By Nicole Boutros and Open Weaver Banks

A New York State Division of Tax Appeals Administrative Law Judge (ALJ) held that for banking franchise tax purposes a taxpayer did not have to utilize a net operating loss (NOL) carryover in a year in which the taxpayer did not pay tax on its entire net income base. The taxpayer had a federal and New York State loss for the 2005 tax year, carried its federal NOL to the 2006 and 2007 tax years, and deducted the full New York State NOL in the 2007 tax year. The taxpayer did not deduct the New York State NOL in the 2006 tax year because its entire net income for that year was a negative number and, therefore, the taxpayer was required to pay tax on its higher taxable asset base instead. On audit, the state sought to treat the taxpayer as if it had deducted the majority of its 2005 New York State NOL against its 2006 entire net income and reduced the taxpayer’s 2007 NOL deduction by the same amount. The ALJ held that the Department could not require the taxpayer to “hypothetically apply” its NOL to a year in which the taxpayer’s tax liability on its entire net income base, even without the NOL deduction, triggered an alternative tax base. The ALJ explained that, while New York Tax Law limits a taxpayer’s New York State NOL to the taxpayer’s federal NOL, it does not set a minimum New York State NOL a taxpayer must utilize. Furthermore, New York Tax Law cannot require such a result because a taxpayer always pays the federal corporate income tax on income, whereas a taxpayer may not always pay the banking franchise tax on an income base. The ALJ’s decision potentially creates refund opportunities for taxpayers that deducted NOLs in years in which they did not pay tax on entire net income. The decision also could impact a taxpayer’s “prior net operating loss” pools for tax years beginning on or after January 1, 2015. In the Matter of TD Holdings II, Inc., DTA No. 825329 (N.Y. Div. of Tax App.  Jan. 22, 2015).