## Facts

- Alex and Bertha Rosenberg owned shares of Prince David, Inc., a corporation formed in 1979 to develop and sell condominium units.
- Prince David operated as a C corporation through its fiscal year ending November 30, 1982, and incurred net operating losses (NOLs) in those years, largely from carrying charges (interest and real estate taxes) on condominium units.
- The corporation elected S-corporation status effective December 1, 1982, and reported on a calendar-year basis thereafter.
- In 1984 (an S year), Prince David sold 13 condominium units and, in computing 1984 income, treated $303,513 of costs previously deducted in its C-corporation years as excluded from income under the tax-benefit rule rather than as NOL carryforwards.
- The resulting S-corporation income (after the claimed exclusion) passed through to the Rosenbergs and was reported on their 1984 joint return.
- The Commissioner determined a 1984 deficiency, asserting the $303,513 was a C-year NOL carryover barred from use against S-year income by I.R.C. § 1371(b).

## Issues

1. Whether I.R.C. § 1371(b) prohibits a corporation’s NOL carryover from C-corporation years from offsetting income in a later year when the corporation is an S corporation.
2. Whether the tax-benefit rule permits treating prior-year C-corporation deductions that produced no tax benefit as a current-year exclusion from S-corporation income, instead of as an NOL carryforward.

## Decision

- The Tax Court sustained the deficiency.
- NOL carryovers generated in C-corporation years could not offset the corporation’s 1984 S-corporation income under § 1371(b).
- The tax-benefit rule did not allow the shareholders to recharacterize the disallowed NOL carryovers as an income exclusion in the S year.

## Legal Principles

- Under I.R.C. § 1371(b), no net operating loss carryforward or carryback from a non-S-corporation year is allowable as a carryover or carryback to an S-corporation year.
- The statutory bar applies even when the entity is the same corporation before and after the S election.
- The tax-benefit rule concerns income inclusion upon a later recovery of an amount previously deducted; it does not create an income exclusion to avoid an express statutory limitation.
- Judicial doctrines cannot be applied to override clear statutory commands; where § 1371(b) applies, recharacterization theories cannot convert disallowed NOL carryovers into tax-free S-corporation income.

## Conclusion

The Tax Court held that § 1371(b) prevents C-corporation NOL carryovers from reducing income in a later S-corporation year and rejected use of the tax-benefit rule to treat prior-year deductions as a current-year exclusion from S-corporation income.


Rosenberg v. Commissioner, 96 T.C. 451 (1991)