Metro One v. CIR

§ 56’s Relief Rule does not allow a taxpayer subject to the Alternative Minimum Tax to offset upwards of 100% of a taxpayer’s income with net operating losses, because the term “carryovers” as used in § 56(d)(1) refers only to “carryforwards.” Thus, taxpayers are not able to use net operating losses carried back to 2001 or 2002 from later tax years under the Relief Rule.

Metro One Telecommunications (Metro) was subject to the Alternative Minimum Tax (AMT) in 2002. In 2003 and 2004, it had net operating losses (NOLs) that it carried back to reduce the 2002 taxable income to $0. The Commissioner of Internal Revenue Service (Commissioner) issued a Notice of Deficiency to Metro for $630,159. Metro petitioned the United States Tax Court for review of the deficiency, and the court found for the Commissioner. Metro appealed to the Ninth Circuit. The Court framed the issue as “whether a taxpayer, subject to the AMT in 2002[,] may . . . reduce its income tax liability by claiming a deduction for NOLs that arose in later years.” Metro argued that a phrase in the Relief Rule, “carryovers of net operating losses,” should be read to include both carrybacks and carryforwards, since other code sections give “carryovers” that meaning. The Commissioner proffered a “carryovers” as carryforwards only interpretation, arguing that § 56(a)(4) requires that, “if a taxpayer is subject to the AMT, the taxpayer must claim an alternative tax net operating loss deduction (ATNOLD) instead of the net operating loss deduction permitted by § 172.” The Court agreed with the tax court by adopting the Commissioner’s interpretation, and determined that “carryovers” consistently is used only to mean carryforwards in the Relief Rule. The Court also noted that the mechanics of the Tax Relief Act of 2004 limit the ATNOLD to be “90% of the taxpayer’s alternative minimum taxable income (AMTI), or the amount of the NOLs, whichever is lesser.” Thus, the Court ultimately determined that “the plain meaning of ‘carryovers’ indicates that the Relief Rule does not apply to NOLs that are carried back under [the circumstances of this case]. AFFIRMED.