rp-09-26.pdf

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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, §§ 172, 6411)

Rev. Proc. 2009-26
SECTION 1. PURPOSE
.01 In February 2009, the American Recovery and Reinvestment Tax Act of 2009,
Div. B of Pub. L. No. 111-5, 123 Stat. 115 (the Act) was signed into law. Section 1211
of the Act allows an eligible small business (ESB) to elect to carry back a 2008 net
operating loss (NOL) for a period of 3, 4, or 5 years to offset taxable income in those
preceding taxable years. Prior to the Act, taxpayers generally could carry back an NOL
only two taxable years. On March 16, 2009, the Internal Revenue Service and Treasury
Department issued Rev. Proc. 2009-19, 2009-14 I.R.B. 747, advising taxpayers how to
elect the 3-, 4-, or 5-year carryback.
.02 The Service has received many claims from taxpayers that seek a 3-, 4-, or 5-
year carryback but that inadvertently have not made a valid election in accordance with

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Rev. Proc. 2009-19. These inadvertent failures may be due to the fact that the
enactment of § 1211 and issuance of Rev. Proc. 2009-19 occurred midway through the
current tax return filing season.
.03 To provide certainty to taxpayers and to implement the intent of Congress in
providing an extended carryback period, this revenue procedure modifies Rev. Proc.
2009-19 to provide that an ESB may elect a 3-, 4-, or 5-year carryback period simply by
filing a Form 1045, Form 1139, or amended return that carries back the NOL for 3, 4, or
5 years. Although Forms 1045 and 1139 ordinarily are due within 12 months after the
taxable year of the NOL, § 172(b)(1)(H)(iii) requires that the taxpayer elect a 3-, 4-, or 5-
year carryback within 6 months after the due date (excluding extensions) of the return
for the taxable year of the NOL. Thus, a taxpayer that seeks to make a timely §
172(b)(1)(H) election using Form 1045, Form 1139, or an amended return must file the
form in advance of its ordinary due date.
.04 This revenue procedure also prescribes: (1) how a taxpayer elects a 3-, 4-, or 5-
year carryback if the taxpayer previously filed an election to forgo an NOL carryback
period; and (2) how a taxpayer elects a 3-, 4-, or 5-year carryback if the taxpayer is a
partner of an ESB that is a partnership, a shareholder of an ESB that is an S
corporation, or a sole proprietor.
SECTION 2. BACKGROUND
.01 Section 172(a) allows a deduction equal to the aggregate of the NOL carryovers
and carrybacks to the taxable year. Section 172(b)(1)(A)(i) provides that an NOL for
any taxable year generally must be carried back to each of the 2 years preceding the

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taxable year of the NOL. Section 172(b)(3) provides that any taxpayer entitled to a
carryback period under § 172(b)(1) may make an irrevocable election to relinquish the
carryback period with respect to an NOL for any taxable year.
.02 Section 6411(a) provides that a taxpayer may file an application for a tentative
carryback adjustment of the tax for the prior taxable year affected by an NOL carryback
from any taxable year. Section 6411(a) also provides that the application must be filed
on or after the date of filing for the return for the taxable year of the NOL from which the
carryback results and within a period of 12 months after that taxable year or, with
respect to any portion of a business credit carryback attributable to an NOL from a
subsequent taxable year, within a period of 12 months from the end of the subsequent
taxable year. Section 6411(b) provides a 90-day period during which the Service will
make a limited examination of the application to discover omissions and errors of
computation and determine the amount of the decrease in tax attributable to the
carryback. The Service may disallow, without further action, any application that
contains errors of computation that cannot be corrected within the 90-day period or that
contains material omissions. The decrease in tax attributable to the carryback will be
applied against unpaid amounts of tax. Any remainder of the decrease will, within the
90-day period, be credited or refunded.
.03 Section 172(b)(1)(H) permits an ESB to carry back its applicable 2008 NOL to 3,
4, or 5 years preceding the taxable year of the NOL, as the ESB elects.
.04 Section 172(b)(1)(H)(iv) provides that the term “eligible small business” has the
meaning given by § 172(b)(1)(F)(iii), except that § 448(c) is applied by substituting “$15

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million” for “$5 million” each place it appears. Section 172(b)(1)(F)(iii) provides that a
small business is a corporation or partnership that meets the gross receipts test of §
448(c) for the taxable year in which the loss arose (or in the case of a sole
proprietorship, that would meet such test if the proprietorship were a corporation).
.05 Section 448 generally prohibits certain taxpayers from using the cash receipts
and disbursements method of accounting. Section 448(b)(3) provides an exception to
this requirement in the case of any corporation or partnership if, for all prior taxable
years beginning after December 31, 1985, the entity (or any predecessor) met the $5
million gross receipts test of § 448(c). Section 448(c)(1) provides that a corporation or
partnership meets the $5 million gross receipts test for any prior taxable year if the
average annual gross receipts of the entity for the 3-taxable-year period ending with that
prior taxable year does not exceed $5 million. Section 448(c)(2) (aggregation rules)
generally provides that all persons treated as a single employer under subsection (a) or
(b) of § 52 or subsection (m) or (o) of § 414 are treated as one person for purposes of §
448(c)(1).
.06 The $5 million gross receipts test of § 448(c) is applied to a taxpayer’s prior
taxable year by determining the average annual gross receipts for the 3-year period that
ends with that prior taxable year. Under §172(b)(1)(F)(iii), in order to be a small
business, a taxpayer must meet the gross receipts test of § 448(c) for the taxable year
in which the NOL arose. Consequently, to determine if a taxpayer is a small business
for purposes of § 172(b)(1)(F)(iii), the taxable year in which the NOL arose is the last
taxable year of the 3-year period to which the test is applied.

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.07 Section 172(b)(1)(H)(ii)(I) provides that the term “applicable 2008 net operating
loss” means the taxpayer’s NOL for any taxable year ending in 2008. However, under
§ 172(b)(1)(H)(ii)(II), the taxpayer may elect instead to have the term mean the
taxpayer’s NOL for any taxable year beginning in 2008.
.08 Section 172(b)(1)(H)(iii) provides that any election under § 172(b)(1)(H) is
required to be made in such a manner as may be prescribed by the Secretary, and must
be made by the due date (including extension of time) for filing the taxpayer’s return for
the taxable year of the NOL. The election is irrevocable and may be made only for one
taxable year.
.09 Section 1211(d)(2) of the Act provides that in the case of an applicable 2008
NOL for a taxable year ending before the date of enactment of the Act (February 17,
2009), (A) a previous election made under § 172(b)(3) for the NOL may be revoked on
or before April 17, 2009; (B) the § 172(b)(1)(H) election for the NOL is treated as timely
if made on or before April 17, 2009; and (C) an application under § 6411(a) with respect
to the NOL is treated as timely if filed on or before April 17, 2009.
SECTION 3. SCOPE
This revenue procedure applies to any taxpayer that is an ESB, a partner of a
partnership that is an ESB, a shareholder in an S corporation that is an ESB, or a sole
proprietor of a business that is an ESB, and that incurred an NOL for any taxable year
ending in 2008 or beginning in 2008.
SECTION 4. APPLICATION

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.01 Time and manner of making the election under § 172(b)(1)(H).
(1) In general. A taxpayer within the scope of this revenue procedure that has an
applicable 2008 NOL may make the election under § 172(b)(1)(H) by following the
procedure described in either section 4.01(2) or section 4.01(3) of this revenue
procedure.
(2) Electing on original return. A taxpayer may make the election under §
172(b)(1)(H) by attaching a statement to the taxpayer’s timely filed federal income tax
return for the taxable year in which the applicable 2008 NOL arises. The statement
must state that the taxpayer is electing to apply § 172(b)(1)(H) and specify the length of
the NOL carryback period elected by the taxpayer (3, 4, or 5 years). If the taxpayer’s
taxable year of the applicable 2008 NOL ends before February 17, 2009, the taxpayer
must make the election on or before the later of the due date (including extensions of
time) of the taxpayer’s return for that taxable year or April 17, 2009.
(3) Electing on an appropriate form
. A taxpayer that did not make the election
under § 172(b)(1)(H) using the procedures of section 4.01(2) of this revenue procedure,
and did not elect to forgo the NOL carryback period under § 172(b)(3), may make the
election under § 172(b)(1)(H) as follows:
(a) What to file.
(i) A taxpayer may make the election under § 172(b)(1)(H) by filing the
appropriate form applying the NOL carryback period chosen by the taxpayer. No
statement or label is required with the appropriate form. The appropriate form is:

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(A) For corporations: Form 1139, Corporation Application for Tentative
Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return.
(B) For individuals: Form 1045, Application for Tentative Refund, or Form
1040X, Amended U.S. Individual Income Tax Return.
(C) For estates or trusts: Form 1045, or amended Form 1041, U.S.
Income Tax Return for Estates and Trusts.
(ii) A taxpayer that makes the election under § 172(b)(1)(H) by filing an
amended return must file the return for the earliest taxable year to which the taxpayer is
carrying back the applicable 2008 NOL. The taxpayer should not file an amended return
for the applicable 2008 NOL taxable year.
(b) When to file
. The appropriate form must be filed on or before the later of
the date that is 6 months after the due date (excluding extensions) for filing the
taxpayer’s return for the taxable year of the applicable 2008 NOL or April 17, 2009.
(c) Additional rules
. If a taxpayer makes the election by filing an appropriate
form that amends a prior refund claim, the amendment also will apply to a carryback of
any alternative tax NOL for the same taxable year. In the case of an amended
application for a tentative carryback adjustment, the 90-day period described in §
6411(b) will begin on the date the amended application is filed.
.02 Revocation of the election to waive NOL carryback period. A taxpayer within the
scope of this revenue procedure that previously elected under § 172(b)(3) to forgo the
carryback period for an applicable 2008 NOL for a taxable year ending before February

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17, 2009, may revoke that election and make the election under § 172(b)(1)(H). Any
revocation of the election to forgo the NOL carryback period also will apply to a
carryback of any alternative tax NOL for the same taxable year. The taxpayer makes
the revocation and election by following the procedures of section 4.01(3) of this
revenue procedure. In addition, the taxpayer should type or print across the top of the
appropriate form “Revocation of NOL Carryback Waiver Pursuant to Rev. Proc. 2009-
19.” The taxpayer must file the revocation and new election under § 172(b)(1)(H) on or
before April 17, 2009.
.03 Partnerships, S corporations, and sole proprietorships
.
(1) If the taxpayer is a partner in a partnership that qualifies as an ESB, the
taxpayer may make the § 172(b)(1)(H) election for its distributive share of the qualifying
ESB partnership income, gain, loss, and deduction that is both allocable to the taxpayer
under § 704 and allowed in calculating the taxpayer’s applicable 2008 NOL.
(2) If the taxpayer is a shareholder in an S corporation that qualifies as an ESB,
the taxpayer may make the § 172(b)(1)(H) election for its pro rata share of the qualifying
ESB S corporation income, gain, loss, and deduction under § 1366 that is allowed in
calculating the shareholder’s applicable 2008 NOL.
(3) If the taxpayer is an owner of a sole proprietorship that qualifies as an ESB,
the taxpayer may make the § 172(b)(1)(H) election for the qualifying ESB sole
proprietorship income, gain, loss, and deduction that is allowed in calculating the
taxpayer’s applicable 2008 NOL.

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(4) In determining whether a partnership, S corporation, or sole proprietorship
qualifies as an ESB, the gross receipts test applies at the partnership, corporate, or sole
proprietorship level. The aggregation rules of § 448(c)(2) apply to determine whether
the partnership, S corporation, or sole proprietorship meets the gross receipts test of
§ 448(c).
(5) The amount of the taxpayer’s applicable 2008 NOL that the taxpayer may
carry back under §172(b)(1)(H) is limited to the lesser of:
(a) The taxpayer’s items of income, gain, loss or deduction that are allowed in
calculating the taxpayer's applicable 2008 NOL and are from one or more partnerships,
S corporations or sole proprietorships that qualify as ESBs, or
(b) The taxpayer’s applicable 2008 NOL.
(6) Examples
.
(a) Example 1
. Partnerships A, B, and C have average annual gross receipts
of $10 million, $12 million, and $14 million, respectively. Partner T owns a 40% interest
in each partnership. None of the partnerships is required to be aggregated with any
other entity for purposes of the aggregation rules of § 448(c)(2). Subject to the
limitations in section 4.03(5) of this revenue procedure, Partner T may apply its election
under § 172(b)(1)(H) to the portion of its applicable 2008 NOL attributable to its
distributive share of the income, gain, loss, and deduction of each of Partnerships A, B,
and C.
(b) Example 2
. The facts are the same as in Example 1, except that
Partnerships A and B are under common control within the meaning of § 52(b)(1).

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Accordingly, Partnerships A and B are treated as one person under the aggregation
rules of § 448(c)(2). Because the aggregated average annual gross receipts of
Partnerships A and B exceed $15 million, Partnerships A and B do not qualify as ESBs.
Partner T may not apply its election under § 172(b)(1)(H) to the portion of its applicable
2008 NOL attributable to its distributive share of the income, gain, loss, and deduction
of Partnerships A and B. However, subject to the limitations in section 4.03(5) of this
revenue procedure, Partner T may apply its election under § 172(b)(1)(H) to the portion
of its applicable 2008 NOL attributable to its distributive share of income, gain, loss, and
deduction of Partnership C.
SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2009-19 is modified and, as modified, is superseded.

SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for NOLs arising in taxable years ending after
December 31, 2007.
SECTION 7. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under the following control numbers: 1545-
0074 Form 1040 (U.S. Individual Income Tax Return) and Form 1040X (Amended U.S.
Individual Income Tax Return); 1545-0123 Form 1120 (U.S. Corporation Income Tax
Return); 1545-0132 Form 1120X (Amended U.S. Corporation Income Tax
Return);1545-0092 Form 1041 (U.S. Income Tax Return for Estates and Trusts); 1545-

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0098 Form 1045 (Application for Tentative Refund); 1545-0582 Form 1139 (Corporation
Application for Tentative Refund). For further information, please refer to the Paperwork
Reduction Act statements accompanying these forms.
DRAFTING INFORMATION
The principal author of this revenue procedure is Seoyeon Park of the Office of the
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this notice, contact Ms. Park at (202) 622-4960 (not a toll-free call).