Feb 02, 2015
From KPMG TaxWatch
Recently, a New York Administrative Law Judge held that a taxpayer was not required to use a state NOL to reduce New York entire net income in a tax year when it paid banking franchise tax on one of the alternative bases. Under New York law for the tax year at issue, banks subject to tax under Article 32 paid tax on one of four bases, depending on which base produced the highest tax. These bases included entire net income, assets, minimum taxable income, and fixed dollar minimum tax. In computing entire net income, a taxpayer was required to add back the federal NOL deduction and was then permitted to deduct a New York specific NOL. The New York NOL was “presumably the same” as the federal NOL, but could not exceed the federal NOL allowed under IRC Section 172. Nothing in the statute mandated that the state NOL could not be less than the federal NOL or that a taxpayer had to use an NOL deduction at all. The taxpayer at issue had filed a New York State bank franchise tax return for the relevant tax year reporting positive entire net income. For federal tax purposes, it likewise reported positive federal taxable income, which was offset by a NOL deduction. For New York purposes, it was clear that, even without a NOL deduction, its tax on the alternative “assets” base would exceed the tax on entire net income. Thus, on its New York bank tax return the taxpayer did not take a NOL deduction. On audit, the State claimed that the taxpayer had to take the maximum allowable state NOL deduction (essentially, wasting such NOLs) to bring entire net income down to zero. The matter eventually went before the Division of Tax Appeals.
The Administrative Law Judge (ALJ) rejected the Division’s argument and agreed that the taxpayer “was not required to use a [New York State] NOL deduction to unnecessarily decrease its entire net income in a tax year when its banking corporation franchise tax liability was not measured by entire net income, but rather another applicable basis.” This conclusion, the ALJ noted, was consistent with other New York cases and also with the legislative intent behind the NOL deduction. As an ALJ case, this decision has no precedential value and it remains to be seen whether the state will appeal to the Tax Appeals Tribunal. Please contact Russ Levitt at (212)-872-6717 with questions on Matter of TD Holdings, Inc.
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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.