On November 29, the Delaware Supreme Court struck the Delaware Division of Revenue’s policy of limiting a separate-company taxpayer’s NOL deduction to the consolidated NOL deduction of the federal consolidated group of which the taxpayer was a member.1
Corporations that paid Delaware corporate income tax in prior years as a result of the Division’s policy should file refund claims (download the model refund claim below). Although Delaware codified the Division’s policy limiting NOL deductions in 2021, taxpayers should consider the now-codified limitation’s effective date and validity.
The Division’s NOL Limitation
Delaware requires taxpayers to file separate-company corporate income tax returns.The Division has long-recognized that a corporation that is a member of a federal consolidated group must compute its taxable income on its Delaware return on a separate-company basis.2
But, the Division’s audit practice was to adopt the consolidated NOL on the consolidated group’s as-filed federal return as a limitation on the taxpayer’s own separate-company NOL deduction on its Delaware return.3
Taxpayer’s Challenge Successful
Last year, in VeriSign, Inc. v. Director of Revenue, Delaware’s Superior Court found the NOL limitation violated the tax uniformity clause of the Delaware Constitution.4 The court recognized the limitation divided Delaware corporate taxpayers into two groups on the basis of their federal filing status (consolidated versus separate) and applied the limitation to one group (consolidated federal filers) but not the other (separate-company federal filers). The court rejected the Division’s limitation because there was no authority for the agency to create such a classification.
On November 29, 2021, the Delaware Supreme Court affirmed on an alternative basis.5 The Court found that using the consolidated NOL as a limitation was irreconcilable with the Delaware corporate income tax statute, which imposed tax on a separate-company basis.The court did not reach the tax uniformity clause or other constitutional claims raised.