SC: Administrative Law Court Holds Banks Cannot Deduct NOL Carryforwards

Recently, the South Carolina Administrative Law Court (ALC) addressed an issue of first impression in the state—whether a bank could deduct NOLs in computing South Carolina bank tax. This determination, in many ways, depended on two key issues. The first was whether the South Carolina bank tax was an “income tax” or a “franchise tax” and the second was whether, for bank tax purposes, the state’s conformity to the IRC mandated that the bank was entitled to an NOL deduction. The ALC first determined that the bank tax is a franchise tax, for many reasons, including a longstanding history of the tax being interpreted as a franchise tax based on income. Furthermore, a regulation described the bank tax as a franchise tax. The ALC also found it compelling that certain non-taxable income was included in the bank tax base, which in its view indicated that the bank tax was a franchise tax. 

After making this determination, the ALC next addressed whether the legislature intended the bank tax to conform to the IRC so that banks could deduct NOL carryforwards, similar to other non-bank corporations. In sum, the taxpayer’s position was that by conforming to the IRC in Chapter 6 of the tax statutes (the South Carolina Income Tax Act), the general assembly granted all corporations including banks, the ability to deduct NOLs regardless of whether the bank tax was a franchise tax. Central to the taxpayer’s position was that the Chapter 6 conformity provisions were amended in 2005 to state that they applied to all of Title 12, which includes the bank tax in Chapter 11. The ALC concluded that the taxpayer failed to establish that conformity to the IRC was a basis for allowing a bank taxpayer an NOL deduction. Notably, the state adopted the IRC with certain exclusions and limitations and the general assembly chose for banks to be treated differently than other corporations subject to income tax under Chapter 6. Had the General Assembly intended for banks to compute their tax base the same as corporations, it could have incorporated the Chapter 6 provisions, as it did specifically for purposes of the building and loan associates tax. Next, the ALC noted that conformity aside, the taxpayer also failed to establish that the bank tax was based on “taxable income.” In the ALC’s view, the NOL carryforward deduction was only authorized when computing tax based on taxable income. The bank tax, in contrast, is based on “entire net income.” Please contact Jeana Parker at 919-664-7143 with questions on Synovus Bank v. South Carolina Department of Revenue.