The New Jersey Tax Court rejected a taxpayer’s due process claim finding that the Division of Taxation properly issued the notice of assessment. The taxpayer made three arguments: (1) that the Division issued the assessment in the name of the predecessor corporation instead of the successor corporation, (2) that the assessment was addressed to the wrong zip code, and (3) that the taxpayer’s third-party mailroom routed the assessment to the wrong location. In addressing each of these claims, the court reasoned that the taxpayer’s officer executed prior statute waivers in the name of the predecessor corporation and that the assessment was delivered to the proper address where agents of the taxpayer accepted and signed the mail return receipt card. Although there was evidence that the taxpayer’s mailroom routed the assessment to a different location, the court found that the taxpayer’s neglect was not excusable and that it was responsible for its organization’s failure to take prompt action to respond to the assessment. (Merrill Lynch Credit Corporation v. Division of Taxation, Dkt. No: 004230-2017 (NJ Tax Ct. Sep. 28, 2018) WL 4718875).

The South Carolina Administrative Law Court found that the taxpayer bank could not deduct net operating loss (NOL) carryforwards when computing its bank tax liability. The taxpayer argued that banks should be allowed to deduct NOLs regardless of whether it is paying under the income or the franchise tax, because of the state’s conformity with the Internal Revenue Code (IRC), which allows corporations to deduct NOLs. The Department of Revenue (DOR) argued that IRC conformity did not extend to banks, because under state law, corporate income tax is based on “taxable income,” and the bank tax is a franchise tax based on “entire net income.” The administrative law judge agreed with the DOR and concluded that the NOL carryforward deduction is only authorized when computing tax based on taxable income rather than entire net income. Synovus Bank v. Dep’t of Revenue, No. 17-ALJ-17-0418-CC (S.C. Admin. Law Ct. Oct. 22, 2018).

In interpreting an ambiguous statute allowing for a tax credit against the state’s financial institution excise tax (FIET), the Alabama Court of Appeals held in favor of the Department of Revenue’s interpretation. Alabama imposes a 6½% FIET on the net income of certain financial institutions. After deducting administrative charges payable to the Department, the Department is required by statute to distribute the FIET proceeds to the counties and municipalities in which the financial institution is located, with the remaining amount to the Alabama general fund. Taxpayers who make certain investments in designated areas of the state are eligible under Alabama Code § 41-9-218(1) for a credit against the “state-distributed portion” of the FIET due. The court stated that although the phrasing “state-distributed portion” of the tax credit statute was ambiguous, the various differing constructions by the taxpayer, the Department, and the lower court did “not stand on equal footing.” Because of the Department’s “expertise in matters of taxation,” the court held that the Department’s interpretation of the statute—that the “state-distributed portion” refers only to the FIET proceeds distributed to the state general fund—was entitled to deference. The court reasoned that even though the Department did not promulgate a rule or regulation interpreting the statute, the Department was entitled to deference because it applied the same interpretation “on its internal paperwork in making its final assessment” and before the circuit court and court of appeals, rather than just adopting the interpretation as a litigation position. Thus, the credit applied to reduce the FIET liability by only the amount of the FIET proceeds distributed to the state general fund, and not to the amount of the FIET proceeds distributed to the counties, municipalities, and the state as argued by the taxpayer.


Alabama Dep’t of Revenue v. Bryant Bank, CV-17-900699 (Ala. Civ. App. Sept. 14, 2018).

By Liz Cha and Open Weaver Banks

The North Carolina Supreme Court affirmed the North Carolina Business Court’s decision that Fidelity Bank was precluded from deducting “market discount income” from US bonds for North Carolina corporate income tax purposes. Fidelity Bank acquired US government bonds at a discount, held these bonds until maturity, and earned “market discount income.” Market discount income is the difference between (1) the amount a corporation initially paid for discounted bonds and (2) the amount it received from those discounted bonds at maturity. To determine its taxable corporate income, Fidelity Bank treated the market discount income as taxable income and then deducted this income as interest earned on US government obligations. Fidelity Bank argued that this income should be treated as interest because it is treated that way for federal income tax purposes.

However, the court determined that, while North Carolina law does not define the term “interest,” it should be interpreted in accordance with its plain meaning as involving “periodic payments received by the holder of a bond.” The fact that market discount income is treated as interest for purposes of determining federal taxable income did not mean that it should be treated as “interest” for all purposes under North Carolina tax law. The court also noted that the state legislature has selectively incorporated certain definitions from the Internal Revenue Code into the North Carolina Revenue Act and that if the legislature intended for “interest” to take on the same meaning it would require “specific support in relevant statutory language.” The Fidelity Bank v. North Carolina Department of Revenue, No. 392A16, 393PA16 (N.C. Aug. 18, 2017).

By Alla Raykin and Eric Coffill

The Massachusetts Appellate Tax Board (ATB) upheld the Commissioner’s assessment, resulting from a denial of a subsidiary’s securities corporation classification for corporate excise tax purposes. Companies classified as securities corporations receive favorable excise tax treatment under G.L. c. 63, § 38B(a), including not being subject to inclusion in the parent’s combined group. The ATB found that classification required either submitting an application before the end of the taxable year or having a classification from the Commissioner from a previous taxable year. The Commissioner denied the classification because the company did not file the required application. The ATB determined that the Commissioner’s prior acceptance of returns without audit did not constitute acquiescence to the classification. Without the classification, the subsidiary should have been included in the parent’s combined reporting group, which resulted in a higher tax liability for both the subsidiary and its parent. Techtarget, Inc. v. Commissioner of Revenue, No. C314725, ATB 2016-481 (Mass. App. Tax Bd. Nov. 18, 2016).

By Charles Capouet and Madison Barnett

The New York City Tax Appeals Tribunal held that a bank filing a combined New York City bank tax return properly excluded from its combined group a Connecticut investment subsidiary that primarily held mortgage loans secured by non-New York property. Where there are substantial intercorporate transactions among banking corporations or bank holding companies engaged in a unitary business, New York City law presumes that a combined return is required. The Tribunal held that although there were substantial intercorporate transactions, the combined report presumption was rebutted because the intercompany transactions were conducted at arm’s length, and the transactions and entities had non-tax business purposes and economic substance. The Tribunal determined that “[a]lthough it is clear that the tax purposes [of forming the investment subsidiary] were substantial, separating the non-New York loans from [the New York bank] was a sufficient non-tax business purpose to support the transactions.” As a result, New York City could not require the bank to include its investment subsidiary in its combined New York City bank tax return. In re Astoria Fin. Corp. & Affiliates, No. TAT (E) 10-35 (BT) (N.Y.C. Tax Appeals Tribunal May 19, 2016).

By Nicole Boutros and Eric Coffill

The New York State Tax Appeals Tribunal determined that a taxpayer subject to the Article 32 bank franchise tax must use its net operating loss deduction to reduce its entire net income to zero in years in which the bank franchise tax was paid by the taxpayer on an alternative, non-income tax base. The Tribunal reached its decision notwithstanding that the taxpayer would have paid the bank franchise tax on an alternative tax base even without applying the NOL deduction. While New York State tax reform changed the NOL computation for tax years beginning on or after January 1, 2015, taxpayers can still carry over pre-tax reform NOLs to post-tax reform years using the “prior net operating loss” subtraction. As such, New York State bank franchise tax and corporation franchise tax taxpayers may want to consider how this decision affects their unabsorbed NOL base in pre-tax reform years, as such NOLs will enter into their prior net operating loss subtraction pool. In the Matter of the Petition of TD Holdings II, Inc., DTA No. 825329 (N.Y. Tax App. Trib. Apr. 7, 2016).

By Charles Capouet and Todd Lard

The New Jersey Tax Court ruled on the sourcing of mortgage-related receipts received by a bank and also held that the Division of Taxation could not throw out receipts from the bank’s denominator. The taxpayer originated loans for its New Jersey borrowers through its New Jersey lending office employees and also acquired loans made by third-party New Jersey brokers to New Jersey borrowers. The taxpayer performed loan-related functions, such as underwriting, outside of New Jersey, and pooled the loans for sale to certain government-sponsored entities in exchange for mortgage-backed securities that it simultaneously sold to broker-dealers. The tax court held that the taxpayer was required to include, in its New Jersey receipts factor numerator, interest income, origination fee income and gross proceeds of sales attributed to loans to New Jersey borrowers. However, loan service fee income and income on sales of loan servicing rights were not includible in the New Jersey factor. Finally, the tax court followed the Superior Court of New Jersey, Appellate Division’s decision in Lorillard Licensing Company LLC v. Director, Division of Taxation, holding that the Division could not exclude receipts from the taxpayer’s denominator because the taxpayer had nexus with other states under New Jersey nexus standards. Flagstar Bank, FSB v. Dir., Div. of Taxation, Dkt. No. 019335-2010 (N.J. Tax Ct. Mar. 22, 2016).

A New York State Division of Tax Appeals administrative law judge issued three determinations addressing the tax implications for unauthorized insurance companies, both life and non-life. Significant uncertainty has surrounded New York State’s taxation of unauthorized insurance companies since New York State amended its insurance tax provisions in 2003. The Department of Taxation and Finance even issued a technical memorandum in 2012 reversing its prior position on unauthorized life insurance company taxation. These ALJ determinations provide much needed clarity, although questions still remain.

View the full Legal Alert.

By Hanish Patel and Marc Simonetti

In a Chief Counsel Ruling, the California Franchise Tax Board (FTB) ruled that, for purposes of determining its sale factor, a financial information provider should source the sales of its information services based on where the taxpayer’s customer receives the benefit of the service, and not where the ultimate customer (the taxpayer’s customer’s customer) receives the benefit.  The taxpayer provides financial data—real-time stock quotes, company screenings and other market research data—to business entity customers that, in turn, use the data to manage portfolios and offer products to their own customers. Additionally, the FTB ruled that the taxpayer could identify and measure the location of the benefit received based on the relative computing power usages of its customers because the computing power correlated to the fees received for the service. Cal. FTB Chief Counsel Ruling No. 2015-02 (released Feb. 19, 2016).