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Royal Indem Co v. Tax Appeals

Court of Appeals of the State of New York
Dec 21, 1989
549 N.E.2d 1181 (N.Y. 1989)


Argued November 16, 1989

Decided December 21, 1989

Appeal from the Appellate Division of the Supreme Court in the Third Judicial Department.

Eugene Chester and James H. Kenworthy for appellant.

Robert Abrams, Attorney-General (Wayne L. Benjamin, O. Peter Sherwood and Peter H. Schiff of counsel), for respondents.

We agree with the Appellate Division that under Tax Law § 1503 (b) (4) (B) a taxpayer's State deduction for net operating losses for a tax year is limited to the amount of the Federal loss deduction for the same year.

The facts are not in dispute. Petitioner, a property and casualty insurer, is a Delaware corporation licensed to do business in New York. For tax years beginning on or after January 1, 1974, petitioner became subject to tax under article 33 of the Tax Law (Tax Law § 1500 et seq.) for the privilege of doing business in this State (see, Tax Law § 1501 [a]).

During the taxable years 1974 and 1975, petitioner sustained net operating losses. All of its 1974 and a portion of its 1975 losses were "carried back" to pre-1974 tax years for Federal income tax purposes (see, Internal Revenue Code [26 USC] § 172 [b] [2]). The balance of petitioner's net operating losses sustained in 1975 were "carried forward" as deductions to its 1976 and 1977 entire net income for Federal income tax purposes. Because petitioner did not pay New York State taxes under article 33 before 1974, it could not similarly "carry back" a deduction for 1974 and 1975 losses to pre-1974 tax years for State income tax purposes. In filing its 1976 and 1977 State returns under article 33, petitioner was permitted under the statute to take "net operating loss deductions". Petitioner took, as part of its deductions, the amount of its 1974 and 1975 losses which it had not been able to carry back for State tax purposes but had been able to carry back to pre-1974 tax years for Federal tax purposes. As a result, in 1976 and 1977 the amount of the deduction petitioner took for net operating losses for State tax purposes was greater than the amount taken for Federal tax purposes.

The Audit Division of the State Department of Taxation (the Department) reduced petitioner's net operating loss deductions for the 1976 and 1977 tax years to the amount of its Federal net operating loss deduction. Upon administrative review, the Administrative Law Judge upheld the Department's actions and respondent Tax Appeals Tribunal confirmed the ALJ's determination. Petitioner commenced this article 78 proceeding challenging the Tribunal's determination. The Third Department confirmed the determination and dismissed the proceeding and this court granted petitioner leave to appeal.

Petitioner argues that the use of the Federal method of computation, and not the actual amount, of the Federal net operating loss deduction is required to be used in determining the State net operating loss deduction under Tax Law § 1503. Petitioner relies principally on a Second Circuit decision interpreting an analogous former New York City general corporate taxation scheme (see, Matter of Avien, Inc., 532 F.2d 273). We decline to follow the Second Circuit's reasoning in Avien and agree with the conclusion reached below that the New York net operating loss deduction cannot exceed the amount deducted on the Federal return for the corresponding year (see, Matter of American Employers' Ins. Co. v State Tax Commn., 114 A.D.2d 736; see also, Matter of Eveready Ins. Co. v New York State Tax Commn., 129 A.D.2d 958, lv denied 70 N.Y.2d 604).

Whether and to what extent a deduction shall be allowed is a matter of legislative grace and, therefore, the taxpayer bears the burden of establishing its right to a particular deduction (see, Matter of Grace v New York State Tax Commn., 37 N.Y.2d 193, 197; Matter of Gurney v Tully, 51 N.Y.2d 818, revg on dissenting opn by Staley, J., 67 A.D.2d 303, 305-307). Petitioner has not sustained its burden.

Petitioner's franchise tax is based on petitioner's entire net income or portion thereof allocated within this State (Tax Law § 1502 [a] [1]). Tax Law § 1503 (b) (4) provides that any net operating loss deduction "allowable under section one hundred seventy-two * * * of the internal revenue code [ 26 U.S.C. § 172], which is allowable to the taxpayer for federal income tax purposes" may be used for State tax purposes. Any such deduction "shall not, however, exceed any such deduction allowable to the taxpayer for the taxable year for federal income tax purposes" (Tax Law § 1503 [b] [4] [B] [emphasis supplied]). While petitioner will never be able to claim its 1974 loss and a portion of its 1975 as a deduction for State tax purposes, we nevertheless believe respondent properly interpreted Tax Law § 1503 (b) (4) (B).

Respondent's interpretation of Tax Law § 1503 is supported by the legislative history. The legislative history suggests that the deduction provisions contained in article 33 of the Tax Law were intended to be substantially similar to those required under article 9-A (see, State Dept of Taxation Fin, Mem in support, Bill Jacket, L 1974, ch 649, at 3; State Ins Dept, Mem in support, id., at 7; Senate Budget Report on Bills in support, id., at 11, 12). The Legislature provided that the provisions in article 33 should be regarded as being in pari materia and construed in a like manner as substantially identical provisions contained in article 9-A (L 1974, ch 649, § 12). At the time of the enactment of article 33, the analogous article 9-A loss deduction provision (see, Tax Law § 208 [f]) had been consistently interpreted as limiting the State loss deduction for the tax year to the amount of the Federal deduction (see, Matter of Abraham Straus v Tully, 47 N.Y.2d 207, 214).

In light of the foregoing, the judgment of the Appellate Division should be affirmed, with costs.


Judgment affirmed, with costs.

Summaries of

Royal Indem Co v. Tax Appeals

Court of Appeals of the State of New York
Dec 21, 1989
549 N.E.2d 1181 (N.Y. 1989)
Case details for

Royal Indem Co v. Tax Appeals

Case Details

Full title:In the Matter of ROYAL INDEMNITY COMPANY, Appellant, v. TAX APPEALS…

Court:Court of Appeals of the State of New York

Date published: Dec 21, 1989


549 N.E.2d 1181 (N.Y. 1989)
549 N.E.2d 1181
550 N.Y.S.2d 610

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