United States

Minnesota: Tax Court Holds IRC Section 382 Limitation Is Not Apportioned

Aug 21, 2017
From KPMG TaxWatch

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Internal Revenue Code Section 382 provides that if a loss corporation undergoes an ownership change, the amount of post-change income that can be offset by pre-ownership change losses cannot exceed the Section 382 limitation. The Section 382 limitation is the stock value of the acquired loss corporation (with certain adjustments) multiplied by the long term tax exempt rate. Recently, the Minnesota Tax Court addressed whether the Section 382 limitation, which applies to Minnesota net income, is required to be apportioned. This determination was critical because if the limitation was apportioned, 85 percent of the losses of the company acquired by the taxpayer would have expired before they were able to be used. Under the taxpayer’s interpretation of the law, within two years all of the pre-acquisition NOLs could have been used to offset the taxpayer’s Minnesota taxable income. The Commissioner’s long-standing policy, embodied in Revenue Notice 99-07, was that the Section 382 limitation was apportioned using the post-change year’s apportionment percentage to determine the amount of taxable net income that was eligible to be offset by an NOL carried forward from a pre-change year.  

Under Minnesota law, the “limitation amount determined under section 382 shall be applied to net income, before apportionment, in each post change year to which a loss is carried (emphasis added). In the tax court’s view, the statutory language unambiguously provided that the Section 382 limitation was applied before apportionment and the court declined to add language to the statute that was not adopted by the legislature. Because there was no ambiguity in the law, the Commissioner’s administrative interpretation in Revenue Notice 99-07 was not entitled to deference. The court noted that it had reached this same conclusion five years ago in the Express Scripts case.  As a tax court decision, this opinion is not precedential. It remains to be seen whether the Department of Revenue will appeal. Please contact Mike O’Brien at 651-305-5441 with questions on Sinclair Broadcast Group, Inc. v. Commissioner of Revenue.

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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.