Administrative Law Judge Affirms Holding on Alabama SRLY Rule

State & Local Tax Alert: Alabama Edition

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On August 15, 2012, Chief Administrative Law Judge Bill Thompson issued his long-awaited SRLY ruling, holding that an Alabama consolidated group was entitled to carry forward certain net operating losses (“NOLs”) incurred before the group’s election to file an Alabama consolidated return; however, Judge Thompson also held that the group could not deduct any NOLs incurred before 1999 when the consolidated filing option was not available. Coca-Cola Enterprises Inc. v. Alabama Department of Revenue, Admin. L. Div. Dkt. No. CORP. 09-641 (Op. & Prelim. Order August 15, 2012). The Alabama Department of Revenue (the “Department”) filed an application for rehearing, arguing that the Taxpayer’s pre-2007 NOLs were subject to the Ala. Code § 40-18-39(h) limitation (the “Alabama SRLY rule”) because the group did not elect to file an Alabama consolidated return until 2007.

Specifically, the definition of an “Alabama affiliated group” provides several requirements, including that each member “[c]ombines and reports taxable income or loss … on a single return for the Alabama affiliated group.” Ala. Code § 40-18-39(b)(1)f. Citing this requirement, the Department argued that the filing of an Alabama consolidated return is a prerequisite to the existence of an Alabama affiliated group. Because the Taxpayer did not file an Alabama consolidated return until 2007, the Department contended that the Taxpayer’s pre-2007 separate company NOLs were not incurred while it was a member of an Alabama affiliated group, and were thus limited by the Alabama SRLY rule.

The Administrative Law Division rejected the Department’s argument in its February 14, 2013, Final Order on Rehearing (copy attached): “[b]y itself, §40-18-39(b)(1)f. can arguably be construed as supporting the Department’s position. But various other provisions in §40-18-39, when read together, show that the actual filing of an Alabama consolidated return is not a prerequisite to the existence of an Alabama affiliated group.” Judge Thompson also noted that Alabama’s provision that allows an affiliated group the option to elect a consolidated return was consistent with the federal consolidated return regime. See I.R.C. § 1501 (providing that “[a]n affiliated group of corporations shall . . . have the privilege of making a consolidated return . . . in lieu of separate returns”).

Judge Thompson held that “[t]he purpose for the SRLY rule limitation is to prevent an affiliated group of corporations from purchasing another corporation that has amassed large NOLs in prior years, and then using those NOLs to offset the income of the other group members in subsequent years. That is, the SRLY rules prevent an affiliated group from ‘buying’ tax losses by limiting an acquired corporation’s pre-acquisition NOLs to only offset the current year and future income of the acquired corporation. The SRLY rules do not apply, however, to NOLs incurred by a corporation that filed separate returns in the loss years but was also a member of the same affiliated group during the loss years … Allowing the affiliated group to deduct the NOLs incurred by the Taxpayer since 1999 is clearly authorized under Alabama law.”

The final order on rehearing may be appealed to Montgomery County Circuit Court by March 16, 2013. It is unknown at this time whether either party intends to appeal.