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Passive Loss and NOL Carry-back

I have a client with an NOL this year. In 2012 (his 2-year carryback), he has a rental passive loss in the phase-out range. To the best of my ability to follow the IRC, it looks as if I need to recompute the (up to $25k) phase-out - because there doesn't seem to be an exclusion of NOLs from PAL-MAGI. However, as this NOL is generated by a passive activity where the loss is being recognized, do I then adjust the carry forward from 2014 to

2015 of the other PALs to account for the additional amount allowed in 2012? (The PAL activities include real-estate rentals). 26 U.S.C. 469(i)(3)(F) does not include section 172 among items ignored in MAGI, and I didn't see anything in section 172 either that says don't recompute the active rental loss allowance in the carry-back year (which in this case won't affect the 2014 PAL recognized, only the PAL carried forward [if applicable], but could - thus altering the NOL itself).

Looking through the IRC and regulations provided no guidance. Not even the IRS audit technique guide on PALs helped - other than to confirm that the $25k allowance can contribute or source an NOL. None of that said what to do with a phasing-out in the carryback year that could affect the the NOL that the PAL generates in the later year.

Searching Google for: "Passive activity" "net operating loss" only turned up that the active rental loss deduction can generate an NOL, but not what to do if the year carried-back itself has a phased-out active rental loss (where the disallowed part contributes to the PAL accumulated in the NOL-source year).

Is there any guidance out there on recomputing the PAL rental allowance in the MAGI phase-out range after an NOL carryback?

Reply to
D. Stussy
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No one has an answer or guidance? Rare that I stumped the group!

Reply to
D. Stussy

Not so much being stumped as getting a headache as I tried to figure it out. The more I tried to get my arms around it, the stronger the headache.

Reply to
Alan

Well, I thought the answer was rather obvious. :)

First, I would verify that you and client have considered just carrying the NOL forward, not back.

But, if you carry it back, you recompute the taxes in the carryback year, and thus the PAL status. You also would do that in the intervening years, but it could be that the only thing that changes is the PAL carryforward to match that of the adjusted carryback year. At that point you are in the current year. If that ended up changing the NOL, you have to go through an iterative process, back to the carryback year and forward again, until it all settles out.

Isn't there a box somewhere that says "have the IRS compute my tax"? :)

Reply to
taxed and spent

As God said to Moses, "Take these two tablets and call me in the morning."

Reply to
Stuart A. Bronstein

Well, I thought the answer was rather obvious. :)

First, I would verify that you and client have considered just carrying the NOL forward, not back.

But, if you carry it back, you recompute the taxes in the carryback year, and thus the PAL status. You also would do that in the intervening years, but it could be that the only thing that changes is the PAL carryforward to match that of the adjusted carryback year. At that point you are in the current year. If that ended up changing the NOL, you have to go through an iterative process, back to the carryback year and forward again, until it all settles out.

Isn't there a box somewhere that says "have the IRS compute my tax"? :) ======Foregoing the carryback: Mathematically not as fun. ;-)

As far as the iterative process goes, there's technically no precedent for that, although I agree that the limit found by such a process would be the mathematical answer. What I found strange is that their audit guide does say that the PAL rental allowance may cause an NOL, but it never tells the auditor to subsequently adjust any PAL suspended loss carryforward in the year carried back. Maybe they used the "ostrich method" (head in the sand)?

Having the IRS compute the tax: The generating year will obviously have zero income tax. They don't do NOL CB claims. :-(

Reply to
D. Stussy

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