The New York State Tax Appeals Tribunal has held that a taxpayer was required to use its net operating loss (“NOL”) carryforward deduction to decrease its entire net income in a year in which its banking corporation tax liability was not measured by its entire net income. Matter of TD Holdings II, Inc., DTA No. 825329 (N.Y.S. Tax App. Trib., Apr. 7, 2016). The Tribunal overturned the determination of the ALJ, who had held that the taxpayer was not required to use any portion of its NOL in a year in which its entire net income was already low enough to trigger the application of an alternative tax base.
During tax years 2005 through 2007, TD Holdings II, Inc. (“TD Holdings”) was subject to the New York bank tax under former 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 and approximately $9.2 million for New York bank tax purposes. In 2006, TD Holdings claimed approximately $3.7 million of its 2005 federal NOL carryforward on its federal return, but did not claim any of its 2005 New York NOL carryforward on its New York bank tax return because its 2006 entire net income was low enough that the alternative tax on assets was instead triggered. In 2007, TD Holdings claimed the remainder of its 2005 federal NOL carryforward on its federal return and claimed the remainder of its 2005 New York NOL carryforward on its New York bank tax return. On audit, the Department required TD Holdings to use its available New York NOL carryforward to offset its entire net income in 2006, even though it was not taxed on its entire net income in that year.
During the years at issue, the New York bank tax was imposed on one of four alternate bases, whichever resulted in the highest tax: (i) entire net income; (ii) taxable assets; (iii) alternative entire net income; or (iv) a minimum tax. Tax Law former § 1455. The Tax Law also provided that 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 could not exceed the maximum federal NOL deduction allowed for the same year. Tax Law former § 1453(k-1).
The ALJ had concluded that under the plain language of the statute, TD Holdings was not required “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,” and that while the statute provided that a taxpayer’s New York NOL deduction could not exceed its federal NOL deduction, it did not provide that the deduction could not be less than its federal NOL deduction. In reaching his conclusion, the ALJ had relied heavily upon a Tax Appeals Tribunal decision holding that the similar corporate income tax statute that placed a ceiling on New York NOL deductions equal to allowable federal NOL deductions did not provide that a New York NOL deduction “can never be less than the [f]ederal deduction.” Matter of Brooke-Bond Group (U.S.), Inc., DTA No. 810951 (N.Y.S. Tax App. Trib., Dec. 28, 1995) (emphasis in original).
The Tribunal overturned the ALJ determination, noting at the outset that tax exemption and deduction statutes must be strictly construed against the taxpayer, and that the taxpayer must prove that the Department’s interpretation of the statute is “irrational” and that the taxpayer’s interpretation is the only reasonable construction. The Tribunal then held that the taxpayer failed to meet its burden to show that the Department’s interpretation was unreasonable because there was no language in Tax Law former § 1453(k-1) which limited the application of an NOL carryforward to years in which the taxpayer measured its bank tax liability on its entire net income base. The Tribunal also found Matter of Brooke-Bond to be inapplicable, noting that the decision did not in any way tie the New York NOL deduction to the payment of New York tax on an alternative basis. Instead, it found that Brooke-Bond simply established that given the legislative intent to conform New York law to federal law with respect to NOLs, New York taxpayers should benefit from the federal rule that NOL deductions should be limited to an amount that brings a taxpayer’s income to zero, even where such an amount results in a New York NOL deduction that is less than the federal NOL deduction.
The Tribunal also found that the New York State corporate tax reform legislation effective for tax years beginning on or after January 1, 2015, which expressly limits the maximum allowable NOL deduction in a year to “the amount that reduces the taxpayer’s tax” on its income base to the higher of the other potentially applicable bases, also supported the Department’s interpretation of the Tax Law in effect for tax years prior to 2015. The Tribunal reasoned that “when the Legislature amends a statute, it is presumed that the amendment was made to effect some purpose and make some change in the existing law.”
It is not known at this time whether TD Holdings will appeal the Tribunal’s decision. Although the issue of NOL utilization is now clearly addressed under the new corporate tax reform legislation, if the Tribunal’s decision is appealed and overturned, it could potentially create refund opportunities for both banks and nonbanks that utilized NOL carryforward deductions in years when they were not subject to tax on the entire net income base. In particular, the ultimate resolution of this case will impact the computation of a taxpayer’s prior NOL conversion subtraction (the device by which pre-2015 NOLs are calculated and carried forward for use in tax years beginning on or after January 1, 2015).