Rev. Rul. 56-285

Advice has been requested whether the net operating loss reported for the year 1950, by reason of which a net operating loss carryover is claimed as a deduction from income for the year 1955, should be adjusted by the amount of excessive depreciation claimed for the year 1950, since the statutory period of limitation for assessment of taxes for that year has expired.

Taxpayer was incorporated in June, 1950, and files its income tax returns on the calendar year basis. Each of the returns so filed for the years 1950 to 1954, inclusive, has shown a net loss. In its return for 1950, the corporation deducted depreciation computed on certain assets acquired at the time of its organization in 1950. It has been determined that the claimed basis of the assets was exessive, and hence that the amount of depreciation claimed as a deduction in the computation of the corporation's net operating loss for 1950 was also excessive.

Under section 122(b)(2)(B) of the Internal Revenue Code of 1939, as continued in effect by section 172(g)(1) of the Internal Revenue Code of 1954, a net operating loss sustained in a taxable year beginning after December 31, 1949, may be carried over to the five succeeding taxable years. The term `net operating loss' as defined in section 122(a) of the 1939 Code, with exceptions not here material, means the excess of the deductions allowed by Chapter 1 of that Code over the gross income. Among such deductions is the depreciation allowable under section 23(l). Under section 172(a) and (e) of the 1954 Code, such net loss is allowable as a deduction in computing taxable income.

The fact that the statutory period for assessment of income taxes for the year in which the loss was sustained has expired does not preclude the making of such adjustments as may be necessary to correct the net operating loss deduction. Phoenix Coal Co., Inc. v. Commissioner , decided March 13, 1956, by the United States Court of Appeals for the Second Circuit. Therefore, it is held that the net operating loss for the year 1950, carried over and claimed as a deduction from income for the year 1955, should be adjusted to reflect the amount of depreciation properly allowable for the loss year. Compare Commissioner v. William D. Disston , 325 U.S. 442.