Can a New York insurance company carry back its 2002 New York net operating loss to 1997 under Article 33 when it could not carry back the federal loss to that year?

Plain-English summary

A New York insurance company taxed under Article 33 had complicated loss history. It carried its 1999 NOLs back to 1997, which for federal purposes reduced 1997 federal taxable income to zero. Then it incurred a large 2002 NOL (federal $14.7M; New York $13.7M) and asked whether it could carry the 2002 New York NOL back to 1997 under Article 33.

The Department said no. Under Article 33, the New York NOL deduction must arise from the same source year as the federal NOL deduction. For federal purposes, none of the 2002 federal NOL could be carried back to 1997 -- 1997 federal taxable income had already been zeroed out by the earlier 1999 carryback, leaving nothing for the 2002 loss to offset. Because the federal 2002 loss could not be carried back to 1997, none of the 2002 New York NOL may be carried back to 1997 either. With Issue 1 answered no, the limitation question (Issue 2) is moot.

What this means for you

New York insurer NOLs follow the federal carryback year

Under Article 33, a New York NOL deduction is tethered to the federal NOL deduction's source year. You cannot carry a New York loss back to a year the federal loss cannot reach. The federal carryback drives the New York carryback.

Earlier carrybacks can use up a target year

A prior loss carried back to a year can zero out that year's federal income, leaving no room for a later loss to be carried to the same year. Once federal taxable income for the target year is fully absorbed, a subsequent year's federal NOL (and therefore the New York NOL) cannot reach it.

Sequence your loss years carefully

Track which loss years have already been absorbed into which target years federally. The New York result will mirror the federal availability -- so plan carrybacks with the same-source-year rule in mind.

Common questions

Q: Can a New York insurer carry a New York NOL back to a year the federal NOL cannot reach?
A: No. Under Article 33, the New York NOL deduction must arise from the same source year as the federal NOL deduction.

Q: Why couldn't the 2002 loss reach 1997?
A: The company's 1997 federal taxable income had already been reduced to zero by an earlier carryback of its 1999 federal NOL, leaving nothing for the 2002 loss to offset.

Q: What about the limitation question?
A: It was moot, because the carryback was not allowed in the first place.

Citations and references

Statutes, regulations, and authorities:
- Tax Law Article 33 (franchise tax on insurance corporations)
- Tax Law section 1503(b) (entire net income; net operating loss deduction for insurers)
- Internal Revenue Code section 172 (net operating loss deduction)
- Amper, Politziner & Mattia, P.C., TSB-A-04(16)C (Oct. 1, 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a04_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(16)C
Corporation Tax
October 1, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C040127A

On January 27, 2004, a Petition for Advisory Opinion was received from Amper, Politziner
& Mattia, P.C., 6 East 43rd Street, New York, NY 10017.
The issues raised by Petitioner, Amper, Politziner & Mattia, P.C., are:
1.Whether a New York State insurance company (“Company”) may carry back any amount
of the 2002 New York net operating loss (NOL) to the 1997 taxable year for purposes of
Article 33 of the Tax Law.
2. If the answer to Issue 1 is yes, is there a limitation on the amount?
Petitioner submits the following facts as the basis for this Advisory Opinion.
Company is a New York State insurance company that is taxable under Article 33 of the Tax
Law. This Advisory Opinion assumes that Company is a calendar year taxpayer.
For taxable year 1997, Company reported federal taxable income of $1,887,257. For taxable
year 1997, Company’s New York entire net income (after NOL carryback) was $2,306,761.
For taxable year 1999, Company incurred a federal NOL of $1,889,455 and a New York
NOL of $391,402. Company filed federal and New York carryback claims to carry back the taxable
year 1999 NOLs to taxable year 1997.
For federal income tax purposes, Company carried back and utilized $1,887,257 of the
taxable year 1999 NOL to offset all of the taxable year 1997 federal taxable income.
For purposes of Article 33 of the Tax Law, Company carried back and utilized $391,402,
which was all of the taxable year 1999 New York NOL, to offset a portion of Company’s taxable
year 1997 New York entire net income. This carryback reduced New York entire net income for
taxable year 1997 to $2,306,761.
For taxable year 2002, Company incurred a federal NOL of $14,727,812 and a New York
NOL of $13,683,040.
For federal income tax purposes, Company was not able to carry back any of the taxable year
2002 federal NOL to taxable year 1997, because the taxable year 1999 federal NOL that was carried
back to taxable year 1997 offset all of the taxable year 1997 federal taxable income.

-2­
TSB-A-04(16)C
Corporation Tax
October 1, 2004

Applicable law and regulations
Internal Revenue Code (IRC) section 172(b) contains rules for net operating loss carrybacks
and carryovers, and provides, in part:
(1) Years to which loss may be carried. –
(A) General rule. Except as otherwise provided in this paragraph, a net operating
loss for any taxable year –
(i) shall be a net operating loss carryback to each of the 2 taxable years
preceding the taxable year of such loss, and
(ii) shall be a net operating loss carryover to each of the 20 taxable years
following the taxable year of the loss.
*

*

*

(F) Retention of 3-year carryback in certain cases. –
*

*

*

(H) In the case of a taxpayer which has a net operating loss for any taxable year
ending during 2001 or 2002, subparagraph (A)(i) shall be applied by substituting “5” for “2”
and subparagraph (F) shall not apply.
(2) Amount of carrybacks and carryovers. – The entire amount of the net operating
loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be
carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss
may be carried. The portion of such loss which shall be carried to each of the other taxable
years shall be the excess, if any, of the amount of such loss over the sum of the taxable
income for each of the prior taxable years to which such loss may be carried....
Section 1503(b)(4) of Article 33 of the Tax Law provides that in computing entire net
income:
Any “net operating loss deduction” or “operations loss deduction” allowable under
sections one hundred seventy-two or eight hundred ten of the internal revenue code,
respectively, which is allowable to the taxpayer for federal income tax purposes:
(A) shall be adjusted to reflect the modifications required by the other paragraphs of
this subdivision;

-3­
TSB-A-04(16)C
Corporation Tax
October 1, 2004

(B) shall not, however, exceed any such deduction allowable to the taxpayer for the
taxable year for federal income tax purposes; and
(C) shall not include any such loss incurred in a taxable year beginning prior to
January first, nineteen hundred seventy-four or during any taxable year in which the taxpayer
was not subject to the tax imposed under section fifteen hundred one.
Section 3-8.5 of the Business Corporation Franchise Tax Regulations (Article 9-A
Regulations) contains the rules for aggregating net operating losses, and provides:
When the net operating losses of two or more years, or the portions of net operating
losses of two or more years, are carried back or carried forward to be deducted from the
income of one particular taxable year, the [Commissioner of Taxation and Finance] requires
that an aggregate method of deducting the losses be used. The taxpayer must compute the
aggregate of the Federal net operating losses to be carried to the particular taxable year, and,
also, compute the aggregate of the net operating losses under article 9-A for such year.
After computing the two aggregate figures, whichever of the two (Federal or State)
is smaller is the aggregate net operating loss which is allowable as a carry back or carry
forward to the particular taxable year. The limitations described in subdivisions (b), (c) and
(d) of section 3-8.2 of this Subpart apply in deducting the aggregate of losses. [Examples
omitted]
Opinion
Section 1503(b)(4)(B) of the Tax Law has been interpreted to mean that a New York NOL
deduction may not exceed the amount of the federal NOL absorbed in the same year (Matter of
Royal Indemnity Company v Tax Appeals Tribunal, 75 NY2d 75), and that the federal and state NOL
deduction must arise from the same source year (see Matter of the Aetna Casualty and Surety
Company, 214 AD2d 238; Lehigh Valley Industries, Tax Appeals Tribunal, May 5, 1988, citing
Matter of Eveready v State Tax Commn, 129 AD2d 958, lv denied 70 NY2d 604). Although Lehigh
Valley, supra, arose under Article 9-A of the Tax Law, under Royal Indemnity Company, supra, the
regulations and case law under section 208.9(f) of Article 9-A of the Tax Law are equally applicable
to section 1503(b)(4) of the Tax Law.
In Lehigh Valley, supra, the petitioner argued that section 3-8.5 of the Article 9-A
Regulations, which contains the rules for the aggregation of losses, supported its claim that a
New York NOL deduction need not originate in the same year as the federal NOL deduction. The
Tribunal found that since the petitioner did not have NOLs from two or more years that it was
seeking to carry back or forward, the rule of section 3-8.5 of the Article 9-A Regulations was not
applicable to determining the petitioner’s entire net income.

-4­
TSB-A-04(16)C
Corporation Tax
October 1, 2004

In Matter of the Aetna Casualty and Surety Company, supra, the issue was whether section
1503(b)(4) of the Tax Law prohibited the deduction of any NOL in excess of the amount the
taxpayer carried back or forward from the same year when calculating the NOL deduction claimed
on its federal income tax return. The Appellate Division addressed whether the losses deducted on
the franchise tax return must arise in the same source year or years as those deducted on the federal
return (a requirement known as “source year conformity.”) The Appellate Division stated, in part:
Tax Law section 1503(b)(4) expressly permits a taxpayer to utilize, when calculating
its income for franchise tax purposes, the NOL deduction that it claimed on its Federal
income tax return for the corresponding year. This deduction must be modified in certain
respects, with the resulting figure to be deducted from taxable income, but, significantly,
only to the extent that it does not exceed the Federal deduction (see, Tax Law section
1503(b)(4)(B)). Because the statute begins with the deduction claimed on the Federal return,
the Department has taken the position - which we have implicitly upheld (see, Matter of
Eveready Ins. Co. v New York State Tax Commn., 129 AD2d 958, 959, lv denied 70 NYS2d
604; Matter of American Employers’ Ins. Co. v State Tax Commn., 114 AD2d 736, 737-738)
- that it allows the deduction of only those losses that made up the Federal deduction,
namely, those incurred in the same year(s). Given that the modifications made to the Federal
deduction, when calculating the State deduction, do not encompass the inclusion of losses
from other years, the Department’s interpretation cannot be said to be unreasonable.
Therefore, it must be upheld (see, Matter of Custom Shop Fifth Ave. Corp. v Tax Appeals
Tribunal of State of N.Y., [195 AD2d 702, 704]. Petitioners’ attempt to rely on the regulation
governing aggregation of losses from multiple years (see, NYCRR 3-8.5) to circumvent the
source year conformity rule is also unavailing, for, as the Tribunal notes, that regulation
incorporates similar limitations on deductibility.
It bears noting that this “source year” limitation has also been recognized, and
apparently accepted, by the Court of Appeals, which found in the Matter of Royal Indem. Co.
v Tax Appeals Tribunal (75 NY2d 75,78) that the petitioner therein, having already utilized
its Federal losses from 1974 and part of 1975, would never be able to deduct its
corresponding State losses (see also, Matter of American Employers’ Ins. Co. v State Tax
Commn., supra, at 738). Moreover, the Department’s argument, that true conformity with
Federal operation loss rules cannot be achieved by requiring numerical conformity only,
provided an additional, reasonable basis for the Tribunal’s decision.
With respect to Issue 1, for taxable year 1999, Company had a federal NOL of $1,889,455.
Pursuant to IRC section 172, Company carried back and utilized $1,887,257 of the taxable year 1999
NOL to offset all of its federal taxable income for taxable year 1997. For taxable year 1999,
Company had a New York NOL of $391,402. Pursuant to section 1503(b)(4) of the Tax Law,
Company carried back and utilized all of the taxable year 1999 New York NOL to offset a portion
of its New York entire net income for taxable year 1997. After this adjustment, Company’s
New York entire net income for taxable year 1997 was $2,306,761.

-5­
TSB-A-04(16)C
Corporation Tax
October 1, 2004
For taxable year 2002, Company incurred a federal NOL of $14,727,812 and a New York
NOL of $13,683,040. Pursuant to section 1503(b)(4)(B) of the Tax Law, and following Royal
Indemnity, supra; Aetna Casualty and Surety, supra; Eveready, supra; and Lehigh Valley, supra,
the federal and state NOL deductions must arise from the same source year. For federal income tax
purposes, none of the taxable year 2002 federal NOL was allowable as a carry back to taxable year
1997 because Company’s federal taxable income for taxable year 1997 was previously reduced to
zero when Company carried back its taxable year 1999 federal NOL to taxable year 1997.
Accordingly, none of the taxable year 2002 New York NOL may be carried back to taxable year
1997 to reduce Company’s New York entire net income for taxable year 1997.
In light of the conclusion reached in Issue 1, Issue 2 is moot.

DATED: October 1, 2004

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.