tions of both spouses, and the modifications prescribed in paragraph (a) of this section are to be computed as if the combined income and deductions of both spouses were the income and deductions of one individual.

(e) Taxable years beginning in 1953 and ending in 1954. The net operating loss of a taxpayer other than a corporation for a taxable year which begins in 1953 and ends in 1954 shall be the sum of—

(1) Application of Internal Revenue Code of 1954. That portion of the net operating loss for the taxable year, computed in accordance with paragraph (a) of this section as though such taxable year began after December 31, 1953, which the number of days in the taxable year after December 31, 1953, bears to the total number of days in the taxable year, and

(2) Application of Internal Revenue Code of 1939. That portion of the net operating loss for the taxable year, computed in accordance with section 122 of the Internal Revenue Code of 1939 and as though section 172 of the Internal Revenue code of 1954 had not been enacted, which the number of days in the taxable year before January 1, 1954, bears to the total number of days in the taxable year.

(f) Illustration of computation of net operating loss of a taxpayer other than a corporation-(1) Facts. For the calendar year 1954 A, an individual, has gross income of $483,000 and allowable deductions of $540,000. The latter amount does not include the net operating loss deduction or any deduction on account of the sale or exchange of capital assets. Included in gross income are business capital gains of $50,000 and ordinary nonbusiness income of $10,000. Included among the deductions are ordinary nonbusiness deductions of $12,000 and a deduction of $600 for his personal exemption. A has a business capital loss of $60,000 in 1954. A has no other items of income or deductions to which section 172 (d) applies.

(2) Computation. On the basis of these facts, A has a net operating loss for 1954 of $104,400, computed as follows: Deductions for 1954 (as specified in first sentence of subparagraph (1))

Plus: Amount of business capital loss ($60,000) to extent such amount does not exceed business capital gains ($50,000) --

Total

$540,000

50,000

590,000

104, 400

Deductions for 1954 adjusted as required by section 172 (d)...Gross income for 1954_-_.

Net operating loss for 1954__ [T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6828, 30 F.R. 7805, June 17, 1965; T.D. 6862, 30 F.R. 14427, Nov. 18, 1965] § 1.172-4 Net operating loss carrybacks and net operating loss carryovers.

(a) General provisions—(1) Years to which loss may be carried-(i) In general. In order to compute the net operating loss deduction the taxpayer must first determine the part of any net operating losses for any preceding or succeeding taxable years which are carrybacks or carryovers to the taxable year in issue.

(ii) Loss for taxable years ending after December 31, 1957. Except as provided in subdivisions (iii), (iv), and (v) of this subparagraph, a net operating loss sustained in a taxable year ending after December 31, 1957, shall be carried back to the three preceding taxable years and carried over to the five succeeding taxable years.

(iii) Loss for taxable years for which certifications have been issued under the Trade Expansion Act of 1962. A net operating loss sustained in a taxable year ending on or after December 31, 1962, for which a certification has been issued under section 317(a) of the Trade Expansion Act of 1962 (76 Stat. 889) shall, subject to the provisions of section 172 (b) (3) (A) and (B) and § 1.172-9, be carried back to the five preceding taxable years and, except as provided in subdivision (iv) of this subparagraph, shall be carried over to the five succeeding taxable years.

(iv) Loss of a regulated transportation corporation. Except as provided in subdivision (v) of this subparagraph, a net operating loss sustained in a taxable year ending after December 31, 1955, by a taxpayer which is a regulated transportation corporation (as defined in section 172(j) (1)) shall, subject to the provisions of section 172 (j) and § 1.172-10, be carried back to the taxable years

specified in subdivision (ii), (iii), or (vi) of this subparagraph, whichever is applicable, and shall be carried over to the seven succeeding taxable years.

(v) Loss attributable to foreign expropriation. If the provisions of section 172 (b) (3) (C) and § 1.172-11 are satisfied, the portion of a net operating loss sustained in a taxable year ending after December 31, 1958, attributable to a foreign expropriation loss (as defined in section 172(k)) shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss and shall be a net operating loss carryover to each of the ten taxable years following the taxable year of such loss.

(vi) Loss for taxable years ending after December 31, 1953, and before January 1, 1958. A net operating loss sustained in a taxable year ending after December 31, 1953, and before January 1, 1958, shall be carried back to the two preceding taxable years and, except as provided in subdivision (iv) of this subparagraph, shall be carried over to the five succeeding taxable years. This rule shall apply even though the loss year is otherwise subject to the Internal Revenue Code of 1939.

(vii) Loss for taxable years beginning after December 31, 1949, and ending before January 1, 1954. A net operating loss sustained in a taxable year beginning after December 31, 1949, and ending before January 1, 1954, shall be carried back to the first preceding taxable year and carried over to the five succeeding taxable years.

(2) Periods of less than 12 months. A fractional part of a year which is a taxable year under sections 441 (b) and 7701 (a) (23) is a preceding or a succeeding taxable year for the purpose of determining under section 172 the first, second, etc., preceding or succeeding taxable year.

(3) Amount of loss to be carried. The amount which is carried back or carried over to any taxable year is the net operating loss to the extent it was not absorbed in the computation of the taxable (or net) income for other taxable years, preceding such taxable year, to which it may be carried back or carried over. For the purpose of determining the taxable (or net) income for any such preceding taxable year, the various net operating loss carryovers and carrybacks to such taxable year are considered to be applied in reduction of the taxable (or net) in

come in the order of the taxable years from which such losses are carried over or carried back, beginning with the loss for the earliest taxable year.

(4) Husband and wife. The net operating loss carryovers and carrybacks of a husband and wife shall be determined in accordance with this section, but subject also to the provisions of § 1.172-7.

(5) Excess profits tax. For the number of taxable years to which a net operating loss may be carried back for the purpose of determining the excess profits tax imposed by subchapter D of chapter 1 of the Internal Revenue Code of 1939, see § 1.172-8.

(6) Corporate acquisitions. For the computation of the net operating loss carryovers in the case of certain acquisitions of the assets of a corporation by another corporation, see section 381 and the regulations thereunder.

(7) Special limitations. For special limitations on the net operating loss carryovers in certain cases of change in both the ownership and the trade or business of a corporation and in certain cases of corporate reorganization lacking specified continuity of ownership, see section 382 and the regulations thereunder.

(8) Electing small business corporations. For special rule applicable to corporations which were electing small business corporations under subchapter S (section 1371 and following), chapter 1 of the Code, during one or more of the taxable years described in section 172 (b) (1), see paragraph (g) of § 1.172-1.

(b) Portion of net operating loss which is a carryback or a carryover to the taxable year in issue-(1) Manner of computation. (i) A net operating loss shall first be carried to the earliest of the several taxable years for which such loss is allowable as a carryback or a carryover, and shall then be carried to the next earliest of such several taxable years, etc. Except as provided in § 1.172-11, the entire net operating loss shall be carried back to such earliest year.

(ii) The portion of the loss which shall be carried to any of such several taxable years subsequent to the earliest taxable year is the excess of such net operating loss over the sum of the aggregate of the taxable incomes (computed as provided in § 1.172-5) for all of such several taxable years preceding such subsequent taxable year which are subject to the Internal Revenue Code of

1954 and the aggregate of the net incomes (computed as provided in 26 CFR (1939) 39.122-4(c) (Regulations 118) or in the corresponding section of prior applicable regulations) for all of such preceding taxable years which are subject to the Internal Revenue Code of 1939.

(iii) If, for any taxable year ending after December 31, 1958, a portion of the net operating loss is attributable to a foreign expropriation loss (as defined in section 172(k)), and if an election under paragraph (c) of § 1.172-11 is made with respect to such portion of the net operating loss, then see § 1.172-11 for the separate treatment of such portion of the net operating loss.

(2) Taxable years beginning in 1953 and ending in 1954. (i) Notwithstanding subparagraph (1) of this paragraph, in the case of a net operating loss sustained in a taxable year which begins in 1953 and ends in 1954, the amount of such loss which shall be carried back to the second preceding taxable year is the amount which bears the same ratio to such net operating loss (computed as provided in § 1.172-2 (c) or § 1.172-3 (e), whichever applies) as the number of days in such loss year after December 31, 1953, bears to the total number of days in such year.

(ii) To determine the portion of the net operating loss for such a taxable year ending in 1954 which shall be carried to any taxable year subsequent to such second preceding taxable year there shall be substituted, in the application of subparagraph (1) (ii) of this paragraph, for the net income of such second preceding taxable year an amount equal to the portion of the net operating loss which is carried back to such second preceding taxable year in accordance with this subparagraph, if such amount is smaller than the net income of such second preceding taxable year as computed under 26 CFR (1939) 29.122-4 (c) (Regulations 111).

(3) Taxable years beginning in 1957 and ending in 1958. (i) Notwithstanding subparagraph (1) of this paragraph, in the case of a net operating loss sustained in a taxable year which begins in 1957 and ends in 1958, the amount of such loss which shall be carried back to the third preceding taxable year is the amount which bears the same ratio to such net operating loss (as determined

under section 172(c)) as the number of days in the loss year after December 31, 1957, bears to the total number of days in such year.

(ii) To determine the portion of the net operating loss for such a taxable year ending in 1958 which shall be carried to any taxable year subsequent to such third preceding taxable year there shall be substituted, in the application of subparagraph (1)(ii) of this paragraph, for the taxable income of such third preceding taxable year an amount equal to the portion of the net operating loss which is carried back to such third preceding taxable year in accordance with this subparagraph, if such amount is smaller than the taxable income of such third preceding taxable year as computed under paragraph (a) of § 1.172-5.

(4) Regulated transportation corporations. For the portion of a net operating loss sustained by a regulated transportation corporation in a taxable year beginning in 1955 and ending in 1956 which may be carried over to the sixth and seventh taxable years succeeding such taxable year, see paragraph (d) of § 1.172-10.

(5) Excess profits tax. For the portion of a net operating loss which may be carried back from a taxable year ending after December 31, 1953, for the purpose of determining the excess profits tax imposed by subchapter D, chapter 1 of the Internal Revenue Code of 1939, see § 1.172-8.

(6) Illustration of principles. The application of this paragraph may be illustrated by the following examples:

Example (1). A taxpayer who makes his tax returns on the calendar-year basis has a net operating loss for 1954. The entire net operating loss for 1954 may be carried back to 1952. The amount of the carryback to 1953 is the excess of the 1954 loss over the net income for 1952. The amount of the carryover to 1955 is the excess of the 1954 loss over the aggregate of the net incomes for 1952 and 1953. The amount of the carryover to 1956 is the excess of the 1954 loss over the sum of the aggregate of the net incomes for 1952 and 1953 and the taxable income for 1955. Similarly, the amount of the carryovers to 1957, 1958, and 1959 is the excess of the 1954 loss over the sum of the aggregate of the net incomes for 1952 and 1953 and the aggregate of the taxable incomes for 1955 and 1956; for 1955, 1956, and 1957; and for 1955, 1956, 1957, and 1958, respectively. For such purposes, the net incomes for 1952 and 1953 shall be computed as provided in 26 CFR (1939)

39.122-4(c) (Regulations 118), and the taxable incomes for 1955 through 1958 shall be computed as provided in § 1.172-5.

Example (2). (1) A taxpayer who makes his tax returns on the basis of a fiscal year ending June 30 has a net operating loss (computed as provided in section 172(c)) for the taxable year which begins July 1, 1957, and ends June 30, 1958. The amount of the carryback from such taxable year to the taxable year ending June 30, 1955, the third preceding taxable year, is 181/365ths of the net operating loss. If such amount is not less than the taxable income (computed as provided in § 1.172-5) for the taxable year ending June 30, 1955, the amount of the carryback to the taxable year ending June 30, 1956, is the excess of the net operating loss over the taxable income so computed for the taxable year ending June 30, 1955; and the amount of the carryback to the taxable year ending June 30, 1957, is the excess of the net operating loss over the aggregate of the taxable incomes so computed for the taxable years ending June 30, 1955, and 1956. The amount of the carryovers to the taxable years ending June 30, 1959, 1960, 1961, 1962, and 1963 is the excess of the net operating loss over the aggregate of the taxable incomes (computed as provided in § 1.172-5) for the taxable years ending June 30, 1955, 1956, and 1957; 1955, 1956, 1957, and 1959; 1955, 1956, 1957, 1959, and 1960; 1955. 1956, 1957, 1959, 1960, and 1961; and 1955, 1956, 1957, 1959, 1960, 1961, and 1962, respectively.

(11) If, however, the taxable income (computed as provided in § 1.172-5) for the taxable year ending June 30, 1955, exceeds the amount of the carryback to such taxable year (181/365ths of the net operating loss for the loss year), then the amount of the carryback to the taxable year ending June 80, 1956, is the excess of the net operating loss over the amount of the carryback to the taxable year ending June 30, 1955. The amount of the carryback to the taxable year ending June 30, 1957, is the excess of the net operating loss over the sum of the amount of the carryback to the taxable year ending June 30, 1955, and the taxable income (computed as provided in § 1.172-5) for the taxable year ending June 30, 1956. The amount of the carryovers to the taxable years ending June 30, 1959, 1960, 1961, 1962, and 1963 is the excess of the net operating loss over the sum of the amount of the carryback to the taxable year ending June 30, 1955, and the aggregate of the taxable incomes (computed as provided in § 1.172-5) for the taxable years ending June 30, 1956, and 1957; 1956, 1957, and 1959; 1956, 1957, 1959, and 1960; 1956, 1957, 1959, 1960, and 1961; and 1956, 1957, 1959, 1960, 1961, and 1962, respectively.

(c) Illustration. The principles of this section are illustrated in § 1.172-6. [T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6862, 30 FR. 14427, Nov. 18, 1965]

$ 1.172-5 Taxable income which is subtracted from net operating loss to determine carryback or carryover.

(a) Taxable year subject to the Internal Revenue Code of 1954. The taxable income for any taxable year subject to the Internal Revenue Code of 1954 which is subtracted from the net operating loss for any other taxable year to determine the portion of such net operating loss which is a carryback or a carryover to a particular taxable year is computed with the modifications prescribed in this paragraph. These modifications shall be made independently of, and without reference to, the modifications required by §§ 1.172-2 (a) and 1.172-3 (a) for purposes of computing the net operating loss itself.

(1) Modifications applicable to corporations only. In the case of a corporation the deductions provided by section 242 (relating to partially tax-exempt interest) and by section 922 (relating to Western Hemisphere trade corporations) shall not be allowed.

(2) Modifications applicable to unincorporated taxpayers only. In the case of a taxpayer other than a corporation, in computing taxable income and adjusted gross income

(i) No deduction shall be allowed under section 151 for the personal exemptions (or under any other section which grants a deduction in lieu of the deductions allowed by section 151) and under section 1202 in respect of the net longterm capital gain.

(ii) The amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includible on account of gains from sales or exchanges of capital assets.

(3) Modifications applicable to all taxpayers. In the case either of a corporation or of a taxpayer other than a corporation

(1) Net operating loss deduction. The net operating loss deduction for such taxable year shall be computed by taking into account only such net operating losses otherwise allowable as carrybacks or carryovers to such taxable year as were sustained in taxable years preceding the taxable year in which the taxpayer sustained the net operating loss from which the taxable income is to be deducted. Thus, for such purposes, the net operating loss for the loss year or any taxable year thereafter shall not be taken into account.

Example. The taxpayer's income tax returns are made on the basis of the calendar year. In computing the net operating loss deduction for 1954, the taxpayer has a carryover from 1952 of $9,000, a carryover from 1953 of $6,000, a carryback from 1955 of $18,000, and a carryback from 1956 of $10,000, or an aggregate of $43,000 in carryovers and carrybacks. Thus, the net operating loss deduction for 1954, for purposes of determining the tax liability for 1954, is $43,000. However, in computing the taxable income for 1954 which is subtracted from the net operating loss for 1955 for the purpose of determining the portion of such loss which may be carried over to subsequent taxable years, the net operating loss deduction for 1954 is $15,000, that is, the aggregate of the $9,000 carryover from 1952 and the $6,000 carryover from 1953. In computing the net operating loss deduction for such purpose, the $18,000 carryback from 1955 and the $10,000 carryback from 1956 are disregarded. In computing the taxable income for 1954, however, which is subtracted from the net operating loss for 1956 for the purpose of determining the portion of such loss which may be carried over to subsequent taxable years, the net operating loss deduction for 1954 is $33,000, that is, the aggregate of the $9,000 carryover from 1952, the $6,000 carryover from 1953, and the $18,000 carryback from 1955. In computing the net operating loss deduction for such purpose, the $10,000 carryback from 1956 is disregarded.

(ii) Recomputation of percentage limitations. Unless otherwise specifically provided in this subchapter, any deduction which is limited in amount to a percentage of the taxpayer's taxable income or adjusted gross income shall be recomputed upon the basis of the taxable income or adjusted gross income, as the case may be, determined with the modifications prescribed in this paragraph. Thus, in the case of an individual the deduction for medical expenses would be recomputed after making all the modifications prescribed in this paragraph, whereas the deduction for charitable contributions would be determined without regard to any net operating loss carryback but with regard to any other modifications so prescribed. See, however, the regulations under paragraph (g) of § 1.170-2 (relating to charitable contributions carryover of individuals) and paragraph (c) of § 1.170-3 (relating to charitable contributions carryover of corporations) for special rules regarding charitable contributions in excess of the percentage limitations which may be treated as paid in succeeding taxable years.

Example (1). For the calendar year 1954 the taxpayer, an individual, files a return