Alabama ALJ Finds Single Return Limitation Year Rule Inapplicable for 1999 and After

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Coca-Cola Enterprises Inc. could offset affiliated group income on its consolidated group return with net operating losses incurred during the 1999 and later tax years, even though the affiliated group did not elect to file a consolidated return in those years, an Alabama administrative law judge ruled. [Ala. Dept. of Rev., Administrative Law Judge Ruling Docket No. 09-641, 8/15/12]

Alabama first allowed consolidated returns for the 1999 tax year under Ala. Code § 40-18-39 and followed federal provisions that generally allow for the sharing of NOLs between affiliated group members, according to the decision.

Ala. Code § 40-18-39, as originally enacted, included the federal single return limitation year (SRLY) rule, which limits the deductibility of a loss incurred by a corporation before it became a member of a consolidated group to the amount necessary to reduce to zero the taxable income of the corporation as calculated on a separate return basis.

Administrative Law Judge Bill Thompson determined that the SRLY rule did “not apply if the corporation that incurred the loss was a group member in the year of the loss,” under a 2001 amendment to Ala. Code § 40-18-39(h) that Judge Thompson said clarified the SRLY rule for tax years beginning in or after 1999.

Judge Thompson's “analysis of the Alabama SRLY rule could be beneficial to any affiliated group of Alabama taxpayers that incurred separate company losses beginning in 1999 and subsequent tax years, provided the group elects to file a consolidated Alabama return,” Jimmy Long, an associate at Bradley Arant Boult Cummings LLP in Birmingham, Ala., told Bloomberg BNA. Long noted that the Administrative Law Division will not issue a final order until after the Department of Revenue recalculates the refund due to the taxpayer.

Long and Chris Grissom, a partner at the Birmingham office of Bradley Arant Boult Cummings LLP, were co-counsel to the taxpayer in the appeal.

'Lonely Parent' Exception Removed.

Judge Thompson found that the 2001 amendment also had the effect of removing from the general SRLY rule the federal “lonely parent” exception under Treas. Reg. § 1.1502-1(f)(2)(i), which allows a parent's NOL from a year when it was not a member of a consolidated group to be shared by the group in a later year when the parent is a member of the group.

Judge Thompson concluded that the legislature intended to remove the “lonely parent” exception to prohibit the sharing of NOLs incurred before 1999 between affiliated group members.

Long believes that, “there may still be challenges to the ruling's holding on the ability to share losses prior to 1999 and there is some question as to whether the lonely-parent exception can be invalidated.”

“Both of these turn, in large part, on the long-standing regulations the department had in place parroting the federal rules and the stated intent of the legislature to follow those federal rules,” Long added referring to Ala. Admin. Code r. 810-3-35.1-.03. The department adopted the regulation in 2001 and repealed it in 2010, after the tax years at issue in the decision.

In addition, the decision partially overruled the Administrative Law Division's prior decision in Weyerhaeuser USA Subsidiaries v. Alabama, No. 04-511 (Ala. Admin. Law Div. March 11, 2005), in which the division had determined that NOLs incurred before 1999 could be shared between group members.

Long told Bloomberg BNA that the department appealed Weyerhaeuser, but the parties subsequently settled. Long was not certain whether the department would appeal this decision.

Full text of the opinion is available at

By Erin McManus  

For a discussion of the NOL deduction in Alabama, see 1200 T.M., Income Taxes: State Treatment of Net Operating Losses, at 1200.04.B.1.b.