On April 24, 2017, the Department sent a denial letter in response to the Taxpayer’s claim for refund of corporate income tax for 2011 and 2012, stating that a net operating loss established on a separate entity cannot be claimed on a consolidated return. On July 27, 2017, the Taxpayer protested the denial. The main issue of this protest was whether the taxpayer qualified for the net operating loss deduction and so should receive a refund. The Department partly argued that the refund claim could be denied based on the statute of limitations, but the Hearing Officer dismissed this as never the reason for the actual denial. Instead, the case hinged entirely if it was appropriate for the Taxpayer to claim the net operating loss. To create the New Mexico base income which determines tax, the Taxpayer must add back the net operating loss taken on the federal return and then take the allowable New Mexico net operating loss permissible under its own rules. A taxpayer must show clear entitlement to a deduction for it to be allowed. The Department argued that the returns and supporting documentation including the schedules provided, were insufficient to determine this. The Taxpayer provided some information regarding the federal net operating losses, but this alone could not allow for a clear determination of the New Mexico net operating loss deduction. Department regulation has established specific rules about when a corporation may claim a net operating loss first used by another corporation or first reported under another filing method. Some conditions require the loss to still be a part of base income while other instances allow for loss carryovers if they are permitted for federal income tax purposes. To determine if the net operating loss qualified the Department needed additional information about when the net operating loss was first claimed, by which entity, whether that entity filed New Mexico corporate income tax returns and under which reporting method, and about the Taxpayer’s acquisition of the entity. The Taxpayer was ultimately responsible for these omissions and failed to established entitlement to the refund. This having been decided, the Hearing Officer agreed with the Department that there was insufficient evidence to determine whether the deduction was allowable and the Hearing Officer ordered the protest denied.
The GEO Group Inc