NOL carryforward from newly married spouse

[Christy H]

I have an existing tax client who married in 2023.  The new spouse has a significant NOL from prior years.  The NOL can only be used against the new spouses income.  However, the ProSeries program is applying the NOL to both spouses income.  How do I get the software program to only apply the NOL to the new spouse that incurred the NOL?

[Just-Lisa-Now-]

ProSeries is severely lacking in NOL management, you'll probably have to make the adjustment manually somehow.

[Camp1040]

Some times you can "fix" the issue by using the carryover worsheet and manually enter or override entries.

[BobKamman]

Where are you finding that the NOL can't be applied to the joint income?  That might be correct, but all the examples I find involve situations where the couple was married in both the loss year and the carryover year -- just not filing jointly each year.  Or, after a divorce the spouse with a loss wants to carryback to a joint-return year.  There's no rule requiring one spouse's itemized deductions to be limited to that spouse's income, so is it different for NOL's?  (And I hate to ask, if this happened in a community-property state.)  

[Christy H]

IRS publication 536 states:

Change in Marital Status

If you and your spouse were not married to each other in all years involved in figuring NOL carrybacks and carryovers, only the spouse who had the loss can take the NOL deduction. If you file a joint return, the NOL deduction is limited to the income of that spouse.

[BobKamman]

And the paragraph that immediately follows that is, "For example, if your marital status changes because of death or divorce, and in a later year you have an NOL, you can carry back that loss only to the part of the income reported on the joint return."  And there is a 2004 Chief Counsel memorandum sent to a Service Center that answered that question.  It doesn't really cite any authority, it just points out that there is nothing reliable which is why it was asked in the first place.  The CCM starts out by noting "conflicting directions in Publication 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts (2003), the instructions to Form 1045, Application for Tentative Refund, and Internal Revenue Manual (IRM) Section 21.5.9."

But you are not asking about a carryback from single to joint.  And your clients may have thousands of dollars at stake, depending on what you tell them.  If you cite an IRS publication to a judge, you'll be laughed out of court.  

Sometimes, what a publication leaves out is the best clue to an answer.  Pub 536 doesn't say, "if your marital status changes because of marriage, and in an earlier year you have an NOL"  Because IRS doesn't have an answer to that one, and neither do I.  

[Christy H]

In Calvin v. United States, 10 Cir., 354 F. 2d 202, 204, the court held that an NOL income tax deduction may be taken only by the taxpayer who incurs it.  As for as I can see, there has been no recent case to overturn this precedent.

I spoke to the Intuit technical support help desk today.  Both ProSeries Basic and ProSeries does not have the ability to only apply the NOL to one spouses income.  I had to use overrides in the Carry Forward worksheets and 1040 worksheet to manually correct this.  Keep in mind that there may be other forms that are driven off of total income that need to be manually corrected.  In this case, I also had to override the calculation of retirement savings credit and AMT calculations.  Not a fun process, but I do feel that I eventually got the correct overall tax calculated.

[Frustrated-in-IL]

This thread doesn't affect me but I have been following it and I am impressed that the original poster has clearly done research on this before posting.  Speaking for myself, I am so tired of reading the "Can I deduct my goldfish as a dependent?" questions frequently asked.

[BobKamman]

Well, that’s the law in the Muck Now* circuit, and it might be to your clients’ advantage. What’s interesting is that in Calvin and other cases, one spouse wanted to use the other’s NOL, apparently thinking that it would save taxes. But in other cases, you wouldn’t want to lower the non-loser spouse’s taxable income down to the zero bracket. You would just want to use the losing spouse’s deduction to skim the cream off the top of the taxable income, and save some for next year. And if that’s the result, I would not be surprised if any given auditor on any given day might see the benefit of the strategy, and insist on the opposite result. After all, marriage today isn’t what it once was in 1959.
(*useful anagram for remembering 10th Circuit states)

[Taxes-by-Rocky]

I have to add my two cents here...sticking with the Valentine's Day theme.

What the court failed to recognize in Calvin is that marriage is not necessarily undertaken with a 'for profit' motive as corporate mergers and acquisitions are supposed to be.  Therefore, the court's analogy seems somewhat misguided.  After all, has a 'change in control' really occurred?  And if so, exactly how would one measure that?  No doubt, Asa and Lois Calvin had their own views.  For nothing else, the court should have allowed the application of IRC 382(l)(5) or (l)(6) and applied a long-term high-yield junk bond rate (i.e., second marriage), instead of the usual long-term tax exempt (risk free) rate.

Taxation never ceases to amaze me!