NOL Deduction Against GCT Limited to Federal Deduction

Published: February 15, 1999
Source: Inside New York Taxes

The New York City Tax Appeals Tribunal has concluded that the New York City General Corporation Tax net operating loss deduction cannot exceed the amount that could have been utilized on a taxpayer's federal corporate income tax return for the same tax year. (Saviano, Tobias & Weinberger, P.C., TAT(H) 96-148(GC), September 28, 1998.)

A professional corporation engaged in the practice of law elected to be taxed as an S corporation for federal tax purposes. It reported losses on its federal income tax returns in the amount of $40,022, $124,182, and $122,790 for 1992 through 1994. The firm computed its City GCT liability pursuant to the alternative tax measured by entire net income plus compensation of officers. It had "taxable income" for two years at issue, 1993 and 1994, when officers compensation was added back.

For City GCT purposes, the firm claimed a $40,022 net operating loss deduction in 1993, the amount of the loss reported on its federal income tax return for 1992, and a $152,341 net operating loss deduction in 1994, the cumulative amount of the losses claimed on its federal returns for 1992 and 1993, less an adjustment for State and City taxes paid in 1993.

The NOL deductions for 1993 and 1994 were disallowed on the grounds that "[t]he deduction of a net operating loss carryforward from prior years may not exceed and is limited in the amount of the current year's Federal Taxable Income." After failing to reach agreement at a conciliation conference, the firm filed a petition with the City Tax Appeals Tribunal asserting that the amount of the NOL deduction allowed for City GCT purposes equals the aggregate of the net operating loss carrybacks and carryovers to that year -- even if those losses are not utilized in that year for federal tax purposes and even if the same loss had previously been used for City GCT purposes.

In a well-reasoned opinion, Administrative Law Judge Schwartz rejected the firm's argument. The ALJ first set forth the relevant provisions of law, including N.Y.C. Administrative Code Search7RH11-602.8(f), which provides, in relevant part, that the net operating loss deduction against the City GCT "shall not exceed the deduction for the taxable year allowed under section one hundred seventy-two of the internal revenue code, or the deduction for the taxable year which would have been allowed if the taxpayer had not made an election under subchapter s of chapter one of the internal revenue code." The ALJ then commented that:

The essence of Petitioner's argument is that for purposes of Code Search7RH11-602.8(f), the NOL "deduction allowed" under IRC Search7RH172 for any particular tax year refers to the NOL deduction as defined by IRC Search7RH172(a). That is, the aggregate of all NOL carrybacks and NOL carryovers that could be available for any tax year is the amount that may be deducted against GCT taxable income for that year. In making its argument, Petitioner completely ignores IRC Search7RH 172(b) which determines how much of the carryovers and carrybacks may be deducted in any particular year for Federal purposes.

Judge Schwartz also noted a troubling consequence of the firm's argument. The firm was not only attempting to use losses for City GCT purposes that were not allowable for federal purposes, but also claimed that the same losses may be used over and over again, giving rise to what Judge Schwartz coined the "Eveready Bunny tax deduction, a deduction that just keeps going, and going, and going." This Eveready Bunny effect is illustrated by the firm's attempt to claim the 1992 loss from its federal return against both its 1993 and 1994 City GCT.

Observations: This decision is consistent with the Third Department's reading of the State Corporate Franchise Tax. (See In re Telmar Communications Corp. v. State Tax Commission, 48 A.D.2d 189 (1975). Thus the law on the point appears well settled.