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 carry back 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

In 1960 the taxpayer undertakes the operation of a trade or business and sustains therein a net operating loss of $4,700. In 1961 he sustains a net operating loss of $10,000 in the operation of the business. Under section 172(b) (2), it is determined that the entire amount of each loss, $4,700 and $10,000, is a carryback to 1959. In determining the amount of the carryover of the 1961 loss to 1962, the taxable income for 1959 as computed under this paragraph is $3,870, determined as follows:

3,870 The tax

(iii) Minimum limitation. able income, as modified under this paragraph, shall in no case be considered less than zero.

(4) 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) Taxable year subject to 1939 Code (1) In general. For the computation of the net income for any taxable year (other than the taxable years described in subparagraphs (2) and (3) of this paragraph) subject to the 1939 Code which is subtracted from the net operating loss for any other taxable year to determine the portion of such loss which is a carryback or a carryover

year, (Regula

see

to а particular taxable 26 CFR (1939) § 39.122-4 (c) tions 118) or the corresponding section of prior applicable regulations.

(2) Taxable years beginning in 1953 and ending in 1954. The net income for any taxable year beginning in 1953 and ending in 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 shall be the sum of

(i) That portion of the net income for such taxable year, computed as provided in clauses (i) and (ii) of the first sentence of section 122(b) (2) (B) of the Internal Revenue Code of 1939, which the number of days in such taxable year before January 1, 1954, bears to the total number of days in such taxable year, and

(ii) That portion of the net income for such taxable year, computed

(a) As provided in clauses (i) and (ii) of the first sentence of section 122 (b) (2) (B) of the Internal Revenue Code of 1939 but without regard to the modifications provided in section 122(d) (1) and (2) of such Code, and

(b) By allowing as a deduction an amount equal to the sum of the credits allowable for such taxable year under section 26(b) (relating to credit for dividends received) and section 26 (h) (relating to credit for dividends paid on certain preferred stock) of the Internal Revenue Code of 1939 in determining normal-tax net income,

which the number of days in such taxable year after December 31, 1953, bears to the total number of days in such taxable year.

(3) Taxable years beginning after December 31, 1953, and ending before August 17, 1954. The net income for any taxable year beginning after December 31, 1953, and ending before August 17, 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 shall be the net income for such taxable year, computed—

(i) As provided in clauses (i) and (ii) of the first sentence of section 122(b) (2) (B) of the Internal Revenue Code of 1939 but without regard to the modifications provided in section 122(d) (1) and (2) of such Code, and

(ii) By allowing as a deduction an amount equal to the sum of the credits allowable for such taxable year under section 26(b) (relating to the credit for dividends received) and section 26(h) (relating to the credit for dividends paid on certain preferred stock) of the Internal Revenue Code of 1939 in determining normal-tax net income.

(4) Statute of limitations, etc.; interest. If a refund or credit of any overpayment resulting from the application of subparagraph (2) or (3) of this paragraph is prevented on September 2, 1958, or within six months after such date, by the operation of any law or rule of law other than section 3760 of the Internal Revenue Code of 1939 or section 7121 of the Internal Revenue Code of 1954, relating to closing agreements, and other than section 3761 of the Internal Revenue Code of 1939 or section 7122 of the Internal Revenue Code of 1954, relating to compromises, refund or credit of such overpayment may, nevertheless, be made or allowed if claim therefor is filed on or before March 2, 1959. No interest shall be paid or allowed on any overpayment resulting from the application of subparagraph (2) or (3) of this paragraph. See section 14 (c) of the Technical Amendments Act of 1958 (72 Stat. 1611). [T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6862, 30 F.R. 14428, Nov. 18, 1965; T.D. 6900, 31 F.R. 14641, Nov. 17, 1966] § 1.172-6 Illustration of net operating loss carrybacks and carryovers. The application of § 1.172-4 may be illustrated by the following example:

(a) Facts. The books of the taxpayer, whose return is made on the basis of the calendar year, reveal the following facts: Net operating loss

Taxable year

1954----

1955

1956

1957

1958

1959

1960--

1961

1962

1963

Taxable income

$15,000----

The taxable income thus shown is computed without any net operating loss deduction. The assumption is also made that none of the other modifications prescribed in § 1.172-5 apply. There are no net operating losses for 1950, 1951, 1952, 1953, 1964, 1965, or 1966.

Net operating loss---
Less:

Taxable income for 1955
(the $30,000 taxable in-
come for such year
reduced by the carry-
back to such year of
$60,000 from 1956, the
carryback from 1958 to
1955 not being taken
into account).
Taxable income for 1956

(a year in which a net
operating loss was sus-
tained)-

Taxable income for 1957
(the $20,000 taxable in-
come for such year
reduced by the carry-
over to such year of
$30,000 from 1956, the
carryback from 1958 to
1957 not being taken
into account).
Taxable income for 1959
(the $30,000 taxable in-
come for such year
reduced by the carry-
over to such year of
$10,000 from 1956, the
carryover from 1958 to
1959 not being taken
into account) –

Carryover..

$20,000

$150,000

20,000

180,000

(6) Carryover to 1961. The carryover to this year is $95,000, computed as follows:

Net operating loss..
Less:

Taxable income for 1955

(the $30,000 taxable income for such year reduced by the carryback to such year of $60,000 from 1956, the carryback from 1958 to 1955 not being taken tained)

Taxable income for 1956
(a year in which a net
operating loss was sus-
tained)

Taxable income for 1957
(the $20,000 taxable in-
come for such year
reduced by the carry-
over to such year of
$30,000 from 1956, the
carryback from 1958 to
1957 not being taken
into account) –
Taxable income for 1959

(the $30,000 taxable income for such year reduced by the carryover to such year of $10,000 from 1956, the carryover from 1958 to 1959 not being taken into account) ---. Taxable income for 1960 (the $35,000 taxable income for such year reduced by the carryover to such year of 80 from 1956, the carryover from 1958 to 1960 not being taken into account)

Carryover.--.

$20,000

$150,000

35,000

55,000

95,000