TITLE 3: TAXATION

CHAPTER 4: CORPORATE INCOME TAXES

PART 1: GENERAL PROVISIONS

3.4.1.1 ISSUING AGENCY: Taxation and Revenue Department, Joseph M. Montoya Building, 1100 South St. Francis Drive, P.O. Box 630, Santa Fe NM 87504-0630

[1/15/97; 3.4.1.1 NMAC - Rn, 3 NMAC 4.1.1, 12/14/00]

3.4.1.2 SCOPE: This part applies to every domestic corporation and to every foreign corporation employed or engaged in the transaction of business in, into or from New Mexico or deriving any income from any property or employment in New Mexico.

[1/15/97; 3.4.1.2 NMAC - Rn, 3 NMAC 4.1.2, 12/14/00]

3.4.1.3 STATUTORY AUTHORITY: Section 9-11-6.2 NMSA 1978.

[1/15/97; 3.4.1.3 NMAC - Rn, 3 NMAC 4.1.3, 12/14/00]

3.4.1.4 DURATION: Permanent.

[1/15/97; 3.4.1.4 NMAC - Rn, 3 NMAC 4.1.4, 12/14/00]

3.4.1.5 EFFECTIVE DATE: 1/15/97, unless a later date is cited at the end of a section, in which case the later date is the effective date.

[1/15/97; 3.4.1.5 NMAC - Rn & A, 3 NMAC 4.1.5, 12/14/00]

3.4.1.6 OBJECTIVE: The objective of this part is to interpret, exemplify, implement and enforce the provisions of the Corporate Income and Franchise Tax Act.

[1/15/97; 3.4.1.6 NMAC - Rn, 3 NMAC 4.1.6, 12/14/00]

3.4.1.7 DEFINITIONS: Reserved]

[1/15/97; 3.4.1.7 NMAC - Rn, 3 NMAC 4.1.7, 12/14/00]

3.4.1.8 CITATION OF REGULATIONS: Unless otherwise stated, all citations of statutes in Title 3, Chapter 4 NMAC pertaining to the Corporate Income and Franchise Tax Act are to the New Mexico Statutes Annotated, 1978 (NMSA 1978).

[1/7/92, 1/15/97; 3.4.1.8 NMAC - Rn, 3 NMAC 4.1.8, 12/14/00]

3.4.1.9 NET OPERATING LOSSES

A. Net operating losses; generated by deduction of income from United States obligations.

(1) If the exclusion of income from obligations of the United States of America results in a negative amount for New Mexico net income for a taxable year, the resulting negative amount may be deemed to be a net operating loss for that taxable year. The taxpayer must establish the loss from exclusion of income from obligations of the United States of America by filing a New Mexico return or amended return within the time period set forth in Section 7-2A-9 NMSA 1978 and Subsections B, C and E of Section 7-1-26 NMSA 1978. An amended return carrying back or forward any such net operating loss must be filed within the time period set forth in Subsection 7-1-26B NMSA 1978. The taxpayer shall apply relevant provisions of 26 U.S.C. Section 172 of the Internal Revenue Code to determine the years to which the net operating loss may be applied.

(2) Any net operating loss deemed created by this subsection (3.4.1.9A NMAC) may be carried back or forward in accordance with the provisions of Section 7-2A-2 NMSA 1978 and Subsections B through E of Section 3.4.1.9 NMAC. For taxable years beginning prior to January 1, 1991, the resulting taxable income shall then be allocated and apportioned in that year pursuant to the provisions of Section 7-2A-8 NMSA 1978.

(3) Example: For 1986, B Corporation reported $100,000 of federal taxable income on line 30 of its federal corporate income tax form 1120. During 1986, B corporation received $150,000 of interest income from United States obligations that was included in its federal taxable income. In preparing its 1986 New Mexico income tax form CIT-1, B corporation would report $100,000 of income on line 2 of page 1 of the form CIT-1 and would report $150,000 of interest from United States obligations on line 3 of page 1. Because the amount on line 3 of page 1 of the form CIT-1 is greater than the amount on line 2 of page 1, B corporation will report a negative amount of $50,000 as New Mexico net income. B corporation may carry the negative net income amount of $50,000 either back or forward as if that amount were a net operating loss being carried back or forward under the provisions of the Internal Revenue Code. B corporation reported $75,000 of New Mexico net income for 1983; therefore it could carry back the negative $50,000 amount of New Mexico net income from 1986 to reduce its 1983 New Mexico net income to $25,000. B corporation would be required to file an amended form CIT-1 for the year of 1983 to reflect the reduction of the federal taxable income for 1983 by the $50,000 negative net income for 1986. The federal taxable income on the amended form CIT-1 for 1983 would, therefore, reflect an adjusted amount of $25,000. In that amended return, B corporation would recompute its New Mexico net taxable income for 1983 based upon this adjustment.

(4) This version of Subsection 3.4.1.9A NMAC retroactively applies to taxable years beginning on or after January 1, 1991.

B. Net operating losses; time limitation.

(1) A net operating loss, including any net operating loss deemed created pursuant to Subsection 3.4.1.9A NMAC, for a taxable year may be excluded from the base income of any other taxable year only if the net operating loss for the taxable year is established by the filing of a return, either original or amended, within the time periods set forth in Subsections B, C and E of Section 7-1-26 NMSA 1978.

(2) Example: In 1997, a corporation that reports income tax on a calendar year basis discovers an error which relates to its state returns for 1990 and 1993. The original 1990 and 1993 returns were timely filed in 1991 and 1994, respectively. Absent the time limitations on filing amended returns, correcting the error through filing of amended returns would create net operating losses in both 1990 and 1993. An amended return may be filed only for 1993 and only the 1993 loss may be excluded from the base income of any other year.

(3) This subsection (3.4.1.9B NMAC) retroactively applies to taxable years beginning on or after January 1, 1991.

C. Net operating losses; must be deductible for federal income tax purposes.

(1) The net operating loss carryover of a corporation or corporations acquired by the taxpayer or otherwise included, as for example, through a change in reporting method, in the taxpayer's return for a taxable year may be excluded from New Mexico base income only to the extent the Internal Revenue Code and regulations issued thereunder would permit deduction of such loss carryovers for federal income tax purposes for that taxable year by that taxpayer.

(2) This subsection (3.4.1.9C NMAC) retroactively applies to taxable years beginning on or after January 1, 1991.

D. Net operating losses; carryover and carryback rules for taxable years beginning after 1990.

(1) For taxable years beginning on or after January 1, 1991, any corporate net operating loss for federal tax purposes and any net operating loss deemed created pursuant to Subsection 3.4.1.9A NMAC may be carried forward only. These loss carryovers may be excluded from base income only for five years or until the total amount of the loss carryover has been excluded, whichever occurs first. The first year in which the loss carryover may be excluded from base income is:

(a) in the case of a timely filed original return, the next taxable year; and

(b) in all other cases, the first taxable year after the date on which the return establishing the loss is filed, not the next taxable year following the taxable year in which the loss occurred.

(2) Example: Corporation B reports for tax purposes on a calendar year basis. In June, 1993, B files an amendment to its timely filed 1991 original New Mexico corporate income and franchise tax return. The 1991 original return showed a net operating profit. As a result of the amendment to the 1991 return, a net operating loss is generated for 1991. B may first apply the 1991 net operating loss generated by the amended return to B's New Mexico corporate income and franchise tax return for 1994. B may not apply this net operating loss to 1992 or 1993.

(3) For taxable years beginning on or after January 1, 1991, net operating loss carryovers must be applied in the following order:

(a) net operating loss carryovers from taxable years beginning prior to January 1, 1991, beginning with the carryover from the oldest taxable year; and

(b) net operating loss carryovers from taxable years beginning on or after January 1, 1991, beginning with the carryover from the oldest year.

(4) Example: Z corporation began operations January 1, 1988 and has timely filed (on a calendar year basis) its income tax returns every year. Z reported a net operating profit in 1988, a net operating profit of zero in 1989 and a net operating loss in 1990 which exceeded its 1988 profit by $5,000. Z sustains another net operating loss of $11,000 for 1991 but reports a net operating profit of $8,000 for 1992. In applying its loss carryovers, Z must first apply the net operating loss from 1990 to 1988. On its 1992 return, Z first applies the $5,000 carryover balance originating from 1990 and then the loss carryover deriving from 1991.

(5) For taxable years beginning on or after January 1, 1991, any corporation excluding a net operating loss carryover from a prior taxable year must attach to the New Mexico return for that taxable year a schedule showing the taxable year in which each net operating loss being carried forward occurred, the amount of each loss excluded in each taxable year following the taxable year in which the loss occurred and the amount of the loss being applied to the taxable year for which the return is being filed.

(6) For any taxable year beginning on or after January 1, 1991, the net operating loss for that taxable year may not be carried back to any preceding taxable year.

(7) This subsection (3.4.1.9D NMAC) retroactively applies to taxable years beginning on or after January 1, 1991.

E. Net operating losses; carryover and carryback rules for taxable years beginning before 1991.

(1) For taxable years beginning prior to January 1, 1991, any net operating loss, including any net operating loss deemed created pursuant to Subsection 3.4.1.9A NMAC, may be carried forward or carried back to any other taxable year beginning prior to January 1, 1991 in accordance with the provisions of the Internal Revenue Code unless contrary to the provisions of the Corporate Income and Franchise Tax Act and Title 3 Chapter 4 NMAC.

(2) For taxable years beginning prior to January 1, 1991, a net operating loss, including any net operating loss deemed created pursuant to Subsection 3.4.1.9A NMAC, may be carried back only to those prior taxable years for which a corporate income and franchise tax return was originally due, without regard to any extension, in the period beginning with the January 1 of the third calendar year preceding the calendar year in which began the taxable year for which the loss is established and ending with the day before the first day of the taxable year for which the loss is established.

(3) Example: D corporation files on a fiscal year basis. Its fiscal year ends April 30. In September, 1993, D files an amended corporate income and franchise tax return for its taxable year starting May 1, 1989 and ending April 30, 1990. The amendment establishes a net operating loss for that taxable year. The oldest year to which D may carry back the net operating loss is its taxable year beginning May 1, 1985 and ending April 30, 1986, the return for which was originally due July 15, 1986.

(4) This subsection (3.4.1.9E NMAC) retroactively applies to taxable years beginning on or after January 1, 1991.

[8/10/89, 1/7/92, 1/15/97; 3.4.1.9 NMAC - Rn & A, 3 NMAC 4.1.9, 12/14/00]

3.4.1.10 INCOME FROM OBLIGATIONS OF GOVERNMENTS

A. Income from United States government obligations.

(1) Income from obligations issued by the United States are not includable in net income.

(2) Because they are not obligations of the United States, income from investment in the following is includable in net income:

(a) financial instruments guaranteed by the federal national mortgage association ("Fannie Maes"), the government national mortgage association ("Ginnie Maes"), the federal national home loan association ("Freddie Macs") and any similar organization whose income states are not prohibited by federal law from subjecting to income taxation;

(b) financial instruments issued by the college construction loan insurance corporation or the national consumer cooperative bank;

(c) agreements ("repo's") to sell and repurchase United States government obligations; and

(d) agreements ("reverse repo's") to purchase and resell United States government obligations.

(3) This version of this subsection (3.4.1.10A NMAC) retroactively applies to taxable years beginning on or after January 1, 1991.

B. Income from obligations of Puerto Rico and territories and possessions of the United States.

(1) Income from obligations of the commonwealth of Puerto Rico and of Guam, the Virgin Islands, American Samoa, Northern Mariana Islands and other territories or possessions of the United States are includable in net income only to the extent that inclusion is not prohibited by federal law. Income from such obligations which New Mexico is prohibited from taxing by the laws of the United States may be deducted from net income.

(2) This subsection (3.4.1.10B NMAC) retroactively applies to taxable years beginning on or after January 1, 1992.

C. Exclusion of certain income from mutual funds or trusts.

(1) Income from investments in mutual funds, unit investment trusts or simple trusts which are invested in obligations of the United States, obligations of the state of New Mexico or its agencies, institutions, instrumentalities or political subdivisions or obligations of the commonwealth of Puerto Rico or territories or possessions of the United States may be deducted from net income to the extent that such investment income is nontaxable income provided that:

(a) for the purposes of this subsection (3.4.1.10C NMAC), "nontaxable income" means income from investments in obligations of:

(i) the United States;

(ii) the state of New Mexico or any of its agencies, institutions, instrumentalities or political subdivisions;

(iii) the commonwealth of Puerto Rico, the income from which obligations states are prohibited from taxing by the laws of the United States; and

(iv) Guam, the Virgin Islands, American Samoa, Northern Mariana Islands or other territories or possessions of the United States, the income from which obligations states are prohibited from taxing by the laws of the United States; and

(b) the mutual fund, unit investment trust or simple trust provides to the investor an annual statement of the income, by source, which was distributed to the individual investor.

(2) Only that amount of income may be deducted which is shown on the statement as flowing through to the investor from obligations of the United States, of the commonwealth of Puerto Rico, of Guam, the Virgin Islands, American Samoa, Northern Mariana Islands or other territories or possessions of the United States or of the state of New Mexico or any of its agencies, institutions, instrumentalities or political subdivisions.

(3) This subsection (3.4.1.10C NMAC) applies to taxable years beginning on or after January 1, 1991.

D. Expenses related to certain investment income.

(1) Because this investment income is exempt from income taxation by New Mexico, expenses of the taxpayer related to the earning of income from investments, directly or through mutual funds, unit investment trusts or simple trusts, in obligations of the United States, obligations of the state of New Mexico or its agencies, institutions, instrumentalities or political subdivisions or obligations of the commonwealth of Puerto Rico or territories or possessions of the United States may not be deducted from net income. To the extent that such expenses have been deducted in determining federal taxable income, the amount must be added back to net income.

(2) Income from investment in state and local bonds is subject to New Mexico income taxation. Expenses of the taxpayer related to the earning of income from investments, directly or through mutual funds, unit investment trusts or simple trusts, in state or local bonds are deductible in determining net income. To the extent that such expenses have not been deducted in determining federal taxable income, these amounts may be subtracted from net income.

(3) This version of this subsection (3.4.1.10D NMAC) applies to taxable years beginning on or after January 1, 1991.

E. Income earned on "state or local bonds".

(1) Not included in the term "state or local bond" is any obligation of the commonwealth of Puerto Rico or of territories or possessions of the United States the income from which New Mexico is prohibited from taxing by the laws of the United States.

(2) For taxable years beginning on or after January 1, 1991, income from investing in any state or local bond, as that term is defined in Section 7-2A-2 NMSA 1978, is includable in base income.

(3) Income from investing in state or local bonds is to be included in base income in the year it is actually received without regard to federal tax treatment of the income, except that:

(a) the taxpayer may elect to report this income for New Mexico purposes on an accrual basis; and

(b) income from investing in state or local bonds earned or accrued before the first taxable year beginning on or after January 1, 1991, but which is received after that date is not includable in base income. Income is earned or accrued ratably, by assigning an equal amount of income to each day of the accrual period.

(4) Example 1: A, a New Mexico corporation, purchases a state of California municipal bond in 1992 and receives semi-annual interest payments. A does not elect to report to New Mexico on an accrual basis. All income from this bond is included in base income. This income is included only as the interest payments are received.

(5) Example 2: B, a New Mexico corporation and calendar year filer, purchases a city of Los Angeles municipal bond in 1990. This bond pays interest semi-annually on April 1 and October 1. B does not elect to report to New Mexico on an accrual basis. On April 10, 1991, B receives $1,000 of interest. Since this payment includes interest earned or accrued before January 1, 1991, this income is to be allocated between the period prior to the tax year and the period following December 31, 1990. The income accrual period is 182 days in length (October 1, 1990, through March 31, 1991), of which 90 days are in B's first taxable year beginning on or after January 1, 1991. B's 1991 base income includes $494.51 ($1,000 x 90/182). The remaining $505.49 is not subject to New Mexico corporate income tax.

(6) Example 3: C, a New Mexico corporation and calendar year filer, purchased a city of San Francisco municipal bond on January 1, 1981 for $1,400. C does not elect to report accrued income on this bond for New Mexico corporate income tax purposes. Although this bond pays interest semi-annually, C bought it stripped and at a discount. C has no right to the interest. On January 1, 1995, C receives the bond principal of $5,000. This is C's first and only payment on the bond. Since this payment includes income earned or accrued before January 1, 1991, the income is allocated between the period prior to January 1, 1991, and the period following December 31, 1990. The income accrual period is 5112 days, of which 1461 are after December 31, 1990. C's 1995 base income includes $1,028.87 ((1461/5112) x ($5,000 - $1,400)). The remaining $2,571.13 of income is not subject to New Mexico corporate income tax.

(7) This subsection (3.4.1.10E NMAC) is applicable to taxable years beginning on or after January 1, 1991.

[1/7/92, 6/24/93, 11/17/95, 1/13/96, 1/15/97; 3.4.1.10 NMAC - Rn & A, 3 NMAC 4.1.10, 12/14/00]

3.4.1.11 BASE INCOME FOR FILING AS A SEPARATE CORPORATE ENTITY

A. When a corporation, which is a member of a group of corporations filing a consolidated income tax return for federal income tax purposes, files a New Mexico corporate income and franchise tax return as a separate corporation, that corporation's base income shall be determined by completing a simulated federal corporate income tax return for the separate corporation. In completing the simulated federal return, only the income and expenses of the separate corporation will be allowed. The simulated return shall be prepared as if the corporate entity were filing a federal return as a separate corporation and not as a corporation included in a consolidated return. All provisions of the Internal Revenue Code which would apply to the filing as a separate corporation shall apply to the completion of the simulated return. Procedures and adjustments allowed by the Internal Revenue Code which apply to the filing of a federal consolidated return concerning the elimination of intercompany transactions or the sale or dissolution of one of the corporations within the federal consolidated group shall not be allowed when completing the simulated federal return for New Mexico income tax purposes. Net operating loss carryovers and carrybacks shall be in accordance with Subsections A through E of Section 3.4.1.9 NMAC but in no case shall a net operating loss established for the corporation reporting on a separate corporation basis be excluded from the base income of any other corporation or from the base income reported on any combined or consolidated return for any group of corporations.

B. This section (3.4.1.11 NMAC) applies to taxable years beginning on or after January 1, 1992.

[1/7/92, 1/15/97; 3.4.1.11 NMAC - Rn & A, 3 NMAC 4.1.11, 12/14/00]

3.4.1.12 FOREIGN SOURCE DIVIDENDS

A. Foreign source dividends received by a corporation reporting to New Mexico as a separate entity are wholly or partially excludable from the corporation's base income as follows:

(1) 70% of the dividends included on lines 13 and 14, schedule C, federal form 1120 received from corporations owned less than 20% by the reporting corporation but only if those dividends would have been subject to the 70% deduction under 26 U.S.C. Section 243(a)(1) had the payor of the dividends been a domestic corporation.

(2) 80% of the dividends included on lines 13 and 14, schedule C, federal form 1120 received from corporations owned 20% to 80% by the reporting corporation but only if those dividends would have been subject to the 80% deduction under 26 U.S.C. Section 243(c) had the payor of the dividends been a domestic corporation.

(3) 100% of the dividends included on lines 13 and 14, schedule C, federal form 1120 received from corporations owned more than 80% by the reporting corporation but only if those dividends would have been subject to the 100% deduction under 26 U.S.C. Section 243(a)(3) had the payor of the dividends been a domestic corporation.

B. The exclusion of foreign source dividends set forth in Section 3.4.1.12 NMAC applies only so long as New Mexico's method of taxing foreign source dividends is unconstitutional.

C. Section 3.4.1.12 NMAC applies to taxable years beginning on or after January 1, 1997.

[5/31/98; 3.4.1.12 NMAC - Rn & A, 3 NMAC 4.1.12, 12/14/00]

HISTORY OF 3.4.1 NMAC:

Pre-NMAC History: The material in this part was derived from that previously files with the State Records Center:

R.D.-C.I.T. Regulations 14:1, 14:2, Regulations Pertaining to Corporate Supported Child Care; Credits Allowed Corporation Income Tax Act Section 7-24A-14 NMSA 1978, filed 10/16/84.

R.D.-C.I.T. Regulation 8.6:1, 8.6:2, 8.6:3, Regulations Pertaining to the Corporate Income Tax Act Section 7-2A-8.6 NMSA 1978, filed 5/17/85.

R.D.-C.I.T. Regulations 8:1/8:2, Regulation Pertaining to Separate Accounting Defined Corporation Income Tax Act Section 7-2A-8 NMSA 1978, filed 5/12/86.

R.D.-C.I.T. Regulation 5.1:1/2, Regulation Pertaining to Corporation Income Tax Act Section 7-2A-5.1 NMSA 1978, filed 11/18/86.

R.D.-C.I.T. Regulation 9.1:1, Regulation Pertaining to Corporation Income Tax Act Section 7-2A-9.1 NMSA 1978, filed 11/18/86.

C.I.T. Regulation 9:2, Regulation Pertaining to Reporting Methods for the Corporation Income Tax Act Section 7-2A-9 NMSA 1978, filed 6/2/87.

TRD Rule 2A-88, Regulations Pertaining to the Corporate Income and Franchise Tax Act (Sections 7-2A-1 to 7-2A-13), filed 9/16/88.

TRD Rule CIT-91, Regulations Pertaining to the Corporate Income and Franchise Tax Act 7-2A-1 to 7-2A-14 NMSA 1978, filed 1/7/92.

History of Repealed Material: [RESERVED]

NMAC History:

3 NMAC 4.1, Corporate Income Taxes - General Provisions, filed 12/31/96.

3.4.1 NMAC, Corporate Income Taxes - General Provisions, filed 12/1/2000.