Refund Opportunity: Minnesota Concedes Its Position on Section 382 Net Operating Loss Limitations

Minnesota taxpayers with losses subject to the limitation and whose NOLs were limited by apportionment under the old guidance may be able to amend their returns and claim refunds.

On Nov. 6, 2017, the Minnesota Department of Revenue issued Revenue Notice 17-09, announcing that they will not challenge the Minnesota Tax Court’s decision in Sinclair v. Commissioner and will accept that Minnesota taxpayers do not have to apportion their federal section 382 limitation when computing the net operating loss (“NOL”) deduction for state tax purposes. [1] This overturns a long-standing position by the Department of Revenue and could provide refund opportunities for corporations that limited their NOLs based on the Department’s erroneous guidance.

Internal Revenue Code Section 382 applies when a corporation with NOLs has a qualifying change in its stock ownership, whether by acquisition, new issuance, conversions and/or other similar transactions. The “382 limitation” restricts the use of a loss corporation’s NOL carryovers against current net income for a period of time after the event by that corporation or its successors. The limitation is intended to prevent an acquirer from using the old loss carryovers faster than the original corporation could have used them in the absence of a change in ownership, and is designed to prevent a business from acquiring a loss corporation solely for its NOLs.

Many states, including Minnesota, track their own state NOL separately for purposes of computing state taxable income. Under this post-apportionment method of tracking state losses, NOLs are both created and used after state adjustments have been made to federal net taxable income and the apportionment percentage has been applied to this state-adjusted taxable income. Since 1997, Minnesota’s tax statutes have directed that the federal section 382 limitation is to be applied to net income before apportionment when computing the amount of loss available. [2]

Despite the seemingly-clear language of the tax statute covering this provision, Minnesota’s longstanding position has been to both apply the limitation to net income before apportionment and then also apportion this limitation based on the current year’s apportionment percentage. [3] This resulted in a very poor outcome for taxpayers such as Sinclair, who had high Minnesota apportionment in the loss years (thus generating large Minnesota NOLs), but low Minnesota apportionment in the years the NOLs could be used. Now, after the Tax Court decision in Sinclair, the Department of Revenue is conceding this position.

What is particularly interesting about this notice is that the Department of Revenue chose not to appeal the decision by the Tax Court. The state’s longstanding position was to further limit the 382 limitation by apportionment, as evidenced by its directive in Revenue Notice 99-07. Further, the Department of Revenue continued to take this position even after the Tax Court had already ruled against it in 2012, which it failed to timely appeal. [4]

As a result of the case and the Department’s concession, Minnesota taxpayers with losses subject to the 382 limitation whose NOLs were limited by apportionment under the old guidance may have an opportunity to amend their returns for open tax periods and claim refunds. Aprio’s SALT team is experienced in understanding the nuances of state rules on corporate transactions so that you can structure your transaction to maximize the benefit from tax attributes, such as NOLs.

We continue to monitor these and other important state tax issues in order to assist you with your specific tax situation, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2017 SALT Newsletter.

[1] Minnesota Department of Revenue Notice #17-09, 11/6/2017; Sinclair Broad. Grp., Inc. v. Comm’r of Revenue, No. 8919-R, 2017 (Minn. Tax Ct. Aug. 11, 2017).

[2] Minn. Stat. §290.095 subd. 3(d).

[3] Minnesota Department of Revenue Notice #99-07, 8/9/1999.

[4] Express Scripts, Inc. v. Commissioner of Revenue, No. 8272-R, 2012 (Minn. Tax. Ct. Aug. 20, 2012).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.