When a corporation had a federal S election in effect (but no New York S election) during its loss years, how is its New York net operating loss carryforward computed for a later year when it's a regular C corporation?

Subject

The proper method of computing the net operating loss carryforward for New York franchise tax purposes, where a federal Subchapter S election was in effect for the loss years but no New York State S election was made for those years.

Plain-English summary

Corsearch, Inc. (formerly Pro Data Searches, Inc., reincorporated from New York into Delaware in a tax-free merger) had a federal S election in effect from 1983 through 1985, but never made the separate New York S election — so for New York purposes it was taxed as a regular C corporation the whole time, even while it was an S corporation federally. It lost money every year from 1983 through 1987, then turned profitable in 1988. By 1989, Corsearch wanted to know how much of that accumulated loss it could carry forward and deduct against its New York tax: should the New York carryforward be based on the small federal NOL actually available ($30,228, since federal S-corp losses generally pass through to shareholders rather than carrying forward at the corporate level), or on the much larger amount ($993,795) that would have been available if the corporation had never made the federal S election at all?

The Department sided with the larger, "as-if-no-S-election" number, but with an important nuance: § 208.9(f)(3) caps the deduction at what would have been allowed under IRC § 172 recomputed as if no federal S election had been made in the loss years. Applying that formula year by year (including the actual 1988 profit, which reduced the available carryforward), the Department calculated the 1989 New York NOL carryforward limitation at $993,795, yielding an allowable 1989 New York carryforward of $985,461 — very close to, but not identical to, Corsearch's own $985,257 estimate (the ruling did not audit Corsearch's dollar figures).

What this means for you

Corporations that elected federal S status without a matching New York S election

If your corporation had a federal S election but never elected S status for New York, your New York NOL carryforward for the S-corporation loss years is computed as if you'd never made the federal S election in the first place — not based on the (typically much smaller) net operating loss actually reported for federal purposes during those years. Recompute each loss year's federal-style NOL as if there had been no Subchapter S election, then apply that recomputed figure to the New York carryforward.

Accountants and tax professionals

Tax Law § 208.9(f) is the controlling limitation — the New York NOL deduction "shall not exceed... the deduction for the taxable year which would have been allowed if the taxpayer had not made an election under subchapter s." This is distinct from simply carrying forward the actual federal NOL reported during S-corporation years (which is typically minimal or zero, since S-corp losses usually flow through to shareholders instead of accumulating at the corporate level). Recompute year by year, and remember the deduction cannot include losses from years the taxpayer wasn't subject to Article 9-A tax at all (a related trap explored in the same-year ruling TSB-A-90(4)C).

Companies that reincorporated via a tax-free merger

Corsearch's history — a New York corporation reincorporated into Delaware via an IRC § 368(a)(1)(F) merger — didn't disrupt the loss-carryforward analysis; the Department tracked the loss history continuously across the predecessor and successor entities.

Common questions

Q: If I never elected S status for New York, is my New York NOL carryforward the same as my federal S-corp-year NOL?
A: No. It's recomputed as if the federal S election had never been made, which is typically a much larger number since S-corp losses usually pass through to shareholders rather than showing up as a corporate-level NOL.

Q: Does a later profitable year reduce the carryforward available for future years?
A: Yes. The Department's calculation applied the recomputed loss-year NOLs against the 1988 profit before arriving at the 1989 carryforward limitation.

Q: Can another taxpayer with a similar federal-S/no-New-York-S history rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented (and the Department did not verify Corsearch's specific dollar figures), and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 208.9(f) (net operating loss deduction and its limitations)
• Tax Law § 208.9(f)(3) (NOL deduction capped at the IRC § 172 amount recomputed as if no federal S election had been made)
• 26 U.S.C. § 172 (federal net operating loss deduction)
• 26 U.S.C. § 368(a)(1)(F) (tax-free reincorporation merger)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_1c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90(1)C
Corporation Tax
January 11, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C890920B

On September 20, 1989, a Petition for Advisory Opinion was received from Corsearch, Inc.,
19 West 21st Street, New York, New York 10010.
The issue raised by Petitioner, Corsearch, Inc., is what is the proper method of computing
the net operating loss carryforward available for New York State franchise tax purposes, under
Article 9-A of the Tax Law, where the federal Subchapter S election was in effect for the loss years,
but the S election was not in effect for New York State franchise tax purposes for such years.
Petitioner, was incorporated and began business in New York State on July 12, 1983 as Pro
Data Searches, Inc. and elected on July 18, 1983 to be taxed for federal income tax purposes as an
S corporation. No such election was made for New York State franchise tax purposes. In June, 1984,
Pro Data Searches, Inc., a New York corporation was reincorporated in Delaware and began business
in New York State. This was accomplished by organizing Corsearch, Inc., a Delaware corporation,
and merging Pro Data Searches, Inc. into Corsearch, Inc. pursuant to section 368(a)(1)(F) of the
Internal Revenue Code. Effective January 1, 1986, Corsearch, Inc. revoked its S election for federal
income tax purposes, and has continued to operate in New York State as a regular "C" corporation
for federal and New York State tax purposes.
The history of the corporations profits and losses are as follows:

Company Name

Year

Federal
Tax
Status

Pro Data Searches, Inc.
Pro Data Searches, Inc.
Corsearch, Inc.
Corsearch, Inc.
Corsearch, Inc.
Corsearch, Inc.
Corsearch, Inc.

1983
1/1-6/27/84
6/28-12/31/84
1985
1986
1987
1988

S Corp
S Corp
S Corp
S Corp
C Corp
C Corp
C Corp

Federal

New York
State

(244,636)
(244,727)
(206,746)
(267,458)
(170,858)
( 25,984)
166,614

(241 046)
(257 261)
(205 391)
(256 143)
(166 542)
( 25 692)
166 818

The federal losses in the years the corporation was an S corporation were computed as if the
corporation had not made the election under Subchapter S of the Internal Revenue Code.
Petitioner states that, for New York franchise tax purposes, its net operating loss generated
in a year in which a federal S election was in effect, is being used in a year in which the federal S
election is not in effect. In 1989, the actual available federal net operating loss deduction for
Corsearch, Inc. will be $30,228, the amount of the net operating loss carryforward generated
TP-9 (9/88)

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TSB-A-90(1)C
Corporation Tax
January 11, 1990
in the years the corporation was not an S corporation. The available federal net operating loss
deduction, calculated as if the corporation had never been an S corporation, would be $993,795.
Assuming the corporation has enough profits in 1989 to use the entire amount of net operating losses
available for carryforward, it is implied but unclear, in section 208.9(f)(3), that the full $993,795
would be the limitation for the New York State net .operating ..... loss deduction. If the limitation
is 993,795, the actual New York State net operating loss carryforward of $985,257 would be allowed
in full.
Petitioner contends that section 208.9(f) of the Tax Law is unclear as to whether such section
is referring to years in which a federal S election is still in effect or years in which a federal S
election was in effect for a prior year.
Petitioner further contends that the intent of the statute is to treat a taxpayer, who has not
elected S corporation status for New York State but has made the election for federal income tax
purposes, the same as a taxpayer who has not made the federal election. The New York State net
operating loss limitation for a taxpayer who had never made an S election would be $993,795, the
federal net operating loss allowable for carryforward. Therefore, Petitioner contends that it should
be allowed its full New York State net operating loss carryforward of $985,257.
Section 208.9(f) of the Tax Law states:
[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,
or which would have been allowed if the taxpayer had not made an
election under subchapter s of chapter one 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,
(2) such deduction shall not include any net operating loss
sustained during any taxable year beginning prior to January first,
nineteen hundred sixty-one, or during any taxable year in which the
taxpayer was not subject to the tax imposed by this article,
(2-a) such deduction, for a taxable year in which the taxpayer
was a target corporation in a subdivision seventeen corporate
acquisition or any subsequent taxable year, shall not include any net
operating loss sustained by the target corporation in its taxable year
during which such acquisition occurred or in any prior taxable year.
(2-b) such deduction, for a taxable year in which the

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TSB-A-90(1)C
Corporation Tax
January 11, 1990
taxpayer was a surviving corporation in a subdivision eighteen
corporate merger or any subsequent taxable year, shall not include
any net operating loss sustained by any target corporation in its
taxable year during which such merger occurred or in any prior
taxable year. Where the target corporation is merged into another
corporation, its "taxable year during which such merger occurred"
means its taxable year ending immediately prior to such merger.
(2-c) such deduction, for a taxable year in which the taxpayer
was a consolidated corporation in a subdivision eighteen corporate
consolidation or any subsequent taxable year, shall not include any
net operating loss sustained by any target corporation in its taxable
year ending immediately prior to such consolidation or in any prior
taxable year.
(3) such deduction shall not exceed the deduction for the
taxable year allowed under section one hundred seventy-two of the
internal revenue code, or the deduction for the taxable year which
would have been allowed if the taxpayer had not made an election
under subchapter s of chapter one of the internal revenue code,
(4) where the shareholders of the taxpayer have made the
election provided for in subsection (a) of section six hundred sixty of
this chapter, such deduction shall not include any net operating loss
sustained during any taxable year for which such election was in
effect, and
(5) the net operating loss deduction allowed under section one
hundred seventy-two of the internal revenue code shall for purposes
of this paragraph be determined as if the taxpayer had elected under
such section to relinquish the entire carryback period with respect to
net operating losses, except with respect to the first ten thousand
dollars of each of such losses, sustained during taxable years ending
after June thirtieth, nineteen hundred eighty-nine.
For New York State franchise tax purposes, Pro Data Searches, Inc. and Corsearch, Inc.,
computes its New York State net operating loss for each year in which it is taxable under Article 9A. For taxable years 1983 and short taxable period ended 6/27/84, Pro Data Searches, Inc. computes
a federal net operating loss as if it had not made the election to be treated as a federal S corporation.
For short taxable period ended 12/31/84 and taxable year 1985, Corsearch, Inc. computes a federal
net operating loss as if it had not made the election to be treated as a federal S corporation. For
taxable years 1986 and 1987, Corsearch, Inc. is a "C" Corporation for federal income tax purposes
and computes its federal net operating loss accordingly.
Section 208.9(f) of the Tax Law provides that when Corsearch, Inc. computes its New York
State net operating loss deduction for taxable year 1988, such deduction is limited to the net
operating loss deduction that would have been allowed under section 172 of the Internal

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TSB-A-90(1)C
Corporation Tax
January 11, 1990
Revenue Code for taxable year 1988, as if Corsearch, Inc. and Pro Data Searches, Inc. had not made
a federal S election for the loss years 1983 through 1985. Based on Petitioner's figures, for purposes
of section 208.9(f)(3), the 1988 net operating loss deduction is limited to $166,614. Therefore, the
aggregate New York State net operating loss available for carryforward to 1989 and subsequent years
would be $985,461. Assuming Petitioner has enough profits in 1989 to use the entire amount of
New York State net operating loss carryforward, such carryforward is limited, by section 208.9(f)(3),
to the net operating loss deduction that would have been allowed under section 172 of the Internal
Revenue Code for 1989, as if Corsearch, Inc. and Pro Data Searches, Inc. had not made the federal
S election for the loss years. Accordingly, pursuant to section 208.9(f)(3), the net operating loss
deduction limitation is $993,795 and the amount of the New York State net operating loss deduction
for 1989 would be $985,461.
It should be noted that it is not within the scope of this advisory opinion to verify the
accuracy of Petitioner's dollar amounts.

DATED: January 11, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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