SECTION 3. DEFINITIONS

.01 The term ‘‘agency’’ means a federal agency that files information returns reflecting reportable payments made by that agency.

.02 The term ‘‘participant’’ means an agency that has been accepted to participate in the Program.

.03 The term ‘‘payee’’ means a person with respect to whom a reportable payment (as defined in § 3406(b)(1)) has been made or is likely to be made by an agency.

.04 The term ‘‘account’’ means any account, instrument, or other relationship with a payee (such as a contract) with respect to which an agency has made or is likely to make a reportable payment. See § 31.3406(j)–1(e).

.05 For purposes of this revenue procedure, the term ‘‘TIN’’ means the Tax

Specified Liability Losses

Notice 97–36

This notice addresses the improper characterization by some taxpayers of net operating losses as specified liability losses under § 172(f)(1)(B)(i) of the Internal Revenue Code. In addition, this notice informs taxpayers that the Internal Revenue Service will closely scrutinize claims for refund and applications for tentative carryback adjustments under § 6411(a) that the taxpayer attributes to a specified liability loss under § 172(f)(1). Claims for refund filed on Form 1120X, Amended U.S. Corporation Income Tax Return, after June 11, 1997, must identify the specific type of specified liability loss claimed.

Section 172(a) permits a deduction for a taxpayer’s net operating loss carryovers and carrybacks. Section 172(b)(1)(A)(i) generally allows a net operating loss to be carried back up to 3 taxable years preceding the taxable year of the loss (the ‘‘loss year’’). However, § 172(b)(1)(C) generally allows the portion of a net operating loss qualifying as a specified liability loss to be carried back up to 10 taxable years preceding the loss year.

Section 172(f)(1)(B)(i) includes within the term ‘‘specified liability loss’’ the portion of a net operating loss attributable to an amount allowable as a deduction under Chapter 1 of the Code with respect to a liability arising out of a federal or state law if the act (or failure to act) giving rise to the liability occurs at least 3 years before the beginning of the loss year (the ‘‘3-year act requirement’’).

The Service has received income tax refund claims based on the carryback of amounts purported to be specified liability losses that rely on incorrect interpretations of § 172(f)(1)(B)(i). These claims inappropriately treat as specified liability losses amounts attributable to routine current year costs. For example, some taxpayers interpret the 3-year act requirement to be satisfied if they can identify a connection between the liability and any act (or failure to act) occurring at least 3 years before the loss year, no matter how remote the connection between the liability and the act. Thus, they claim that current year costs, such as auditing fees incurred to comply with federal securities law requirements to file independently certified annual

financial statements, are specified liability losses. The premise of the claim is that the act giving rise to these annual fees was the corporation’s first public stock offering, which caused the corporation to become subject to federal securities laws, and this act occurred at least 3 years before the loss year. The Service believes that interpreting the specified liability loss provisions in this manner is plainly contrary to the intent and purpose of § 172(f)(1)(B)(i), and that expenses such as those described above do not give rise to specified liability losses. The Treasury Department and the Service intend to issue regulations that will address the requirements of § 172(f)(1)(B). In addition, the Service will closely scrutinize claims for refund and applications for tentative carryback adjustments under § 6411(a) that the taxpayer attributes to a specified liability loss under § 172(f)(1)(B). A taxpayer that files Form 1120X after June 11, 1997, to claim a refund based, in whole or in part, on the carryback of any specified liability loss must identify, in Part II of the form, the portion of the loss attributable to a product liability and the portion attributable to a federal or state law or tort liability.

DRAFTING INFORMATION: The principal author of this notice is Forest Boone of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Mr. Boone at (202) 622– 4960 (not a toll-free call).

26 CFR 601.602: Tax forms and instructions. (Also Part I, Section 3406; 31.3406(d)–5.)

Rev. Proc. 97–31