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In a matter of first impression, the Colorado Court of Appeals (appeals court) held in Anschutz v. Colo. Dept. of Rev., No. 21CA1242 (Colo. Ct. App., Nov. 17, 2022), that individual taxpayers could amend their state income tax return after retroactive changes to federal law made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) reduced their state taxable income for those years.

On March 27, 2020, Congress enacted the CARES Act, which, among other things, suspended the "excess business loss"¹ deduction limits for the 2018-20 tax years. In April 2020, the taxpayers, a married couple filing jointly, amended their 2018 federal and Colorado income tax returns, claiming the entirety of their "excess business losses" and seeking refunds based on the retroactive reduction of their federal and state taxable income. The taxpayers based their claim on Colo. Rev. Stat. Section 39-22-103(5.3), which, for Colorado income tax purposes, defines Colorado's version of the IRC as "the provisions of the [federal IRC], as amended … as the same may become effective at any time or from time to time, for the taxable year."

In June 2020,² the Colorado Department of Revenue (the Department) adopted Emergency Rule Section 39-22-103(5.3), which was replaced with a permanent rule effective September 30, 2020. Under that rule, federal changes enacted after the end of a tax year do not affect a taxpayer's Colorado tax liability for that tax year and those changes are incorporated into Colo. Rev. Stat. Section 39-22-103(5.3) only to the extent they were in effect in the tax year in which they were enacted and prospectively. Citing the Emergency Rule, the Department denied the taxpayers' refund claim. The taxpayers appealed the Department's decision to the district court, which granted the Department's motion to dismiss the case. In so doing, the district court concluded that Colo. Rev. Stat. Section 39-22-103(5.3) was ambiguous, and the Department's interpretation was reasonable and entitled to deference. The taxpayers appealed the ruling.

In reversing the district court's dismissal of the taxpayers' case, the appeals court agreed with the taxpayers' interpretation based on the plain language of the Colorado statutory provision, which it concluded was unambiguous. The appeals court noted that two types of federal statutory provisions make up the definition of IRC in Colo. Rev. Stat. Section 39-22-103(5.3): (1) those found in the IRC "as amended"; and (2) those found elsewhere in the law of the United States, to the extent they relate to federal income tax laws. The appeals court reasoned that the phrase "for the taxable year" modified both provisions without any limitation as to when any amendment is enacted or goes into effect.

With regard to the Department's Emergency Rule, the appeals court declined to defer to it, concluding that the rule was contrary to the statute's plain language. The appeals court also noted that the Colorado legislature's Office of Legislative Legal Services had opined that the Emergency Rule was contrary to the operative statutory language. Finally, the appeals court observed that the legislature can amend the Colorado income tax code to decouple with changes in the IRC, but Colorado law automatically incorporates amendments to the IRC until such amendments become effective.

Implications

The appeals court's decision clarifies that rolling IRC conformity means that Colorado law automatically incorporates amendments to the IRC "for" the tax year enacted, including retroactive changes. Colo. Rev. Stat. Section 39-22-103(5.3) defines IRC conformity for both individual and corporate income taxpayers. Taxpayers affected by this decision should consider amending Colorado income tax returns to seek refunds for any overpayments that may have been made. The statute of limitation for refunds in Colorado is the federal statute of limitations plus one year (i.e., generally four years).

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer Brittenham, legal editor

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ENDNOTES

¹ "Excess business loss" means the excess, if any, of taxpayers' aggregate deductions attributable to their trades or businesses over the sum of their aggregate gross income or gain attributable to those trades or businesses plus $250,000 (or $500,000 for joint filers). See IRC Section 461(l)(3).

² In the same timeframe, the Colorado Legislature enacted Colo. Rev. Stat. Section 39-22-104(3)(I)-(n), which precludes taxpayers from using certain CARES Act provisions in calculating Colorado taxable income for tax years beginning after the enactment of the CARES Act and before January 1, 2021. In 2021, the legislature enacted another amendment beginning in tax year 2021, which allowed taxpayers to subtract up to $300,000 of excess business losses and to carry over up to $150,000 per year in excess business losses from 2021 and over the next four tax years. See Colo. Rev. Stat. Section 39-22-104(4)(z). These provisions did not affect the 2018 tax year at issue.