Apache Corporation and Subsidiaries v. Commissioner

Apache Wins: Tax Court Allows Split Waiver of NOL Carrybacks

In a victory for corporate taxpayers seeking greater flexibility in loss management, the Tax Court, in a reviewed opinion, sided with Apache Corporation, allowing it to selectively waive the carryback period for a portion of its net operating loss (NOL). At stake were refunds totaling approximately $24 million, which Apache sought by carrying back "Specified Liability Losses" (SLLs) to the 2006 and 2007 tax years. The IRS challenged this move, arguing that Apache's waiver of the carryback period for its regular NOLs in 2016 and 2017 also precluded it from carrying back the SLLs. The core question before the court: Can a taxpayer waive the carryback period for one part of an NOL while retaining it for another? The Tax Court answered yes, allowing Apache to pursue its refunds.

The Facts: A Tale of Two Elections

Following a challenging economic period, Apache reported substantial Net Operating Losses (NOLs) in both 2016 and 2017. A portion of these NOLs qualified as "Specified Liability Losses" (SLLs), a category defined under Section 172(f) of the Internal Revenue Code. Section 172(f) allows for a 10-year carryback period for losses stemming from certain liabilities, such as product liability or statutory obligations, as opposed to the general two-year carryback. For 2016, Apache reported an NOL of $1,931,356,691, which included $40,734,363 in SLLs. The following year, 2017, saw an NOL of $3,082,583,587, with $30,818,137 classified as SLLs.

In a move that would later become central to the dispute, Apache attached an election statement to both its initial and superseding 2016 and 2017 tax returns. The statement read: "ELECTION TO FOREGO NET OPERATING LOSS CARRYBACK PURSUANT TO INTERNAL REVENUE CODE § 172(b)(3) AND TREAS. REG. § 1.1502-21(b)(3) This is an election under § 1.1502-21(b)(3)(i) to waive the entire carryback period pursuant to section 172(b)(3) for the 2016 CNOLs of the consolidated group of which Apache Corporation (EIN . . . ) is the common parent. Apache Corporation and Subsidiaries does not elect to relinquish the carryback period with respect to specified 5 liability losses incurred in this tax year ended December 31, 2016 pursuant to Internal Revenue Code § 172(f)(6)." Critically, Apache explicitly stated its intention to waive the general NOL carryback under Section 172(b)(3), while simultaneously affirming its right to carry back its SLLs.

Subsequently, Apache filed Form 1139, Corporation Application for Tentative Refund, seeking to carry back its $40,734,363 SLL from 2016 to 2006, claiming a refund of $13,829,316. A similar move was made for the 2017 tax year, with Apache filing Form 1139 to carry back its $30,818,137 SLL to 2007, seeking a refund of $10,139,167. Apache received tentative refunds for both years in January 2018 and March 2019, respectively.

The IRS later examined Apache’s 2016 and 2017 returns and, on September 26, 2022, issued a Notice of Deficiency disallowing the SLL carrybacks to 2006 and 2007. The IRS argued that Apache's election under Section 172(b)(3) to forgo the "entire carryback" applied to all components of the NOL, including the SLL portion, thus precluding the carryback of SLLs. Apache contested this determination, leading to the present Tax Court case. Apache sought a ruling that it properly carried back its SLLs, while the IRS maintained that the Section 172(b)(3) election waived the carryback period for all losses, including SLLs.

The Law: General vs. Specified Losses

The dispute centers on interpreting Section 172 of the Internal Revenue Code, which governs the treatment of net operating losses (NOLs). A "net operating loss" arises when a taxpayer's deductions exceed their gross income, as the Tax Court noted, citing United Dominion Indus., Inc. v. United States, 532 U.S. 822, 825 (2001). Section 172(a) allows a deduction for the aggregate of NOL carryovers and carrybacks to a given tax year.

Section 172(b)(1) defines the years to which an NOL can be carried. The default rule, as stated in Section 172(b)(1)(A), allows taxpayers to carry back an NOL two years and then forward twenty years. However, Congress has created exceptions for specific types of losses, recognizing that certain losses are particularly large and sporadic. One such exception, relevant to this case, involves "specified liability losses." Section 172(b)(1)(C) allows a ten-year carryback period for these specified liability losses (SLLs).

Section 172(b)(3) provides an election whereby taxpayers can choose to forgo the carryback period for a net operating loss. Specifically, it states that "Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year." This election is often useful for taxpayers with expiring tax credits who would prefer to utilize those credits in earlier years instead of carrying back the loss.

The conflict in this case hinges on the interpretation of "entire carryback period." Does this phrase mean every possible carryback period available to the taxpayer, including the special ten-year SLL carryback? Or does it refer only to the general two-year carryback period, allowing taxpayers to selectively waive the general carryback while retaining the SLL carryback? The answer to this question determines whether Apache validly carried back its SLLs to 2006 and 2007.

The Analysis: 'A' vs 'The' Carryback Period

The conflict in this case hinges on the interpretation of "entire carryback period." Does this phrase mean every possible carryback period available to the taxpayer, including the special ten-year SLL carryback? Or does it refer only to the general two-year carryback period, allowing taxpayers to selectively waive the general carryback while retaining the SLL carryback? The answer to this question determines whether Apache validly carried back its SLLs to 2006 and 2007.

The court began its analysis with the "plain language of the statute," as it must in any question of statutory interpretation. Section 172(b)(3) allows a taxpayer entitled to a carryback period under paragraph (1) to "relinquish the entire carryback period." The court emphasized that "the entire carryback period" refers back to "a carryback period under paragraph (1)." The critical question, then, became what carryback period or periods Section 172(b)(1) provides.

The court then invoked the Dictionary Act, which states that "words importing the singular include and apply to several persons, parties, or things" unless the context indicates otherwise. Therefore, the reference to "a carryback period" in Section 172(b)(3) is consistent with multiple carryback periods if Section 172(b)(1) provides for them. And it does. Section 172(b)(1), titled "Years to which loss may be carried," establishes carrybacks of varying lengths for different types of losses. Specifically, Section 172(b)(1)(A)(i) provides a two-year carryback for a general net operating loss. Section 172(b)(1)(C) provides a ten-year carryback for specified liability losses (SLLs). Other subparagraphs create different carryback periods for REIT years, excess interest losses, eligible losses, and farming losses.

The court concluded that Section 172(b)(1) establishes multiple distinct "carryback periods" for the purposes of the waiver election in Section 172(b)(3). Although the term "carryback period" is not defined in the Tax Code, the court looked to its ordinary meaning. It consulted several dictionaries, including Merriam Webster’s Collegiate Dictionary and Black’s Law Dictionary, to define "period" as a division of time. It defined "carryback" by reference to Black's Law Dictionary as a provision in the tax law which allows a taxpayer to apply a net operating loss in one year to the three immediately preceding tax years, beginning with the earliest year.

Therefore, a "carryback period" is a division of time to which a loss amount can be carried back. This definition, the court reasoned, corresponds precisely with the content of Section 172(b)(1), where each subparagraph sets out a different division of time in which a loss amount may be carried back. Thus, each of these divisions of time constitutes a distinct carryback period to which a taxpayer is "entitled...under paragraph (1)" within the meaning of Section 172(b)(3).

Historical Context & The 'Tiebreaker'

The Tax Court bolstered its textual analysis with historical context and regulatory interpretation. It pointed to Treasury Regulation § 1.172-13, finalized in 1986, which addressed the interplay between general net operating losses and product liability losses – a category later incorporated into the broader definition of a "specified liability loss" under Section 172(f)(1)(A). The regulation stated that if a taxpayer sustained both a general net operating loss and a product liability loss in the same year, an election under Section 172(b)(3) to relinquish the entire carryback period "does not preclude the product liability loss from being carried back 10 years." The court reasoned that, under the IRS's own regulation, Apache should be permitted the carryback. The court further stated that there was no meaningful reason to treat product liability losses under Section 172(f)(1)(A) differently than other specified liability losses under Section 172(f)(1)(B) for carryback period elections, as Congress joined both categories together in 1990.

Moreover, the court noted that the legislative history surrounding the 1997 amendments to Section 172 supported the independent operation of different carryback periods. These amendments shortened the default carryback period from three years to two but retained longer carryback periods for specific losses, such as those related to casualty losses. Congressional reports indicated that these special, longer carryback periods were intended to remain available even as the default carryback period was shortened.

Finally, the court invoked the Gould principle as a tiebreaker. Citing Gould v. Gould, the court emphasized the longstanding legal principle that ambiguous tax statutes are to be construed against the government and in favor of the taxpayer. Thus, even if the interpretation of Section 172(b)(3) were deemed a close call, the court would be obligated to construe it in a manner favorable to Apache.

The Dissent: All or Nothing

Despite the majority's reasoning, Judges Halpern and Marshall dissented, arguing that a net operating loss (NOL) has only one carryback period, regardless of whether parts of it might be carried back to different years under special rules. They looked to the origins of the carryback waiver rule in 1976, when such elections were strictly "all-or-nothing." At that time, a single taxpayer could not have more than one carryback period for any one NOL, according to the dissent. Thus, an election to waive the carryback under Section 172(b)(3), which allows a taxpayer to "elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year," necessarily meant relinquishing the entire NOL carryback.

The dissent contended that Apache attempted to make an election that simply does not exist under the law. Therefore, according to Judges Halpern and Marshall, the entire election should be deemed invalid. In their view, the court should have denied both the IRS's and Apache's motions for partial summary judgment, instead requiring Apache to carry its specified liability losses back ten years and the rest of its NOL back two years. In short, the dissenting judges believed the various carryback periods were intended to remain available even as the default carryback period was shortened.

Impact: A Win for Nuanced Tax Planning

As Judges Halpern and Marshall pointed out, however, the court's majority opinion was not unanimous. They believed that Apache should have been required to carry its specified liability losses back ten years and the rest of its NOL back two years. In short, the dissenting judges believed the various carryback periods were intended to remain available even as the default carryback period was shortened.

Despite this dissent, the Reviewed Opinion in Apache validates a nuanced tax planning strategy: strategically 'splitting' net operating loss (NOL) waivers to maximize tax refunds through specified liability losses (SLLs) while preserving other beneficial tax attributes. By waiving the general carryback period under Section 172(b)(3), which allows a taxpayer to relinquish "a carryback period" to which it is entitled, without specifying that all carryback periods for a given year must be relinquished together, a taxpayer can carry forward general losses to offset future income. At the same time, the taxpayer can preserve the ten-year carryback period under Section 172(b)(1)(C) for its specified liability loss. A specified liability loss under Section 172(f) includes deductions attributable to product liability or liabilities arising under federal or state law, such as environmental remediation, where the act giving rise to the liability occurred at least three years before the taxable year. The Apache decision signals the Tax Court's willingness to apply the IRS's own regulations and the 'Tiebreaker' canon against the IRS in complex statutory interpretation cases, providing taxpayers with increased flexibility in optimizing their tax positions.