In Matter of TD Holdings II, Inc., DTA No. 825329 (N.Y.S. Div. of Tax App., Jan. 22, 2015), a New York State Administrative Law Judge concluded that a banking corporation franchise taxpayer was not required to use a net operating loss (“NOL”) carryforward deduction to decrease its entire net income calculation in a year in which its tax liability was measured by a tax base other than the entire net income base.
Background. During the fiscal years 2005 through 2007, TD Holdings II, Inc. (“TD Holdings”) was subject to the New York banking corporation franchise tax (“bank tax”) under Article 32 and filed New York bank tax returns. In 2005, TD Holdings reported a loss of approximately $11.7 million for federal income tax purposes (as calculated on a pro forma return because TD Holdings was included in consolidated federal income tax returns). TD Holdings also reported a loss of approximately $9.2 million for New York bank tax purposes in 2005. It appears that none of the 2005 losses were required to be carried back to prior years. In 2006, TD Holdings claimed approximately $3.7 million of its 2005 federal NOL carryforward on its federal return. However, TD Holdings chose not to claim any of its 2005 New York NOL carryforward on its 2006 New York bank tax return, even though it reported New York entire net income for that year. TD Holdings made this choice because its 2006 entire net income prior to NOL subtractions was low enough that it was instead required to calculate its tax due based on its taxable assets, so the use of New York NOLs in 2006 would not have provided any benefit to the company. In 2007, TD Holdings claimed approximately $8 million of its 2005 federal NOL carryforward on its federal return, and claimed the entirety of its 2005 New York NOL carryforward on its New York bank tax return.
On audit, the Department concluded that, in 2006, TD Holdings was required to use the same amount of New York NOLs as the federal NOLs it had claimed on its federal return. The Department’s basis for this position was that a taxpayer could use a lower amount of New York NOLs than federal NOLs only as explicitly allowed by New York statutes, and there was no explicit allowance covering this situation.
The law. During the years at issue, the New York bank tax was calculated on alternate bases, including on an entire net income base and a taxable assets base, and was imposed on the base that resulted in the highest tax. Tax Law § 1455. The allowable New York NOL deduction was “presumably the same” as the federal NOL deduction claimed in the same year, and the New York NOL deduction specifically could not exceed the maximum federal NOL deduction allowed for the same year. Tax Law § 1453(k-1).
The decision. Concluding that “a taxpayer’s New York NOL deduction may differ from its federal NOL deduction,” the ALJ ruled that TD Holdings “was not required by the plain language” of the Tax Law “to hypothetically apply the 2005 New York NOL to an entire net income [base] that was already sufficiently low enough to cause use of an alternative tax base.”
In reaching his conclusion, the ALJ relied on a Tax Appeals Tribunal decision concerning the Article 9-A tax, reasoning that the NOL deduction statute applicable to the corporate franchise tax is “nearly identical” to the NOL deduction statute applicable to the bank tax. Matter of Brooke-Bond Group (U.S.), Inc., DTA No. 810951 (N.Y.S. Tax App. Trib., Dec. 28, 1995) (analyzing Tax Law § 208(9)(f)(3)). In that case, the Tribunal concluded that the Article 9-A NOL statute placed a ceiling on New York NOL deductions equal to allowable federal NOL deductions, but did not state that a New York NOL deduction “can never be less than the [f]ederal deduction.” Id. (Emphasis in original). The Tribunal justified its conclusion on the basis that requiring a taxpayer to lose an NOL deduction “simply to achieve conformity with the amount of the [f]ederal deduction” was “at odds with the fundamental purpose for which” the Article 9-A NOL statute was adopted.
However, for the 2007 year, TD Holdings conceded, and the ALJ agreed, that its New York NOL deduction must be limited to the amount of its federal NOL deduction. Thus, TD Holdings’ 2007 New York NOL deduction had to be adjusted downward because, in 2007, TD Holdings claimed the entirety of its $9.2 million in New York NOLs accumulated from 2005, but was allowed only $8 million in federal NOL deductions.
Comprehensive New York State corporate tax reform legislation, effective for taxable years beginning on or after January 1, 2015, repealed the bank tax and subjects banks to Article 9-A. The same reform legislation amended the New York NOL deduction statutes to, among other things: (1) place limitations on the use of and provide separate calculations for NOLs incurred in tax years beginning before January 1, 2015; and (2) expressly limit the maximum allowable deduction of NOLs accrued in tax years beginning on or after January 1, 2015 to “the amount that reduces the taxpayer’s tax” on its “business income base” to the higher of the other potentially applicable bases. As such, the issue raised in this case has been clearly addressed by statute in a generally taxpayer- friendly fashion for purposes of calculating NOLs accrued in 2015 and future years.
Nonetheless, the issue in this case may be of importance for taxpayers that had New York NOLs in previous years, or that will be using pre-2015 NOLs in post-2015 years as permitted under the new statute. As acknowledged by the ALJ, the NOL deduction statute applicable to the bank tax was “nearly identical” to the NOL deduction statute applicable to Article 9-A prior to the reforms effective in 2015, so the principles outlined in this case should be applicable to Article 9-A taxpayers. Although the decision may be appealed, taxpayers that used NOLs in years when their pre-NOL entire net income tax base was lower than an alternate base not dependent upon an entire net income calculation should consider filing amended returns for open years, claiming New York NOL deductions and carryforwards consistent with the principles outlined in this case.