Tax Court Holds Different Carryback Periods Are Allowed Under Sec. 172

(Parker Tax Publishing December 2025)

The Tax Court held that an election by the parent corporation of a consolidated group to waive the entire carryback period under Code Sec. 172(b)(3) for the consolidated net operating loss of the consolidated group relinquished the carryback of only that portion of the parent's net operating loss that exceeded its reported specified liability loss. The court found that Code Sec. 172, judicial precedent, and IRS regulations all supported the taxpayer's position that it was able to restrict its elections to its normal net operating losses. Apache Corporation and Subs v. Comm'r, 165 T.C. No. 11 (2025).

Background

Apache Corp. is an oil and gas exploration and production company based in Houston, Texas. During 2016 and 2017, Apache was the common parent of an affiliated group. That group filed a consolidated calendar year Form 1120, Corporation Income Tax Return, for both years.

For each of 2016 and 2017, Apache reported a net operating loss (NOL) that consisted in part of a "specified liability loss" within the meaning of Code Sec. 172(f)(1). Apache's return for each year included an election under Reg. Sec. 1.1502- 21(b)(3)(i) to waive the entire carryback period pursuant to Code Sec. 172(b)(3) for the consolidated NOL of the consolidated group of which Apache was the common parent. Apache expressly stated that it did not elect under Code Sec. 172(f)(6) to relinquish the carryback period with respect to the specified liability loss incurred in each year.

Apache received a tentative refund for each of 2006 and 2007 from the carryback of the specified liability losses it reported for 2016 and 2017, respectively. The IRS then determined deficiencies for 2006 and 2007 based on the disallowance of the carrybacks.

Apache took its case to the Tax Court. Moving for partial summary judgment, Apache argued that its election for each year relinquished the carryback of only that portion of its NOL that exceeded its reported specified liability loss. The IRS sought partial summary judgment that Apache's election for each of 2016 and 2017 relinquished the carryback of its entire NOL for the year.

Net Operating Losses

A net operating loss results from deductions in excess of gross income for a given year. Code Sec. 172 permits taxpayers to carry NOLs through time, taking them backward or forward to years for which they can be deducted. Under Code Sec. 172(b)(1)(A), an NOL generally can be carried back 2 years and then forward 20 years.

Over time, Congress has defined categories of losses which can be carried back further. As relevant in this case, in 1990 Congress changed the law so that a "specified liability loss" could be carried back 10 years. Code Sec. 172(f)(1) defines a specified liability loss to include (1) losses attributable to product liability and (2) amounts that satisfy a liability under a state or federal law relating to the reclamation of land, the decommissioning of a nuclear power plant, the dismantlement of a drilling platform, the remediation of environmental contamination, or payments under a workers compensation act.

But Congress did not leave taxpayers without choices. Code Sec. 172 permits taxpayers to elect not to carry back their NOLs and instead to carry such losses only forward. The election is helpful to taxpayers who have tax attributes (such as credits) that might otherwise expire unused. A taxpayer in that position might prefer to use expiring credits during the earlier years to which an NOL would otherwise have been carried back and have the loss available for use in the future.

Apache was one such taxpayer. For 2016 and 2017, it made elections under Code Sec. 172(b)(3) to waive the carryback period for its normal NOLs. That is, it chose to carry those losses only forward. But it expressed an intent not to relinquish the 10-year carryback for its specified liability losses. Thus, the issue before the Tax Court was whether Apache could restrict its elections to its normal NOLs.

Analysis

A majority of the Tax Court held that Apache was permitted to elect to relinquish the two-year carryback period for its standard NOL without waiving the 10-year carryback for its specified liability loss.

The court found that Code Sec. 172(b)(1) sets out distinct carryback periods for different kinds of losses. For example, there is no carryback for a so-called REIT year under Code Sec. 172(b)(!)(B)(i), and the carryback is 10 years specified liability losses under Code Sec. 172(b)(1)(C). By the court's count, Code Sec. 172(b)(1) establishes at least six potential carrybacks of different lengths, and the court observed that the same taxpayer could be entitled to several of these in the same year. This fact strongly suggested, in the court's view, that Code Sec. 172(b)(1) establishes distinct "carryback periods" - i.e., multiple carryback periods - for purposes of the election in Code Sec. 172(b)(3).

In addition, the court found that the structure of Code Sec. 172, especially Code Sec. 172(f)(5) and analogous provisions, supports the conclusion that different carryback periods are allowed. A taxpayer has only one NOL for each year, and Code Sec. 172(b)(2), which sequences the years to which a loss is carried, provides a rule that applies to "[t]he entire amount" of that NOL. For a portion of an NOL to be carried back separately under Code Sec. 172(b)(2), therefore, a special rule is required. Code Sec. 172(f)(5) provides that rule for specified liability losses: "For purposes of applying subsection (b)(2), a specified liability loss for any taxable year shall be treated as a separate net operating loss for such taxable year ... " (emphasis added). The court noted that analogous provisions exist for eligible losses and farming losses.

The court observed that, by contrast, no rule similar to that of Code Sec. 172(f)(5) is required for Code Sec. 172(b)(3), because the latter provision, together with Code Sec. 172(b)(1), already contemplates multiple carryback periods working in tandem. Additionally, given that Code Sec. 172(f)(5) and similar rules signal portions of NOLs are meant to be treated separately from the rest of the NOL - i.e., given that under those provisions and under Code Sec. 172(b)(1) the losses are treated as separate losses and carried back for a different number of years - the court said it is logical that those portions would have separate carryback periods as well.

Next, the court concluded that when a taxpayer is entitled to multiple carryback periods under Code Sec. 172(b)(1), Code Sec. 172(b)(3) applies to each individual period, such that the taxpayer may elect to retain or relinquish the period independent of the others. The court reasoned that reading Code Sec. 172(b)(3) as providing a taxpayer with an all or nothing election (i.e., relinquish each and every one of the periods set out in Code Sec. 172(b)(1) or be stuck with all of them) makes little sense given the number of different carryback periods set out in Code Sec. 172(b)(1). It also makes little sense, the court said, in view of Congress's going out of its way to give taxpayers additional choices when it comes to specified liability losses.

Two judges concurred in part and dissented in part with the majority's opinion. They argued that the election allowed by Code Sec. 172(b)(3) necessarily relinquishes the carryback of the electing taxpayer's entire NOL. Because any NOL has only one carryback period, the dissenters reasoned that an election under Code Sec. 172(b)(3) necessary relinquishes the carryback of the taxpayer's entire NOL. Even if a single NOL could have multiple carryback periods, the dissenters would still read Code Sec. 172(b)(3) to say that a taxpayer entitled to one or more carryback periods can elect to relinquish the carryback period or periods to which the taxpayer is entitled.

For a discussion of net operating losses, see Parker Tax ¶99,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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