CARES ACT – IRS Issues Guidance for Refund Claims, Part II Elections

In response to unprecedented economic dislocation and the effective shut down of the U.S. economy, the Coronavirus Aid, Relief and Economic Security (CARES) Act (the “Act”), was signed into law on March 27, 2020. The Act includes a significant number of tax and other provisions designed to support businesses impacted by the Coronavirus pandemic, notably measures to provide cash flow support at a time when commercial revenue generation has all but ceased.

Several of the Act’s provisions provide insurance companies opportunities to access much needed cash on an accelerated basis through the use of certain tax attributes, namely existing and current Net Operating Losses (NOL). In some cases, the benefit will be available currently, while in others the benefit becomes available when taxpayers have filed their 2019 and/or 2020 business tax returns.

As in the case of most new legislation, the provisions of the CARES Act allowing insurance companies to file refund claims has raised a host of technical and procedural issues. In the two weeks since enactment, many taxpayers have modeled the potential economic, accounting, and cash impact of the new rules, but have been unable to file refund claims awaiting IRS guidance.

On April 9, 2020, the IRS issued administrative and procedural guidance for taxpayers in the form of Revenue Procedure 2020-24 and Notice 2020-26. On April 10, DHG discussed the provisions of Notice 2020-26. This follow up discusses the provisions of Revenue Procedure 2020-24.

Revenue Procedure 2020-24

Revenue Procedure 2020-24 provides guidance regarding certain elections newly available to taxpayers under § 172(b)(1)(D) of the Internal Revenue Code (IRC) which was added by the CARES Act. The CARES Act amended § 172(b)(1) to provide for a carryback of any NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises (the carryback period). As a result of the amendment, taxpayers take into account such NOLs in the earliest taxable year in the carryback period, carrying forward any unused amounts to each succeeding taxable year.

New Elections Available

The elections available under the CARES Act amendments to § 172 IRC discussed in Revenue Procedure 2020-24 are:

  1. Election to waive NOL carryback - provides guidance regarding an election to waive the carryback period for an NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2020.
  2. Election to exclude section 965 years - provides guidance regarding an election to exclude from the carryback period for an NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, any taxable year in which the taxpayer has a § 965(a) inclusion, (a “section 965 year”).
  3. Elections under the CARES Act special rule concerning taxable years beginning before Jan. 1, 2018, and ending after Dec. 31, 2017 - provides guidance regarding elections to waive any carryback period, to reduce any carryback period, or to revoke any election made under § 172(b) to waive any carryback period for a taxable year that began before Jan. 1, 2018, and ended after Dec.31, 2017.

The primary focus of this article will be the first 2 elections. For a variety of planning or structural reasons, a taxpayer may choose to forego a carryback period. In addition, the Tax Cuts and Jobs Act of 2017 (TCJA) created a favorable tax rate repatriation regime intended to lessen the tax burden of deemed repatriations of accumulated earnings of certain foreign subsidiaries. To the extent that a NOL were carried back to shelter such income, the favorable tax rate in effect could be negated and thus the optionality created in this Revenue Procedure.

TCJA & CARES Act Overlap

For a taxable year beginning before Jan. 1, 2021, the CARES Act, allows a deduction for the taxable year equal to the aggregate of the NOL carryovers and carrybacks carried to the taxable year. For any taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, an NOL must first be carried back to each of the five taxable years preceding the taxable year of the NOL creation.

Under NOL, carryback rules in force prior to enactment of the TCJA in 2017, a taxpayer entitled to a carryback period could make an irrevocable election to relinquish the carryback period for an NOL for any taxable year. The TCJA elimination of the NOL carryback period for C corporations (except for P&C companies taxed under Part II of subchapter L) eliminated the need for such an election.

[Note: the TCJA also eliminated the carryback availability for the Operations Loss Deduction (OLD) for life insurance companies taxed under Part I of Subchapter L and reclassified such losses as NOLs under § 172. For P&C companies, the TCJA retained a 2-year carryback period]

The CARES Act creation of a special 5-year carryback provision for NOLs once again makes an irrevocable election to relinquish the carryback period relevant for tax planning purposes. As noted above, this everchanging rules environment for NOL carrybacks does not impact P&C companies. Since the TCJA did not alter their NOL carryback rules, and we have essentially returned to pre-TCJA law, the most significant change for P&C companies is an expanded carryback period. As a result of the CARES Act changes, C Corporation and life insurance company members of insurance groups may now wish to consider this “new” election while P&C companies will have several additional carryback tax years for which to consider such a determination.

The TCJA also included a special provision relating to the untaxed earnings and profits of a controlled foreign corporation or cfc. In the insurance context, a cfc could be either a regular C corporation conducting non-risk bearing activities; an investment vehicle/fund; or an actual risk bearing insurance company domiciled outside the United States. New TCJA rules in § 965 and the regulations thereunder generally require that the subpart F income (as defined in § 952-954) of a deferred foreign income corporation be increased for the last taxable year of such corporation that begins before Jan. 1, 2018 and for certain taxpayers to include in gross income their pro rata share of the increase in subpart F income of the deferred foreign income corporation. Such deemed income inclusions were then taxed at one of two different statutory rates that were significantly below the newly enacted 21percent corporate tax rate.

In an effort to isolate the preferential tax rate of the deemed repatriation provisions, § 965(n) and § 1.965-7(e) allowed a taxpayer to make an election for a taxable year to not take into account the net income impact of § 965 inclusions in determining the taxpayer’s (1) NOL deduction under § 172 for the taxable year, or (2) taxable income for the taxable year (computed without regard to the deduction allowable under § 172) that may be reduced by NOL carryovers or carrybacks to the taxable year under § 172.

Section 172(b)(1)(D)(iv) provides that if an NOL is carried back under § 172(b)(1)(D)(i) to any section 965 year, then the taxpayer is treated as having made the election under § 965(n) with respect to each such section 965 year.

Section 172(b)(1)(D)(v) provides two special rules for elections under § 172(b)(3). The first rule allows a taxpayer with one or more section 965 years to elect, in lieu of the election under § 172(b)(3), to exclude all section 965 years from the carryback period for an NOL. The second rule provides that a taxpayer must make an election under § 172(b)(1)(D)(v)(I) or § 172(b)(3) to exclude section 965 years from or waive, respectively, the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019 by the due date, including extensions of time, for filing the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020.

It is important to note that an election under § 172(b)(1)(D)(v)(I) to exclude all section 965 years from the carryback period for an NOL allows a taxpayer to disregard those taxable years when applying an NOL to the carryback period and determining whether the taxpayer has an overpayment and can receive a refund or credit for any of the remaining years in the carryback period to which the NOL is applied.

The goal of these new elections appears to allow taxpayers to retain the isolation effect of the § 965 inclusions. Said differently, without this isolation effect, some or all of the § 965 inclusions could theoretically be taxed at a rate in excess of the of two preferable statutory rates contained in the TCJA.

Operating Rules in Revenue Procedure 2020-24

The revenue procedure applies to taxpayers who wish to (1) elect under § 172(b)(3) to waive the carryback period for an NOL arising in a taxable year beginning in 2018 or 2019, and those who wish to (2) elect under § 172(b)(1)(D)(v)(I) to exclude all section 965 years from the carryback period for an NOL arising in a taxable year that begins in 2018, 2019, or 2020.

The revenue procedure provides the following procedural rules for making an affirmative election to waive the carryback period or to exclude section 965 years from carryback:

  1. Elections to waive carryback under § 172(b)(3) for NOLs arising in taxable years beginning in 2018 or 2019 - the election must be made no later than the due date, including extensions, for filing the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020. A taxpayer must make an election by attaching to its Federal income tax return filed for the first taxable year ending after March 27, 2020, a separate statement for each of taxable years 2018 or 2019 for which the taxpayer intends to make the election. The election statement must state that the taxpayer is electing to apply § 172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies. Once made, the election is irrevocable.
  2. Election to exclude section 965 years from carryback period – the election for an NOL arising in a taxable year beginning in 2018 or 2019 must be made no later than the due date, including extensions, for filing the taxpayer’s Federal income tax return for the first taxable year ending after March 27, 2020. For an NOL arising in a taxable year beginning after Dec. 31, 2019, and before Jan. 1, 2021, an election must be made by no later than the due date, including extensions, for filing the taxpayer’s Federal income tax return for the taxable year in which the NOL arises. The election is made by attaching an election statement to the earliest filed of: (1) The Federal income tax return for the taxable year in which the NOL arises; (2) The taxpayer’s claim for tentative carryback adjustment (Form 1045, Application for Tentative Refund; or Form 1139, Corporation Application for Tentative Refund) applying the NOL to a taxable year in the carryback period; or (3) The amended Federal income tax return applying the NOL to the earliest taxable year in the carryback period that is not a section 965 year. Taxpayers making the election and claiming a refund or credit as a result of the carryback of the NOL by filing amended Federal income tax returns for taxable years in the carryback period must also attach an election statement to each amended return. The election statement must state that the taxpayer is electing to apply § 172(b)(1)(D)(v)(I) under Rev. Proc. 2020-24, the taxable year in which the NOL arose, and the taxpayer’s section 965 years. Once made, the election is irrevocable.

In summary, the IRS has now provided much anticipated and favorable guidance with respect to NOL refund opportunities under the CARES Act. In conjunction with Notice 2020-26, affected taxpayers should now be in a position to complete their analysis of the new guidance and immediately begin the process of completing and filing the tentative carryback adjustment claims.

For questions or more information, please contact insurance@ dhg.com.

CONTRIBUTORS

Jim Sabella
Partner, DHG Insurance
Jim.Sabella@dhg.com

RELATED KNOWLEDGE SHARE

GET IN
TOUCH
© Dixon Hughes Goodman LLP. All rights reserved.
DHG is registered in the U.S. Patent and Trademark Office to Dixon Hughes Goodman LLP.
praxity