The opinion of the court was delivered by: NEAHER
This is an appeal by the City of New York ("the City") from a decision of the bankruptcy judge expunging its claim against the debtor for unpaid corporation taxes in the amount of $17,789.32. Decision of the appeal turns upon the correct construction to be placed on the carryforward and carryback loss provisions of the City's General Corporation Tax, Administrative Code of the City of New York, § R46-2.0(8)(f).
The pertinent facts are not in dispute. On December 24, 1970, the debtor ("Avien") filed a petition for an arrangement under Chapter XI of the Bankruptcy Act and thereafter was continued in the operation of its business. The City, in June 1973, conducted an audit of Avien's books and records for the period from January 1966 through December 24, 1970, with respect to its tax liability to the City. After completion of the audit, the City filed an amended claim in the Chapter XI proceeding which included an item of $17,789.32 for unpaid general corporation tax allegedly accruing in Avien's fiscal year ending June 30, 1968 (together with interest and penalties of $2,018.50).
There is no question that the City's foregoing tax claim is based upon Avien's City General Corporation Tax Report for fiscal 1968, which showed a net income of $286,969.82 before net operating loss. Despite that alleged "income", Avien paid no federal taxes in that year because its income was more than offset by the following carryforward losses reported on its federal tax return:
Fiscal Year Ending Taxable Income (Loss)
June 30, 1963 ($762,423.73)
June 27, 1965 ($156,856.34)
July 3, 1966 ($993,529.48)
June 30, 1968 $282,598.52
Avien also reported losses on its federal returns for fiscal 1969 and 1970 of $165,427.60 and $337,177.85 respectively.
In urging the validity of its claim despite Avien's losses, the City contends, in effect, that the carryforward and carryback loss provisions of the City's Administrative Code require a taxpayer to use as an offset against income only the identical loss he has used as an offset on the federal return. The City further contends that if other provisions of the City's tax law prohibit the use of that loss for City tax purposes, the taxpayer may not substitute as a deduction a loss from a different year.
The bankruptcy judge concluded that, in the absence of express legislative history to the contrary, the implicit legislative intent in adopting a carryforward and carryback loss provision, i.e., to allow an averaging of income over a number of years, would best be effectuated by not binding a taxpayer to the loss used on his federal return if that loss did not qualify for City tax purposes. This court agrees.
The City's tax on corporate net income is imposed under Title R of Chapter 46 of the New York City Administrative Code § 2.0(8), effective January 1, 1966, which provides in pertinent part:
"'Entire net income' means net income from all sources which shall be the same as the taxpayer's federal taxable income . . . ."
Subdivision (f) of § 2.0(8) provides in part:
"A net operating loss deduction shall be allowed which shall be the same as the net operating loss deduction allowed under section one hundred seventy-two of the internal revenue code or which would have been allowed if the taxpayer had not made an election under subchapter s of chapter one of the internal revenue code, except that . . . (2) such deductions shall not include any net operating loss sustained during any taxable year in which the taxpayer was not subject to the tax imposed by this part, and (3) such deduction shall not exceed the deduction for the taxable year allowable under section one hundred seventy-two of the internal revenue code . . .."
The City's position is that a city taxpayer, pursuant to § 2.0(8), must report taxable income for City tax purposes which is "the same as" the taxable income reported for federal tax purposes. The latter is determined in accordance with § 63(a) of the Internal Revenue Code of 1954 ("the Code"), which provides in part:
"'[Taxable] income' means gross income, minus the deductions allowed by this chapter . . . ."
One of the allowed deductions is that provided for in § 172 of the Code.
The City, therefore, would have the court conclude that the same carryover loss used as an offset for federal tax purposes must be used as an offset for City tax purposes, so that taxable income for City tax purposes will be "the same as" ...