News & Insights

Minnesota Tax Court Rules that Acquired NOL Should Not Be Apportioned

Tax Development Aug 23, 2017

The Minnesota Tax Court applied the plain meaning of the statute when it determined that the net operating loss (NOL) carryover from an acquired corporation should not be apportioned. In Sinclair Broadcast Group v. Commissioner of Revenue (2017 STT 156-12), the court disagreed with the commissioner that the Minnesota application of federal section 382 allowed for an apportionment of the federal limitation. 

The federal limitation of the amount of an NOL carryover from an acquired corporation that can be utilized to offset taxable income is determined by multiplying the stock value of the acquired corporation by the long-term tax-exempt rate. Minnesota has incorporated this limitation into its law by providing that the section 382 limitation amount “shall be applied to net income, before apportionment, in each post change year to which a loss is carried.” [Minn. Stat. section 290.095 sub. 3(d)]

Sinclair Broadcasting Group Inc. (“Sinclair”) acquired KLGT Inc. with unused NOLs for state income tax purposes of more than $4 million in 1998. Following the federal limitation rules, Sinclair and the commissioner agreed that the value of the subsidiary determined that the annual loss available would be approximately $2.6 million. The commissioner, however, argued that this limitation should be further limited by Sinclair’s state apportionment rate, which at 1% would result in the expiration of the losses before they could be fully utilized.

The court disagreed with the commissioner and determined that the taxpayer was correct in applying the unapportioned section 382 limitation amount to the taxpayer’s unapportioned net income. The commissioner’s interpretation would provide additional restrictions on the use of acquired NOLs and deprive taxpayers of a “favorable tax attribute” contrary to the law and the legislative intent.

The commissioner’s reliance on the long-standing Revenue Notice 99-07 was unpersuasive to the court, as administrative rulings can only be consulted when the statute is ambiguous, not when the plain meaning of the statute is used for interpretation.

The Department of Revenue (DOR) has refused to follow similar reasoning in the 2012 decision in Express Scripts Inc. v. Commissioner of Revenue (Doc. 2012-18199), stating that the Tax Court is a court in the executive branch. The DOR failed to act on a timely basis to file an appeal in Express Scripts and has continued to issue assessments in attempts to relitigate this issue.

TECHNICAL INFORMATION CONTACT:

Mary Bernard
Director
Ryan
401.272.3363
mary.bernard@ryan.com