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14 W. Res. L. Rev. 233 (1962-1963)
What Is a Net Operating Loss

handle is hein.journals/cwrlrv14 and id is 243 raw text is: 1963]

Tax Utilization of Net Operating Losses
Harlan Pomeroy
The starting point in any problem involving a net operating loss de-
duction, either for a loss corporation or for a corporation which wishes
to acquire a loss corporation, is the net operating loss. A net operating
loss should be distinguished from a net operating loss deduction. A net
operating loss relates to the year of the loss. A net operating loss deduc-
tion relates to a prior or subsequent, presumably profitable, year to which
a net operating loss is carried. The computation and determination of a
net operating loss itself is but one of the steps in the determination of a
net operating loss deduction. Thus, three steps are taken in determining
a net operating loss deduction:' (1) determining the net operating loss
for the appropriate year preceding or following the particular tax year;
(2) determining the net operating loss carryovers and carrybacks to t.at
particular tax year; and (3) determining the amount of the net operat-
ing loss deduction for that particular year by adding such carryovers and
Statutory Definition of Net Operating Loss
A net operating loss itself is defined by statute.2 Generally speaking,
it is the excess of deductions over gross income. However, the In-
ternal Revenue Code of 1954 also requires that certain modifications be
made in determining the excess of deductions over income, i.e., the
amount of the loss.3 The general effect of these modifications is to limit
a net operating loss to losses incurred in a trade or business, to casualty
and theft losses, and to losses from the sale of property used in a trade or
business. The number and type of modifications which are made in de-
termining a net operating loss depend upon whether a corporate or a non-
corporate taxpayer is involved. However, for both corporate and non-
1. Treas. Reg. § 1.172-1(b) (1956) [hereinafter cited as Reg. §]. Section 172(a) of the
Internal Revenue Code of 1954 defines net operating loss deduction; § 172 (c) defines net
operating loss.
2. INT. REV. CODE oF 1954, S 172(c) [hereinafter cited as CODE 53.
3. CODE § 172(d).

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