A recent New York City Tax Appeals Tribunal decision reinforces some of the long-standing obstacles for corporations claiming net operating loss deductions for general corporation tax purposes. However, the decision charts potentially new ground in permitting those net operating losses to include amounts incurred by the taxpayer, even where the deductibility of certain components of the NOL is limited for federal tax purposes. Matter of Plasmanet, Inc., TAT(E) 12-17(GC) (N.Y.C. Tax App. Trib., Jan. 20, 2017).
Facts. Plasmanet, Inc., an Internet-based sweepstakes provider, claimed NOL deductions on its 2008 and 2009 General Corporation Tax ("GCT") returns equal to its NOL deductions claimed for federal purposes. Following a field audit, the Department of Finance issued a Notice of Determination disallowing a portion of Plasmanet's NOL deductions based on the "same source year rule." Under that rule, the NOL being applied for GCT purposes must relate to losses arising in the same year as in the federal NOL.
After the administrative hearing had concluded, the Department issued a revised Notice of Determination (the "Final NOD"), whereby it further reduced the claimed NOL deduction for 2008 and 2009 by the amount of Plasmanet's charitable contributions for the years 2006 through 2009 because Plasmanet did not actually deduct them for federal purposes. Although Plasmanet did make the charitable contributions, for federal purposes the deduction was limited to 10% of its taxable income, but available for carryforward, under Internal Revenue Code ("IRC") 170(b)(2)(A). Since Plasmanet had no federal taxable income after its federal NOL deductions, it could not claim a charitable deduction in those years. The Department took the position that the statute of limitations for amending its federal returns to now claim the charitable deductions had expired.
In her determination, the Administrative Law Judge upheld the Department's Final NOD in its entirety, except that she abated a substantial understatement of tax penalty. Plasmanet then brought this appeal to the City Tribunal.
City Tribunal decision. The City Tribunal held for the Department that the "same source year rule" required that the NOLs claimed for GCT purposes must arise in the same tax year as the losses that comprise the federal NOL deductions for the relevant years. In doing so, it rejected Plasmanet's claim that a 1989 amendment to the GCT law, which limited the NOL carryback deduction for GCT purposes to $10,000, constituted an implicit legislative rejection of the same source rule, arguably since it meant that the federal and GCT NOL deductions would necessarily be based on different source years.
However, partially reversing the ALJ, the City Tribunal ruled in favor of the taxpayer by holding that the charitable deductions should be allowed in computing Plasmanet's NOL deduction for GCT purposes. The City Tribunal first noted that the burden of proof had shifted to the Department with respect to the increased deficiency asserted in the final NOD, which was issued after Plasmanet had filed its Petition challenging the original NOD. The City Tribunal then noted that Plasmanet had disclosed the amount of its charitable contributions on its federal returns "to the greatest extent possible." It then concluded that the Department had failed to meet its burden of proof that the charitable deductions limited under IRC 170(b)(2)(A) could not be taken into account in computing Plasmanet's NOL deduction for GCT purposes.
The Tribunal's decision upholding the "same source year rule" for NOLs is not particularly surprising in light of prior decisions by both the City and State Tax Appeals Tribunals. See, e.g., Matter of Andal Corp., TAT(E) 93-179(GC) (N.Y.C. Tax App. Trib., June 30, 1995). Its decision here permitting charitable deductions to be taken into account in computing Plasmanet's NOL does seem reasonable, since the federal deductions would have been available but for the fact that Plasmanet's Federal NOL limited the deductibility of the charitable contributions. The City Tribunal stated that it reached this decision because the burden of proof had shifted to the Department, but did not elaborate on its rationale, possibly leaving open the question of whether it would have reached the same conclusion had the burden of proof not shifted to the Department because of the Final NOD.
It should be noted that, under corporate tax reform for both New York City and New York State corporate income tax purposes, a corporation's NOL deduction is no longer limited by the same source year rule or by the amount of the federal NOL deduction for tax years beginning after 2014.