IRS denies corporation's untimely election to accelerate disaster loss deduction

Chief Counsel Advice 201306017

In Chief Counsel Advice, IRS has concluded that a corporation failed to elect under Code Sec. 165(i) to deduct its disaster losses on the prior year's return. IRS determined that, although the informal claim doctrine could potentially apply for purposes of meeting the deadline for making the Code Sec. 165(i) election, the document filed by the taxpayer in this case didn't set out specific information regarding the nature or amount of the losses and wasn't perfected by a later-filed claim.

Background. A taxpayer that sustains a loss attributable to a disaster occurring in a Presidential disaster area may elect to deduct that loss on the return for the tax year immediately preceding the tax year in which the disaster occurred. (Code Sec. 165(i)) Generally, a taxpayer must make this election by filing a return, an amended return, or a refund claim on or before the later of (i) the due date of his income tax return (determined without regard to any filing extension) for the tax year in which the disaster actually occurred, or (ii) the due date of his tax return (determined with regard to any filing extension) for the immediately preceding tax year. In general, the claim or refund should specify the date or dates of the disaster which gave rise to the loss, and the city, town, county, and State in which the property which was damaged or destroyed was located at the time of the disaster.

In addition to meeting the requirements above, there are additional rules that apply to refund claims. First, refund claims must specify the grounds and facts on which they are based so that IRS can ascertain the legality of the claim. (Reg. § 301.6402-2(b)(1)) In addition, the statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. For corporations, for an overpayment of income taxes for a tax year of the corporation for which a Form 1120 has been filed, the refund claim is made on Form 1120X, Amended U.S. Corporation Income Tax Return. (Reg. § 301.6402-3(a)(3))

Facts. Taxpayer is a corporation that uses the calendar year as its tax year. The examination of Taxpayer's tax return for Year 1 commenced on Date 1. On Date 3, Taxpayer received an Examination plan (the Plan) for the examination of the Year 1 return that required all proposed adjustments submitted by Taxpayer (“Taxpayer proposed adjustments,” or TPAs) to be individually numbered and formatted in a specified manner.

During Year 2, Taxpayer sustained losses from Hurricanes 1 and 2 which, despite presumably being disaster losses eligible for the Code Sec. 165(i) election, Taxpayer didn't elect to claim as a deduction on its Year 1 return (filed on Date 2).

On Date 4, Taxpayer submitted a 2-page document (the “Date 4 document”) advising Examination that it was proposing an adjustment to its Year 1 return to elect under Code Sec. 165(i) to take into account in Year 1 disaster losses sustained in Year 2. The first page of the Date 4 document stated that the enclosure (i.e., the second page of the document) was a TPA, but the second page did not have a designated TPA number and wasn't presented in the format specified by the Plan. The document generally stated that disaster losses were suffered at various Taxpayer facilities in various states as a result of both Hurricanes. The document did not propose an adjustment, but rather stated that the final amount of casualty losses would be provided later in a final TPA. Taxpayer did not specify which losses were the subject of the election, which facilities were affected, which state the losses occurred in, which hurricane caused the losses, the nature of the damage, or the amount of the losses. The period for making the Code Sec. 165(i) election for the Year 2 losses expired on Date 5, the original due date for the Year 2 return.

Taxpayer later informed Examination that it intended to file a claim with respect to the disaster losses and, on Date 6, filed its Year 2 return with a copy of the Date 4 document attached to it. On Date 7, Taxpayer submitted TPA X, which was numbered and in the format required by the Plan. The TPA stated that Taxpayer was making the Code Sec. 165(i) election for one particular loss at one particular location in a particular state, as a result of one of the hurricanes (Hurricane 2), and claimed a specific amount as a negative adjustment to taxable income. It stated that it was not a revision of a previous TPA.

On Date 8, Examination sent Taxpayer an e-mail that the Service could not accept TPA X because the regs require a formal claim for refund to make the Code Sec. 165(i) election. Taxpayer filed a protest on Date 9 and a supplemental protest on Date 10.

Issues. The issues presented in the CCA are:

... whether a taxpayer may make a Code Sec. 165(i) election to deduct a disaster casualty loss in the preceding tax year on an informal claim for refund (and if so, if one was made in this case); and

... whether, under Reg. § 1.165-11(e), the election must be made on a return, amended return, or claim for refund for the year preceding the disaster, or whether the taxpayer can make the election by submitting a statement with the tax return for the year of the disaster.

No valid election. The CCA concludes that Taxpayer didn't make a valid Code Sec. 165(i) election.

Specifically, Reg. § 1.165-11(e) requires a Code Sec. 165(i) election to be made on a return, amended return, or claim for refund—which IRS interprets as requiring a formal refund claim subject to the requirements under Code Sec. 6402. A formal refund claim, for a corporation, is made on Form 1120X, with an accompanying statement of the grounds and facts in support of the claim and a written declaration that it is made under the penalties of perjury. (Reg. § 301.6402-2(b)(1), Reg. § 301.6402-3(a)(3)) In this case, no timely formal refund claim was filed.

Although IRS observed that a Code Sec. 165(i) election made on a document that meets the requirements of an informal refund claim for Code Sec. 6402 andCode Sec. 6511 purposes could potentially be sufficient for meeting the deadline for making the Code Sec. 165(i) election under Reg. § 1.165-11(e), Taxpayer's Date 4 document didn't satisfy the requirements to be considered an informal claim. Notably, it didn't provide specific information regarding the losses, the affected facilities, the relevant locations, or the amounts. It also didn't propose an adjustment, but rather stated that the final amount would be provided at a later time.

Similarly, in addition to not satisfying the informal claim requirements, the Date 4 document was also deficient as an election under Reg. § 1.165-11(e). It didn't specify the relevant disaster, and Taxpayer's argument that it was essentially an election for both hurricanes, and that the election was implicitly revoked in TPA X, was rejected. Overall, the CCA stated that the Code Sec. 165(i) regs didn't contemplate use of a “vague “placeholder” document such as the Date 4 document.” The other documents filed after Date 5 were also insufficient to establish an informal claim since they were untimely and, in any event, not perfected by later claims.

Taxpayer's final argument, that it made the Code Sec. 165(i) election by attaching a copy of the Date 4 document to its Year 2 return, also failed. That return was filed after the period for making the election had expired, the Date 4 document was impermissibly vague, and moreover, the “return” referred to in Reg. § 1.165-11(e)is the return for the year preceding the disaster, and not the year of the disaster.

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