantage of the loss.

Insurance Reimbursement - Your casualty loss must be reduced by the amount of any insurance reimbursement. Generally, if you are insured for your loss and the insurance company offers you an amount that the insurance company deems to be the FMV of the item or items lost in the casualty, you will generally not have a casualty loss unless the combination of insurance loss limits and deductibles exceeds the personal loss limitations.

Filing Relief - The IRS will generally provide filing relief for affected individuals and businesses within a Presidentially declared disaster zone, including extensions for filing tax returns, entity returns, information returns, and making deposits. The duration of these extensions will vary depending on the facts and circumstances of the disaster.

For example, in the aftermath of Hurricane Sandy, the IRS extended most filing and payment deadlines that occurred in late October until February 1, 2013. The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to receive this relief.

All workers assisting with relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are generally also eligible for relief. Watch for IRS announcements related to each event.

If you have incurred a casualty or disaster loss, please contact this office so that we may provide you with guidance related to claiming and documenting your loss.

TIPS FOR RECENTLY MARRIED AND DIVORCED TAXPAYERS

Newlyweds and the recently divorced should ensure the name on their tax return matches the name registered with the Social Security Administration. A mismatch could unexpectedly increase a tax bill or reduce the size of any refund.

• For recently married taxpayers, the tax scenario begins when the bride says, "I do." If she takes her husband's last name, but does not tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security number.
• After a divorce, a woman who had taken her husband's name and made that change known to the SSA should contact the SSA if she goes back to her previous name.

It is easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's website, www.ssa.gov, by calling 1-800-772-1213, and at local offices. The SSA Web site provides the addresses of local offices.

If you have any questions related to your requirements to the IRS after getting married or divorced, or you would like help changing your name with the SSA, give us a call at (562) 912-4334. We are happy to help.

USE OF CELL PHONES FOR BUSINESS

The following is a summary of important tax developments concerning the use of cell phones for business use. Please call us for more information at (562) 912-4334.

Regardless if the phone is owned by you or your company, business uses is deductable. However because cell phones are indentified as “listed property”, there are strict substantiation requirements. Listed property is any property that lends itself to both business and personal use like computers, cars and cell phones. A Cell Phone Log should be used to substantiate the business use. The use of this log is required to take a business deduction. Therefore, providing you used this log, the company can reimburse you for the business use. It is important to note that if the company owns the phone, then any personal usage of an employer-provided cell phone is a taxable fringe benefit.

To get around the substantiation requirements, you should have two phones, one deducted to business and the other dedicated for personal.

As of the date of this e-mail, the IRS Commissioner and the Treasury Secretary have called on Congress to simplify the rules for cell phone substantiation and asked that no tax consequences will occur to employers or employees for personal use of cell phones provided by employers. Additionally, legislation has been introduced to eliminate cell phones from the listed property definition. Practitioners should monitor this issue for further developments.

Please call us at (562) 912-433 if you have any questions..

8 TIPS FOR TAXPAYERS WHO OWE MONEY

The vast majority of Americans get a tax refund each spring. However, what if you are not one of them? What if you owe money to the IRS or your state?

Here are nine tips for individuals who need to pay taxes. The tips are similar for corporations, but more involved.

1. If you get a bill for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments.

2. You can also pay the bill with your credit card. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com).

3. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the IRS or your state.

4. You can pay the balance owed by electronic funds transfer, check, money order, cashier's check, or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or 800-945-8400 or online at www.eftps.gov.

5. You may request an installment agreement if you cannot pay the liability in full. This is an agreement between you and the Taxing Authority for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.

6. For the IRS, if you owe $25,000 or less in combined tax, penalties, and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov.

7. If you owe your state, you might b required to submit a financial statement and documents proving your inability to pay in full.

8. You can also complete and mail an Installment Agreement Request [for the IRS Form 9465]. The Taxing Authorities will inform you usually within 30 days whether your request is approved or denied or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. For the IRS, at a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will fully pay the total balance owed within 60 months.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based on your financial information.

9. If an installment agreement is approved, a one-time user fee will be charged. For the IRS the user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged. This is automatically figured and is based on your income.

For more information about installment agreements and other payment options, give our office a call at 562-912-4334.

THE TAX COURT DISALLOWS THE EXCLUSION OF THE SALE OF HOME

In a tax court decision [David A. Gates and Christine A Gates, Petitioners v. Commissioner of the IRS, Respondent], held that taxpayers, who voluntarily demolished and constructed a new house on their property in order to enlarge and remodel their home, couldn't exclude the gain on the sale of the new house under the Code Sec. 121 exclusion for the sale of a principal residence. Although the taxpayers owned and used their old house as a principal residence for at least two of the five years before the sale, the Code Sec. 121 exclusion did not apply because they never lived in the new house and it was never used as their principal residence.

The Code Sec. 121 exclusion allows a taxpayer to exclude from income up to $250,000 of gain from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years before the sale. The full exclusion does not apply if, within the two-year period ending on the sale date, the exclusion applied to another home sale by the taxpayer. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home sale gain if (1) either spouse owned the home for at least two of the five years before the sale, (2) both spouses used the home as a principal residence for at least two of the five years before the sale, and (3) neither spouse is ineligible for the full exclusion because of the once-every-two-year limit.

If you want more information or need assistance, please call our office

CONGRESS OKs EXTEND CLOSING DATE FOR HOMEBUYER CREDIT

On June 30, Congress passed H.R. 5623, the Homebuyer Assistance Improvement Act of 2010. The Act, which is now cleared for the President’s signature, provides first-time homebuyer credit relief to taxpayers who couldn’t meet a key June 30, 2010, closing date.

Under prior law, both the regular Code 36 first-time homebuyer credit of $8,000 and the reduced credit of $6,500 for long-term residents generally expired for homes purchased after Apr. 30, 2010. However, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit could be claimed if the purchase closed before July 1, 2010.

The Act amends Code Sec. 36(h)(2) to provide that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline to complete their closing by the end of September.

The three-month extension of the closing date provides tax relief for those who couldn't close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act’s supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

The cost of the three-month closing reprieve is fully offset with revenue raisers, including these tax changes: expanding the bad check penalty under Code Sec. 6657 to cover electronic payments, effective for instruments tendered after the enactment date; and providing for disclosure of prisoner return information under Code Sec. 6103(k)(10) to state prisons, effective for disclosures after the enactment date.

© 2010 Thomson Reuters/RIA. All rights reserved.

JUNE 2010 TAX BRIEFING

First-time Homebuyer Credit:
The Treasury Inspector General for Tax Administration (TIGTA) released a report on the IRS's efforts to identify and prevent fraudulent Section 36 First-Time Homebuyer Credits claimed on 2008 Form 1040's and 1040X's—for the full report, go to www.treas.gov/tigta/auditreports/2010reports/201041069fr.pdf . TIGTA found that 10,282 taxpayers received credits for homes used by other taxpayers to claim the credit (in one case, 67 taxpayers used the same home), while $9.1 million went to 1,295 prisoners who were incarcerated when they reportedly purchased their home (including 241 prisoners serving life sentences). While admitting there were questionable claims, the IRS responded that it blocked or denied nearly 400,000 questionable credit claims, saving taxpayers more than $1 billion.

Zero Rate Interest Netting:
There is a net interest rate of zero under IRC Sec. 6621(d) for the period of time that interest is payable and allowable on equivalent underpayments and overpayments of tax by the same taxpayer. To qualify, interest must be payable under Subchapter A of Chapter 67 of the Code (interest on underpayments) and allowable under Subchapter B of Chapter 67 of the Code (interest on overpayments) by the same taxpayer. An IRS legal memo concluded that interest on an underpayment of tax paid through a Chapter 11 bankruptcy plan could not be netted against allowable overpayment interest because the interest paid through the Chapter 11 plan is not interest payable under the Internal Revenue Code, as required by IRC Sec. 6621(d) . ILM 201024040 .

Health Care Reform:
An extensive set of regulations (found in TD 9491 ) implement Public Health Service Act (PHS Act) sections 2704 (preexisting condition exclusions), 2711 (lifetime and annual dollar limits on benefits), 2712 (rescissions), and 2719A (patient protections). PHS Act section 2704 generally is effective for plan years (in the individual market, policy years) beginning on or after 1/1/14 (on or after 9/23/10 for enrollees, including applicants for enrollment, who are under 19 years of age), while the rest of the provisions generally are effective for plan years (or policy years) beginning on or after 9/23/10. The regulations are part of a multiphase rule project affecting healthcare insurance plans, and were issued in conjunction with regulations issued by the Departments of Labor, and Health and Human Services. [ Editor's Note: PPC's Guide to Health Care Reform (HCR) , which will be available by 9/1/10 and updated quarterly, will have detailed coverage of these and other health care reform provisions.]

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

IRS APPROVES EXTENDED CARRYBACK OF NET OPERATING LOSS’ FOR CONSOLIDATED GROUPS

IRS has issued temporary regulations that provide consolidated group may elect to carry back a consolidated Net Operating Loss arising in consolidated return year ending after 2007, or beginning before 2010.

The regulations are seen as necessary to provide taxpayers with immediate elective relief for the carryback of net operating losses within a consolidated group to the Extended Carryback Period. In addition, these regulations provide that a group may revoke a prior NOL election and waive the standard carryback period or Extended Carryback Period.

Please call us if you have any questions or need assistance.

Here is the entire text of the temporary regulations.

§1.1502-21T Net operating losses (temporary)

(a) through (b)(3)(ii)(B) [Reserved]. For further guidance, see §1.1502-21(a) through (b)(3)(ii)(B).

(C) Partial waiver of carryback period for an applicable consolidated net operating loss—(1) Application. The acquiring group may make an election described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section with respect to an acquired member or members only if it did not file a valid election described in §1.1502-21(b)(3)(ii)(B) with respect to such acquired member or members on or before [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].

(2) Partial waiver of entire pre-acquisition carryback period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the consolidated net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable CNOL) for which the group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the carryback period during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to five taxable years, including the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section).

However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(2) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(2) with respect to any particular portion of an Applicable CNOL if any carryback is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(2) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(2) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of loss] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.

(3) Partial waiver of pre-acquisition Extended Carryback Period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the Applicable CNOL for which the acquiring group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section) during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to three taxable years.

However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(3) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(3) with respect to any particular portion of an Applicable CNOL if a carryback to one or more taxable years that are prior to the taxable year that is two taxable years preceding the taxable year of the Applicable CNOL is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member, and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(3) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] EXTENDED CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of losses] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.

(4) Claim for a carryback. For purposes of paragraphs (b)(3)(ii)(C)(2) and (b)(3)(ii)(C)(3) of this section, a carryback is claimed with respect to a net operating loss if there is a claim for refund, an amended return, an application for a tentative carryback adjustment, or any other filing that claims the benefit of the NOL or CNOL in a taxable year prior to the taxable year of the loss, whether or not subsequently revoked in favor of a claim based on an Extended Carryback Period provided under section 172(b)(1)(H).

(5) Time and manner for filing statement. A statement described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section that relates to an Applicable CNOL shall be made by the due date (including extension of time) for filing the return for the taxpayer's last taxable year beginning in 2009.

(6) Example:
(i) Waiver in case of pre-consolidation separate return years. T was a separate corporation that was not part of a consolidated group, until December 31, 2004, when it was acquired by the X Group. On December 31, 2007, the X Group sold all of the stock of T to the P Group. P did not make the election described in §1.1502-21(b)(3)

(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback (as defined in paragraph (b)(3)(v) of this section) pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL, and the P Group elected, pursuant to paragraph (b)(3)(ii)(C)(2) of this section, to waive the portion of the carryback period during which T was included in any other consolidated group. T's fifth and fourth taxable years preceding the year of the loss were its 2003 and 2004 separate return years. Due to the P Group's election pursuant to paragraph (b)(3)(ii)(C)(2) of this section, T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which it was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv).
(ii) Split-waiver election made. The facts are the same as in paragraph (i) except that the group made the election described in §1.1502-21(b)(3)(ii)(B) with regard to its acquisition of T in 2007. Due to the P Group's election pursuant to §1.1502-21(b)(3)(ii)(B), T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which T was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv). (b)(3)(iii) and (b)(3)(iv) [Reserved]. For further guidance, see §1.1502-21(b)(3)(iii) and (b)(3)(iv).

(v) Extended Carryback Period under section 172(b)(1)(H). Section 172(b)(1)(H) allows a taxpayer to elect to carry back a single net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable NOL) to its third, fourth, or fifth taxable year preceding the taxable year of the loss (Extended Carryback Period). As contemplated by section 172(b)(1)(H), the designated taxable year within the Extended Carryback Period may be the fifth taxable year preceding the year of the loss (Five-Year Carryback), and section 172(b)(1)(H)(iv) limits the amount of the Applicable NOL that may be carried back to 50 percent of the taxpayer's taxable income (computed without regard to any NOL deduction attributable to the loss year or any taxable year thereafter) for such fifth preceding taxable year. This paragraph (b)(3)(v) provides rules for computing the 50 percent limitation under section 172(b)(1)(H)(iv) where a Five-Year Carryback is made to a consolidated return year from any consolidated return year or separate return year.

(A) Election—(1) In general. Except as otherwise provided in this section, a consolidated group may elect an Extended Carryback Period pursuant to section 172(b)(1)(H) with regard to a consolidated net operating loss arising in a taxable year ending after December 31, 2007 and beginning before January 1, 2010 (Applicable CNOL). However, no election may be made under this paragraph for a taxpayer described in section 13(f) of the Worker, Homeownership, and Business Assistance Act of 2009, Public Law 111-92, 123 Stat. 2984 (November 6, 2009). The election pursuant to section 172(b)(1)(H) applies to the entire Applicable CNOL, except as otherwise provided in paragraph (b)(3)(ii)(C) of this section or in this paragraph (b)(3)(v).

See also paragraph (c) of this section (SRLY limitation).

(2) Revoking a previous carryback waiver. A consolidated group may revoke a prior election pursuant to §1.1502-21(b)(3)(i) to relinquish the entire carryback period with respect to an Applicable CNOL, but only if the group makes the election pursuant to section 172(b)(1)(H) with regard to such Applicable CNOL.

(3) Pre-acquisition electing member. If a member (Electing Member) of a consolidated group makes an Extended Carryback Period election pursuant to section 172(b)(1)(H) with regard to a loss from a separate return year ending before the Electing Member's inclusion in a consolidated group, the election will not disqualify the acquiring group from making an otherwise available election pursuant to section 172(b)(1)(H) with regard to an Applicable CNOL incurred in a consolidated return year that includes the Electing Member.

(B) Taxpayer's taxable income. For purposes of computing the limitation under section 172(b)(1)(H)(iv) on a Five-Year Carryback to any consolidated return year from any consolidated return year or separate return year, taxpayer's taxable income as used in section 172(b)(1)(H)(iv)(I) means consolidated taxable income (CTI) (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or any taxable year thereafter) in the consolidated return year that is the fifth taxable year preceding the year of the loss.

(C) Limitation on Five-Year Carrybacks to a consolidated group.—(1)

Annual Limitation. The aggregate amount of Five-Year Carrybacks to any consolidated return year may not exceed 50 percent of the CTI for that year (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or attributable to any taxable year thereafter) (Annual Limitation).

(2) Pro rata absorption of limited and non-limited losses. All Five-Year Carrybacks and other net operating losses from years ending on the same date that are available to offset CTI in the same year are absorbed on a pro rata basis. See §1.1502-21(b)(1).

(D) Election by small business. This paragraph (b)(3)(v) does not apply to any loss of an eligible small business as defined in section 172(b)(1)(H)(v)(II) with respect to any election made pursuant to section 172(b)(1)(H) as in effect on the day before the date of the enactment of the Worker, Homeownership, and Business Assistance Act of 2009.

(E) Examples. The rules of this paragraph (b)(3)(v) are illustrated by the following examples. For purposes of the examples, all affiliated groups file consolidated returns, all corporations are includible corporations that have calendar taxable years, the facts set forth the only relevant corporate activity, and all transactions are with unrelated parties.

Example 1. Computation and Absorption of Five-Year Carrybacks. (i) Facts. P is the common parent of the P Group. On June 30, 2006, P acquired all of the stock of T from X, the common parent of the X Group. The X Group has been in existence since 1996. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL. P did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. T's fifth taxable year preceding the year of the loss was the X Group's 2004 consolidated return year. For 2004, T's separate return limitation year (SRLY) limitation for losses carried into the X Group was $400. The X Group's CTI for 2004 is $200. The X Group did not make a Five-Year Carryback election for a CNOL from its 2008 or 2009 taxable year. There are no other NOL carrybacks into the X Group's 2003 or 2004 consolidated taxable year.

(ii) Five-Year Carryback from separate return year. Pursuant to paragraph (b)(3)(v)(C)(1) of this section, the amount of T's apportioned loss that is eligible for Five-Year Carryback is limited to 50 percent of the X Group's CTI for 2004, or $100 ($200 x 50 percent). Therefore, $100 of T's apportioned loss will be carried into the X Group's 2004 consolidated return year. In addition, T's 2008 loss is subject to the SRLY limitation of $400 with respect to the X Group. Thus, the amount of T's portion of the P Group's 2008 CNOL that may offset the X Group's 2004 CTI is $100 (the lesser of $400 (T's SRLY limitation) or $100 (the amount of T's Five-Year Carryback)).

(iii) Pro rata absorption of limited and non-limited losses within a single consolidated return year. The facts are the same as in paragraph (i), except that the X Group sustained a $750 CNOL in 2008, which X elected to carry back four years to its 2004 consolidated return year (no Five-Year Carryback). Further, the X Group had CTI of $500 in 2004. Therefore, the X Group and the P Group both carry back CNOLs from years ending December 31, 2008, although only the P Group's CNOL (including the portion allocable to T) constitutes a Five-Year Carryback. The Annual Limitation on Five-Year Carrybacks will be $250 [$500 x 50 percent]. The $750 CNOL carryback within the X Group is subject to no limitation. Under §1.1502-21(b)(1), because the 2008 CNOL of the X Group and the 2008 SRLY loss of T are losses from years ending on the same date and are available to offset CTI in the same year, the two losses offset the X Group's $500 CTI on a pro rata basis. Accordingly, $375 of the X's Group's 2008 CNOL [$500 x $750/($750 + $250)] and $125 of T's portion of the P Group's 2008 CNOL [$500 x $250/($750 + $250)] offset the X Group's 2004 CTI.

Example 2. Multiple carryback years. (i) Facts. On January 1, 2004, Individual A formed X, which formed corporations S and T, and X elected to file a consolidated Federal income tax return. For its 2004 consolidated taxable year, the X Group's CTI was $1,100. For its 2005 consolidated taxable year, the X Group's CTI was $1,000. On June 30, 2007, the X Group sold all of the S stock to the Y Group and sold all of the T stock to the Z Group. The X Group terminated in 2007. Neither Y nor Z made the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to S and T, respectively, the portion of the carryback period for which S and T were members of the X Group. In 2008, the Y Group sustained an $800 CNOL, $400 of which was attributable to S under §1.1502-21(b)(2)(iv)(A). Y elected a Five-Year Carryback with regard to the Y Group's 2008 CNOL pursuant to section 172(b)(1)(H). Y did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which S was included in the X Group. In 2009, the Z Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). Z elected a Five-Year Carryback with regard to the Z Group's 2009 CNOL pursuant to section 172(b)(1)(H). Z did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the Extended Carryback Period during which T was included in the X Group.

(ii) Analysis. The $400 of Y Group's 2008 CNOL that is apportioned to S is carried back as a separate return year Five-Year Carryback to the X Group's 2004 consolidated return year. The $600 of Z Group's 2009 CNOL that is apportioned to T is also a separate return year Five-Year Carryback to the X Group's 2005 consolidated return year. The Annual Limitation on Five-Year Carryback to the X Group's 2004 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $550 ($1,100 of CTI x 50 percent). Because S is making the sole Five-Year Carryback to the X Group's 2004 consolidated return year, S will make a Five-Year Carryback of the full $550. Similarly, the Annual Limitation for Five-Year Carryback to the X Group's 2005 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $500 ($1,000 of CTI x 50 percent).

Because T is making the sole Five-Year Carryback to the X Group's 2005 consolidated return year, T will make a Five-Year Carryback of the full $500.

The SRLY limitations for S and T, respectively, may limit the absorption of the Five-Year Carrybacks within the X Group.

Example 3. Pre-acquisition election by T. P is the common parent of the P Group. On December 31, 2008, P acquired all of the stock of T from X, the common parent of the X Group. T had been a member of the X Group since 1999. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. Pursuant to section 172(b)(1)(H), the X Group elected to make a Five-Year Carryback of its 2008 CNOL back to 2003. A portion of this CNOL is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). In 2009, the P Group incurred a CNOL of $1,000, $600 of which is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). Pursuant to section 172(b)(1)(H), the P Group elected a Five Year Carryback with regard to its 2009 CNOL. P did not make the election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. The Five-Year Carryback election by the X Group with respect to its 2008 CNOL (which includes the portion of the CNOL attributable to T) does not disqualify the P Group from electing a Five-Year Carryback with regard to its 2009 CNOL. Therefore, the P Group may carry back its CNOL, including the portion attributable to T, in accordance with §1.1502-21 and the rules of this section. (c) through (h)(8) [Reserved]. For further guidance, see §1.1502-21(c) through (h)(8).

(9) Section 172(b)(1)(H)—(i) Applicability date. This section applies to any consolidated Federal income tax return due (without extensions) after

[INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER], if such return was not filed on or before such date.

However, a consolidated group may apply this section to any consolidated Federal income tax return that is not described in the preceding sentence.

(ii) Expiration date. The applicability of this section will expire on June 21, 2013 .
*****
Steven T. Miller
Deputy Commissioner for Services and Enforcement.
Approved: June 16, 2010
Michael F. Mundaca
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-15087 Filed 06/22/2010 at 8:45 am; Publication Date: 06/23/2010]

© 2010 Thomson Reuters/RIA. All rights reserved.