Our view is that certain California taxpayers can utilize California net operating losses, or NOLs, “siloed” in certain legal entities within the unitary group on a combined group basis. In addition, taxpayers with NOLs incurred prior to any of the three NOL suspension periods that California has adopted since 2000 may be able to add up to six years to the carryover period for those NOLs.
(This is a republication of Law360’s March 12 installment of Reed Smith’s California Tax Takes monthly column.)
California NOLs should be carried over and deducted on a combined group basis
California requires affiliated corporations conducting a unitary business to file a combined report, thus treating the group “as an integral unit in an entire business comprising the parent and all of its subsidiary corporations.”1 If the business is conducted in more than one legal entity, the state “look[s] at the total income of the group.”2 Therefore, although the statute imposes tax on “every corporation doing business” in California,3 the tax itself is computed as if a unitary group of corporations were a single entity.
The method of computing income of corporations within a unitary group also applies when computing losses of the members of the group. Thus, consistent with the theory of a unitary business, if a corporation is a member of a unitary group, an NOL is generated if the group’s deductions exceed the group’s gross income. The Franchise Tax Board (FTB) agrees with this proposition. Thus, it follows that if the NOL is defined by reference to the group’s deductions and gross income, the resulting carryover and deduction must be made against the group’s gross income in a succeeding year. Indeed, the business income from all activities of a unitary business is combined into a single combined report, whether activities are conducted by divisions of a single corporation or by members of a commonly controlled group of corporations.4