The New Mexico Department of Taxation and Revenue granted a combined reporting group’s corporate income tax protest by allowing the group to claim a deduction for net operating losses (NOLs) that two of its members generated and reported previously on a separate entity basis. The taxpayer was the parent corporation of a group of affiliates, which included three entities doing business in New Mexico. In prior years, the three affiliates filed New Mexico corporate income tax returns on a separate basis, and two of the three affiliates generated NOLs. The taxpayer elected to file a combined report for the year at issue, and the Department initially disallowed the taxpayer’s attempt to claim the NOLs previously generated by two of the affiliates. The Department based its decision on a regulation prohibiting combined reporting groups from deducting NOLs established by a corporate member reporting on a separate basis. However, a different regulation, which incorporates federal law, specifically allows NOL deductions after a change of reporting method. New Mexico uses federal taxable income as the starting point to determine state taxable income, but statutorily excludes several items otherwise allowable under federal law. Federal law allows consolidated groups to deduct their members’ NOLs arising in separate return years. The Department’s hearing officer reasoned that nothing in New Mexico’s statutory scheme altered the federal rules and concluded that the regulation the Department relied upon was contrary to the legislature’s intent. Therefore, the NOL carryforward generated by separate filers was allowed. In the Matter of the Protest of Covenant Transportation Group Inc., N.M. Tax’n & Rev. Dep’t, No. 14-45 (Dec. 29, 2014).