Rev. Rul. 65-190

Advice has been requested whether, for Federal income tax purposes, a refund of New York State corporation franchise taxes resulting from a net operating loss carryback should be included in the income of a taxpayer using the accrual method of accounting in the taxable year of the loss which gives rise to the refund or in a later year in which the claimed refund is approved or received.

For taxable years beginning after December 31, 1960, the State of New York permits a net operating loss deduction for State corporation franchise tax purposes which shall be `presumably the same,' with certain adjustments, as that allowed under section 172 of the Internal Revenue Code of 1954. See section 208 of the New York Tax Law, Vol. 59 (Part 1) McKinney's Consolidated Laws of New York. That section provides detailed and precise rules for determining, on a given set of facts, the amount of the net operating loss deduction.

However, in order to obtain a refund of State corporation franchise taxes arising out of a net operating loss carryback, the taxpayer must file a claim with the New York State Tax Commission. The New York State Tax Commission is not bound by any Federal decision as to the refund but has authority to recompute the taxes of the taxpayer. See section 212 of the New York Tax Law, as amended, supra .

Section 451 of the Code provides, in part, that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-1(a) of the Income Tax Regulations provides, in part, that, under an accrual method of accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.

The inclusion in gross income will be required even though it may be necessary for additional acts to be performed by third persons, if it is reasonable to expect that these acts will be performed. See Automobile Insurance Co. of Hartford, Conn. v. Commissioner , 72 Fed.(2d) 265 (1934). See also Continental Tie & Lumber Co. v. United States , 286 U.S. 290 (1932), Ct. D. 494, C.B. XI-1, 260 (1932), where the Supreme Court of the United States held that the taxpayer should accrue amounts owing under the Transportation Act of 1920, in the year the right to such payments arose, and not in a later year when actually paid. The Court said that, in the former year, the taxpayer could `ascertain with reasonable accuracy' the amount of the award, and that the taxpayer's accounts `contained all the information that could ever be available touching relevant expenditures.' In H. O. Boehme, Inc. v. Commissioner , 15 T.C. 247 (1950), acquiesence, C.B. 1951-1, 1, which also involved the New York franchise tax, accrual of a refund was in the year when the taxpayer `has all of the basic data or facts from which he may within reasonable limits determine an amount which he has a fixed right to receive.' The year of accrual was held to be the year in which a final agreement with the United States regarding renegotiation of war contracts was executed, rather than a later year when the refund was received or an earlier year to which the refund related.

Where a net operating loss is sustained for a particular taxable year, the amount of the loss can be calculated with reasonable accuracy from the books and accounts of the taxpayer. Assuming the validity of the taxpayer's transactions and the correctness of the figures so established, the net operating loss incurred will be approved by the New York State Tax Commission if the claim is properly submitted.

Accordingly, it is held that a refund of New York State corporation franchise taxes resulting from a net operating loss carryback is properly accruable in the income of a taxpayer using the accrual method of accounting for the taxable year of the loss which gives rise to the refund.