Tax Court Allows Oil Company to Split NOL Elections, Opening Path to Significant Refunds

The U.S. Tax Court has opened the door to new tax planning opportunities, holding in Apache Corp. v. Commissioner that the taxpayer was permitted to make different elections for different types of net operating losses (NOLs), enabling the company to secure roughly $24 million in tax refunds. The ruling brings welcome clarity to the interaction of several NOL provisions under IRC § 172 and confirms that taxpayers may treat general NOLs and specified liability losses (SLLs) differently when making carryback and carryforward elections.

At issue was whether Apache could elect to carry forward its substantial 2016 and 2017 general NOLs, totaling $1.93 billion and $3.08 billion, respectively, while simultaneously carrying back $40.7 million and $30.8 million in SLLs from those same years. The SLLs, which stemmed from long-tail obligations such as infrastructure dismantling and environmental remediation, were carried back to tax years 2006 and 2007, generating refund claims of $13.8 million and $10.1 million. 

The IRS disallowed the claims on the theory that once Apache elected to relinquish the carryback period for its general NOLs, it was required to treat all NOL components, including SLLs included, the same way.

Judge Emin Toro, writing for the court, rejected the IRS’s position. The opinion concluded that neither the text nor structure of § 172 requires a single, unified election for all forms of NOLs. To the contrary, the statute provides distinct carryback rules for specified liability losses, and nothing in the Code compels a taxpayer to forgo those special rules merely because it elects to carry other NOLs forward. The court noted that the statutory text, surrounding context, judicial precedent, and even prior IRS regulatory interpretations supported Apache’s approach. The IRS’s chief objection, that allowing split elections would create administrative inconvenience, was deemed unpersuasive.

The court’s reasoning emphasizes that § 172 is designed to smooth income across economic cycles by allowing losses to be absorbed in the years that best match a taxpayer’s economic reality. Allowing Apache to carry back only its SLLs aligns with that purpose, particularly given the long-term nature of the underlying liabilities. The opinion also reflects the longstanding interpretive principle that ambiguities in tax statutes should be construed against the government, a point highlighted in a separate concurrence by Judge Ronald L. Buch. In a partial dissent, Judge James S. Halpern, joined by Judge Alina Marshall, agreed that the IRS misinterpreted the taxpayer’s election but disagreed that the statute permits carrying some NOLs back and others forward from the same tax year.

For taxpayers, the decision provides valuable guidance and additional flexibility when planning NOL utilization. Companies with significant SLLs, particularly in energy, natural resources, and environmental sectors, may now confidently consider split elections as a tool to maximize available carryback periods while preserving forward-looking tax attributes. The ruling also invites taxpayers with prior-year SLLs to reassess whether refund opportunities may exist under this newly clarified framework. However, NOL carrybacks are only allowable for certain tax years as the carryback provisions were removed from § 172 beginning in 2018 with a temporary COVID related exception for NOLs arising in tax years 2018 through 2020.

If your organization maintains multiple categories of NOLs or long-tail liabilities, this case may open strategic opportunities for refund claims or refined election planning. Companies seeking guidance on the potential implications of the Apache decision for their tax planning may contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page.