New York Law Review

Tag: State Tax Deduction

  • Matter of American Employers’ Ins. Co. v State Tax Commn., 68 N.Y.2d 77 (1986): Limitation on State Net Operating Loss Deduction

    Matter of American Employers’ Ins. Co. v State Tax Commn., 68 N.Y.2d 77 (1986)

    A taxpayer’s state deduction for net operating losses for a tax year is limited to the amount of the federal loss deduction for the same year.

    Summary

    American Employers’ Insurance Company (AEIC) sought to deduct net operating losses (NOLs) on its New York State tax returns for 1976 and 1977, losses which it had carried back for federal tax purposes to pre-1974 years. Because AEIC paid no New York State taxes before 1974, it could not carry the losses back for state purposes. Consequently, the NOL deductions claimed on the state returns exceeded those claimed on the corresponding federal returns. The New York State Department of Taxation reduced the NOL deductions on AEIC’s state returns to match the federal deductions. The New York Court of Appeals affirmed the Tax Appeals Tribunal’s determination, holding that Tax Law § 1503(b)(4)(B) limits the state NOL deduction to the amount of the federal NOL deduction for the same year. The court reasoned that legislative history indicated that article 33 of the Tax Law was intended to mirror article 9-A, which had been consistently interpreted to limit the state loss deduction to the amount of the federal deduction.

    Facts

    American Employers’ Insurance Company (AEIC), a Delaware corporation, was licensed to conduct business in New York and was subject to tax under Article 33 of the Tax Law. In 1974 and 1975, AEIC incurred net operating losses (NOLs). AEIC carried back all of its 1974 NOLs and a portion of its 1975 NOLs to pre-1974 tax years for federal income tax purposes. Because AEIC had not paid New York State taxes before 1974, it could not carry back the NOLs for state income tax purposes. AEIC carried forward the remaining 1975 NOLs to its 1976 and 1977 federal income tax returns. When filing its 1976 and 1977 New York State tax returns, AEIC included as part of its net operating loss deductions the amount of its 1974 and 1975 losses that it could not carry back for state tax purposes but had carried back for federal tax purposes. As a result, AEIC’s claimed NOL deductions were greater for state tax purposes than for federal tax purposes in 1976 and 1977.

    Procedural History

    The Audit Division of the State Department of Taxation reduced AEIC’s NOL deductions for the 1976 and 1977 tax years to match the federal NOL deduction. The Administrative Law Judge upheld the Department’s actions. The Tax Appeals Tribunal confirmed the ALJ’s determination. AEIC commenced an Article 78 proceeding challenging the Tribunal’s determination. The Third Department confirmed the determination and dismissed the proceeding. The Court of Appeals granted AEIC leave to appeal.

    Issue(s)

    Whether under Tax Law § 1503(b)(4)(B), a taxpayer’s state deduction for net operating losses for a tax year is limited to the amount of the federal loss deduction for the same year.

    Holding

    Yes, because Tax Law § 1503(b)(4)(B) explicitly states that the net operating loss deduction for state tax purposes shall not exceed the deduction allowable for federal income tax purposes for the taxable year.

    Court’s Reasoning

    The court reasoned that the taxpayer bears the burden of establishing its right to a particular deduction, citing Matter of Grace v New York State Tax Commn., 37 NY2d 193, 197. The court relied on the plain language of Tax Law § 1503(b)(4), which provides that any net operating loss deduction allowable under section 172 of the Internal Revenue Code is allowable for state tax purposes, but such deduction “shall not, however, exceed any such deduction allowable to the taxpayer for the taxable year for federal income tax purposes” (Tax Law § 1503[b][4][B]). The court found that the legislative history supported the interpretation that article 33 was intended to be substantially similar to article 9-A. The Legislature provided that the provisions in article 33 should be regarded as being in pari materia and construed in a like manner as substantially identical provisions contained in article 9-A (L 1974, ch 649, § 12). At the time of the enactment of article 33, the analogous article 9-A loss deduction provision had been consistently interpreted as limiting the State loss deduction for the tax year to the amount of the Federal deduction, citing Matter of Abraham & Straus v Tully, 47 NY2d 207, 214.