Reed Smith Client Alerts

On September 9, 2019, the Maryland Tax Court issued its decision in Sunbelt Rentals Inc. v. Comptroller of Maryland, allowing a corporate taxpayer to deduct net operating losses ("NOLs") incurred by corporations previously merged into the taxpayer, notwithstanding the fact that the merged corporations did not file Maryland corporate income tax returns in the years in which the NOLs were incurred. Taxpayers with similar facts should consider filing protective claims for refund for open periods.

On October 12, 2007, Maryland amended the Code of Maryland Regulations by adding a provision that denies the use of NOLs from acquired corporations as a deduction, unless the corporation incurring the NOL was subject to Maryland income tax law in the tax year in which its NOL was generated.1 Prior to this amendment, the Comptroller allowed NOLs of merged entities to be deducted by the surviving entity, irrespective of whether the merged entity had been subject to Maryland income tax in the tax year when the loss was incurred. Although Maryland law allows the Comptroller to adopt regulations, the regulations must be reasonable and consistent with the statutory scheme the Comptroller seeks to implement or explain.2

In Sunbelt Rentals Inc. v. Comptroller of Maryland, the taxpayer ("Sunbelt"), merged with NationsRentUSA, Inc. and NationsRent, Inc. (collectively "NationsRent") in 2006, with Sunbelt surviving.3 Prior to the merger, in tax years 2003 through 2006, NationsRent incurred losses. Sunbelt deducted NOLs originally incurred by NationsRent on its Maryland corporate income tax returns for the 2007 through 2013 tax years. Relying on its regulation, the Comptroller disallowed Sunbelt's deduction for the NOLs generated by NationsRent. On appeal, the Tax Court agreed with Sunbelt that the regulation was contrary to Maryland's statutory scheme. As such, the Tax Court allowed Sunbelt's NOL deductions.