Background
Hologic and its affiliates filed New Hampshire business-profits-tax returns as a water’s-edge combined group. In an amended fiscal-year 2017 return, the group sought a refund by carrying back a capital loss incurred by parent Hologic in fiscal year 2020, largely from the sale of Cynosure, to offset a 2017 capital gain earned by affiliate Gen-Probe from the sale of its blood-screening division.
The Department of Revenue Administration rejected the carryback, concluding that a group member’s capital loss could offset only that same member’s capital gains. After the DRA affirmed its assessment, the superior court ruled for Hologic, holding that the statute permitted the cross-member offset and that certain DRA rules requiring separate computation of gross business profits conflicted with the statute.
The Court’s Holding
The New Hampshire Supreme Court reversed. Under RSA chapter 77-A’s water’s-edge method, each member of a combined group must first determine its own net income under Internal Revenue Code concepts, including the treatment of capital gains and losses, before those net incomes are added to produce the group’s combined net income. Therefore, a member’s capital loss carryback may offset only that member’s own capital gains.
The court held that RSA 77-A:6, IV is a reporting and tax-imposition provision, not a command to treat all group members as a single taxpayer at every stage of calculating income. It also rejected Hologic’s state uniformity and federal Commerce and Due Process Clause challenges, explaining that each business organization receives the same ability to offset its own capital gains and that the statutory apportionment process—not the pre-apportionment calculation of combined net income—addresses the relationship between tax and in-state activity. The court also reversed the ruling invalidating Rev 302.09 and 302.10.
Key Takeaways
- Water’s-edge combined-group members must calculate net income separately before combining their income for New Hampshire tax purposes.
- A capital loss carryback from one affiliate cannot reduce another affiliate’s capital gain.
- RSA 77-A:6, IV does not override the calculation method established in RSA 77-A:1 and RSA 77-A:2-b.
Why It Matters
The decision confirms a member-by-member limitation on capital-loss carrybacks in New Hampshire water’s-edge combined reporting. Multistate corporate groups cannot use a parent’s or affiliate’s capital loss to offset another group member’s gain when determining combined net income.
The ruling also reinforces that constitutional concerns over whether a unitary business’s income is fairly tied to New Hampshire activity generally concern apportionment, including the available statutory mechanism for seeking alternative apportionment, rather than cross-member netting at the tax-base calculation stage.