United States

New Mexico: Combined Group Can Use NOLs Generated in Separate Filing Year

Jan 19, 2015
From KPMG TaxWatch

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Recently, a New Mexico Hearing Officer ruled in favor of a taxpayer in a dispute involving the use of NOLs. The taxpayer, the parent of a group of corporations, had three subsidiaries doing business in New Mexico. In pre-2012 tax years, the subsidiaries filed separate tax returns. Beginning in 2012, the entities elected to file a combined return. The taxpayer (the reporting entity) utilized loss carryovers reported by two of the subsidiaries in earlier tax years to offset the group’s income. The Department subsequently denied the taxpayer’s claimed losses, arguing that a departmental regulation precluded the taxpayer from utilizing losses earned in separate filing years to offset the combined group’s income. The matter later went before a hearing officer.

Under New Mexico law, base income is taxable income plus the net operating loss deduction allowed under IRC §172(a). From base income, certain adjustments are made, including an exclusion for allowed net operating loss carryovers. The Hearing Officer first observed that if the Legislature intended to exclude NOL carryovers allowed under IRC § 172(a) it would have specifically done so. Furthermore, the regulation relied on by the Department contradicted another departmental regulation, which appeared to allow a NOL deduction after a change in reporting method to the extent permitted by the IRS. As such, the Hearing Officer ruled that the deduction, which was allowed for federal purposes, was allowed in computing New Mexico taxable income. Furthermore, the regulation relied on by the Department did not bar the taxpayer from claiming the NOL deduction because it contradicted the statute. Please contact Blair Norman at 615-248-5544 with questions on this Hearing Officer Determination.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.