involved in the computation of such net operating loss carrybacks and carryovers is a taxable year subject to the Internal Revenue Code of 1939, see also 26 CFR (1939) 39.122-4(e) (Regulations 118) or the corresponding section of prior applicable regulations.

(b) From separate to joint return. If a husband and wife, making a joint return for any taxable year, did not make a joint return for any of the taxable years involved in the computation of a net operating loss carryover or a net operating loss carryback to the taxable year for which the joint return is made, such separate net operating loss carryover or separate net operating loss carryback is a joint net operating loss carryover or joint net operating loss carryback to such taxable year.

(c) Continuous use of joint return. If a husband and wife making a joint return for a taxable year made a joint return for each of the taxable years involved in the computation of a net operating loss carryover or net operating loss carryback to such taxable year, the joint net operating loss carryover or joint net operating loss carryback to such taxable year is computed in the same manner as the net operating loss carryover or net operating loss carryback of an individual under § 1.172-4 but upon the basis of the joint net operating losses and the combined taxable income of both spouses.

(d) From joint to separate return. If a husband and wife making separate returns for a taxable year made a joint return for any, or all, of the taxable years involved in the computation of a net operating loss carryover or net operating loss carryback to such taxable year, the separate net operating loss carryover or separate net operating loss carryback of each spouse to the taxable year is computed in the manner set forth in §1.172-4 but with the following modifications:

(1) Net operating loss. The net operating loss of each spouse for a taxable year for which a joint return was made shall be deemed to be that portion of the joint net operating loss (computed in accordance with paragraph (d) of §1.172-3) which is attributable to the gross income and deductions of such spouse, gross income and deductions being taken into account to the same extent that they are taken into account in computing the joint net operating loss.

(2) Taxable income to be subtracted— (1) Net operating loss of other spouse. The taxable income of a particular spouse for any taxable year which is subtracted from the net operating loss of such spouse for another taxable year in order to determine the amount of such loss which may be carried back or carried over to still another taxable year is deemed to be, in a case in which such taxable income was reported in a joint return, the sum of the following:

(a) That portion of the combined taxable income of both spouses for such year for which the joint return was made which is attributable to the gross income and deductions of the particular spouse, gross income and deductions being taken into account to the same extent that they are taken into account in computing such combined taxable income, and

(b) That portion of such combined taxable income which is attributable to the other spouse; but, if such other spouse sustained a net operating loss in a taxable year beginning on the same date as the taxable year in which the particular spouse sustained the net operating loss from which the taxable income is subtracted, then such portion shall first be reduced by such net operating loss of such other spouse.

(ii) Modifications. For purposes of this subparagraph, the combined taxable income shall be computed as though the combined income and deductions of both spouses were those of one individual. The provisions of § 1.172-5 shall apply in computing the combined taxable income for such purposes except that the net operating loss deduction shall be determined without taking into account any separate net operating loss of either spouse, or any joint net operating loss of both spouses, which was sustained in a taxable year beginning on or after the date of the beginning of the taxable year in which the particular spouse sustained the net operating loss from which the taxable income is subtracted.

(e) Recurrent use of joint return. If a husband and wife making a joint return for any taxable year made a joint return for one or more, but not all, of the taxable years involved in the computation of a net operating loss carryover or net operating loss carryback to such taxable year, such net operating loss carryover or net operating loss carryback to the taxable year is computed in the manner set forth in paragraph (d) of this section. Such net operating loss

carryover or net operating loss carryback is considered a joint net operating loss carryover or joint net operating loss carryback to such taxable year.

(f) Joint carryovers and carrybacks. The joint net operating loss carryovers and the joint net operating loss carrybacks to any taxable year for which a joint return is made are all the net operating loss carryovers and net operating loss carrybacks of both spouses to such taxable year. For example, a husband and wife file a joint return for the calendar year 1956, having a joint taxable income for such year. The wife filed a separate return for the calendar years 1954 and 1955, in which years she sustained net operating losses. The husband filled separate returns for his fiscal year ending June 30, 1955, and, having received permission to change his accounting period to a calendar year basis, for the 6-month period ending December 31, 1955. The husband sustained net operating losses in both such taxable years. Since the husband and wife did not file a joint return for any taxable year involved in the computation of the net operating loss carryovers to 1956 from 1954 and 1955, the joint net operating loss carryovers to 1956 are the separate net operating loss carryovers of the wife from the calendar years 1954 and 1955 and the separate net operating loss carryovers of the husband from the fiscal year ending June 30, 1955, and from the short taxable year ending December 31, 1955. If the husband and wife also file joint returns for the calendar years 1957, 1958, and 1959, having joint taxable income in 1957 and 1958 and a joint net operating loss in 1959, the joint net operating loss carrybacks to 1956, 1957, and 1958 from 1959 are computed on the basis of the joint net operating loss for 1959, since separate returns were not made for any taxable year involved in the computation of such carrybacks.

(g) Illustration of principles. In the following examples, which illustrate the application of this section, it is assumed that there are no items of adjustment under section 172(b) (2) (A) and that the taxable income or loss in each case is the taxable income or loss determined without any net operating loss deduction. The taxpayers in each example, H, a husband, and W, his wife, report their income on the calendar-year basis.

Example (1). H and W filled joint returns for 1954 and 1955. They sustained a joint net operating loss of $1,000 for 1954 and a

joint net operating loss of $2,000 for 1955. For 1954 the deductions of H exceeded his gross income by $700, and the deductions of W exceeded her gross income by $300, the total of such amounts being $1,000. Therefore, $700 of the $1,000 joint net operating loss for 1954 is considered the net operating loss of H for 1954, and $300 of such joint net operating loss is considered the net operating loss of W for 1954. For 1955 the gross income of H exceeded his deductions, so that his separate taxable income would be $1,500, and the deductions of W exceeded her gross income by $3,500. Therefore, all of the $2,000 joint net operating loss for 1955 is considered the separate net operating loss of W for 1955. Example (2). (1) H and W filed joint returns for 1954 and 1956, and separate returns for 1955 and 1957. For the years 1954, 1955, 1956, and 1957 they had taxable incomes and net operating losses as follows, losses being indicated in parentheses:

(11) The net operating loss carryover of H from 1957 to 1958 is $4,000, that is, his $4,000 net operating loss for 1957 which is not reduced by any part of the taxable income for 1956, since none of such taxable income is attributable to H and the portion attributable to W is entirely offset by her separate net operating loss for her taxable year 1957, which taxable year begins on the same date as H's taxable year 1957. H's $4,000 net operating loss for 1957 likewise is not reduced by reference to 1955 since H sustained a loss in 1955. The 80 taxable income for 1956 which reduces H's net operating loss for 1957 is computed as follows:

(ii) The combined taxable income of $9,500 for 1956 is reduced to $1,000 by the net operating loss deduction for such year of $8,500. This net operating loss deduction is computed without taking into account any net operating loss of either H or W sustained in a taxable year beginning on or after January 1, 1957, the date of the beginning of the taxable year in which H sustained the net operating loss from which the taxable income is subtracted. This $8,500 is composed of H's carryovers of $5.000 from 1954 and $2,500 from 1955, and of W's carryover of $1,000 from 1954 (the excess of W's $3,000 loss for 1954 over her $2,000 income for 1955). None of the $1,000 combined taxable income for 1956 (computed with the net operating loss deduction described above) is attributable to H since it is caused by W's income (computed after deducting her separate carryover) offsetting H's loss (computed by deducting from his income his separate carryovers). No part of the $1,000 combined taxable income for 1956 which is attributable to W is used to reduce H's net operating loss

for 1957 since such taxable income attributable to W must first be reduced by W's $1,500 net operating loss for 1957, her taxable year beginning on the same date as the taxable year of H in which he sustained the net operating loss from which the taxable income is subtracted.

(iv) The net operating loss carryover of W from 1957 to 1958 is $500, her $1,500 loss reduced by the sum of her 80 taxable income for 1955 (computed by taking into account her $3,000 carryover from 1954) and her $1,000 taxable income for 1956, that is, the portion of the combined taxable income for 1956 which is attributable to her.

Example (3). (i) Assume the same facts as in example (2) except that for 1957 the net operating loss of W is $200 instead of $1,500.

(11) The net operating loss carryover of H from 1957 to 1958 is $3,200, that is, his $4,000 net operating loss for 1957 reduced by the sum of his 80 taxable income for 1955 (a year in which he sustained a loss) and his $800 taxable income for 1956. Such $800 is computed as follows:

(iii) The combined taxable income for 1956, computed with the net operating loss deduction in the manner described in example (2), remains $1,000, no part of which is attributable to H. To the $0 taxable income attributable to H for 1956 there is added $800, the excess of the $1,000 taxable income for such year attributable to W over her $200 net operating loss sustained in 1957, a taxable year beginning on the same date as the taxable year of H in which he sustained the $4,000 net operating loss from which the taxable income is subtracted.

(iv) W has no net operating loss carryover from 1957 to 1958 since her net operating loss of $200 for 1957 does not exceed the $1,000 taxable income for 1956 attributable to her. Example (4). (1) Assume the same facts as in example (2), except that W changes her accounting period in 1957 to a fiscal year ending on January 31, and has neither income nor losses for the taxable year January 1, 1957, to January 31, 1957, or for the fiscal year February 1, 1957, to January 31, 1958, but has a net operating loss of $200 for the fiscal year February 1, 1958, to January 31, 1959.

(ii) The net operating loss carryover of H from 1957 to 1958 is $3,000, that is, his net operating loss of $4,000 for 1957 reduced by the sum of his $0 taxable income for 1955 (a year in which he sustained a loss) and his $1.000 taxable income for 1956. Such $1,000 is computed as follows:

(ii) The combined taxable income for 1956, computed with the net operating loss deduction in the manner described in example (2), remains $1,000, no part of which is attributable to H. To the $0 taxable income attributable to H for 1956 there is added the $1,000 taxable income attributable to W for such year. The taxable income attributable to W is not reduced by any amount since she does not have a net operating less for her taxable year beginning on

January 1, 1957, the date of the beginning of the taxable year of H in which he sustained the $4,000 net operating loss from which his taxable income is subtracted.

(iv) The net operating loss carryover of W from the fiscal year beginning February 1, 1958, to her next fiscal year is $200, that is, her net operating loss of $200 for the fiscal year beginning February 1, 1958, reduced by the sum of her $0 taxable income for 1956, her $0 taxable income for the taxable year January 1, 1957, to January 31, 1957 (a year in which she had neither income nor loss), and her 80 taxable income for the fiscal year February 1, 1957, to January 31, 1958 (also a year in which she had neither income nor loss). The 80 taxable income for 1956 is computed as follows:

(v) The combined taxable income of $9,500 for 1956 is reduced to $0 amount by the net operating loss deduction for such year of $12,500. This net operating loss deduction is computed by taking into account the net operating loss of H for 1957 since it was sustained in a taxable year beginning before February 1, 1958, the date of the beginning of the taxable year of W in which she sustained the $200 net operating loss from which her taxable income is subtracted. This $12,500 is composed of H's carryovers of $5,000 from 1954 and $2,500 from 1955 and of his carryback of $4,000 from 1957, plus W's carryover of $1,000 from 1954 (the excess of W's $3,000 loss for 1954 over her $2,000 income for 1955). Since there is no combined taxable income for 1956, there is no taxable income attributable to W for such year. § 1.172-8 Net operating loss carryback for purposes of the excess profits tax. (a) Applicable rule. In computing the excess profits tax imposed by subchapter D, chapter 1 of the Internal Revenue Code of 1939, excess profits net income shall be computed as if section 172 of the Internal Revenue Code of 1954 had not been enacted and as if section 122 of the Internal Revenue Code of 1939 were applicable to all pertinent taxable years to which the Internal Revenue Code of 1954 is otherwise applicable.

(b) Illustrations. The application of paragraph (a) of this section may be illustrated as follows:

(1) Net operating loss. The net operating loss itself, even though it is sustained in a taxable year which is otherwise subject to the Internal Revenue Code of 1954, shall be computed for this purpose under the provisions of section 122 of the Internal Revenue Code of 1939 and 26 C.F.R. (1939) 39.122-2 (Regulations 118) or the corresponding section of prior applicable regulations.

(2) Net operating loss carryback. (i) Since section 122 of the Internal Revenue Code of 1939 allows only a one-year

carryback of a loss sustained in a taxable year beginning after December 31, 1949, only such one-year carryback shall be allowed for purposes of computing excess profits net income even though the loss is sustained in a taxable year ending after December 31, 1953, for which section 172(b) (1) otherwise allows a two-year carryback.

(ii) Thus, a calendar year taxpayer which sustains a net operating loss in 1954 may carry such loss back to both 1952 and 1953 for purposes of computing the normal tax and surtax imposed by sections 13 and 15, respectively, of the Internal Revenue Code of 1939, but may carry such loss back only to 1953 for purposes of computing excess profits net income in determining the excess profits tax imposed by subchapter D, chapter 1 of the Internal Revenue Code of 1939. Such 1954 loss shall have no effect on the determination of the excess profits tax for 1952. The amount of the carryback from 1954 to 1953 for purposes of determining the excess profits tax for 1953 is an amount equal to the amount of the net operating loss computed as provided in subparagraph (1) of this paragraph.

(iii) A net operating loss sustained in the calendar year 1955 by such taxpayer may be carried back to 1953 for purposes of computing normal tax and surtax but shall have no effect on the determination of the excess profits tax for 1953 or for any other year.

§ 1.172-9 Net operating loss carrybacks in case of certifications under the Trade Expansion Act of 1962.

(a) Eligibility for five-year carryback (1) In general. Section 317(a) of the Trade Expansion Act of 1962 (76 Stat. 889), hereinafter referred to as the Trade Act, provides that if the Secretary of Commerce determines that an alleged net operating loss of a firm (as defined in section 405 (3) of the Trade Act) for any taxable year arose predominantly out of the carrying on of a trade or business which was seriously injured, during such taxable year, by certain increased imports, and that the tax assistance provided under section 172 (b) (1) (A) (ii) of the Code will materially contribute to the economic adjustment of the firm, then he shall certify such determinations. Section 172(b) (1) (A)

(ii) provides that in the case of a taxpayer with respect to a taxable year ending on or after December 31, 1962, for which a certification has been issued under such section 317(a), a net operating loss for such year shall be a net operating loss carryback to each of the five taxable years preceding the loss year. Section 172(b) (3) (A) provides special notice and consent rules which must be satisfied for the five-year carryback to apply. See paragraphs (c) and (d) of this section. Section 172 (b) (3) (B) provides that the application of the five-year carryback in the case of a partnership and its partners, or an electing small business corporation (as defined in section 1371 (b)) and its shareholders, shall be determined under regulations prescribed by the Secretary or his delegate. See paragraph (b) of this section.

(2) Taxpayer must sustain net operating loss. The existence and amount of any net operating loss shall be determined under section 172(c) and §§ 1.172-1 through 1.172-3. Thus, for example, an individual who operates a firm as a sole proprietorship which is certified for tax assistance for a taxable year must combine the gross income and deductions (subject to the modifications specified in section 172(d) and § 1.172-3) from all of his activities for the taxable year in determining the existence and amount of a net operating loss. special rules applicable in the case of a partner of a partnership or of a shareholder of an electing small business corporation, see paragraph (b) of this section. For rules applicable in determining the extent to which a net operating loss of a member of an affiliated group of corporations making or required to make a consolidated return may be carried back five years, see paragraphs (a) (4) and (b) (6) of § 1.1502-31.

For

(3) Provision elective. The five-year carryback provisions of section 172 (b) (1) (A) (ii) apply to a taxpayer only if all the requirements relating to the application of such section are satisfied. Thus, for example, if a certification is issued under section 317(a) of the Trade Act with respect to a net operating loss of a partnership, one or more partners of of such partnership may apply such fiveyear carryback provisions while the remaining partners may apply the three

year carryback provisions of section 172 (b) (1) (A) (i).

(4) Effect of determinations by the Secretary of Commerce. Neither the issuance of a certification under section 317(a) of the Trade Act, nor any determination made by the Secretary of Commerce, is determinative of either the existence or the amount of any net operating loss for purposes of section 172 or any other section of the Code.

(b) Special rule for partners of a partnership or shareholders of an electing small business corporation—(1) In general. This paragraph provides rules for applying section 172(b) (3) (B), which provides that the application of the fiveyear carryback in the case of a partnership and its partners, or an electing small business corporation and its shareholders, shall be determined under regulations prescribed by the Secretary or his delegate, and that a net operating loss sustained by a partner or such a shareholder shall be eligible for the five-year carryback only if it arose predominantly from losses in respect of which certifications, issued under section 317(a) of the Trade Act, are filed in accordance with section 172(b) (3) (A) (i).

(2) Computation of predominant losses. (i) The net operating loss of a partner or of a shareholder of an electing small business corporation for a taxable year shall be considered to have arisen predominantly from losses in respect of which certifications were filed only if more than 50 percent of his total net operating loss for such taxable year is comprised of losses (or shares of losses) described in subdivision (ii) of this subparagraph.

(ii) For purposes of subdivision (i) of this subparagraph, the losses and shares of losses described in this subdivision are as follows:

(a) The amount of any loss for the year of a proprietorship of which such partner or shareholder is the proprietor, if such loss is certified under section 317 (a) of the Trade Act and if the filing requirements of paragraph (c) of this section are satisfied with respect to such loss.

(b) Such partner's or shareholder's share of any loss of a partnership of which he is a member which is taken into account for the year, if such loss is certified under section 317(a) of the

Trade Act and if the filing requirements of paragraph (c) of this section are satisfied with respect to such loss.

(c) Such partner's or shareholder's share of any net operating loss of an electing small business corporation of which he is a shareholder which is taken into account for the year, if such loss is certified under section 317(a) of the Trade Act and if the filing requirements of paragraph (c) of this section are satisfied with respect to such loss.

(3) Entire amount of net operating loss is a carryback. If the net operating loss of a partner of a partnership, or of a shareholder of an electing small business corporation, for a taxable year is considered to have arisen predominantly from losses in respect of which certifications are filed, and if the other rules provided in this section are satisfied, the five-year carryback period shall apply to the entire net operating loss of the taxpayer.

(4) Examples. This paragraph may be illustrated by the following examples:

Example (1). Jones is a partner in the ABC partnership, a shareholder in X Corporation, an electing small business corporation, and the sole proprietor of a business. The corporation makes its return on the basis of a fiscal year ending May 31, and the partnership and Jones make their returns on the basis of a calendar year. The partnership and corporation each have losses in respect of which certifications have been issued under section 317(a) of the Trade Act for their taxable years ending in 1963, and in respect of which the filing requirements of section 172(b)(3)(A) and paragraph (c) of this section have been satisfied. For the calendar year 1963, Jones has a net operating loss, as defined in section 172(c), of $19,000, computed as follows:

Jones' portion of the net operating

loss of X Corporation, allowed as

(10,000)

2,000

a deduction under section 1874.- ($5,000) Jones' distributive share of loss of the partnership-Jones' distributive share of the partnership's gain from sales or exchanges of property described in section 1231 (relating to property used in the trade or business and involuntary conversions) --Excess of deductions over gross income from Jones' individually owned business___. Excess of nonbusiness gross income over nonbusiness deductions___Net operating loss (as defined in section 172 (c)) for 1963---------- (19,000)

(7,000)

1,000