Maryland Comptroller Improperly Denied NOL Deduction Based on Regulation Amendment

The Maryland Tax Court held the Comptroller overreached his authority in limiting a corporate taxpayer’s net operating loss. The Comptroller impermissibly created a modification to “federal taxable income” through regulatory amendments.

Merger of Businesses and NOL Deductions

The taxpayer, Sunbelt Rentals, acquired and merged with two entities in 2006. Sunbelt claimed net operating loss (NOL) deductions for 2007 through 2013. However, for three of the tax years, the Comptroller did not allow Sunbelt to claim the acquired companies’ carryforward NOL deductions.

NOL Regulation Amendment

In 2007, the Comptroller amended the regulation governing NOLs. The amendments barred taxpayers from using the NOLs of some liquidated or acquired corporations. Taxpayers could only use the NOLs of corporations subject to Maryland tax when the NOLs were generated.

Comptroller’s Position

The Comptroller contended that he is statutorily authorized to adopt reasonable regulations to administer state income tax laws. He also argued that the acquired corporations had no “taxable year” in Maryland, so the NOLs had no nexus with the state.

Taxpayer’s Argument

Sunbelt argued against the NOL denial because the amended regulation:

  • is contrary to the Maryland statutory scheme;
  • cannot apply to NOLs generated and acquired before the effective date of the announced regulation; and
  • impermissibly discriminates against interstate commerce in violation of the Commerce Clause.

The taxpayer based its argument on the Maryland law stating that modified income is equal to a corporation’s federal taxable income.

Tax Court Decision

The Tax Court noted that Maryland can change federal taxable income via limited and specifically identified statutes. The Comptroller tried to create a modification by using the definition of “taxable year” out of context. Also, the term “taxable year” is not found in the regulations and is not in any of the statutes authorizing a modification. Therefore, the court reversed the NOL denial.

By Amber Harker, J.D.

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All stories by: CCHTaxGroup