Reed Smith Client Alerts

The Maryland Tax Court recently ruled that a bank was entitled to deduct all of its interest received with respect to federal obligations for Maryland corporate income tax purposes, thereby generating net operating losses (NOLs) that were available to carry forward to subsequent tax years.

Earlier this month, in Branch Banking and Trust Company v. Comptroller1, the Maryland Tax Court ruled that the Comptroller’s policy of limiting the corporate income tax subtraction for interest on federal obligations violated Maryland and federal law, as well as the Supremacy Clause of the U.S. Constitution.

By way of background, the starting point for computing a corporation’s Maryland corporate income tax liability is the corporation’s federal taxable income. This amount is then modified by specific additions and subtractions. Pursuant to these modifications, interest on federal obligations is added back in its entirety, and then a subtraction for federal obligation interest is allowed. The Comptroller interpreted this subtraction to be limited to the amount necessary to reduce the corporation’s reportable Maryland taxable income for the particular year to zero. Thus, the Comptroller’s policy disallowed subtraction of interest on federal obligations to the extent the subtraction would have created an NOL for Maryland corporate tax purposes. In contrast, the Comptroller’s policy did not limit the subtraction for interest on Maryland obligations. Interest on Maryland obligations could be subtracted in its entirety, even if the subtraction resulted in an NOL.

Branch Banking and Trust Company (“BB&T”), a North Carolina state-chartered commercial bank that was doing business in Maryland and filing corporate income tax returns in Maryland, filed refund claims for its 2007 and 2008 tax years to subtract its interest on federal obligations that had not been subtracted in prior tax years as a result of the Comptroller’s policy. The Comptroller denied the refund claims, and BB&T appealed the Comptroller’s decision to Maryland Tax Court.

The Tax Court ruled that the Comptroller’s policy violated both Maryland statutory law and federal law.2 In addition, the Tax Court ruled that the Comptroller’s policy violated the Supremacy Clause of the U.S. Constitution by discriminating against those who hold federal obligations in favor of those who hold state obligations. The court explained that the Comptroller’s policy clearly placed a greater burden on holders of federal obligations, and that “the disparate treatment between these two obligations and those similarly situated taxpayers who hold them creates a higher Maryland corporate income tax per non-exempt taxable dollar on those who have federal obligation interest than on those who hold state obligations.”3

As a result, the Tax Court held that BB&T was entitled to subtract all of its federal obligation interest received in prior tax years to the extent that the subtraction for such interest had been limited in the year received under the Comptroller’s policy.

This decision opens up a refund opportunity for any corporation subject to Maryland income tax that has received interest on federal obligations and has not been able to subtract the full amount of that interest in prior tax years because of the Comptroller’s policy limiting the subtraction for interest on federal obligations. If you have questions regarding how the Maryland Tax Court’s decision in the BB&T case applies to your business, please contact the authors of this Alert or another member of the Reed Smith State Tax Group.

  1. MD. Tax Ct, CASE No. 13-IN-OO-0076 (August 12, 2016).
  2. See Md. Code Ann. Tax Gen. § 10-307(a) and 10-307(f), which allows the subtraction of interest income from federal obligations in calculating Maryland modified income, and 31 U.S.C. § 3124, which exempts federal obligation interest from state taxation.
  3. Branch Banking and Trust Company, CASE No. 13-IN-OO-0076 at 4-5.


Client Alert 2016-234