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Delaware’s NOL Limitation Policy Invalidated

Tax Development Dec 15, 2021

Delaware’s NOL Limitation Policy Invalidated

The recent Delaware Supreme Court decision in Director of Revenue v. Verisign, Inc. established that the Division of Revenue’s long-standing policy of limiting a corporate taxpayer’s separate Delaware net operating loss (NOL) to the amount of the federal consolidated NOL was not supported by statute. Unfortunately, this policy has been codified by the Delaware Legislature, effective July 30, 2021 in Code § 1903(a)(2)i.


Delaware law requires corporations to file their corporate income tax returns on a separate company basis, necessitating the preparation of a proforma federal return on a separate company basis when the federal return is filed on a consolidated basis for the group. The Division’s 30-year-plus policy, included in its audit manual, restricts the allowable state NOL to an amount equal to the NOL reported on the federal return. This policy requires a Delaware taxpayer to compute its federal NOL on a separate company basis, then limit the deduction to the amount reported as the federal consolidated NOL of the group. This limitation, however, did not apply when all members of the consolidated group filed a separate Delaware return. 

Verisign, Inc. Facts

During tax years 2005 through 2013, Verisign, Inc. generated $2.89 billion in NOLs on a separate company basis. These NOLs were used on its Delaware separate company corporate income tax returns for 2014 through 2016, reducing taxable income to zero. The federal consolidated income for the affiliated group of Verisign entities for 2015 and 2016 was reported as $39 million and $2 million, respectively. The Division limited the Delaware NOL deductions for the two years to the income reported on a federal consolidated basis.

Delaware Judicial Responses

The case was first heard by the Superior Court of Delaware.1 The court found that the Division’s policy did not violate the U.S. Constitution’s Commerce Clause, in that it did not discriminate against interstate commerce. Instead, the court found that the policy violated the Delaware Constitution’s Uniformity Clause, which states that “(a)ll taxes shall be uniform upon the same class of subjects.” Requiring a taxpayer to use an aggregate NOL deduction was found to be “flatly inconsistent” with the mandate that each taxpayer “shall annually pay a tax…on its taxable income.” [Emphasis added.] In violation of Delaware’s Uniformity Clause, the policy divided taxpayers into two groups: those that filed federal consolidated returns and those that filed separate federal returns. The policy of limiting the NOL was applied only to the first group of taxpayers, thus violating the Uniformity Clause. 

The case was appealed to the Delaware Supreme Court.2 While the Supreme Court found in favor of the taxpayer, it did so on other grounds. The Court found that the Delaware Division of Revenue overstepped its authority in enacting the policy. In the decision, the Court noted that although the policy was in the Division’s internal manual, the Division could not “explain how it got there in the first place.” The policy had been in “in place for at least 30 years and in any event longer than any current employee of the decision can remember.” The Court found that the policy conflicted the plain language for the computation of separate taxable income and was therefore invalid. The Supreme Court did not find it necessary to rule on the constitutionality of the policy, as it held the policy invalid on other grounds. 


Although legislation earlier this year has codified the Division’s policy previously found only in the audit manual, there is no specific effective date of the revised policy other than the enactment date. House Bill 171 does, however, remove the exception for consolidated returns where all members file separately in Delaware. It remains unclear how the Division will apply the NOL limitation for returns filed after the date the bill was signed.

Ryan’s state income tax team is here to assist taxpayers to determine whether amended returns should be filed in previous years and how to calculate current year NOL deductions. 

1 Verisign, Inc. v. Dir. Of Rev., 2020 WL 7640107 (Del. Super. Ct. December 17, 2020).

2 Director of Revenue v. Verisign, Inc., Del. Sup Ct., C.A. No. N19C-08-093 (November 29, 2021).


Mark L. Nachbar

Mary Bernard

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