Net operating loss deduction;

              The Net Operating Loss Deduction
BY JAMES R. FAVRET, PARTNER, AND KENNETH W. STRINGER PRINCIPAL, CINCINNATI OFFICE
Presented by Mr. Favret before the West Vir­ginia
Tax Institute, Charleston — December, 1955
The net operating loss deduction is a subject which is both impor­tant
and somewhat complicated. Its importance lies in the fact that it is perhaps the principal means by which the Government shares in the adversity as well as prosperity of a taxpayer. The importance of the deduction is emphasized by the fact that it frequently arises at a crucial period in which a refund of income taxes is a prime consideration in financing a business. Another important aspect of the deduction is that it minimizes the importance of precise allocations of income or deduc­tions
between different years.
The complications arise from the fact that the determination of the deduction requires a series of very precisely defined and inter-re­lated
computations involving several years under, at the present time, at least two and sometimes more tax laws.
The net operating loss deduction was first provided by the Revenue Act of 1939, which allowed a carry-over of two years with no carry­back.
The Revenue Act of 1942 added the carry-back concept. The carry-back and carry-over periods were further amended by the Rev­enue
Acts of 1950 and 1951 and the Technical Changes Act of 1953. After the latest amendment the Internal Revenue Code of 1939 permitted a one year carry-back and a five year carry-over. The method of com­putation
remained substantially unchanged until 1954.
The Internal Revenue Code of 1954 made some rather substantial changes with respect to the net operating loss deduction. In general, the 1954 Code extended the carry-back period to two years, liberalized the computation, and attempted to add more certainty with respect to the carry-over to successor corporations and the limitations on acqui­sitions
of businesses for the purpose of securing such carry-overs. One of the more liberal features which is of particular interest in states such as West Virginia, which are rich in natural resources, is the elimination of the adjustments required with respect to percentage depletion.
In this discussion we will give attention first to the matter of
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