An Alabama administrative law judge (ALJ) has issued a final order on rehearing holding that separate return limitation year (SRLY) rules do not apply to net operating losses (NOLs) incurred by corporations that filed separate returns but were members of the same affiliated group during the loss year.1 Prior to filing a consolidated return, the affiliated group could deduct the NOLs from tax years during which Alabama allowed taxpayers to elect to file on a consolidated basis. The ALJ rejected the Alabama Department of Revenue's argument that an Alabama affiliated group cannot exist before the group files its first Alabama consolidated return.
Background
The taxpayer, Coca-Cola Enterprises, Inc., was the common parent of two subsidiaries, Vending Holding Company (VHC) and Roddy Coca-Cola Bottling Company (Roddy). The taxpayer and its subsidiaries filed separate entity Alabama income tax returns through 2006. The taxpayer had claimed NOLs on its 1992 through 2002 separate returns and on its 2004 separate return.
The entities, which constituted an Alabama affiliated group, elected to file a group consolidated return in 2007. Each entity was required to compute its taxable income or loss on the consolidated return on a separate basis. The taxpayer and VHC each reported small amounts of losses on the 2007 return, while Roddy reported taxable income of approximately $11 million. Netting the group members' individual taxable income and losses resulted in a group taxable income of over $10 million. The consolidated return deducted the separate return NOLs incurred by the taxpayer in 1992 through 2002 and in 2004. These NOL carryovers nearly eliminated the group's 2007 consolidated income.
The Department disallowed the NOLs and partially denied the refund claim on the basis that the taxpayer's first consolidated return was filed for the 2007 tax year, and the taxpayer could not claim the NOL deduction generated in years in which the taxpayers filed separately. The taxpayer appealed to the Administrative Law Division. The issue before the ALJ was whether the group was permitted to deduct the taxpayer's prior NOLs on its consolidated 2007 return to offset Roddy's taxable income.
Preliminary Order Allowed Use of NOLs Incurred after 1998
On August 15, 2012, the ALJ issued an opinion and preliminary order holding that the taxpayer's NOLs incurred prior to 1999 could not be used to offset Roddy's taxable income.2 Because Alabama did not allow taxpayers to file on a consolidated basis prior to 1999, SRLY rules adopted by Alabama acted to restrict the availability of the NOL deduction.3 However, NOLs generated in years beginning after 1998 could be carried forward and used to offset the group's income.
Final Order Allows NOLs Incurred before Filing of Consolidated Return
Following the opinion and preliminary order, the taxpayer timely filed for a rehearing and argued that the Department had miscalculated the refund amount. The Department also applied for a rehearing and argued that an Alabama affiliated group cannot exist before filing its first Alabama consolidated return. Because the taxpayer's group did not file its first Alabama consolidated return until 2007, the Department argued that all of the taxpayer's pre-2007 NOLs were subject to the SRLY limitation and could not be claimed on the 2007 return.
The ALJ disagreed with the Department and determined that an Alabama affiliated group can exist before filing its first consolidated return. According to the ALJ, the Alabama legislature clearly intended for the federal consolidated return provisions to apply in Alabama. Under federal law, an affiliated group of corporations can exist before the group elects to file a federal consolidated return. Also, the Alabama consolidated return statute confirms that an Alabama affiliated group can elect to file (or not to file) an Alabama consolidated return, showing that the concept of an Alabama affiliated group can exist before it files its first Alabama consolidated return.
In support of its argument that the filing of an Alabama consolidated return is a prerequisite to the existence of an Alabama affiliated group, the Department cited to the statutory definition of "Alabama affiliated group" as "a group of corporations . . . which are members of an affiliated group as defined [by federal law] and which affiliated group files a federal consolidated corporate income tax return, each member of which . . . [c]ombines and reports taxable income or loss . . . on a single return for the Alabama affiliated group."4The ALJ acknowledged that this language could arguably be construed to support the Department's argument, but other statutory provisions allow for an affiliated group to make an election to file a consolidated return. Because an affiliated group can elect to file a consolidated return, it must follow that the group can elect not to file a consolidated return. In this case, the taxpayer elected not to file a consolidated return from 1999 through 2006.
The ALJ explained that the SRLY rule is intended to prevent an affiliated group from purchasing a corporation with large NOLs in prior years and using these NOLs against other group members' income in future years. However, the SRLY rules do not apply to NOLs incurred by a corporation that filed separate returns in the loss years but was also a member of the affiliated group during the loss years.
Commentary
In Alabama, there has been considerable controversy concerning the application of the SRLY rule to NOLs in a consolidated context. Part of the controversy is due to the fact that Alabama did not allow the filing of consolidated returns at all until 1999. The ALJ determined in the preliminary order that NOLs incurred prior to 1999 are treated differently than NOLs incurred after this time. In reaching his decision that NOLs generated in years after 1998 could be carried forward, the ALJ emphasized that it was irrelevant that the taxpayer did not file consolidated returns prior to 2007. The Department, however, disputed this conclusion. The final order clarifies the preliminary order and is favorable to affiliated groups with NOLs incurred after 1998 that have not filed consolidated returns for years prior to taking the NOL deduction. The case also may be used as persuasive, if not precedential, authority by taxpayers with substantial NOL attributes in other jurisdictions that have similar consolidated election regimes.5
Footnotes
1 Coca-Cola Enterprises, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. CORP. 09-641, Feb. 14, 2013.
2Coca-Cola Enterprises, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. CORP. 09-641, Aug. 15, 2012. For a detailed discussion of this opinion and preliminary order, see GT SALT Alert: Alabama ALJ Clarifies Application of NOLson Consolidated Returns.
3 See ALA. CODE § 40-18-39(b), (c), (h).
4 ALA. CODE § 40-18-39(b)(1).
5 Note that this decision is consistent with a case decided by the Florida District Court of Appeals. Golden West Financial Corp. v. Florida Department of Revenue, 975 So.2d 567 (Fla. Dist. Ct. App. 2008).
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