State Tax Consequences of Short Period Tax Returns
Livanos, George S., The CPA Journal
Most states require a corporation to maintain the same taxable year(s) for both Federal and state reporting purposes. Inasmuch as a corporation is required to file a Federal income tax return for each taxable year, the corporation is also required to file a state income tax return for each taxable year. Generally speaking, when a corporation is acquired by a member of a group filing a Federal consolidated tax return, the acquired corporation must (as per Federal rules) file a state tax return covering the period from the start of its year through the acquisition date and a second state tax return for the period starting the day after the acquisition date and ending on the last day of the consolidated group's taxable year. Accordingly, the newly acquired subsidiary is generally required to file two corresponding short period state income tax returns in the year of acquisition.
Combined reporting jurisdictions (e.g., New York, New York City, and Connecticut) allow a newly acquired subsidiary to be included in the combined reports of both selling and/or acquiring groups in the year of acquisition and/or disposition (the general rule, discussed above) but only to the extent the entity is engaged in a unitary business. New Jersey has also adopted the general rule as stated above. In certain unusual circumstances, however, New Jersey permits a newly acquired subsidiary to file a single return [Drake Bakeries, Inc. v. Taxation Div. Director, 12 NJ Tax 172 (1991)].
For states that allow net operating loss ("NOL") carrybacks and/or carryforwards, there seems to be a lack of consistency regarding the treatment of the newly acquired corporation's preacquisition and postacquisition NOLs.
For separate state reporting purposes, IRC Sec. 382 limitations may apply where there has been a change of ownership greater than 50%, if the state has adopted Federal rules for computing NOLs, does not have separate NOL provisions, or begins the computation of state taxable income with line 30 of the Federal tax return.
For combined reporting purposes, the limitations on the utilization of preacquisition NOLs of a newly acquired corporation may arise not only from IRC Sec. 382 limitations but also from separate return limitation year ("SRLY") limitations and from the underlying requirement that the corporation must have incurred the loss in a year where the corporation was subject to tax in that given state.
For New York State reporting purposes, short period returns must be tiled in the following circumstances:
* A newly organized corporation whose first taxable year is less than 12 months;
* A foreign corporation (i.e., a corporation incorporated in a state other than New York) that first becomes subject to New York tax after the start of its Federal tax year;
* A corporation that dissolves, merges, or otherwise ceases being subject to tax before the end of its Federal tax year;
* A corporation that changes its Federal tax year; or
* A corporation that joins or separates from a Federal consolidated group or changes from one consolidated group to another.
Where the sale of a subsidiary arises as a result of IRC Sec. 338(h)(10) transaction, the resulting short period treatment for New York, which adopts Federal tax treatment [TSB-M-91(4)(C)] is that the target corporation should file two franchise tax reports. The first of these ends on the acquisition date and includes the day on which the deemed sale of the target's assets occurred. …