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IRS Rules Closely Held C Corps May Carry Back NOL’s To Offset Portfolio Gains

The IRS has ruled that a C Corporation may carry back a net operating loss (NOL) to offset portfolio income from a prior year when the corporation was a closely-held corporation.  Under the Internal Revenue Code, a closely-held C corporation is one that at any time during the last half of the tax year, more than 50% in value of its stock is owned, directly or indirectly, by not more than five individuals.  The corporation in the case was a closely-held corporation in years 2 and 3 of existence with earned portfolio income in each year.  In year 4, a change of ownership caused the corporation to lose its closely-held status.  However, this did not prevent the corporation from carrying back a NOL from year 4 to offset portfolio income earned in years 2 and 3.  The IRS ruled that the passive activity loss rule of IRC Section 469 do not limit the offset.

Points of Interest

  • The tax cuts established during the first few years of the Bush Administration will, or are at least slated to, automatically sunset as of January 1, 2011.
  • The requirements for exchanging real property are not nearly as stringent as for non-real property.
  • Because capital gains taxes will increase in the near future, efficient tax planning has become absolutely critical to retirement planning.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors