If I generate a federal net operating loss while I'm a New York nonresident, can I carry that loss back to reduce my New York tax from an earlier year when I was a New York resident?

Plain-English summary

Petitioner, Rocco B. Commisso, was a New York State resident for 1993 through 1995 and paid both federal and New York tax for each of those years. He planned to change his residence in 1996, becoming a New York nonresident, and to acquire a partnership interest that he would actively manage. That partnership was expected to operate entirely outside New York and to generate a federal net operating loss (NOL) for 1996 and 1997 - a loss with no connection to New York sources, arising while Commisso was no longer a New York resident.

Commisso asked whether that federal NOL, generated during a nonresident year, could be carried back to reduce his New York tax liability for an earlier year - 1993, 1994, or 1995 - when he had been a resident.

The Department said yes, potentially. New York has no stand-alone statutory NOL deduction or carryback rule. Instead, the right to deduct or carry back an NOL for New York purposes comes entirely from Tax Law § 612, which starts New York taxable income from the taxpayer's federal adjusted gross income (citing Matter of Berg v Tully, Matter of Sheils v St Tax Comm, and Matter of Gurney v Tully). A New York resident can never claim a bigger NOL deduction on the state return than was claimed federally.

The key mechanism is 20 NYCRR § 154.8(c)(1) of the Personal Income Tax Regulations, which addresses an NOL sustained in a year a change of resident status occurs. It provides that if the taxable year the carryback is applied TO (not the year the loss arose in) is a year the individual was a New York resident, the carryback may be applied on the resident return, to the extent it is includible in the recomputation of federal adjusted gross income for that carry-back year. Because a federal NOL carryback recomputes federal AGI for the earlier resident year, and New York resident AGI is computed FROM federal AGI, the resident year's New York AGI - and thus New York tax liability - is automatically recomputed downward too.

Critically, it makes no difference that the loss itself came from an out-of-state, non-New York-source partnership activity conducted during Commisso's nonresident year. What matters is the residency status of the carry-back (recipient) year, not the loss year - because a resident's New York tax is based on total federal AGI, not just New York-source income.

What this means for you

New York residents planning a move and a new business venture

If you're a New York resident who is about to become a nonresident and start a new business - even one operating entirely outside New York - a startup loss in that new venture isn't necessarily "wasted" for New York purposes just because you were a nonresident when it arose and the business had no New York-source income. If the federal NOL carries back to a year you were still a New York resident, that carryback can flow through to reduce your New York tax for that earlier resident year, because your New York AGI for that year is recomputed to match your recomputed federal AGI.

Accountants and tax professionals tracking multi-year NOL carrybacks across a residency change

The analysis hinges on which year the carryback is applied TO, not which year the loss was generated in or whether the loss had any New York-source connection. Under Tax Law § 612 and 20 NYCRR § 154.8(c)(1), if the carry-back year is a resident year, the New York resident return can absorb the carryback to the extent it's includible in the client's recomputed federal AGI for that year. Practically, this means preparers should trace the federal carryback computation (including any partial NOL absorbed in intervening years) into each affected year's New York resident return, independent of the client's residency status or the loss's source in the year the NOL itself arose.

Common questions

Q: Does it matter that the partnership generating the loss operated entirely outside New York and had no New York-source income?
A: No. The opinion is explicit that this doesn't matter for the carryback question. The New York-source issue would matter if Commisso were trying to deduct the loss against nonresident-year New York-source income; but for a carryback to a resident year, what governs is that resident-year New York tax is based on total federal AGI, not just New York-source income.

Q: Does New York have its own net operating loss carryback statute?
A: No. The opinion states there is no specific statutory provision allowing a New York resident to deduct or carry back an NOL. The right derives entirely from Tax Law § 612's rule that New York taxable income starts from federal adjusted gross income.

Q: Can a New York resident deduct more NOL on the state return than was claimed federally?
A: No. Citing Matter of Sheils v St Tax Comm and Matter of Gurney v Tully, the opinion confirms a New York resident may not claim a net operating loss deduction in excess of the amount claimed on the federal return.

Q: What is the significance of 20 NYCRR § 154.8(c)(1)?
A: It's the regulation that specifically addresses an NOL sustained in the year a change of resident status occurs. It permits the carryback to be applied on a New York resident return only if the year being carried back TO is a resident year, and only to the extent the carryback is includible in the recomputation of federal AGI for that year.

Q: If the carryback year had instead been a nonresident year, would the analysis be different?
A: Yes. The regulation's condition is that the carry-back year be a resident year. The opinion's holding turns entirely on Commisso's earlier years (1993-1995) being resident years; had the target year instead been a nonresident year, this particular resident-return mechanism would not apply in the same way.

Q: Is this opinion limited to Commisso's specific facts?
A: Yes. Like all Advisory Opinions, it binds the Department only as to the petitioner and only to the extent the facts were fully and accurately described; it reflects the law, regulations, and Department policy in effect in 1996, which may have since changed.

Citations and references

• Tax Law § 612 - New York taxable income of a resident starts from the individual's federal adjusted gross income; the source of the right to any NOL deduction or carryback for New York purposes
• 20 NYCRR (Personal Income Tax Regulations) § 154.8(c)(1) - allows an NOL carryback sustained in a year a change of resident status occurs to be applied on a New York resident return if the carry-back year is a resident year, to the extent includible in the recomputed federal AGI for that year
• Matter of Berg v Tully, 92 AD2d 436 - cited for the principle that New York taxable income derives from federal adjusted gross income under Tax Law § 612
• Matter of Sheils v St Tax Comm, 95 Misc 2d 605, rev'd 72 AD2d 896, rev'd 52 NY2d 954 - cited for the same § 612 starting-point principle and for the rule capping a New York NOL deduction at the federal amount claimed
• Matter of Gurney v Tully, 51 NY2d 818 - cited for the rule that a New York resident cannot claim a larger NOL deduction on the state return than was claimed federally

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a96_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-96 (3) I
Income Tax
May 20, 1996

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I960122B

On January 22, 1996, a Petition for Advisory Opinion was received from Mr.
Rocco B. Commisso, 212 Old Mountain Road, RD1, Box 212, Otisville, New York
10963.
The issue raised by Petitioner, Mr. Rocco B. Commisso, is whether a federal
net operating loss which is generated during a New York State nonresident taxable
year may be carried back to a New York State resident taxable year to reduce a
prior period tax liability under Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner was a resident of New York State during taxable years 1993
through 1995.
Petitioner was subject to a federal and New York State tax
liability for each of these years. Petitioner intends to change his residence
during 1996 at which time he will be considered a nonresident of New York State.
During 1996, Petitioner intends to acquire a partnership interest and will
be actively participating in the management and daily operations of the
partnership. It is anticipated that this partnership will generate a federal net
operating loss for taxable years 1996 and 1997. It is also expected that the
partnership will be operating exclusively outside of New York State.
As a
result, the losses generated will not be connected with New York State sources.
There is no specific statutory provision which allows a New York resident
to deduct a net operating loss or to carry-back a net operating loss. Rather, the
right of a New York resident to deduct a net operating loss from the individual's
New York taxable income or to carry-back the unused portion of a net operating
loss derives from section 612 of the Tax Law. Section 612 provides that the
starting point for determining New York taxable income of a New York resident is
the individual's federal adjusted gross income. See, Matter of Berg v Tully, 92
AD2d 436; Matter of Sheils v St Tax Comm, 95 Misc 2d 605, rev'd, 72 AD2d 896,
rev'd, 52 NY2d 954.
A New York resident may not claim a net operating loss deduction on the
individual's New York income tax return in excess of the amount of net operating
loss deduction claimed on the individual's federal income tax return. See,
Sheils, supra; Matter of Gurney v Tully, 51 NY2d 818, revg for reasons stated in
dissenting opinion below, 67 AD2d 303, 305-307.
Section 154.8(c) of the Personal Income Tax Regulations ("Regulations")
provides that a net operating loss, sustained in the year a change of resident
status occurs, may be carried back to another taxable year under certain
conditions. Section 154.8(c)(1) provides as follows:

-2­

TSB-A-96 (3) I
Income Tax
May 20, 1996

[i]f the taxable year to which the carry-back ... is to be applied
is a taxable year in which an individual ... is a resident, such
carry-back ... may be applied on the New York State resident income
tax return to the extent such carry-back ... is includible as a
carry-back in the computation of Federal adjusted gross income of an
individual ... for such taxable year, and only if the taxable year
for which the carry-back ... is to be applied is a taxable year
under article 22 of the Tax Law.
Accordingly, pursuant to section 612 of the Tax Law, section 154.8(c) of
the Regulations and Sheils, supra, where a federal net operating loss is carried
back to a taxable year that an individual was a resident of New York State, the
recomputation of federal adjusted gross income for the carry-back year will
result in a recomputation of New York adjusted gross income for the carry-back
year. A net operating loss carry-back may be allowed for New York personal
income tax purposes to the extent that the carry-back is includible in the
individual's federal adjusted gross income for the carry-back year.
In this case, Petitioner anticipates that in 1996 he will become a
nonresident of New York State, and that the partnership will generate a federal
net operating loss for taxable years 1996 and 1997. If Petitioner sustains a
federal net operating loss in taxable year 1996 or 1997 that is carried back to
another taxable year, Petitioner's federal adjusted gross income will be
recomputed for the carry-back year. When the taxable year to which the net
operating loss carry-back is to be applied is a taxable year Petitioner was a
resident of New York, the net operating loss carry-back may be applied on his
resident income tax return to the extent that the net operating loss carry-back
is includible as a carry-back in his recomputed federal adjusted gross income for
the carry-back year. Petitioner's recomputation of his New York adjusted gross
income for the net operating loss carry-back year, to reflect the recomputed
federal adjusted gross income for the carry-back year, may result in a reduced
New York taxable income and a reduction in Petitioner's New York income tax
liability for the carry-back year.

DATED: May 20, 1996

s/Doris S. Bauman
Director
Technical Services Bureau

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