When a New York subsidiary with an unused net operating loss merges into its out-of-state parent, can the surviving parent carry that loss forward on its own New York corporation franchise tax return?

Plain-English summary

On August 1, 1984, Charrette Drafting Supplies Corporation, a New York corporation, merged into its parent, Charrette Corporation, a Massachusetts corporation. Charrette Corporation would continue the same New York business activity and would file a New York corporation franchise tax return for the period August 1, 1984 through July 31, 1985. Before the merger, the subsidiary had sustained a net operating loss on its own New York franchise tax return. Charrette Corporation asked whether it could carry that loss forward as a deduction on its own post-merger New York return.

Tax Law Section 208(9)(f) generally ties the Article 9-A net operating loss deduction to the federal deduction under IRC Section 172, but with an important carve-out: the New York deduction cannot include any loss "sustained during any taxable year in which the taxpayer was not subject to tax" under Article 9-A. Citing American Can Co. v. State Tax Commission, the Department noted there was never an intent to let a successor acquire NOLs by merging with a subsidiary that wasn't doing business in New York before the merger -- if the subsidiary itself couldn't have used the deduction (because it wasn't New York-taxable), logic says its successor shouldn't be able to either. But the flip side also holds: in the American Can and Berkey Photo State Tax Commission decisions, a successor WAS allowed to use a merged subsidiary's NOL for the periods the subsidiary actually was New York-taxable before the merger.

Since Charrette Drafting Supplies Corporation was doing business in and was subject to New York tax before the merger, its pre-merger loss survived the merger and was usable by its parent, Charrette Corporation, on the post-merger return -- capped at the smaller of the federal IRC Section 172 amount or the New York-computed net operating loss.

What this means for you

Companies merging a loss subsidiary into a parent or affiliate

A New York net operating loss doesn't automatically vanish when the loss-generating corporation is merged out of existence. If the merged subsidiary was actually subject to New York franchise tax during the loss year, the surviving corporation can generally carry that loss forward on its own return for the periods the subsidiary was NY-taxable -- but the deduction is capped at the lesser of the federal IRC Section 172 figure or the New York-computed loss.

Accountants structuring post-merger NOL claims

Verify and document that the loss-generating predecessor was actually subject to New York tax (not merely doing some out-of-state business) during the loss year before claiming its NOL on a successor's return. A predecessor's losses from a year it wasn't New York-taxable don't carry over, per American Can Co.

Common questions

Q: Can a parent corporation always use a merged subsidiary's unused New York net operating loss?
A: Only for losses from years the subsidiary was actually subject to New York corporation franchise tax before the merger. Losses from years the subsidiary wasn't New York-taxable don't carry over to the successor.

Q: Is the New York NOL deduction the same amount as the federal deduction?
A: Not necessarily -- Tax Law § 208(9)(f) presumptively follows the IRC § 172 federal computation, but the New York-computed NOL can be smaller, and the smaller of the two figures is what's usable.

Q: Can other merging companies rely on this Opinion?
A: No. It binds the Department only as to Charrette Corporation's own facts and cannot be relied upon by other taxpayers, even in similar merger structures.

Citations and references

Statutes and decisions:

• Tax Law § 208(9)(f) (Article 9-A net operating loss deduction)
• Internal Revenue Code § 172 (federal NOL deduction)
• American Can Co. v. State Tax Commission, 37 A.D.2d 649, 323 N.Y.S.2d 6
• Matter of American Can Co., State Tax Commission Decision, March 9, 1970
• Matter of Berkey Photo, Inc., State Tax Commission Decision, May 2, 1984 (TSB-H-84(24)C)

Related rulings:

• TSB-A-85(6)C -- Alcan Aluminum, the related but distinct question of investment/employment incentive tax credit survival through a statutory merger

Date note: The document header and the sign-off line both read "October 10, 1985" -- no discrepancy here.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_20c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (20) C
Corporation Tax
October 10, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C841023A

On October 23, 1984, a Petition for Advisory Opinion was received from Charrette
Corporation, 31 Olympia Avenue, Wolburn, Massachusetts 01888.
Petitioner requests an Advisory Opinion to the effect that the net operating loss of a
subsidiary corporation which was merged into Petitioner be allowed as a net operating loss deduction
carry-forward on the New York State Corporation Franchise Tax Return of the Petitioner under
Article 9-A of the Tax Law.
On August 1, 1984, Charrette Drafting Supplies Corporation (a New York Corporation)
merged into its parent Charrette Corporation (a Massachusetts corporation). Charrette Corporation
will file its New York State corporation franchise tax return for the period 8/1/84 - 7/31/85. After
the merger, Charrette Corporation will continue the same business activity in New York State as
those of Charrette Drafting Supplies Corporation. Prior to the merger Charrette Drafting Supplies
Corporation sustained a net operating loss on its New York State corporation franchise tax return.
Tax Law section 208, subdivision 9, paragraph (f) permits a corporation subject to Tax under
Article 9-A a net operating loss deduction "which shall be presumably the same as the net operating
loss deduction allowed under section one hundred seventy-two of the internal revenue code of
nineteen hundred fifty-four,... except that... such deduction shall not include any operating loss
sustained... during any taxable year in which the taxpayer was not subject to tax imposed by this
article...".
In the Matter of American Can Company v. State Tax Commission (37 A.D. 2d 649; 323
N.Y.S. 2d6), the court concluded that, "there was no intent to allow taxpayers to acquire net
operating losses by way of merger with a subsidiary where the subsidiary was not conducting
business in New York prior to merger." Furthermore, "if the deduction is not available to a
corporation during a taxable year in which it is not subject to tax, logic would indicate that it should
not be available as a deduction to the successor of that corporation." In the matter of American Can
Company, Decision of the State Tax Commission, March 9, 1970 and Berkey Photo, Inc., Decision
of the State Tax Commission, May 2, 1984 (TSB-H-84(24)C), the State Tax Commission allowed
a successor corporation the net operating loss of its merged subsidiary for those periods that the
subsidiary was taxable in New York State prior to the merger.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85 (20) C
Corporation Tax
October 10, 1985

Accordingly, Petitioner's New York State corporation franchise tax return for the period
8/1/84 - 7/31/85 can include the net operating loss of Charrette Drafting Supplies Corporation that
would be allowed under section 172 of the I.R.C., or the New York State net operating loss of
Charrette Drafting Supplies Corporation, if less than the Federal net operating loss.

DATED: October 10, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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