Florida appeals court rules on two net operating loss cases

On Feb. 28, 2024, the Florida Court of Appeal released two related decisions regarding net operating loss (NOL) issues for the same taxpayer. In the first decision, the court held that the unapportioned federal annual NOL deduction limitation on NOLs of entities purchased by the taxpayer applied for state purposes.¹ The court rejected the Florida Department of Revenue’s argument that the NOL deduction limitation should be applied for state purposes by apportioning the federal NOL limitation. In the second decision, the court determined that the taxpayer could not apply the federal tax mitigation rules to use NOLs outside the statute of limitations period.²

Background

The taxpayer, Verizon, is a major telecommunications provider that purchased entities in 2006 and 2011 with substantial federal and Florida NOLs. The instant cases resulted from the Department’s audit of Verizon’s 2011–2013 corporate income tax returns. In 2017, the Department issued Verizon a notice that it was due a refund for certain taxes overpaid between 2005 and 2013. Verizon agreed it should receive a refund but disputed the amount that it was owed. The Department and Verizon did not dispute the annual deduction limit for using the NOLs on the federal tax returns. However, they did not agree on the annual deduction limit for state purposes. The Department rejected Verizon’s request to utilize the same limit as the federal amount for state purposes in favor of the Department’s methodology for calculating the Florida NOL deduction limits. Also, Verizon filed a tax protest arguing that it was entitled to use pre-2000 NOLs from the companies it had acquired, and to revise its 2000 tax return. The Department rejected Verizon’s argument because the NOLs were barred by Florida’s three-year statute of limitations.

Verizon filed two separate cases with the circuit court. In the first case, Verizon successfully argued that under Florida law, the state NOL limitation is equivalent to the amount of the federal NOL limitation. After the circuit court agreed with Verizon, the Department filed an appeal with the Florida Court of Appeal. In the second case, Verizon argued that Florida law incorporated federal corporate tax mitigation provisions that applied in its favor. These more favorable equitable mitigation rules would allow Verizon to use NOL deductions after the ordinary statute of limitations had run. After analyzing the relevant Florida corporate tax provisions, the circuit court determined that Florida had not adopted the federal mitigation provisions. Verizon appealed this decision to the Florida Court of Appeals.

Florida follows federal NOL deduction limitations

In the first case, the Florida Court of Appeal affirmed the circuit court’s decision holding that Florida follows the federal NOL deduction limitations. Florida law provides a subtraction for the NOL deduction allowable for federal income tax purposes under IRC Sec. 172 for the tax year.³ The statute also provides that Florida does not permit NOLs to be carried back “but all deductions attributable to such losses shall be deemed net operating loss carryovers . . . and treated in the same manner, to the same extent, and for the same time periods as are prescribed for such carryovers in [IRC Sec. 172].”⁴ The court agreed with Verizon’s plain reading of the statute that Florida follows the federal NOL deduction limitations.

After considering the statutory language, the court noted that the Department’s relevant administrative rule confirmed that the state deduction mirrors the federal amount. The rule provides that “Florida piggybacks the federal provisions in [IRC Sec. 382], which is incorporated by reference in [Fla. Admin. Code Ann. r. 12C-1.0511], concerning the limitation on the use of any NOL carryforward of an acquired corporation.”⁵ Furthermore, “[i]n computing the Florida corporate income tax, a deduction for the NOL carryover will be allowed to the extent of the amount allowed for federal purposes, provided that the deduction does not exceed the total amount of the Florida NOL carryover available in such taxable year.”⁶ Accordingly, the court determined that both the statute and the rule supported the circuit court’s conclusion that the annual NOL deduction limit for state tax purposes is the same as the amount under federal law.

The court declined to follow the Department’s interpretation of the statute that the NOL deductions must utilize a calculation that divides the federal limitation by the total federal NOLs for a taxpayer, and then multiplies this number by the total Florida NOLs for the taxpayer. This method would substantially lower Verizon’s state NOL deduction and prevent it from obtaining the full value of the NOLs of the acquired companies for state tax purposes before the 20-year carryover period ends. The court concluded that except for the express rejection of carrybacks, Florida’s annual NOL deduction limit tracks the amount of the federal limit and can be similarly deducted each year.

Taxpayer not allowed to deduct old NOLs

In the second case, the Florida Court of Appeal agreed with the circuit court that the state has not adopted federal mitigation provisions that would allow Verizon to use NOLs outside the statute of limitations period. The court explained that federal mitigation provisions allow for the correction of errors that would otherwise be barred.⁷ Verizon unsuccessfully argued that Florida law adopts federal corporate tax law concepts and thus implicitly has adopted the federal mitigation provisions.⁸

The court acknowledged that Florida tax law includes a “legislative intent” provision that directs the state to generally follow federal tax law “to the greatest extent possible” to minimize administrative costs.⁹ However, Florida tax law differs from federal law by providing a three-year statute of limitations for requesting tax refunds.¹⁰ Verizon argued that the federal mitigation provisions supersede the statute of limitations due to the legislative intent that Florida utilize federal corporate income tax law, which would include the federal mitigation rules. In rejecting this argument, the court noted that the statute of limitations expressly applies to refund claims such as those made by Verizon. There is no Florida statute that makes an allowance for a federal mitigation exception to the statute of limitations. Also, the court noted that courts do not usually use a “legislative intent” statute to support a substantive right. Verizon’s legislative intent argument conflicted with the statute of limitations.

As further support that the federal mitigation rules do not apply, the court explained that the legislative intent statute targets efficiency goals that do not apply to the instant case. Rather than seeking efficiency, Verizon was attempting to reopen its 2000 tax return and claim deductions of NOLs from even earlier tax years. In contrast, the statute of limitations handles untimely claims with an efficient rule that provides a clear deadline. The court determined that Verizon’s argument of displacing the statute of limitations with a federal tax concept that would keep tax deadlines open indefinitely would conflict with the goal of improving efficiency.

Commentary

These decisions both clarify the use of NOLs under Florida corporate income tax law. In particular, the first case applied the plain meaning of the Florida NOL statute and administrative rule to follow federal provisions concerning NOL limitations. In confirming that Florida corporate income tax conformity to a federal tax provision is absolute unless the state specifically decouples or adjusts the effect, this case expressly rejects the Department’s practice of apportioning the federal NOL limitation for state purposes that is not stated in Florida statutes or administrative rules. Taxpayers that followed the Department’s approach concerning NOL limitations may want to consider filing refund claims, and there could be financial statement considerations to the extent that a limitation subjected the NOL to a valuation allowance. This decision follows a recent trend of Florida courts supporting taxpayer challenges to Department policies where the plain language of the statute or rule was clear. For example, a circuit court held last year that state law required the use of the cost-of-performance method to source service revenue for purposes of the sales apportionment factor applicable to Florida corporate income tax.¹¹ In reaching this decision, the circuit court rejected the Department’s application of market-based sourcing.

The second decision is not surprising to the extent that Florida (like most states) does not automatically follow federal income tax procedural provisions and can decouple from them when desired. In this case, the court refused to allow the preemption of the statute of limitations by the federal mitigation provisions. However, the case is interesting because the court considered the application of Florida’s “legislative intent” statute that comes into play when considering IRC conformity issues.

1 Florida Department of Revenue v. Verizon Communications Inc., Florida Court of Appeal, No. 1D2022-2096, Feb. 28, 2024.
2 Verizon Communications Inc. v. Florida Department of Revenue, Florida Court of Appeal, No. 1D2022-2094, Feb. 28, 2024.
3 Fla. Stat. Ann. § 220.13(1)(b)1.
4 Id.
5 Fla. Admin. Code Ann. r. 12C-1.013(15)(j).
6 Id. (emphasis added by court)
7 IRC § 1311.
8 IRC §§ 1311-1314.
9 Fla. Stat. Ann. § 220.02(3).
10 Fla. Stat. Ann. § 215.26(2).
11 Billmatrix Corp. v. Department of Revenue, Circuit Court of the 2nd Judicial Circuit, Leon County, Fla., No. 2020-CA-000435, March 1, 2023. The court also held that the Department’s inconsistent use of its cost-of-performance regulation violated the Florida Taxpayer’s Bill of Rights. For a discussion of this decision, see GT SALT Alert: “Florida court rules on service sourcing matter.”