26 Cfr 172-13

§ 1.172–13

26 CFR Ch. I (4–1–07 Edition)

which is absorbed when carried over to
a qualified taxable year ending after
October 4, 1976. See § 1.857–2(a)(5), which
provides that for a taxable year ending
before October 5, 1976, the net operating loss deduction is not allowed in
computing the real estate investment
trust taxable income of a qualified real
estate investment trust.
[T.D. 7767, 46 FR 11263, Feb. 6, 1981, as amended by T.D. 8107, 51 FR 43346, Dec. 2, 1986]

§ 1.172–13 Product liability losses.
(a) Entitlement to 10-year carryback—
(1) In general. Unless an election is
made pursuant to paragraph (c) of this
section, in the case of a taxpayer which
has a product liability loss (as defined
in section 172(j) and paragraph (b)(1) of
this section) for a taxable year beginning after September 30, 1979 (hereinafter ‘‘loss year’’), the product liability
loss shall be a net operating loss
carryback to each of the 10 taxable
years preceding the loss year.
(2) Years to which loss may be carried.
A product liability loss shall first be
carried to the earliest of the taxable
years to which such loss is allowable as
a carryback and shall then be carried
to the next earliest of such taxable
years, etc.
(3) Example. The application of this
paragraph may be illustrated as follows:

cprice-sewell on PROD1PC66 with CFR

Example. Taxpayer A incurs a net operating loss for taxable year 1980 of $80,000, of
which $60,000 is a product liability loss. A’s
taxable income for each of the 10 years immediately preceding taxable year 1980 was
$5,000. The product liability loss of $60,000 is
first carried back to the 10th through the 4th
preceding taxable years ($5,000 per year),
thus offsetting $35,000 of the loss. The remaining $25,000 of product liability loss is
added to the remaining portion of the total
net operating loss for taxable year 1980
which was not a product liability loss
($20,000), and the total is then carried back
to the 3rd through 1st years preceding taxable year 1980, which offsets $15,000 of this
loss. The remaining loss ($30,000) is carried
forward pursuant to section 172(b)(1) and the
regulations thereunder without regard to
whether all or any portion thereof originated
as a product liability loss.

(b) Definitions—(1) Product liability
loss. The term product liability loss
means, for any taxable year, the lesser
of—

(i) The net operating loss for the current taxable year (not including the
portion of such net operating loss attributable to foreign expropriation
losses, as defined in § 1.172–11), or
(ii) The total of the amounts allowable as deductions under sections 162
and 165 directly attributable to—
(A) Product liability (as defined in
paragraph (b)(2) of this section), and
(B) Expenses (including settlement
payments) incurred in connection with
the investigation or settlement of or
opposition to claims against the taxpayer on account of alleged product liability.
Indirect corporate expense, or overhead, is not to be allocated to product
liability claims so as to become a product liability loss.
(2) Product liability. (i) The term product liability means the liability of a taxpayer for damages resulting from physical injury or emotional harm to individuals, or damage to or loss of the use
of property, on account of any defect in
any product which is manufactured,
leased, or sold by the taxpayer. The
preceding sentence applies only to the
extent that the injury, harm, or damage occurs after the taxpayer has completed or terminated operations with
respect to the product, including, but
not limited to the manufacture, installation, delivery, or testing of the product, and has relinquished possession of
such product.
(ii) The term product liability does not
include liabilities arising under warranty theories relating to repair or replacement of the property that are essentially contract liabilities. For example, the costs incurred by a taxpayer
in repairing or replacing defective
products under the terms of a warranty, express or implied, are not product liability losses. On the other hand,
the taxpayer’s liability for damage
done to other property or for harm
done to persons that is attributable to
a defective product may be product liability losses regardless of whether the
claim sounds in tort or contract. Further, liability incurred as a result of
services performed by a taxpayer is not
product liability. For purposes of the
preceding sentence, where both a product and services are integral parts of a
transaction, product liability does not

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Internal Revenue Service, Treasury

§ 1.172–13

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arise until all operations with respect
to the product are completed and the
taxpayer has relinquished possession of
it. On the other hand, any liability
that arises after completion of the initial delivery, installation, servicing,
testing, etc., is considered ‘‘product liability’’ even if such liability arises
during the subsequent servicing of the
product pursuant to a service agreement or otherwise.
(iii) Liability for injury, harm, or
damage due to a defective product as
described in this subparagraph shall be
‘‘product liability’’ notwithstanding
that the liability is not considered
product liability under the law of the
State in which such liability arose.
(iv) Amounts paid for insurance
against product liability risks are not
paid on account of product liability.
(v) Notwithstanding subparagraph
(iv), an amount is paid on account of
product liability (even if such amount
is paid to an insurance company) if the
amount satisifies the provisions of
paragraph (b)(2) (i) through (iii) of this
section and the amount—
(A) Is paid on account of specific
claims against the taxpayer (or on account of expenses incurred in connection with the investigation or settlement of or opposition to such claims),
subsequent to the events giving rise to
the claims and pursuant to a contract
entered into before those events,
(B) Is not refundable, and
(C) Is not applicable to other claims,
other expenses or to subsequent coverage.
(3) Examples. Paragraph (b)(2) of this
section is illustrated by the following
examples:
Example 1. X, a manufacturer of heating
equipment, sells a boiler to A, a homeowner.
Subsequent to the sale and installation of
the boiler, the boiler explodes due to a defect
causing physical injury to A. A sues X for
damages for the injuries sustained in the explosion and is awarded $250,000, which X
pays. The payment was made on account of
product liability.
Example 2. Assume the same facts as in Example 1 and that A also sues under the contract with X to recover for the cost of the
boiler and recovers $1,000, the boiler’s replacement cost. The $1,000 payment is not a
payment on account of product liability.
Similarly, if X agrees to repair the destroyed
boiler, any amount expended by X for such

repair is not payment made on account of
product liability.
Example 3. Y, a professional medical association, is sued by B, a patient, in an action
based on the malpractice of one of its doctors. B recovers $25,000. Because the suit was
based on the services of B, the payment is
not made on account of product liability.
Example 4. R, a retailer of communications
equipment, sells a telecommunication device
to C. R also contracts with C to service the
equipment for 3 years. While R is installing
the equipment, the unit catches on fire due
to faulty wiring within the unit and destroys
C’s office. Because R had not relinquished
possession of this equipment when the fire
started, any amount paid to C by R for the
damage to C’s property on account of the defective product is not payment on account of
product liability.
Example 5. Assume the same facts as in Example 4 except that the fire and resulting
property damages occurred after R had installed the equipment and relinquished possession of it. Any amount paid for the property damages sustained on account of the defective product is payment on account of
product liability.
Example 6. Assume the same facts as in Example 4 except that the equipment catches on
fire during the subsequent servicing of the
unit. Because C is in possession of the unit
during the servicing, any amount paid for
the property damage sustained on account of
the defective product would be payment on
account of product liability.
Example 7. X, a manufacturer of computers,
sells a computer to A. X also has its employees periodically service the computer for A
from time to time after it is placed in service. After the initial delivery, installation,
servicing, and testing of the computer is
completed, the computer catches on fire
while X’s employee is servicing the equipment. This fire causes property damage to
A’s office and physical injury to A. Any
amount paid for the property or physical
damage sustained on account of the defective product is payment on account of product liability.

(c) Election—(1) In general. The 10year carryback provision of this section applies, except as provided in this
paragraph, to any taxpayer who, for a
taxable year beginning after September 30, 1979, incurs a product liability loss. Any taxpayer entitled to a 10year carryback under paragraph (a) of
this section in any loss year may elect
(at the time and in the manner provided in paragraph (c)(2) of this section) to have the carryback period with
respect to the product liability loss determined without regard to the

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§ 1.173–1

26 CFR Ch. I (4–1–07 Edition)

carryback rules provided by paragraph
(a) of this section. If the taxpayer so
elects, the product liability loss shall
not be carried back to the 10th through
the 4th taxable years preceding the loss
year. In such case, the product liability
loss shall be carried back or carried
over as provided by section 172(b) (except subparagraph (1)(I) thereof) and
the regulations thereunder.
(2) Time and manner of making election.
An election by any taxpayer entitled to
the 10-year carryback for the product
liability loss to have the carryback
with respect to such loss determined
without
regard
to
the
10-year
carryback provision of paragraph (a) of
this section must be made by attaching
to the taxpayer’s tax return (filed
within the time prescribed by law, including extensions of time) for the taxable year in which such product liability loss is sustained, a statement containing the information required by
paragraph (c)(3) of this section. Such
election, once made for any taxable
year, shall be irrevocable after the due
date (including extensions of time) of
the taxpayer’s tax return for that taxable year.
(3) Information required. In the case of
a statement filed after April 25, 1983,
the statement referred to in paragraph
(c)(2) of this section shall contain the
following information:
(i) The name, address, and taxpayer
identifying number of the taxpayer;
and
(ii) A statement that the taxpayer
elects under section 172(j)(3) not to
have section 172(b)(1)(I) apply.
(4)
Relationship
with
section
172(b)(3)(C) election. If a taxpayer sustains during the taxable year both a
net operating loss not attributable to
product liability and a product liability loss (as defined in section 172(j)(1)
and paragraph (b)(1) of this section), an
election pursuant to section 172(b)(3)(C)
(relating to election to relinquish the
entire carryback period) does not preclude the product liability loss from
being carried back 10 years under section 172(b)(1)(I) and paragraph (a)(1) of
this section.
[T.D. 8096, 51 FR 30482, Aug. 27, 1986]

§ 1.173–1

Circulation expenditures.

(a) Allowance of deduction. Section 173
provides for the deduction from gross
income of all expenditures to establish,
maintain, or increase the circulation of
a newspaper, magazine, or other periodical, subject to the following limitations:
(1) No deduction shall be allowed for
expenditures for the purchase of land
or depreciable property or for the acquisition of circulation through the
purchase of any part of the business of
another publisher of a newspaper, magazine, or other periodical;
(2) The deduction shall be allowed
only to the publisher making the circulation expenditures; and
(3) The deduction shall be allowed
only for the taxable year in which such
expenditures are paid or incurred.
Subject to the provisions of paragraph
(c) of this section, the deduction permitted under section 173 and this paragraph shall be allowed without regard
to the method of accounting used by
the taxpayer and notwithstanding the
provisions of section 263 and the regulations thereunder, relating to capital
expenditures.
(b) Deferred expenditures. Notwithstanding the provisions of paragraph
(a)(3) of this section, expenditures paid
or incurred in a taxable year subject to
the Internal Revenue Code of 1939
which are deferrable pursuant to I.T.
3369 (C.B. 1940–1, 46), as modified by
Rev. Rul. 57–87 (C.B. 1957–1, 507) may be
deducted in the taxable year subject to
the Internal Revenue Code of 1954 to
which so deferred.
(c) Election to capitalize. (1) A taxpayer entitled to the deduction for circulation expenditures provided in section 173 and paragraph (a) of this section may, in lieu of taking such deduction, elect to capitalize the portion of
such circulation expenditures which is
properly chargeable to capital account.
As a general rule, expenditures normally made from year to year in an effort to maintain circulation are not
properly chargeable to capital account;
conversely, expenditures made in an effort to establish or to increase circulation are properly chargeable to capital
account. For example, if a newspaper

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