Tax Planning for Net Operating Loss Carryback Elections – Houston Tax Attorneys

Congress has used Section 172 for net operating losses to stimulate the U.S. economy. It has done this by allowing certain losses to be carried back, thereby generating cash refunds to the taxpayer. This puts cash into the hands of taxpayers who are suffering losses. One only has to look at the history of changes to Section 172 to see this history.

One such allowance was for specified liability losses. These are losses that were specifically listed in Section 172 and allowed to be carried back to prior tax years. Environmental remediation costs were an example. When an oil and gas company has a drilling platform that needs dismantling or contaminated land requires cleanup, the tax loss can generate cash to help pay for these often extraordinary expenses.

The question hasn’t been clear in the various machinations of Section 172 is what happens when there are different loss carryback rules at play for a taxpayer in the same tax year. Can the taxpayer have two net operating loss carrybacks from the same tax year, to different prior years? The specified liability loss rules provide an example, as they had a 10 year carryback, whereas general losses had a two year carryback. So if a taxpayer incurred both in the same year, could they carry back 10 years and two years?

This brings us to Apache Corporation v

This brings us to Apache Corporation v. Commissioner, 2025 T.C. 11, which addresses this very issue. The tax court case provides important guidance on whether taxpayers can selectively waive certain carryback periods while preserving others–effectively being able to use NOL elections as part of their business and tax planning.

Facts & Procedural History

The taxpayer in this case is an oil and gas exploration and production company. For 2016 and 2017, the company filed consolidated corporate income tax returns showing net operating losses of approximately $1.9 billion and $3.1 billion respectively.

Buried within those massive losses were much smaller amounts that qualified as “specified liability losses” under Section 172(f)(1). In 2016, the taxpayer reported a specified liability loss of $40.7 million. In 2017, it reported $30.8 million. These amounts represented environmental remediation costs, decommissioning expenses, or similar cleanup obligations that qualify for special tax treatment.

The taxpayer made elections on both returns to waive the carryback period under Section 172(b)(3) for its consolidated net operating losses. But the taxpayer explicitly stated it was not electing to relinquish the carryback period for the specified liability losses. The company wanted to carry those environmental losses back the full ten years while carrying the regular losses only forward.

The taxpayer then filed Form 1139 applications seeking tentative refunds. It carried the $40.7 million specified liability loss from 2016 back to 2006, claiming a refund of $13.8 million. It carried the $30.8 million loss from 2017 back to 2007, claiming $10.1 million. The IRS issued both refunds.

Later, during an IRS audit, the government changed its position. The IRS issued a notice of deficiency for 2006 and 2007, disallowing the carrybacks entirely. The IRS’s position was that when the taxpayer elected to waive the carryback period, it waived everything. No cherry-picking allowed.

The taxpayer petitioned the U

The taxpayer petitioned the U.S. Tax Court for redetermination. Both parties filed cross-motions for partial summary judgment on the carryback issue. The case was reviewed by the full court.

Net Operating Losses Under Section 172

Section 172 allows taxpayers to smooth income over time. When deductions exceed gross income in a year, the resulting net operating loss can be carried to other years. This prevents businesses from being overtaxed simply because their profitable and unprofitable years don’t align with the calendar.

The basic mechanism works like this. A net operating loss can be carried back to prior years to offset income that has already been taxed. This generates tax refunds–so cash paid to the taxpayer. Any loss remaining after the carryback can be carried forward to offset future income. The carryback provides immediate cash flow. The carryforward preserves the loss for future use.

Under the default rule in Section 172(b)(1)(A) that applied prior to 2022, net operating losses can be carried back two years and forward twenty years. The taxpayer starts by carrying the entire loss to the earliest possible year. If that year’s income doesn’t absorb the full loss, the excess carries to the next year, and so on until the loss is consumed or exhausted.

This default rule doesn’t work for everyone. Consider a company with significant research tax credits that are about to expire. If it carries losses back to years when it had those credits, the loss will eliminate the income. The credits then sit unused and eventually expire worthless. The company loses twice—once from the operating loss and again from the wasted credits.

Section 172(b)(3) addresses this problem

Section 172(b)(3) addresses this problem. It allows taxpayers to elect to waive the entire carryback period and carry losses only forward. This preserves credits and other favorable attributes in the earlier years while banking the loss for future use. This is similar to rules that allow taxpayers to opt out of bonus depreciation, foregoe immediate expensing, etc.

The Ten-Year Carryback for Specified Liability Losses

Congress recognized that certain losses are particularly large and sporadic. Environmental cleanups don’t occur on predictable schedules. When they do occur, the costs can dwarf regular operating expenses. Limiting these losses to a two-year carryback often means the company can’t fully use them because income in just those two prior years won’t absorb the entire loss.

For the years in this case, Section 172(f)(1) defined specified liability losses to include two categories. First are product liability losses under subsection (A). Second are amounts under subsection (B) that satisfy liabilities under federal or state law for land reclamation, nuclear plant decommissioning, drilling platform dismantlement, environmental remediation, or workers compensation payments.

Under the rules applicable to these years, these losses must meet specific timing and accounting requirements. The deduction must arise from a liability that existed for a substantial period before the deduction year. The liability must be identified in financial statements or tax returns from earlier years. These requirements prevent taxpayers from manufacturing specified liability losses out of ordinary business expenses.

Section 172(b)(1)(C) grants specified liability losses a ten-year carryback period instead of the usual two years. This extended window gives companies a realistic chance to absorb the loss against income from more years. For businesses with cyclical earnings, reaching back ten years instead of two can mean the difference between using the loss fully or losing part of it forever.

The tax code treated specified liability losses as separa…

The tax code treated specified liability losses as separate from the rest of a net operating loss. Section 172(f)(5) provides that for purposes of applying the sequencing rules in Section 172(b)(2), specified liability losses are treated as separate net operating losses to be taken into account after the regular portion. The taxpayer first carries back its regular loss two years, then separately carries back the specified liability loss ten years.

The law has changed since the years at issue here

The law has changed since the years at issue here. The special treatment for specified liability losses described in this case no longer exists. The Tax Cuts and Jobs Act (“TCJA”) eliminated most net operating loss carrybacks effective for losses arising after December 31, 2017. Under current law, specified liability losses receive no special carryback period. They follow the general rule—no carryback at all, only carryforward.

Losses can be carried forward indefinitely but are subject to an 80% limitation on the amount of taxable income they can offset in any given year. Congress provided temporary relief for losses arising in 2018, 2019, and 2020, allowing those losses a five-year carryback. But this temporary provision applied to all net operating losses during those years, not specifically to specified liability losses. The entire framework of extended carrybacks for environmental remediation costs, decommissioning expenses, and similar liabilities has been removed from the tax code.

Setting aside the policy argument for allowing specified liability loss carrybacks, this case is still relevant as to the broader statutory interpretation principles it establishes. The tax court’s analysis applies whenever Section 172(b)(1) provides multiple carryback periods for different types of losses in the same year. For example, farming losses currently receive a two-year carryback under Section 172(b)(1)(B). If Congress enacts future legislation creating additional special carryback periods for particular industries or types of losses, which it has done repeatedly over the years, the court’s reasoning would govern whether taxpayers can waive some carryback periods while retaining others.

The Election to Waive Carryback Periods

With that background, we can get into the election. Section 172(b)(3) states that any taxpayer entitled to a carryback may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. The election has to be made by the due date of the return for the loss year. Once made, the election is irrevocable.

The statute uses specific language—”a carryback period” and “the entire carryback period.” Whether these terms refer to one unified period or potentially multiple periods becomes the central interpretive question. If Section 172(b)(1) establishes only one carryback period per loss, then the election necessarily applies to the whole loss. If it establishes multiple periods, then potentially the election could apply to each period separately.

Farmers and certain other taxpayers face similar questions. Section 172(b)(1)(E) allows eligible losses (including casualty losses and disaster-area losses) to be carried back three years. Section 172(b)(1)(F) allows farming losses a five-year carryback. Each of these provisions includes its own election mechanism allowing taxpayers to waive the extended carryback for that particular type of loss.

The question is whether Section 172(b)(3) works the same way. Can a taxpayer with multiple types of losses subject to different carryback periods waive some but not others? Or does the statute require an all-or-nothing choice?

The tax court held that taxpayers entitled to multiple carryback periods under Section 172(b)(1) may waive them individually. The court based this conclusion on statutory text, structure, judicial precedent, and the government’s own prior interpretation.

The tax court agreed with the taxpayer that reading Secti…

The tax court agreed with the taxpayer that reading Section 172(b)(3) as all-or-nothing makes little sense given the number of different carryback periods in Section 172(b)(1). Why would Congress grant taxpayers the flexibility to waive carrybacks entirely but then remove all flexibility to make nuanced choices when multiple carryback periods apply? Section 172(f)(6) provides another example of congressional flexibility.

This provision allows taxpayers with specified liability losses to elect out of the special ten-year carryback and instead use the regular two-year carryback. A taxpayer might make this election if it had sufficient income in the two most recent years to absorb the loss and wanted to preserve attributes in earlier years. The existence of this additional election shows Congress wanted to give taxpayers choices about how to use these losses.

The Takeaway

This case confirms that the NOL rules can create multiple carryback years. Taxpayers can make elections to use their loss carrybacks strategically, which is what Congress likely intended. When a business has both regular operating losses and specified liability losses, for example, it can waive the short carryback period for regular losses while preserving the extended carryback for environmental and decommissioning costs.

This flexibility allows companies to avoid wasting valuable tax attributes in recent years while still obtaining immediate refunds from the special losses. The same principles apply to other losses today. For example, a farm business with both farming losses (which get a two-year carryback) and other business losses could use the Apache framework to selectively waive carrybacks and preserve expiring credits or other tax benefits. This is another tool in the taxpayer’s tax planning toolbox.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Convert Interest Income to Capital Gains on Sales by Omitting Interest? – Houston Tax Attorneys

Business transactions can be structured in any number of ways. Those who are tax savvy can structure their transactions to minimize and even avoid paying taxes.

There are tax provisions that specifically allow for tax savings. To achieve the tax savings, one only has to structure the transaction to meet the requirements of the statute. Then there are also unintended consequences of various tax laws and rules that can allow for tax savings. With the later, they also require structuring transactions to comply with the tax laws. The difference is that the latter options typically involve a fact pattern that is not contemplated by the tax law–a gap in the law, if you will–or a reading or combination of the tax law given unique circumstances that leads to a favorable tax outcome.

The IRS and Congress often react to taxpayers whose transactions produce tax savings that are not per se intended or expressly apparent. It is usually the IRS that raises the issue, the issue ends up in court, and then Congress acts to either affirm or reject the court decision. When Congress acts, it enacts statutes.

In this article we’ll consider Section 483 of the tax code. This provision was added by Congress to limit taxpayer’s ability to have interest, which is taxed at ordinary tax rates, to qualify for lower capital gains tax rates. The law enacted by Congress provides several “outs” that allow for this treatment and includes language that is not all that clear that might allow other “outs.” The Third Circuit’s decision in Trust Under the Trust of Charles G. Berwind Trust v. Commissioner, No. 24-2360 (3d Cir. Oct. 30, 2025), provides an opportunity consider this issue.

Facts & Procedural History

This case involves one of several trusts established to hold interests in a closely held coal mining business. Only two trusts remained as shareholders. Over time, the trust consolidated their ownership and transferred interests to related entities.

The trust held a minority ownership interest in a subsidiary that owned a pharmaceutical coatings company. Beginning in the 1990s, the of the trusts sought to acquire the other trusts ownership stake in the subsidiary. After the owning trust rejected multiple purchase offers, the situation escalated.

In 1999, the business and a newly formed parent company executed a short-form merger under Pennsylvania law. This type of merger allowed a parent corporation owning at least 80% of a subsidiary to merge without a vote by minority shareholders. The merger agreement provided that the the owning trust’s common stock would be “converted into the right to receive a subordinated promissory note” valued at $82,820,000, due in 2001, with 10% interest.

The owning trust filed a lawsuit in 1999 challenging the merger. The lawsuit included claims that the merger violated Pennsylvania law and the subsidiary’s articles of incorporation. It also included a demand for statutory appraisal under Pennsylvania’s dissenters’ rights provisions. The parties engaged in litigation for nearly three years.

In 2002, the parties reached a settlement. The settlement agreement required the owing trust to deliver its subsidiary stock certificates and dismiss the lawsuit. In exchange, the subsidiary agreed to pay the owningn trust $191 million. The payment was made in 2002.

The parties disagreed about the tax treatment of this payment. The subsidary took the position that the payment was made under the 1999 merger agreement. This meant that Section 483 required a portion of the $191 million to be treated as interest taxable at ordinary income rates. The owning trust took the position that the payment was made under the 2002 settlement agreement. This meant that no portion would be characterized as interest and the entire amount would be taxed as capital gains.

The IRS audited both parties’ income tax returns and issued deficiency notices. The deficiency notice sent to the owing trust determined that approximately $31 million of the settlement payment represented unstated interest income taxable as ordinary income. The owning trust filed a petition in the U.S. Tax Court for redetermination of the deficiency. After a trial in 2016, the tax court ruled for the IRS in December 2023. The owning trust appealed to the Third Circuit.

Interest Under Section 483

Before Congress enacted Section 483 in 1964, taxpayers could structure sales of items that are not inventory to convert ordinary income into capital gains. Here’s how it worked: A seller would agree to sell property for payments over time. The contract would specify the total amount to be paid but would not provide for interest. The deferred payment amount would be larger than if payment were made immediately. This larger amount reflected the time value of money–i.e., baked in interest. But because the contract didn’t explicitly identify “interest,” the entire payment was treated as capital gains to the seller rather than interest.

The tax advantage was substantial. Ordinary income is taxed at higher tax rates than capital gains–as it is today. A seller could effectively receive interest on the deferred payment while having that interest taxed at the lower capital gains rate. This was particularly attractive for sales of appreciated property where the seller already expected capital gains treatment on the base sale price.

Congress enacted Section 483 to eliminate this tax planning strategy. The legislative history explains that Congress “intended primarily to prevent taxpayers from converting ordinary income to capital gain” when “the dollar amount of the deferred payments was larger than it would have been had payment been made immediately.” This ensures that taxpayers don’t avoid income taxes by structuring installment contracts to provide only for payment of principal without charging and collecting interest.

Section 483 Versus Section 7872

Before getting into Section 483 and this case, we should pause to consider Section 7872. Section 483 should not be confused with Section 7872, another interest imputation provision in the tax code.

Section 7872 applies to below-market loans between related parties such as gift loans, employer-employee loans, and corporation-shareholder loans. That provision treats the forgone interest as transferred from lender to borrower and then retransferred back as interest income to the lender. Section 483 does not involve gift loans or shareholder loans–and, importantly, does not involve the sale of property.

The difference matters because taxpayers might try to characterize a deferred payment sale as a loan to avoid Section 483. For example, a seller might claim they sold property for a promissory note at face value and then “loaned” the buyer the funds. This doesn’t work. When the transaction is actually a sale with deferred payments, Section 483 applies regardless of loan-like terminology. If there is no sale and the party is just a lender, then Section 7872 rather than Section 483 applies to impute interest on the transaction.

Section 483 and Imputed Interest

With that distinction, we can address Section 483. Section 483 imputes interest to certain deferred payments for property sales. The statute sets out specific conditions that must all be met before interest imputation applies. All four have to be met for interest to apply.

The first requirement is that there must be a payment “under any contract for the sale or exchange of any property.” This language requires both a contract and a sale of property. We will address this requirement more below.

The second requirement is that the payment must be made “on account of the sale or exchange of property” and must “constitute part or all of the sales price.” Additionally, the payment must be “due more than 6 months after the date of such sale or exchange.”

The third requirement is that “some or all of the payments” under the contract must be “due more than 1 year after the date of the sale or exchange.” This ensures that Section 483 only applies when there is a meaningful deferral period. It also provides an easy out to avoid Section 483.

The fourth requirement is that there must be “total unstated interest” under the contract as measured against rates determined by the IRS. This requires a time-value-of-money present value analysis of the payments over the payment period. The formula compares the stated payments under the contract to what the payments would be if they included interest at the applicable federal rate. The difference represents unstated interest that is recognized as interest taxed as ordinary income rather than capital gains.

What Does the Term “Contract” Mean?

This case gets into the first reqirement from above, i.e., the contract requirement. The issue in the case is what counts as a “contract” in the context of a buy out agreement by a subsidiary and a parent entity that was formed by the subsidary as to the minority shareholder of the subsidary?

The owning trust in this case argued that the 1999 merger agreement was not a “contract” for purposes of Section 483. The trust emphasized that it never consented to the merger. As a minority shareholder, it had no vote on the short-form merger under Pennsylvania law. The owning trust contended that without its assent, there could be no contract for the sale of its property.

The Third Circuit rejected this argument. The merger agreement was executed by the subsidiary and its new parent entity. Both corporations’ boards of directors approved the agreement. The merger became effective when the articles of merger were filed with the Pennsylvania Secretary of State in 1999. At that time, the merger agreement effected the sale of the owning trust’s shares and mandated payment in exchange. Thus, according to the appellate court, this enforceable agreement constituted a contract even though the owning trust didn’t assent to it.

The owning trust relied heavily on the Ninth Circuit’s decision in Tribune Publishing Co. v. United States, 836 F.2d 1176 (9th Cir. 1988). In that case, Tribune sued Boise Cascade over a 1969 merger and settled in 1977. The Ninth Circuit concluded that Section 483 didn’t apply to the 1977 settlement payment. The court stated that “Tribune did not voluntarily contract to exchange its Newsprint stock for Boise Cascade stock plus [the settlement proceeds].”

The Third Circuit distinguished Tribune. The Ninth Circuit was simply saying that the parties in that case didn’t contract in 1969 to exchange stock for Boise Cascade stock in 1969 plus settlement proceeds in 1977. The holding didn’t turn on whether the sale was voluntary. Rather, it addressed which agreement the payment was made under. The payment in Tribune wasn’t under the original merger agreement because that agreement didn’t contemplate the later settlement payment.

What Agreement Applies?

Having determined that the sale occurred in 1999, the court turned to the question of which agreement the $191 million payment was made “under. The IRS contended that the payment was made under the 1999 merger agreement.

The court started its analysis with what the word “under” means. Courts have examined similar uses of “under” in other statutes. When an action is said to be taken “under” a provision of law or legal document, what is generally meant is that the action is “authorized” by that provision or document. The Supreme Court has noted that “under” in the legal context “identifies the provision that served as the basis for the” conduct in question. Applying this definition means requires on to examine which agreement created the obligation to pay. Which agreement served as the basis for the payment? Which agreement authorized the sale that gave rise to the payment obligation?

The owning trust argued that the payment was made under the 2002 settlement agreement because that agreement explicitly mandated the $191 million payment. Adopting this narrow interpretation would allow taxpayers to evade Section 483 simply by creating two contracts. The first contract would sell the property but leave the payment terms undefined. The second contract would define the payment terms without explicitly referencing the sale. In that situation, the payment would technically be under a contract for payment rather than under a contract for sale.

The Third Circuit agreed with the IRS. The merger agreement served as the basis for the payment because it was the instrument that effected the sale and created the parent entity’s obligation to pay for the shares. When the parent filed the articles of merger in 1999, the owning trust’s shares were extinguished. At that moment, the new parent entity incurred its obligation to compensate the owning trust for its shares. The 1999 sale created the payment obligation.

The court said that the 2002 settlement agreement, by contrast, didn’t create the obligation to pay. The settlement agreement explicitly stated that there was an ongoing dispute about when the shares were sold. The agreement took pains to specify that it didn’t constitute an agreement to sell the owning trust’s shares. Pennsylvania law had already resolved that question. The merger gave the agreement full effect in 1999.

The Takeaway

The Third Circuit’s decision in this case shows that economic substance applies for Section 483 rather than how parties label their agreements. Taxpayers cannot avoid the interest imputation rules by using multiple contracts or settlement agreements to obscure when a sale occurred. Corporate mergers effect sales when they become legally effective under state law. Litigation and settlements don’t change the original sale date. This means taxpayers have to structure deferred payment transactions correctly from the start. Any sale where payment is deferred more than a year likely triggers Section 483 unless the contract explicitly provides for interest at market rates. The IRS might scritinize transactions that do not meet this requirement and may look through later agreements to find the contract that authorized the sale.