Rev. Rul. 60-216

Advice has been requested as to the treatment of net operating loss carrybacks, in the case of residents of a community property state, where the taxpayers were divorced in a year involving a net operating loss or a net operating loss deduction.

Husband and wife, residents of a community property state, filed a joint return of community income for the taxable year 1954 and paid the full amount of tax due for that year. On July 1, 1955, they were divorced. On September 1, 1955, the husband remarried. The second wife, who was unmarried in 1954, filed a separate return for that year. For the taxable year 1955, the husband and his second wife filed a joint return which properly included the husband's portion of community income with his former wife from January 1, 1955, to July 1, 1955, as well as individual and community income of both the husband and his second wife for 1955. See G.C.M. 10941, C.B. XI-2, 223 (1932). The joint return of community income for the taxable year 1956 filed by the husband and his second wife disclosed a net operating loss. The specific problem presented is the treatment in the instant case of the net operating loss carryback to 1954 and 1955.

Section 172 of the Internal Revenue Code of 1954 provides, in part, for the allowance of a deduction for a taxable year of net operating loss carrybacks to such year, subject to certain modifications.

Section 1.172-7 of the Income Tax Regulations prescribes additional rules for computing the net operating loss carrybacks and carryovers of a husband and wife making a joint return for one or more of the taxable years involved in the computation of the net operating loss deduction. Section 1.172-7(e) of the regulations provides as follows:

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.

These provisions of the regulations contemplate the existence of the same husband and wife for all the years involved in the computation of the net operating loss carryovers and carrybacks and are, therefore, not applicable in the instant case.

Accordingly, in this case, (1) only that portion of the joint community net operating loss for 1956 which vested in the husband may, subject to the provisions of section 172(d) of the Code, be carried back and applied against the part of the community income reported for the taxable year 1954 which vested in him; (2) that portion of the 1956 joint community net operating loss sustained which vested in the second wife may, subject to the provisions of section 172(d) of the Code, be carried back and applied against her separate income for the taxable year 1954; and (3) the unabsorbed portion of the 1956 community net operating loss may, subject to the provisions of section 172(d) of the Code, be carribed back and applied against the income reported in the joint return of the husband and the second wife for the taxable year 1955. See W. O. Allen v. Commissioner , 22 T.C. 70, acquiescence, C.B. 1954-2, 3.