Could Andrew Burg carry a net operating loss established on his 2000 return back to erase 1998 and 1999 New Mexico income tax because federal law and an IRS employee allowed the federal carryback?

Plain-English summary

Andrew Burg could not use a net operating loss established on his 2000 return to obtain refunds of 1998 and 1999 New Mexico personal income tax. Federal law allowed a carryback, but New Mexico's separate rule allowed NOLs only as carryovers to later years.

An IRS examination recognized Burg as a professional stock trader and allowed a substantial NOL from stock-market losses. He carried the loss back against 1998 and 1999 federal income tax.

An IRS employee told Burg he could also apply the loss to those state years. Relying on that advice, Burg amended his New Mexico returns and claimed refunds of tax he had previously paid under an installment agreement.

New Mexico added back the federal NOL deduction

Section 7-2-2(B) began New Mexico base income with federal adjusted gross income but added the federal Section 172(a) NOL deduction taken for the year.

That add-back prevented the federal carryback result from automatically reducing New Mexico income.

The state exclusion applied only going forward

Section 7-2-2(N)(7) created a New Mexico exclusion for NOL carryover deductions. For a timely filed return, the loss first applied in the immediately following taxable year.

If an amended or late original return established the loss, it first applied in the first taxable year beginning after the return was filed. Any unused amount could continue through the next four succeeding years under the provision quoted in the decision.

Because Burg's loss arose on his 2000 return, New Mexico law did not allow it to move backward to 1998 or 1999.

The regulation confirmed no carryback

Regulation 3.3.1.13 gave an example in which a loss first reported on a 1993 amendment to a 1991 return could begin on the 1994 New Mexico return and could not be applied to 1992 or 1993.

That example directly supported the Department's denial.

Federal advice did not change state law

The IRS employee's advice accurately reflected the federal treatment Burg obtained but could not determine New Mexico tax consequences.

Burg also raised concerns about federal securities oversight and the capital gains reported in the earlier years. The New Mexico hearing officer lacked jurisdiction over those federal issues and could decide only whether the state refund denials followed New Mexico law.

Result: protest DENIED. No New Mexico refunds were available for 1998 or 1999 based on the 2000 NOL carryback.

What this means for you

Taxpayers with federal net operating losses

Do not assume federal carryback or carryforward treatment transfers directly to New Mexico. Recalculate under the state's add-back and carryover rules.

Investors or traders amending older returns

Identify the first New Mexico year in which the loss may be used before filing refund claims for prior years.

Taxpayers receiving federal-agency advice

IRS personnel address federal tax. Confirm state consequences with New Mexico authority or a qualified state-tax professional.

Businesses tracking NOL expiration

Maintain a year-by-year carryover schedule because the New Mexico provision in the decision limited the years in which the loss could be used.

Common questions

Q: Did the IRS allow Burg's federal carryback?
A: Yes.

Q: Why did New Mexico deny the same treatment?
A: New Mexico added back the federal NOL deduction and allowed its own exclusion only as a carryover to future years.

Q: Could the 2000 loss reduce 1998 or 1999 New Mexico tax?
A: No.

Q: When could a timely reported 2000 NOL first apply under the quoted rule?
A: In the immediately following taxable year, 2001.

Q: Did the IRS employee's advice bind New Mexico?
A: No.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-2-2(B) — base income and add-back of the federal NOL deduction
• NMSA 1978, § 7-2-2(N)(7) — New Mexico NOL carryover exclusion and timing
• 26 U.S.C. § 172(a) — federal net operating loss deduction
• Regulation 3.3.1.13 NMAC — examples applying New Mexico's NOL carryover rule

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Andrew S. Burg
• Decision PDF: D&O 03-13

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
ANDREW S. BURG; No. 03-13
PROTEST TO DENIAL OF CLAIMS FOR
REFUND OF PERSONAL INCOME TAX
FOR TAX YEARS 1998 & 1999

DECISION AND ORDER

A formal hearing on the above-referenced protest was held July 2, 2003, before Margaret B.

Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was represented by

Bruce J. Fort, Special Assistant Attorney General. Andrew S. Burg (“Taxpayer”) represented himself.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer filed New Mexico personal income tax returns for calendar years 1998

and 1999 reporting tax due to the state.

2. The Taxpayer was unable to pay these liabilities in full and entered into an

installment agreement with the Department.

3. As a result of an IRS examination of the Taxpayer’s 2000 federal income tax return,

the IRS agreed to recognize the Taxpayer as a professional stock trader and allowed him to claim a

significant net operating loss (NOL) arising out of the losses he suffered in the stock market.

4. Pursuant to federal law, the Taxpayer was able to carry the NOL back against his

1998 and 1999 federal income tax liabilities.

5. The IRS employee with whom the Taxpayer worked told the Taxpayer that he could

also apply the NOL against his 1998 and 1999 state tax liabilities.

6. Relying on the advice received from the IRS employee, the Taxpayer filed amended

1998 and 1999 New Mexico income tax returns seeking to carry the NOL back against his state

income tax liabilities for those years and claim a refund of the tax previously paid.

7. On March 5, 2003, the Department denied the Taxpayer’s refund claims.

8. On March 11, 2003, the Taxpayer filed a written protest to the Department’s denial

of his refund claims.

DISCUSSION

The issue presented is whether New Mexico law allows the Taxpayer to claim a refund of 1998

and 1999 New Mexico personal income taxes based on the carry back of NOLs established in his 2000

income tax return.

The Department maintains that the Taxpayer is not entitled to the refund because New

Mexico law does not allow NOLs to be carried back to prior years. The calculation of New Mexico

state income taxes begins with a determination of "base income", which is defined in NMSA 1978, § 7-

2-2(B) as the taxpayer's federal adjusted gross income, plus the amount of the net operating loss

deduction allowed by § 172(a) of the Internal Revenue Code and taken by the taxpayer for that year.

New Mexico then allows certain exclusions to arrive at the "net income" upon which income tax is

imposed. NMSA 1978, § 7-2-2(N)(7) allows the following exclusion for NOLs:

(7) for taxable years beginning on or after January 1, 1991, an amount
equal to the sum of any net operating loss carryover deductions to that year claimed
and allowed, provided that the amount of any net operating loss carryover from a
taxable year beginning on or after January 1, 1991 may be excluded only as follows:

(a) in the case of a timely filed return, in the taxable year
immediately following the taxable year for which the return is filed; or

(b) in the case of amended returns or original returns not timely
filed, in the first taxable year beginning after the date on which the return or amended
return establishing the net operating loss is filed; and

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(c) in either case, if the net operating loss carryover exceeds the
amount of net income exclusive of the net operating loss carryover for the taxable
year to which the exclusion first applies, in the next four succeeding taxable years in
turn until the net operating loss carryover is exhausted; in no event shall a net
operating loss carryover be excluded in any taxable year after the fourth taxable year
beginning after the taxable year to which the exclusion first applies.

These carryover provisions are further amplified in Department Regulation 3.3.1.13 NMAC. The

example in subsection D(b)(2) of the regulation is directly on point:

Example: B reports for income tax purposes on a calendar year basis. The 1991
original return included a net operating profit from a partnership in which B is a
partner. Subsequently, the partnership reports revised information to B, showing a
net operating loss instead of the original net operating profit. Consequently, in June,
1993, B files an amendment to B's timely filed 1991 original New Mexico individual
income tax return. B may first apply the 1991 net operating loss reported on the
1993 amended return to B's New Mexico individual income tax return for 1994. B
may not apply this net operating loss to 1992 or 1993.

The statutes and regulations clearly establish that the Taxpayer in this case is not entitled to use the

NOLs established in his 2000 income tax return to eliminate his state tax liabilities for the 1998 and

1999 tax years.

In support of his protest, the Taxpayer testified that he was given erroneous advice concerning

his state taxes by the IRS. He also stated his belief that the capital gains reported on his 1998 and 1999

returns were fabrications resulting from the failure of the federal Securities and Exchange Commission

to properly carry out its oversight responsibilities. The issues the Taxpayer raises are not issues that the

Department or its hearing officer have jurisdiction to consider. The Taxpayer must address his

concerns on what he sees as the incompetence or malfeasance of the federal government to the

appropriate federal agencies or to his congressional representatives. The only matter at issue in this

administrative protest is whether the Department’s denial of the Taxpayer’s refund claims is supported

by New Mexico law. Based on the statutes and regulations cited above, the Department’s denial was

correct.

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CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of his claims for

refund of 1998 and 1999 personal income taxes, and jurisdiction lies over the parties and the subject

matter of this protest.

2. New Mexico law does not allow the Taxpayer to claim a refund of 1998 and 1999

New Mexico personal income taxes based on the carry back of NOLs established in his 2000 income

tax return.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

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