83 T.C. 831">*831 Respondent determined a deficiency in the amount of $ 48,722.49 in petitioners' Federal income tax for 1977. Petitioners allege that respondent's determination is erroneous and they claim an overpayment of $ 23,191 in their income tax for the same year. The parties have stipulated that petitioners incurred a net operating loss in the amount of $ 223,964 for 1976. The only issue for decision is whether 83 T.C. 831">*832 petitioners made an effective election, as required by section 172(b)(3)(E), ¹ to relinquish the entire carryback period with respect 1984 U.S. Tax Ct. LEXIS 7">*8 to their 1976 net operating loss, which would thereby allow them to carry such loss forward in its entirety to 1977.

FINDINGS OF FACT

At the time they filed their petition in this case, petitioners, who were husband and wife during 1977, the year at issue, resided in Houston, TX. They filed joint Federal income tax returns for the years 1972 through 1977. Petitioners' Federal income tax returns for the years 1974 through 1977 were prepared by Frank C. Williams, a certified public accountant.

Petitioners' 1976 Federal income tax return was timely filed on October 17, 1977, its due date after extensions. In this return, petitioners reported their 1976 taxable income as "None." Attached to petitioners' 1976 Form 1040 is Form 4625, Computation of Minimum Tax. Line 11 of Form 4625 provides as follows: "Enter amount of any 1976 net operating loss carryover to 1977 (attach statement showing computation)." The amount entered in line 11 is $ 131,334.89. No computation statement, as directed under line 11, is attached to the return. 1984 U.S. Tax Ct. LEXIS 7">*9 The return contains no other information concerning petitioners' 1976 net operating loss, or net operating losses from other years.

Petitioners timely filed their 1977 Federal income tax return. Attached to petitioners' 1977 Form 1040 is Supporting Statement 19 which provides the following information:

As a result of agreed audit changes made with respect to their 1976 return, petitioners filed a Form 1040X, Amended U.S. Individual Income Tax Return, for 1976. The amended return for 1976 was dated November 25, 1980, postmarked November 26, 1980, and received by respondent on December 2, 1980; it was submitted after the due date of the return, but 83 T.C. 831">*833 within the statutory period prescribed for filing a claim for refund for petitioners' 1976 taxable year.

Attached to the 1976 Form 1040X, as it was to the 1976 Form 1040, is Form 4625, Computation of Minimum Tax. Line 11 of Form 4625 provides as follows: "Enter amount of any 1976 net operating loss carryover to 1977 (attach statement showing computation)." The amount entered on line 11 is $ 223,395.26. Also entered on line 11 is a reference 1984 U.S. Tax Ct. LEXIS 7">*10 to statement I which is attached to the 1976 Form 1040X, and is entitled "Net Operating Loss Computation." Statement I contains the recalculation of petitioners' 1976 net operating loss, and also states as follows:

ELECTION

In accordance with regulation section 7.0(d) taxpayer elects or has previously elected to forego the carryback period of the 1976 net operating loss deduction.

Petitioners' accountant included the election statement on the amended return because the revenue agent who audited petitioners' original 1976 return did not agree that petitioners had effectively elected to relinquish the carryback period of their 1976 net operating loss on their original 1976 return.

Petitioners filed a Form 1040X, Amended U.S. Individual Income Tax Return, for 1977 as well. In Schedule II, attached to the 1977 Form 1040X, petitioners provided the following information:

1984 U.S. Tax Ct. LEXIS 7">*11 83 T.C. 831">*834 In the notice of deficiency for 1977, respondent determined that petitioners failed to make a valid election under section 172(b)(3)(C)² to relinquish the entire carryback period of their 1976 net operating loss, and, therefore, under section 172(b)(1), petitioners' 1976 net operating loss must be carried back to the 3 preceding years before it may be carried forward to 1977.

OPINION

As a general rule, section 172(b), as in effect during 1977, provides that net operating losses must first be carried back to the 3 years preceding the loss year, and, if unabsorbed by those years, then carried forward to the 7 years following the loss year. Section 172(b)(3)(E), enacted as part of the Tax Reform Act of 1976, however, provides that for any taxable year ending after December 31, 1975, a taxpayer otherwise entitled to a carryback period under section 172(b)(1) may elect to relinquish the entire carryback period with respect to a net operating loss for such year. The 1984 U.S. Tax Ct. LEXIS 7">*12 statute further expressly provides that the election to relinquish the carryback period shall be made by the due date, including extensions of time, for filing the taxpayer's return for the year of the net operating loss for which the election is to be in effect, and, that the election, once made, shall be irrevocable. The statute directs that the election shall be made in the manner prescribed by the Secretary. ^{31984 U.S. Tax Ct. LEXIS 7">*13 1984 U.S. Tax Ct. LEXIS 7">*14}

83 T.C. 831">*835 In accordance with the statutory mandate, the Secretary promulgated Temporary Regs. section 7.0 (T.D. 7459), published in the Federal Register for January 7, 1977, and in the Internal Revenue Bulletin for February 14, 1977. See 42 Fed. Reg. 1469 (1977); 1977-7 I.R.B. 27, and 1977-1 C.B. 587. Temporary Regs. section 7.0 is entitled "Various Elections under the Tax Reform Act of 1976" and, as the title implies, it prescribes the procedure for making elections with respect to certain provisions added to the Code by the Tax Reform Act of 1976, including, among others, the election under section 172(b)(3)(E). Concerning the time for making the election, Temporary Regs. section 7.0(b)(1) follows the statute; it provides that an election under section 172(b)(3)(E) must be made by the later of March 8, 1977, or the due date of the return, including extensions, for the year for which the election is made. As to the manner in which such election is to be effected, Temporary Regs. sec. 7.0(d) provides as follows:

(d) Manner of making election. Unless otherwise provided in the return 1984 U.S. Tax Ct. LEXIS 7">*15 or in a form accompanying a return for the taxable year, the elections described * * * shall be made by a statement attached to the return (or amended return) for the taxable year. The statement required when making an election pursuant to this section shall indicate the section under which the election is being made and shall set forth information to identify the election, the period for which it applies, and the taxpayer's basis or entitlement for making the election.

It is undisputed that petitioners failed to attach a separate statement to their original return for 1976 specifically indicating their intent to elect to relinquish the carryback period of 83 T.C. 831">*836 their 1976 net operating loss. The issue before us is whether they made an effective election, nonetheless, either under the literal terms of Temporary Regs. section 7.0(d), or because they have substantially complied with the election requirements. For the reasons that we shall discuss, we conclude that petitioners have neither literally nor substantially complied with the election requirements of the regulations; they have thus failed properly to elect to relinquish the carryback period of their 1976 net operating loss.

Contending 1984 U.S. Tax Ct. LEXIS 7">*16 that "The regulation obviously does not require a written statement attached to the return in every case to perfect the election," petitioners first argue that because, on their original 1976 return, they reported no taxable income and indicated on line 11 of Form 4625, Computation of Minimum Tax, that a net operating loss in the amount of $ 131,334.89 for 1976 was being carried forward to 1977, they have complied with the literal requirements of Temporary Regs. section 7.0(d) in that the election was either "otherwise provided in the return," or was made "in a form accompanying a return." We do not agree.

It is true that the temporary regulations require a separate statement only if the manner for making the election is not provided for in the return itself or in a form accompanying the return. ⁴ In the case of the election under section 172(b)(3)(E), however, there is no line entry on the return, itself, nor is there a prescribed form which specifically provides for the election to relinquish the carryback period of a net operating loss. For purposes of this election, therefore, it would appear that a separate statement is necessary in order to be in literal compliance with the regulations. 1984 U.S. Tax Ct. LEXIS 7">*17 ^{51984 U.S. Tax Ct. LEXIS 7">*18}

83 T.C. 831">*837 Moreover, we do not accept petitioners' argument that the election was "otherwise provided in the return" or was made in a "form accompanying a return," merely because they reported no taxable income on their original 1976 return and reported a net operating loss carryover of $ 131,334.89 from 1976 to 1977 on line 11 of Form 4625 for purposes of the computation of minimum tax. That petitioners reported no taxable income for 1976 indicates nothing concerning either the existence or the extent of a net operating loss for that year, ⁶ or any intention to carry the net operating loss forward or backward. Further, the mere fact that line 11 on Form 4625 contains an entry indicating a net operating loss carryover of $ 131,334.89 from 1976 to 1977 also indicates nothing with respect to the amount of a 1976 net operating loss, or petitioners' intent to relinquish the carryback period for such loss.

Form 4625, as its title makes 1984 U.S. Tax Ct. LEXIS 7">*19 clear, deals only with the computation of the minimum tax prescribed by section 56 which imposed, for tax years beginning after December 31, 1975, a minimum tax -- a tax in addition to other taxes -- of 15 percent on individuals and other noncorporate taxpayers with respect to certain enumerated tax preference items. Line 11 of Form 4625 reflects the provisions of section 56(b) ^{71984 U.S. Tax Ct. LEXIS 7">*20} which provides that part or all of the minimum tax may be deferred to a subsequent year if the taxpayer incurred a net operating loss in the first year, "any portion of which remains as a net operating loss carryover to a succeeding taxable year." Sec. 56(b)(1)(A). The deferral, beginning with 1976, is the lesser of 83 T.C. 831">*838 the minimum tax imposed for the year or 15 percent of the portion of the unused net operating loss that is available for carryovers. In its carryover year, a 15-percent tax is imposed on the amount by which taxable income is reduced by the portion of the carryover attributable to loss year tax preference items in excess of $ 10,000. Section 56 contains no provision for net operating loss carrybacks, as opposed to carryovers, in computing the minimum tax.

It is possible, therefore, for line 11 on Form 4625 to contain an entry of a net operating loss carryover even though the net operating loss incurred for that year was carried back 3 years and only the unused portion of it remained as a carryover to subsequent years. By no stretch of the imagination does it indicate a taxpayer's intent to forego 1984 U.S. Tax Ct. LEXIS 7">*21 the carryback period with respect to his net operating loss for that year. The entry of the loss carryover on petitioners' Form 4625, therefore, is not the election under section 172(b)(3)(E) required by the temporary regulations.

Having found no literal compliance with the regulations, we turn to petitioners' alternative contention that they have substantially complied with the election requirements. We acknowledge that this Court has recognized that literal compliance with all provisions of a regulation prescribing the manner for making an election is not always necessary when the taxpayer has complied with all of the essential requirements of the regulation. Hoffman v. Commissioner, 47 T.C. 218">47 T.C. 218, 47 T.C. 218">236-237 (1966), affd. per curiam 391 F.2d 930">391 F.2d 930 (5th Cir. 1968); Sperapani v. Commissioner, 42 T.C. 308">42 T.C. 308, 42 T.C. 308">336-337 (1964). In deciding whether literal compliance is necessary for a valid election, the courts have looked to see whether the specific requirements related to the "essence" of the statutory and regulatory scheme. Tipps v. Commissioner, 74 T.C. 458">74 T.C. 458, 74 T.C. 458">468 (1980). In Valdes v. Commissioner, 60 T.C. 910">60 T.C. 910, 60 T.C. 910">913 (1973), the Court listed certain factors to be considered:

In ascertaining whether 1984 U.S. Tax Ct. LEXIS 7">*22 a particular provision of a regulation stating how an election is to be made must be literally complied with, it is necessary to examine its purpose, its relationship to other provisions, the terms of the underlying statute, and the consequences of failing to comply with the provision in question * * *

83 T.C. 831">*839 We conclude that the doctrine of substantial compliance is inapplicable to the instant matter. To be in substantial compliance with the election requirements under section 172(b)(3)(E), we think, as an absolute minimum, the taxpayer must exhibit in some manner, within the time prescribed by the statute, his unequivocal agreement to accept both the benefits and burdens of the tax treatment afforded by that section. See 60 T.C. 910">Valdes v. Commissioner, supra at 914. An intelligent election under section 172(b)(3)(E) requires a taxpayer to compare the tax benefits of the carryback and carryover provisions versus the possible tax benefits of the carryover election in years which have not yet come to pass. The section places the responsibility for making that comparison on the taxpayer and does not permit him to "wait and see." The election must be made on a timely return for the loss year and, 1984 U.S. Tax Ct. LEXIS 7">*23 once made, is "irrevocable for that year." As in the case of certain other elections, the policy of the section "is furthered by requiring a clear manifestation to the government of taxpayer's election"; any other rule "would leave room for the taxpayer to argue later that * * * [he] had never intended to make an election." Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781">743 F.2d 781 (11th Cir. 1984).

An examination of petitioners' original 1976 return, which reports no taxable income, and reports, for purposes of the computation of minimum tax, a net operating loss carryover from 1976 to 1977, reveals only ambiguous intentions at best; it does not reflect petitioner's unequivocal agreement to elect and comply with the terms of section 172(b)(3)(E). It leaves much room for argument, contrary to the scheme of the section. If the tables were turned, respondent would be hard pressed to show that petitioners were committed to the election and its statutory consequences.

Petitioners' arguments with respect to the substantial compliance issue are without merit. First, they contend that they consistently intended only to carry over their 1976 net operating loss and forego its carryback. 1984 U.S. Tax Ct. LEXIS 7">*24 In support of this contention, petitioners' accountant testified at trial that, based on his calculations, he decided that petitioners' 1975 net operating loss was sufficient to offset the income of prior years, and, therefore, that their 1976 net operating loss would benefit petitioners only if carried forward. Thus, when he completed 83 T.C. 831">*840 line 11 of Form 4625 on petitioners' original 1976 return, it was his intention, as confirmed by petitioners, to forego the carryback period of the 1976 net operating loss. Further, he stated that petitioners never filed anything with respondent which would have conveyed any other intent but to forego the carryback period. Petitioners introduced the accountant's workpapers at trial to corroborate his testimony that only a carryforward of the 1976 net operating loss was intended and that a carryback was never considered.

Even were we to accept both the accountant's testimony in full and his workpapers at face value, neither the accountant's state of mind, nor his workpapers were ever available to, or known by, respondent. ^{81984 U.S. Tax Ct. LEXIS 7">*26} The only document available to respondent was the original 1976 return which in no way makes clear the existence of, the amount 1984 U.S. Tax Ct. LEXIS 7">*25 of, or petitioners' intentions with respect to their 1976 operating loss.

Second, petitioners claim that their amended return for 1976, filed in 1980, onto which they attached the required election statement, is evidence of their intention to carry such loss forward and indicative of their substantial compliance with the election requirements. The amended return does not aid petitioners' cause. Section 172(b)(3)(E) explicitly provides that the election must be made by the due date of the return for the year of the net operating loss for which the election is to be in effect. The due date (as extended) of petitioners' 1976 return was October 17, 1977. Petitioners' amended return for 1976 was not received by respondent until December 2, 1980, over 3 years after the due date of the return. In view of the 83 T.C. 831">*841 clear statutory mandate requiring the election under section 172(b)(3)(E) to be made by the due date of the 1984 U.S. Tax Ct. LEXIS 7">*27 return for the loss year, petitioners' amended return is irrelevant to a determination of substantial compliance. ⁹ Cf. J.E. Riley Investment Co. v. Commissioner, 311 U.S. 55">311 U.S. 55 (1940).

Finally, petitioners contend that respondent has "in no way been harmed, damaged, prejudiced, or taken unfair advantage of by petitioners' manner of electing to relinquish the carryback of their 1976 net operating loss." We disagree. First, petitioners err in characterizing the scant information provided on their original 1976 return as a "manner of electing" the relinquishment of the carryback period. More important, however, petitioners filed nothing within the statutorily prescribed time which would have alerted respondent to the tax treatment sought. Relinquishment of the carryback period of petitioners' 1976 net operating loss is not 1984 U.S. Tax Ct. LEXIS 7">*28 something which could be gleaned by respondent by examining the face of the 1976 return, because a 1976 net operating loss may well have had no tax consequences in that year. The consequences of a net operating loss sustained in one year are often only manifest on returns of prior and future years. For this reason, respondent must be notified in some way concerning a taxpayer's intentions in order to facilitate respondent's duty to ensure compliance with the tax law. ¹⁰743 F.2d 781">Knight-Ridder Newspapers, Inc. v. United States, supra at 795-797. Petitioners' return provides no such notification.

The relinquishment of a net operating loss carryback, moreover, affects many other tax years and the operation of other statutory provisions. See secs. 56, 6501(h), 6511(d)(2). Were we to adopt petitioners' argument, we would be placing the Commissioner at a tremendous disadvantage; he would have the onerous administrative burden of gathering petitioners' returns for as many as 11 years and making detailed computations in order to decide from those returns whether an election was made. We think that in providing that a carryback period may be relinquished 1984 U.S. Tax Ct. LEXIS 7">*29 only by an election made in 83 T.C. 831">*842 accordance with regulations and by prescribing that such an election, irrevocable for the taxpayer, must be made within specified time limits, Congress intended that the Commissioner not be so burdened. ¹¹

1984 U.S. Tax Ct. LEXIS 7">*30 To reflect the foregoing,

Decision will be entered for the respondent.