United States

New York: Article 32 Taxpayer Required to Utilize State NOLs when Paying Tax on Non-Income Base

Apr 18, 2016
From KPMG TaxWatch

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Recently, the New York Tax Appeals Tribunal, reversing an earlier ALJ decision, held that a taxpayer was required to use state NOLs 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 were entire net income, taxable assets, alternative taxable income, and a 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, adjusted for certain state modifications and could not exceed the federal NOL allowed under IRC Section 172. In an earlier case, the Tribunal had held that a taxpayer’s NOL could be less than the federal NOL if that was all it took to reduce the taxpayer’s entire net income to zero. In the current case, 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 an NOL deduction. For New York purposes, it was clear that, even without a NOL deduction, the taxpayer’s tax on the “assets” base would exceed the tax on entire net income. Thus, on its New York bank tax return the taxpayer did not take an NOL deduction. After the taxpayer attempted to use its NOLs in a subsequent year, the Division asserted that the taxpayer had to take the maximum allowable state NOL deduction (essentially, wasting such NOLs) in the earlier tax year to bring entire net income down to zero. The matter eventually went before an ALJ, who 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.”

On appeal, the Tribunal reversed. Noting that deduction statutes must be strictly construed against the taxpayer, the Tribunal held that the taxpayer had not established that the Division’s interpretation of the law was erroneous. Although the state NOL could be less than the federal when required to reduce New York entire net income to zero (as in the earlier case), the Tribunal did not agree that this meant that no NOLs needed to be utilized when the taxpayer was paying tax on an alternative base. In the Tribunal’s view, there was no support in the statute for the taxpayer’s position. It concluded that the taxpayer was required to compute tax on entire net income, inclusive of NOLs, regardless of whether it ultimately paid tax on that base. As further support for the Division’s position, the Tribunal noted that post-New York tax reform, the NOL statute was consistent with the taxpayer’s position and it must presume that by amending a statute the Legislature intended to make a material change to the tax law.  Please contact Russ Levitt at (212) 872-6717 with questions on Matter of TD Holdings II, Inc. (Apr. 7, 2016).

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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.