In a New York combined franchise tax report, does the federal IRC section 382 limitation and the SRLY-overlap rule of Treasury Regulation 1.1502-21(g) apply when computing the net operating loss deduction?

Plain-English summary

A group of affiliated corporations files a combined franchise tax report in New York. It asked how the federal limits on using net operating losses (NOLs) carry into the New York combined NOL deduction — specifically the IRC section 382 limitation (which caps NOL use after an ownership change) and the separate return limitation year (SRLY) rules, including the overlap rule of Treasury Regulation § 1.1502-21(g) that turns off SRLY where it would overlap with section 382.

The Department's answer: the federal rules govern. New York's NOL deduction under Tax Law § 208.9(f) is essentially the federal IRC § 172 deduction (capped at the federal amount and subject to New York modifications), and 20 NYCRR § 3-8.7 provides that a corporation reporting on a combined basis is subject to the same NOL limitations that apply for federal income tax as if it had filed a consolidated federal return. So both the section 382 limitation and the SRLY-overlap rule of Treas. Reg. § 1.1502-21(g) are applied in determining the New York combined NOL deduction. If, federally, the SRLY rule does not apply for a year because section 382 overlaps it, then section 382 (not SRLY) likewise governs that year for New York. (The Department does not verify the actual NOL dollar amounts in an advisory opinion.)

What this means for you

Combined filers with acquired loss companies

When your New York combined group includes corporations that brought NOLs with them, expect New York to mirror the federal mechanics: the section 382 ownership-change limitation and the SRLY rules, including the overlap rule that switches off SRLY where section 382 already constrains the losses. You generally do not run a separate, inconsistent New York NOL limitation.

Tax directors and M&A planners

The federal-conformity point is useful for modeling: structure and track ownership changes and loss carryforwards with the federal consolidated-return regulations in mind, because New York's combined NOL deduction rides on those same limitations under § 208.9(f) and 20 NYCRR § 3-8.7.

Accountants and tax professionals

Confirm the federal SRLY/section 382 overlap analysis first; New York follows it. Remember the New York deduction is capped at the IRC § 172 amount and adjusted by the New York modifications, and that the Department will not bless specific dollar figures in an opinion — those are an audit matter.

Common questions

Q: Does New York apply IRC section 382 to combined-group NOLs?
A: Yes. The combined-report NOL deduction is subject to the same federal limitations as a consolidated return, including section 382 and the SRLY-overlap rule of Treas. Reg. 1.1502-21(g).

Q: What happens when SRLY and section 382 overlap?
A: Federally, the overlap rule turns off SRLY and section 382 governs. New York follows that result for the combined NOL deduction.

Q: Will the Department confirm our NOL amounts?
A: No. An advisory opinion only states how the rules apply; verifying the NOL dollar amounts is outside its scope and is handled on audit.

Citations and references

Statutes, regulations, and authorities:
- Tax Law § 208.9(f) (New York NOL deduction; capped at IRC section 172 amount)
- 20 NYCRR § 3-8.7 (combined-report NOL subject to federal consolidated-return limitations)
- IRC § 382 (limitation on NOL carryforwards after ownership change)
- Treasury Regulation § 1.1502-21(g) (SRLY/section 382 overlap rule)
- Tax Law § 211.4 (combined reports)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a07_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(2)C
Corporation Tax
March 19, 2007

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C060824B

On August 24, 2006, a Petition for Advisory Opinion was received from Deloitte Tax
LLP, Two World Financial Center, New York, NY 10281.
The issues raised by Petitioner, Deloitte Tax LLP, are:
1. Whether, in determining the New York State net operating loss deduction for a group
of corporations filing a combined franchise tax report under Article 9-A of the Tax Law,
the provisions of Internal Revenue Code (IRC) section 382 and the separate return
limitation year (SRLY) overlap provisions of U.S. Treasury Regulation section 1.1502­
21(g) are to be applied.
2. Whether, in computing the limitation on the use of net operating losses under Article
9-A of the Tax Law, the SRLY limitation applies to Corporation A’s acquisition of
Corporation B or Corporation A’s acquisitions of Corporation C, Corporation D, and
Corporation E as described below.
3. Whether, in computing the limitation on the use of net operating losses under Article
9-A of the Tax Law, the IRC section 382 limitation applies to Corporation A’s use of the
net operating losses of Corporation B, Corporation C, Corporation D, and Corporation E
as described below.
Petitioner submits the following facts as the basis for this Advisory Opinion.
On October 24, 2001, Corporation A acquired all of the outstanding stock of Corporation
B in a transaction covered by IRC section 382.
For the taxable year 2002, Corporation B and its subsidiaries were included in
Corporation A's federal consolidated return and its combined franchise tax report under Article
9-A of the Tax Law.
At the time of the acquisition of Corporation B by Corporation A, Corporation B and its
subsidiaries had a total federal and New York State net operating loss (NOL) carry forward of
$469 million and $316 million, respectively.
The IRC section 382 NOL deduction limitation applicable to the Corporation B NOL
for the taxable year 2002 was $134 million. For federal income tax purposes pursuant to
Treasury Regulation section 1.1502-21(g)(1), the SRLY rule pursuant to Treasury Regulation
section 1.1502-21(c)(1)(i) did not apply since the provisions of IRC section 382 applied.

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For the taxable year 2002, Corporation A deducted $90 million of Corporation B's NOLs
on its combined franchise tax report under Article 9-A of the Tax Law.
On November 17, 1999, Corporation A acquired 57% of all outstanding shares of
Corporation E (including its subsidiaries, Corporation C and Corporation D) to supplement the
43% of Corporation E that was already owned by Corporation A. This transaction was covered
by IRC section 382. As a result of this transaction, Corporation E, Corporation C, and
Corporation D were included in Corporation A's federal consolidated returns and New York
State combined franchise tax reports for the taxable years 2000, 2001, and 2002.
As of November 17, 1999, Corporation E and its subsidiaries, Corporation C and
Corporation D, had federal and New York NOLs of $219 million and $184 million ("Corporation
E NOLs"), respectively. For the taxable year 2000, the IRC section 382 limitation on this NOL
was $433 million.
As of November 17, 1999, in addition to the Corporation E NOLs, Corporation C and
Corporation D had a federal and New York NOL carry forward of $55 million and $39 million
("Corporation C and D NOLs"), respectively. These NOLs were from taxable years prior to the
year when Corporation E acquired ownership of Corporation C and its subsidiary Corporation D.
(Corporation E acquired all of the stock of Corporation C on November 17, 1998.) For the
taxable years 2000, 2001, and 2002, the IRC section 382 limitations relative to the Corporation C
and Corporation D NOLs were $29 million, $16 million, and $16 million, respectively.
For taxable year 2000, since the IRC section 382 limitation amount on the Corporation E
NOLs was in excess of the available New York NOLs, the entire New York NOL was deducted
in computing combined entire net income for purposes of Article 9-A of the Tax Law. For
federal income tax purposes pursuant to Treasury Regulation section 1.1502-21(g)(1), the SRLY
rule pursuant to Treasury Regulation section 1.1502-21(c)(1)(i) did not apply since the
provisions of IRC section 382 applied.
With respect to the Corporation C and Corporation D NOLs for the taxable year 2000,
since the IRC section 382 limitation amount of $29 million was less than the available New York
NOLs, the amount of NOL deducted in computing combined entire net income for purposes of
Article 9-A of the Tax Law was limited to $29 million. For taxable year 2001, the IRC
section 382 limitation was in excess of the available New York NOLs, and therefore, the
remaining New York NOLs were deducted in computing combined entire net income for
purposes of Article 9-A of the Tax Law. For federal income tax purposes pursuant to Treasury
Regulation section 1.1502-21(g)(1), the SRLY rule pursuant to Treasury Regulation section
1.1502-21(c)(1)(i) did not apply since the provisions of IRC section 382 applied.

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Applicable law and regulations
IRC section 172(a) allows a NOL deduction and provides:
Deduction allowed. — There shall be allowed as a deduction for the taxable year
an amount equal to the aggregate of (1) the net operating loss carryovers to such year,
plus (2) the net operating loss carrybacks to such year. For purposes of this subtitle, the
term "net operating loss deduction" means the deduction allowed by this subsection.
IRC section 382 contains rules for a limitation on NOL carryforwards and
provides, in part
(a) General rule. — The amount of the taxable income of any new loss
corporation for any post-change year which may be offset by pre-change losses shall not
exceed the section 382 limitation for such year.
(b) Section 382 limitation. — For purposes of this section —
(1) In general. — Except as otherwise provided in this section, the section
382 limitation for any post-change year is an amount equal to —
(A) the value of the old loss corporation, multiplied by
(B) the long-term tax-exempt rate.
Treasury Regulation section 1.1502-21 contains rules for the computation of consolidated
NOL deduction and provides, in part:
(a) Consolidated net operating loss deduction. The consolidated net operating loss
deduction (or CNOL deduction) for any consolidated return year is the aggregate of the
net operating loss carryovers and carrybacks to the year. The net operating loss
carryovers and carrybacks consist of—
(1) Any CNOLs (as defined in paragraph (e) of this section) of the
consolidated group; and
(2) Any net operating losses of the members arising in separate return
years.
(b) Net operating loss carryovers and carrybacks to consolidated return and
separate return years. Net operating losses of members arising during a consolidated
return year are taken into account in determining the group's CNOL under paragraph (e)
of this section for that year. Losses taken into account in determining the CNOL may be

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carried to other taxable years (whether consolidated or separate) only under this
paragraph (b).
(1) Carryovers and carrybacks generally. The net operating loss
carryovers and carrybacks to a taxable year are determined under the principles of
section 172 and this section….
*

*

*

(c) Limitations on net operating loss carryovers and carrybacks from separate
return limitation years — (1) SRLY limitation — (i) General rule. Except as provided in
paragraph (g) of this section (relating to an overlap with section 382), the aggregate of the
net operating loss carryovers and carrybacks of a member arising (or treated as arising) in
SRLYs that are included in the CNOL deductions for all consolidated return years of the
group under paragraph (a) of this section may not exceed the aggregate consolidated
taxable income for all consolidated return years of the group determined by reference to
only the member's items of income, gain, deduction, and loss….
*

*

*

(g) Overlap with section 382 — (1) General rule. The limitation provided in
paragraph (c) of this section does not apply to net operating loss carryovers … when the
application of paragraph (c) of this section results in an overlap with the application of
section 382….
Section 208.9(f) of the Tax Law provides, in part:
A net operating loss deduction shall be allowed which shall be presumably the
same as the net operating loss deduction allowed under section one hundred seventy-two
of the internal revenue code… except that in every instance where such deduction is
allowed under this article:
(1) any net operating loss included in determining such deduction shall be
adjusted to reflect the inclusions and exclusions from entire net income required by
paragraphs (a), (b) and (g) hereof,
*

*

*

(3) such deduction shall not exceed the deduction for the taxable year allowed
under section one hundred seventy-two of the internal revenue code, …
Section 211.4(a) of the Tax Law provides, in part:

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Combined reports permitted or required. In the discretion of the commissioner,
any taxpayer, which owns or controls either directly or indirectly substantially all the
capital stock of one or more other corporations, or substantially all the capital stock of
which is owned or controlled either directly or indirectly by one or more other
corporations or by interests which own or control either directly or indirectly
substantially all the capital stock of one or more other corporations, may be required or
permitted to make a report on a combined basis covering any such other corporations and
setting forth such information as the commissioner may require, subject to the provisions
of paragraphs one through five of this subdivision.
Section 3-8.7(a) of the Business Corporation Tax Regulations (“Article 9-A
Regulations”) provides for the computation of the net operating loss deduction on combined
reports, in part, as follows:
In the case of a corporation which reports for purposes of article 9-A on a
combined basis with one or more related corporations, either in the taxable year in which
a net operating loss is sustained or in the taxable year in which a deduction is claimed on
account of such loss, the deduction is subject to the same limitations which apply for
purposes of the Federal income tax as if such corporation had filed for such taxable year a
consolidated Federal income tax return with the same related corporations….
Opinion
In this case, it is assumed that Corporation A and its subsidiaries are permitted or
required to file a combined report pursuant to section 211.4 of the Tax Law.
Petitioner states that for federal income tax purposes for taxable year 2002, pursuant to
Treasury Regulation section 1.1502-21(g)(1), the SRLY rule pursuant to Treasury Regulation
section 1.1502-21(c)(1)(i) did not apply and the Corporation B NOL deducted by Corporation A
in computing combined entire net income for purposes of Article 9-A of the Tax Law was
limited due to the provisions of IRC section 382. In addition, for federal income tax purposes for
taxable years 2000 and 2001, the Corporation E NOLs and the Corporation C and Corporation D
NOLs were also subject to the IRC section 382 limitation on NOL carryforwards.
With respect to Issue 1, section 208.9(f) of the Tax Law provides that the NOL deduction
allowed is presumably the same as the NOL deduction allowed under IRC section 172, except
that such deduction shall not exceed the deduction for the taxable year allowed under IRC
section 172 (and such deduction shall be subject to the New York modifications pursuant to
section 208.9(f)(1)]. Section 3-8.7(a) of the Article 9-A Regulations provides that in the case of a
corporation reporting on a combined basis, either in the taxable year in which an NOL is
sustained or in the taxable year in which an NOL deduction is claimed, the deduction is subject
to the same limitations that apply for purposes of the federal income tax as if such corporation
had filed for such taxable year a consolidated federal income tax return.

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Treasury Regulation section 1.1502-21(b)(1) provides that the consolidated NOL
carryovers and carrybacks are determined under the principles of such section and IRC section
172. Treasury Regulation section 1.1502-21(g)(1) provides that the SRLY limitation provided in
Treasury Regulation section 1.1502-21(c) does not apply to NOL carryovers when the
application of such section 1.1502-21(c) results in an overlap with the application of IRC section
382.
Accordingly, with respect to Issue 1, pursuant to section 208.9(f) of the Tax Law and
section 3-8.7 of the Article 9-A Regulations, in determining the New York State NOL deduction
for a group of corporations filing a combined franchise tax report under Article 9-A of the Tax
Law, the provisions of IRC section 382 and the SRLY overlap provisions of Treasury Regulation
section 1.1502-21(g) are to be applied.
With respect to Issues 2 and 3, in light of the conclusions reached in Issue 1, in
computing the limitation on the use of net operating losses under Article 9-A of the Tax Law, the
provisions of IRC section 382 and the SRLY overlap provisions of Treasury Regulation section
1.1502-21(g) are to be applied. Therefore, if, for federal income tax purposes, the SRLY rule
pursuant to Treasury Regulation section 1.1502-21(c)(1)(i) does not apply to the New York NOL
for a taxable year since the provisions of IRC section 382 apply, the provisions of IRC section
382 will apply under Article 9-A for such taxable year.
It should be noted that it is not within the scope of an advisory opinion to verify the
accuracy of the NOL dollar amounts for Corporation A and its subsidiaries. An advisory opinion
merely sets forth the applicability of pertinent statutory and regulatory provisions to “a specified
set of facts.” (Tax Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a).)

DATED: March 19, 2007

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.