When a company's New York net operating loss for a particular year has already been fully used up in an earlier aggregate carryforward, but the federal loss for that same year still has unused carryforward remaining, can the company still claim a New York aggregate NOL deduction for a later year that includes that already-exhausted year?

Plain-English summary

Arista Records, Inc. ran net operating losses in nearly every year from its 1979 inception through 1985, swung to net income in 1986 and 1987, then posted another loss in the first half of 1988. Both its federal and New York State losses and income tracked closely (though not identically) year by year. The question, submitted through the company's tax advisors, was a technical one about New York's aggregate NOL method: when losses from two or more years are carried forward together to offset income in one particular year, Regulations section 3-8.5 requires computing both a federal aggregate and a New York aggregate for that year and using whichever is smaller.

The mechanics played out across two carryforward cycles. For the taxable year ended December 31, 1986, an aggregate combining Arista's losses from the periods ending 3/31/80, 6/30/80, and 6/30/81 let the company use a $9,064,211 NOL deduction -- but doing so completely exhausted the New York-specific loss for the 6/30/81 period, reducing it to zero, even though a separate federal loss balance for that same period was NOT similarly wiped out. The question for the next cycle (the 1987 taxable year) was whether the 6/30/81 and 6/30/82 periods could again be aggregated for New York purposes, given that a federal aggregate for those periods still existed.

The Department held the exhausted New York year simply drops out. Regulations section 3-8.6's aggregate absorption method requires that for a particular year to be included in an aggregate, there must be a loss in that year for BOTH federal and New York purposes. Since Arista's New York loss for the 6/30/81 period had already been reduced to zero by the earlier aggregate, that period no longer qualifies for inclusion in a later New York aggregate -- even though the federal side still shows an aggregate for those same periods. Practically, this meant Arista did not have a New York aggregate loss situation for the 6/30/81-6/30/82 periods going into 1987, despite having one federally. For the surviving 6/30/82 period specifically, the amount of New York NOL that could be carried forward to the 1987 taxable year was capped at $5,263,661 -- exactly matching the federal NOL amount actually carried forward from that period to 1987 (Regulations section 3-8.2 caps the New York deduction at the federal deduction for the corresponding year) -- leaving $10,819,941 of New York NOL from that period available for future carryforward.

What this means for you

Corporations with multi-year NOL carryforwards where federal and state losses diverge

Track your federal and New York NOLs for each source year separately, not just in aggregate -- once a specific year's New York loss is fully absorbed in one aggregate computation, that year effectively disappears from future New York aggregates even if the parallel federal loss for the same year isn't yet exhausted. The two loss pools can diverge significantly over time even though they started from similar underlying transactions.

Accountants and tax professionals computing multi-year NOL aggregates

Two separate limiting rules interact here: (1) the year-by-year requirement that a loss exist in BOTH federal and New York columns for that year to be includable in an aggregate (section 3-8.6), and (2) the overall cap that the New York deduction for any given year cannot exceed the federal deduction for that same year (section 3-8.2). Model both federal and New York NOL schedules in parallel, year by year, rather than tracking a single blended number.

Common questions

Q: If a New York NOL for a specific year has already been used up, can it be brought back into a later aggregate carryforward?
A: No -- once a year's New York-specific loss is reduced to zero through an earlier aggregate, it no longer qualifies for inclusion in later New York aggregates, even if a federal loss for that same year still has a remaining balance.

Q: Does an aggregate NOL exist for New York purposes whenever one exists for federal purposes?
A: No. A year is only includable in a New York aggregate if there's an actual loss for that year on BOTH the federal and New York returns -- if the New York side is already exhausted, no New York aggregate exists for that year even with a federal aggregate present.

Q: Can the New York NOL deduction for a given year ever exceed the federal deduction for that year?
A: No. Regulations section 3-8.2 and case law establish that the New York NOL deduction is always capped at the amount deducted for federal purposes in the corresponding year.

Citations and references

Statutes and regulations:

• Tax Law section 208.9(f) (New York NOL deduction generally follows IRC section 172, capped at the federal-year deduction)
• Business Corporation Franchise Tax Regulations section 3-8.5 (aggregate method for multi-year loss carrybacks/carryforwards)
• Business Corporation Franchise Tax Regulations section 3-8.2(b), (c), (d) (New York NOL cannot exceed federal deduction; source-year matching)
• Business Corporation Franchise Tax Regulations section 3-8.6 (aggregate absorption method; both-years-loss requirement)

Cases and prior decisions cited:

• Telmar Communications Corp. v. Procaccino, 48 AD2d 189
• Matter of Lehigh Valley Industries, Inc., Tax Appeals Tribunal, May 5, 1988

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_15c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90(15)C
Corporation Tax
August 14, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C900419D

On April 19, 1990, a Petition for Advisory Opinion was received from Arista Records, Inc.,
6 West 57th Street, New York, New York 10019.
The issue raised by Petitioner, Arista Records, Inc., is whether section 3-8.5 of the Business
Corporation Franchise Tax Regulations, relating to aggregating net operating losses, may be used
in computing a New York State aggregate when the New York loss in a particular tax year has
already been applied, but for Federal income tax purposes there is a loss still available for
carryforward, and such tax year is included in the Federal aggregate.
Petitioner's net operating gains and losses for the period from September 29, 1979 through
June 30, 1988 were as follows:

9/29/79 - 3/31/80 net loss
4/1/80 - 6/30/80 net loss
7/1/80 - 6/30/81 net loss
7/1/81 - 6/30/82 net loss
7/1/82 - 5/31/83 net loss
6/1/83 - 6/30/83 net loss
7/1/83 - 12/31/83 net loss
1/1/84 - 12/31/84 net loss
1/1/85 - 12/31/85 net loss
1/1/86 - 12/31/86 net income
1/1/87 - 12/31/87 net income
1/1/88 - 6/30/88 net loss

Federal
$ (1,336,021)
(5,213,940)
(13,617,505)
(23,101,387)
(20,048,655)
(1,746,184)
(4,147,559)
(4,623,480)
(2,187,255)
10,639,062
14,792,065
(2,186,657)

New York State
$ (1,206,923)
(1,943,545)
(5,913,743)
(16,083,602)
(16,858,455)
(1,387,636)
(4,082,597)
(4,554,046)
(2,031,156)
10,721,344
14,843,255
(1,292,428)

The total of the Federal net operating losses (hereinafter "NOLs") for the periods ended
3/31/80 through 12/31/85 amount to $76,021,986 while the total of the New York State losses for
the same periods amount to $54,061,703. For the taxable year ended 12/31/86, the application of
the aggregate NOL rule permitted Petitioner to utilize a NOL of $9,064,211 arising from the
carryforward of Federal and New York State losses from the taxable periods ended 3/30/80, 6/30/80
and 6/30/81. As a result of the application of the aggregate NOL rule, Petitioner's New York State
NOL for the taxable period ending 6/30/81 was reduced to zero. Petitioner's return for the taxable
year ending 12/31/87 shows total unutilized NOLs of $65,382,924 for Federal purposes and
$44,997,492 for New York State purposes. None of the Federal NOL for the taxable period ending
6/30/88 was utilized as a Federal NOL carryback on the return for the taxable year ending 12/31/87.
TP-9 (9/88)

-2­
TSB-A-90(15)C
Corporation Tax
August 14, 1990
Section 208.9(f) of the Tax Law provides, in pertinent part, that:
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
*

*

*

(3) such deduction shall not exceed the deduction for the taxable year
allowable under section one hundred seventy-two of the internal revenue code
....
Section 3-8.5 of the Business Corporation Franchise Tax Regulations provides:
When the net operating losses of two or more years, or the portions of net
operating losses of two or more years, are carried back or carried forward to
be deducted from the income of one particular taxable year, the Tax
Commission requires that an aggregate method of deducting the losses be
used. The taxpayer must compute the aggregate of the Federal net operating
losses to be carried to the particular taxable year, and, also, compute the
aggregate of the net operating losses under article 9-A for such year.
After computing the two aggregate figures, whichever of the two (Federal or
State) is smaller is the aggregate net operating loss which is allowable as a
carry back or carry forward to the particular taxable year. The limitations
described in subdivisions (b), (c) and (d) of section 3-8.2 of this Subpart
apply in deducting the aggregate of losses.
Section 3-8.2 of the Business Corporation Franchise Tax Regulations, the case law and an
administrative decision establish that the amount of the NOL deduction for New York State purposes
cannot exceed the amount deducted on the Federal tax return for the corresponding year. Telmar
Communications Corp. v. Procaccino, 48 AD2d 189; Matter of Lehigh Valley Industries, Inc., Tax
Appeals Tribunal, May 5, 1988.) Further, the source year of the NOL deducted on the New York
State return must be the same as the N0L deducted on the Federal return (Matter of Lehigh Valley
Industries, Inc., supra.)
However the aggregate absorption method set forth in Section 3-8.6 of the Business
Corporation Franchise Tax Regulations is used when the losses in two or more years are carried back
or carried forward against the income in one year. For any particular year to be included in an
aggregate, there must be a loss in that year for both Federal and New York purposes. In addition,
in each year that a NOL deduction is allowed, the New York NOL deduction is limited to the Federal
NOL deduction in that year.
Herein, the entire available New York NOL for the taxable period ending 6/30/81 was
applied in the 3/31/80, 6/30/80 and 6/30/81 aggregate that was carried forward to the taxable year
ended 12/31/86. Since the loss for the taxable period ending 6/31/81 has been reduced to zero,

-3­
TSB-A-90(15)C
Corporation Tax
August 14, 1990
Petitioner does not have a New York aggregate loss situation for the taxable periods ending 6/30/81
and 6/30/82, even though there is an aggregate for such years for Federal purposes. The amount of
New York NOL for the taxable period ending 6/30/82 that may be carried forward to the taxable year
ending 12/31/87 is limited to $5,263,661, the amount of Federal NOL for the taxable period ending
6/30/82 that is carried forward to the taxable year ending 12/31/87. The balance of the New York
NOL for the taxable period ending 6/30/82 available for future carryforward is $10,819,941.

DATED: August 14, 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.