Maryland: Comptroller Regulation Limiting Use of Pre-Merger NOLs is Invalid

The Maryland Tax Court invalidates Comptroller regulation limiting use of pre-merger NOLs.

Podcast Transcript

The Maryland Tax Court recently addressed whether the Comptroller properly disallowed a taxpayer’s use of federal NOL carryforwards from acquired companies that had merged into the taxpayer. A Maryland regulation provides that if an acquired corporation was not subject to Maryland’s income tax law when its NOL was generated, then an acquiring corporation filing a Maryland income tax return may not use the NOL of the acquired corporation to offset its Maryland income. Based on the regulation, the Comptroller argued that the losses could not be used because they were generated in tax years in which the acquired companies did not file Maryland corporate income tax returns. The Tax Court, however, ruled in the taxpayer’s favor. The court noted that the starting point in computing Maryland modified income is federal taxable income including any federal net operating loss deduction, and there is no specific statutory modification requiring a taxpayer to add back federal NOLs from acquired corporations that did not file Maryland returns in the year the losses were generated. The court concluded that the Comptroller’s attempt to limit a federal NOL was contrary to Maryland’s statutory scheme and was therefore invalid. Please contact Dan McGuire at 703-286-8275 with questions on Sunbelt Rentals, Inc. v. Comptroller of Maryland.

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