Preserving Net Operating Losses

January 13, 2023

By Dan Gibson

In a recent case decided by the U.S. Tax Court, Amos, TC Memo 2022 -109, it decided in favor of the IRS in a case of a taxpayer who applied net operating losses (“NOLs”) to her 2014 and 2015 returns. The taxpayer lost the case because she couldn’t support the original NOL amount and didn’t document how the NOLs were utilized between the initial year of the NOL and the tax years being reviewed by the IRS.

Betty Amos, CPA, ran several Fuddruckers restaurants. In the late 1990s, she ran into legal problems with her partner, Nick Buoniconti (retired NFL Hall of Famer). By 2011, all the restaurants had closed. The taxpayer’s NOLs relating to Fuddruckers started in 1999. By 2008, the NOLs carrying forward were nearly $6 million. By 2013, the NOL carryforward was decreased to $4.7 million, which she then used portions of on her 2014 and 2015 returns.

  • The court stated that a taxpayer claiming an NOL must file with the return “a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction,” Reg. § 1.172- 1(c).
  • “A taxpayer who claims a net operating loss deduction bears the burden of establishing both the existence of the net operating loss and the amount that may be carried over to the year involved,” Chico v. Commissioner, T.C. Memo, 2019-123.
  • A taxpayer “cannot rely solely on [his or her] own income tax returns to establish the losses [he or she] sustained,” Barker v. Commissioner, T.C. Memo. 2018- 67, aff’d., 853 F. App’x. 571 (11th Cir. 2021).
  • The taxpayer “must establish that the NOL was not fully absorbed in the years preceding the particular year for which [s]he seeks the NOL deduction,” Villanueva v. Commissioner, T.C. Memo. 2022-27.
  • “To meet this burden, the taxpayer must introduce convincing evidence that he or she incurred NOLs in the taxable years and also prove the taxpayer’s taxable income for the applicable period, beginning to end,” Power v. Commissioner, T.C. Memo. 2016-157.

Taxpayers who claim NOLs must be prepared to prove that they have a bases for the origination of the deduction by providing the supporting records and evidence. This means preserving such support for the initial NOLs and utilizing the NOLs in subsequent years, which could require maintenance of records for 20 years or more. 

About Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.