In February, a Florida district court in Florida Department of Revenue v. Verizon Communications Inc. rejected the Florida Department of Revenue’s (FDOR) historic position that, for state purposes, the NOL limitation is an amount less than the full federal IRC Section 382 limitation on NOLs. Following the decision, Florida joins states that allow taxpayers to use the full federal NOL limitation when determining state-apportioned income.
Crowe observation
The case applies to current returns. In addition, Florida taxpayers that limited their NOL usage on prior year returns by a reduced federal NOL limitation amount might be entitled to refunds for open years.
Background
State corporate income tax liability generally is measured by a taxpayer’s federal taxable income apportioned by a ratio that represents the taxpayer’s activity in that state.
IRC Section 382 limits the ability of a corporation to use its NOLs after an ownership change. That limit is expressed as a dollar amount that is applied to reduce federal taxable income. A question at the state level arises when applying a federal NOL limitation to state income tax. Specifically, the question is whether state application of IRC Section 382 uses the full amount of the federal NOL limitation or is the federal NOL limitation reduced by a proportionate amount that reflects state activity. Prior to the decision in Verizon, Florida’s position on audit has been that, for state purposes, the federal NOL limitation is reduced based on state attributes.
Verizon decision
Following their acquisition by Verizon, two subsidiaries had NOL carryforwards for multiple years that were limited under federal and Florida law by Section 382. Verizon and the FDOR disagreed on the application of Florida’s Section 382 limitation.
The FDOR argued that the annual NOL deduction must “utilize a calculation that divides the federal limitation by the total federal NOLs for a company, then multiplies this number by the total Florida NOLs for that company.” This methodology is not provided in Florida statutes, regulations, or other published guidance.
Verizon argued that a plain language interpretation of Florida statutes and regulations support a position that federal IRC Section 382 provisions are explicitly accepted under state law without modification. Florida’s 1st District Court of Appeal agreed, finding that “Florida’s annual NOL deduction limit tracks the amount of the federal limit and can be similarly deducted each year.”
Looking ahead
Verizon presents an opportunity for Florida taxpayers to reduce tax on state-apportioned income. Florida taxpayers should use the full federal NOL limitation on current year state tax returns and consult with their tax advisers to evaluate whether refunds might be available for prior year returns based on the holding in Verizon.
