United States

New Mexico: Department Withdraws Ruling Allowing Sharing of Losses

Apr 13, 2015
From KPMG TaxWatch

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Earlier this year, a New Mexico Hearing Officer ruled in favor of a taxpayer in a dispute involving the use of NOL carryovers earned in separate filing years, but used in years when the taxpayer and its affiliates filed a combined return.  Shortly after the taxpayer received a favorable ruling, the New Mexico Taxation and Revenue Department filed a motion for reconsideration, which was granted. Recently, the same hearing officer ruled that his earlier decision was incorrect and therefore the original order was withdrawn. The reporting entity, 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 reporting entity utilized loss carryovers reported by two of the subsidiaries in earlier tax years to offset the group’s income. The Department protested the use of the NOLs generated in separate filing years and the matter went before a hearing officer. The hearing officer ruled that the deduction, which was allowed for federal purposes, was therefore allowed in computing New Mexico taxable income and that a departmental regulation attempting to bar the taxpayer from claiming the NOL deduction was invalid because it contradicted the statute.

In the revised ruling, the hearing officer noted that in computing New Mexico base income taxpayers must add back amounts claimed as NOLs on the federal return.  From that point, taxpayers subtract a NOL carryover computed under New Mexico law. That statute did not expressly allow the NOL carryover at issue.  In the hearing officer’s view, this treatment indicated that the Legislature did not intend to adopt the federal treatment of NOLs stemming from another taxpayer’s separate entity return.  Furthermore, because New Mexico does not follow the federal treatment, but provides a state specific NOL subtraction, the regulation relied on by the Department did not conflict with the statute or create an arbitrary limitation on a deduction allowed by the legislature.  The hearing officer next denied the taxpayer’s request to revert to separate filing, but abated penalties because the taxpayer in good faith believed it was entitled to the NOL deductions. 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.