On December 29, 2014, Decision and Order No. 14-45 was issued in this matter. On January 28, 2015, a Motion for Reconsideration was filed by the Department. The motion was granted, the original Decision and Order was withdrawn, and this Amended Decision and Order was issued.
On February 12, 2014, the Department assessed the Taxpayer for corporate income tax, penalty and interest for the reporting period ending on December 31, 2012. The Taxpayer filed a protest to the assessment. The Taxpayer is the parent corporation of a group of affiliated corporations, three of which did business in New Mexico during the relevant period. Before 2012, all three entities filed New Mexico Corporate Income Tax (NM CIT) returns as separate corporate entities. Two of the corporations generated net operating losses on their returns before 2012. In 2012, the Taxpayer elected to file NM CIT returns as a combined consolidated group. On the combined consolidated group return, the Taxpayer claimed the net operating loss carryover first reported in previous years by two of the separate entities. The Department disallowed the Taxpayer’s attempt to claim the net operating losses of the two entities in the 2012 combined consolidated group return. There are no disputes of fact is this matter. The three legal issues at protest are first, whether the Taxpayer, filing as a combination of unitary corporations, may claim a deduction for net carryover losses first reported by its wholly owned member filing on a separate corporate entity basis; second, if not allowed to claim the net operating losses, is the Taxpayer allowed to change its CIT reporting method back to separate entities; and third, should civil negligence penalty be abated. On the first issue, the Department provided argument, and the hearing officer agreed, that based on definitions of “net income” and “base income” in Section 7-2A-2 NMSA 1978, and pursuant to Regulation 126.96.36.199 NMAC, the deduction the Taxpayer attempted to claim is not allowed. For the Taxpayer to return to separate filing, permission must be obtained from the Secretary of the Department. That permission has not been sought by the Taxpayer. In regard to the penalty, the Taxpayer provided a careful legal explanation as to why it believed it was entitled to claim the net operating loss deduction. This showed that the failure to pay resulted from a “mistake of law made in good faith and on reasonable ground”, as required under Section 7-1-69 NMSA 1978, to rebut the presumption of correctness for the assessment of penalty. The penalty was ordered to be abated. The Taxpayer’s protest was granted in part and denied in part.