South Carolina: Administrative Law Court Holds Banks Cannot Deduct NOL Carryforwards

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Recently, the South Carolina Administrative Law Court (ALC) addressed 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. In response to the first question, the ALC observed there was a longstanding history of the bank tax being interpreted as a franchise tax imposed for the privilege of operating, or doing business in South Carolina, albeit a franchise tax measured by entire net income. In fact, there was a regulation that had been in effect for years defining the bank tax as a franchise tax.  The ALC also found it compelling that certain non-taxable income (e.g., interest on government obligations) was included in the bank tax base. In the court’s view, including income that is not taxable for income tax purposes in the tax base indicated that the bank tax was intended to be 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.  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 in the Chapter 11 bank tax statutes, as it did specifically for purposes of the building and loan associations tax.  Next, the ALC addressed whether the use of the term “entire net income” statutorily authorized NOL carryovers. The taxpayer argued that if the legislature had intended to limit a bank’s expense to one year, then it would have used the term “net income.” After a lengthy discourse on the history of NOLs, the ALC concluded that NOLs are not inherently authorized by the term “entire net income,” and the court could not conclude that the term "entire net income" inherently creates a legal right to carryforward excess expenses to another tax year. Please contact Jeana Parker at 919-664-7143 with questions on Synovus Bank v. South Carolina Department of Revenue.