Member-Specific Capital Loss Carrybacks in New Hampshire Water’s-Edge Combined Reporting

1. Introduction

This decision arises from a New Hampshire Business Profits Tax audit dispute involving a unitary, water’s-edge combined group headed by Hologic, Inc. The controversy turned on whether New Hampshire’s combined reporting regime permits a combined group to “share” capital losses across affiliates when computing the group’s tax base.

Parties. The plaintiffs were Hologic, Inc. and its subsidiaries (a water’s-edge combined group). The defendants were the Commissioner of the New Hampshire Department of Revenue Administration (DRA) and the DRA.

Factual backdrop. Hologic sought a refund for fiscal year ending (FYE) 2017 by carrying back a long-term capital loss realized in FYE 2020 (largely from Hologic’s sale of a subsidiary, Cynosure) to offset a capital gain realized in FYE 2017 by another group member, Gen-Probe Incorporated (from selling its blood screening division). The DRA disallowed the carryback on the ground that capital losses may offset only gains of the same member that generated the loss.

Procedural path. The DRA Hearings Bureau affirmed the assessment. On de novo appeal (RSA 21-J:28-b, IV), the superior court ruled for the taxpayer, held that the statute allowed cross-member offsetting within the combined group, and further concluded that N.H. Admin. Rules, Rev 302.09(c), (d), and 302.10 conflicted with RSA chapter 77-A. The Supreme Court reversed.

Key issues.

• Statutory: Does RSA chapter 77-A allow one water’s-edge combined group member’s capital loss carryback to offset another member’s capital gain when computing “combined net income”?
• State constitutional: Does prohibiting cross-member loss sharing violate the “just, uniform, equal, and proportional” taxation requirements under Part I, Article 12 and Part II, Articles 5 and 6 of the New Hampshire Constitution?
• Federal constitutional: Does the DRA’s approach violate the Commerce Clause or Due Process Clause by overtaxing extraterritorial value?
• Regulatory: Do Rev 302.09 and 302.10 impermissibly conflict with RSA chapter 77-A?

2. Summary of the Opinion

The Supreme Court held that RSA chapter 77-A’s “water’s edge method” requires a step-by-step computation in which each member first computes its own “net income” as determinable under the Internal Revenue Code (including the Code’s capital loss limitations and carryback rules). Only after that member-level computation are the members’ net incomes added together to form “combined net income.”

Because capital loss carrybacks operate within the computation of a taxpayer’s net income under the Internal Revenue Code, the Court concluded that a capital loss incurred by one member may offset only that member’s own capital gains, not another affiliate’s gains—even in a combined group.

The Court rejected the taxpayer’s state and federal constitutional challenges, emphasizing that the statutory scheme treats all entities similarly at the member level and that any interstate-commerce concerns are addressed through apportionment under RSA 77-A:3 (including the statute’s built-in mechanism for alternative apportionment if the standard formula is distortive).

Finally, because the Court adopted the DRA’s member-level approach, it reversed the superior court’s conclusion that Rev 302.09 and 302.10 conflict with the statute.

3. Analysis

A. Precedents Cited (and Their Influence)

1) Statutory interpretation framework

• Appeal of Town of Salem, 168 N.H. 572 (2016): Cited for de novo review of statutory interpretation. This underwrote the Court’s independent re-reading of RSA chapter 77-A rather than deferring to the trial court’s construction.
• Boucher v. Town of Moultonborough, 176 N.H. 271 (2023): Supplied the interpretive canon to start with plain language, give effect to every word, construe provisions together, avoid absurd results, and read statutes harmoniously within the broader scheme. The Court invoked these canons to resist reading combined reporting as collapsing all member attributes into a single, undifferentiated tax identity.
• Doe v. Attorney General, 175 N.H. 349 (2022): Reinforced the presumption that the legislature does not enact redundant provisions. This canon was central to the Court’s rejection of Hologic’s expansive reading of RSA 77-A:6, IV (because it would render other “single taxpayer” and combined-factor provisions superfluous).

2) Prior New Hampshire combined reporting / apportionment decisions

• Gen. Elec. Co. v. Comm'r, N.H. Dep't of Revenue Admin., 154 N.H. 457 (2006): Used to situate the statutory architecture: combined reporting for unitary businesses and apportionment of multistate income. The Court also later relied on it for the proposition that constitutional apportionment does not require “mathematical exactitude,” only a “rough approximation.”
• Caterpillar Inc. v. N.H. Dep't of Revenue Admin., 144 N.H. 253 (1999): Provided the stepwise description of the water’s-edge process: determine combined net income, compute apportionment percentage, apply additions/deductions and apportionment to reach taxable business profits. This scaffold strongly supported the Court’s view that net income is computed first and aggregated second—leaving no room for cross-member “netting” of capital gains and losses at the aggregation stage.
• Scott & Williams, Inc. v. Board of Taxation, 117 N.H. 189 (1977): Cited for constitutional acceptance of New Hampshire’s three-factor apportionment approach and, importantly, for the statutory safety valve allowing modified apportionment where the standard formula does not fairly reflect in-state activity. The Court used this to rebut Hologic’s Commerce/Due Process argument: if the taxpayer believes the standard apportionment distorts attribution, the statute provides a remedy (RSA 77-A:3, II(a)).
• Baxter Int'l v. State, 140 N.H. 214 (1995): Supported the characterization of RSA 77-A:6 as a reporting/imposition provision rather than the core rule establishing the method of calculating the tax base. This was key to rejecting Hologic’s attempt to use RSA 77-A:6, IV (“impose the tax as though...”) as a gateway for cross-member sharing of capital losses.

3) New Hampshire constitutional tax-uniformity line

• Polonsky v. Town of Bedford, 173 N.H. 226 (2020): Supplied the presumption of constitutionality and “clear and substantial conflict” standard; the burden rests on the challenger.
• Eby v. State, 166 N.H. 321 (2014): Provided the modern synthesis of Part I, Article 12 and Part II, Articles 5 and 6—requiring taxation to be “just, uniform, equal, and proportional,” permitting classification by property kind/use but not owner, and requiring uniformity within a class.
• Opinion of the Justices, 131 N.H. 640 (1989): Quoted for the rule that the legislature may not create a system that results in two classes of taxpayers paying different rates on essentially the same class of property/business income.
• Opinion of the Justices, 132 N.H. 777 (1990): Used twice: (1) to note that exemptions/deductions/credits must be reasonable and uniform in the business profits tax context; and (2) as a contrast case—where the Court had disapproved structures that effectively impose different burdens based on attributes such as employee count or compensation levels.

4) Federal unitary-business and apportionment cases

• MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553 U.S. 16 (2008): Supplied the doctrinal framing that Commerce and Due Process impose “distinct but parallel” limits and that a state may tax an apportioned sum of a unitary multistate business. The Court relied on this to explain why the taxpayer’s complaint about “out-of-state gain” is addressed by apportionment.
• South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018) and Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977): Cited for the Complete Auto test, particularly the “fairly apportioned” and “fairly related” requirements; they anchored the Court’s conclusion that New Hampshire’s apportionment framework is the relevant constitutional control point.
• Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980): Invoked by the taxpayer for the “rational relationship” limitation; the Court distinguished the taxpayer’s argument by emphasizing the separation between the pre-apportionment tax base computation and the apportionment step.
• Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983): Cited for describing three-factor apportionment as a “benchmark,” reinforcing the Court’s comfort that the constitutional inquiry is satisfied through apportionment rather than through cross-member loss sharing at the tax base stage.

5) Persuasive authority on loss setoffs as deductions

• Somerset Tel. Co. v. State Tax Assessor, 259 A.3d 97 (Me. 2021): Cited for the proposition that setoff of gain with a carryover loss effectively functions as a “deduction from income,” helping the Court analyze the state constitutional uniformity challenge within the familiar framework for exemptions/deductions.

6) Appellate practice / addressing unruled issues

• In the Matter of Sheys & Blackburn, 168 N.H. 35 (2015): Used to justify the Supreme Court’s choice to decide constitutional issues “in the first instance” because they were purely legal and there was only one correct outcome as a matter of law.

B. Legal Reasoning

1) The Court’s step-by-step reading of RSA chapter 77-A

The Court treated the dispute as one of statutory “sequencing” embedded in the water’s-edge combined reporting method:

• Step 1 — member-level net income under the Internal Revenue Code. The statute defines “Combined net income” as “the revenues less expenses as would be determinable under the provisions of the Internal Revenue Code . . . for all business organizations conducting a unitary business” (RSA 77-A:1, XIII). The Court read “for all business organizations” as pointing to separate computations for each organization, consistent with the water’s-edge method’s direction that taxable business profits are determined “by adding their combined net income” (RSA 77-A:1, XVI). The verb “adding” did heavy interpretive work: adding implies multiple pre-existing member-level figures.
• Step 2 — aggregation into combined net income. After each member’s net income is determined, those net incomes are added together to obtain the group’s combined net income.
• Step 3 — additions/deductions and apportionment. The resulting figure is adjusted under RSA 77-A:4 and apportioned under RSA 77-A:3 to determine taxable business profits (RSA 77-A:1, XVI; discussed via Caterpillar Inc.).

2) Why capital loss carrybacks cannot be “shared” across members

Capital loss limitations and carrybacks are part of determining a taxpayer’s net income under federal law (the Court cited 26 U.S.C. § 165(f) and 26 U.S.C. §§ 1211(a), 1212(a)(1)). Because RSA 77-A:1, XIII incorporates “net income as would be determinable” under the Internal Revenue Code, the Court located capital loss carryback accounting within Step 1—before aggregation. Once the Court anchored the carryback in member-level computation, the doctrinal conclusion followed: a carryback reduces only the income of the entity that incurred the capital loss and is computing its own net income under the Code.

3) The rejection of RSA 77-A:6, IV as a “single taxpayer for all purposes” command

The superior court (and Hologic) leaned on RSA 77-A:6, IV, which authorizes the commissioner to impose the tax “as though the entire combined net income ... was that of one business organization.” The Supreme Court rejected the idea that this language rewrites the tax-base computation rules:

• Textual correction. The Court noted the trial court misquoted RSA 77-A:6, IV as containing “as one business organization,” which it does not.
• Singular/plural usage is not dispositive. The Court relied on RSA 21:3 to explain that singular words can extend to several persons or things; thus, “income” does not imply a single-entity tax base.
• Avoiding surplusage. Reading RSA 77-A:6, IV as a universal single-taxpayer rule would make explicit “combined group” and “single taxpayer” language elsewhere redundant—particularly RSA 77-A:3, III (combined apportionment factors of the unitary business group) and RSA 77-A:5, XIII(c) (unitary business considered a single taxpayer for purposes of claiming a research and development tax credit).
• Role in the statutory scheme. Relying on Baxter Int'l v. State, the Court treated RSA 77-A:6, IV primarily as an imposition/reporting and administrative-adjustment provision that operates after the tax base is computed under RSA 77-A:1 and RSA 77-A:2-b.

4) State constitutional uniformity analysis

Hologic argued the DRA’s approach taxes similarly situated business income differently based on filing posture (standalone vs combined group), because a standalone corporation can use capital losses up to capital gains, while a combined group purportedly cannot “at the group level.”

The Court reframed the comparison: under the DRA’s approach, each member—whether it files alone or is part of a combined group—may set off its own capital losses against its own capital gains in the same manner. That symmetry satisfied the substantial equality and within-class uniformity requirements discussed in Opinion of the Justices, 132 N.H. 777 (1990). The Court also distinguished cases in which a tax benefit turns on employer size or wage structure (non-uniform owner-based classification concerns), concluding the scheme here is not preferential to particular types of owners.

5) Federal Commerce and Due Process analysis

Hologic emphasized that Gen-Probe’s gain was tied to activity outside New Hampshire, while Hologic’s loss had New Hampshire nexus, and argued that denying the offset produces a tax out of proportion to in-state activity.

The Court held this criticism targets the wrong stage of the computation. Under the “unitary business principle” (as described in MeadWestvaco Corp. v. Illinois Dept. of Revenue), New Hampshire may include out-of-state value in the pre-apportionment base so long as it taxes only an apportioned share. The relevant constitutional safeguard is apportionment (RSA 77-A:3), which the Court noted has been repeatedly approved (including via Container Corp. of America v. Franchise Tax Bd. and New Hampshire’s own Scott & Williams, Inc. v. Board of Taxation). The Court also emphasized the statutory mechanism for alternative apportionment (RSA 77-A:3, II(a)) and observed the record did not show that Hologic petitioned for modification.

C. Impact

1) Practical consequences for combined groups

• No cross-member capital loss carrybacks. Combined groups cannot use a parent’s (or affiliate’s) capital loss carryback to reduce another member’s historic capital gains when computing combined net income.
• Member-level integrity of federal capital-loss rules. By pegging the computation to “net income as would be determinable” under the Internal Revenue Code at the member level, the decision discourages “group netting” strategies that treat the combined group as a single federal taxpayer for capital transactions.
• Greater relevance of entity structuring and transaction placement. Which legal entity sells an asset (and realizes gain or loss) matters for New Hampshire BPT purposes even within a unitary combined group.

2) Litigation and administrative effects

• Reinforces Rev 302.09 and 302.10. The Court’s holding supports the DRA’s regulatory insistence on separate member computations for gross business profits/net income components.
• Channels constitutional complaints into apportionment-modification petitions. Taxpayers arguing distortion between in-state activity and tax liability are pointed toward RSA 77-A:3, II(a) rather than seeking to reconfigure tax-base computation rules.

3) Doctrinal significance in New Hampshire tax law

The opinion clarifies an important boundary in New Hampshire combined reporting: the combined group is not treated as a single taxpayer for all attributes at the tax-base stage. Instead, the “water’s edge method” is an aggregation mechanism built on member-level federal-tax concepts, with “single taxpayer” treatment appearing only where the statute expressly says so (e.g., certain credits) or at the apportionment stage (combined apportionment factors).

4. Complex Concepts Simplified

• Water’s-edge combined group: A set of related corporations doing a “unitary business” where the combined return generally includes domestic members (and certain others) rather than worldwide affiliates.
• Unitary business: Businesses with common ownership and functional integration such that the enterprise is economically interdependent; the state may apportion a share of total unitary income.
• Combined net income vs apportionment: “Combined net income” is the pooled income figure after each member computes its own net income; “apportionment” is the formula step that limits how much of that pooled income New Hampshire may tax.
• Capital loss carryback: A rule (under federal law) letting a corporation apply a net capital loss from a later year against capital gains in earlier years, but only within the same taxpayer; capital losses generally can offset capital gains (26 U.S.C. § 1211(a)) and may be carried back for specified years (26 U.S.C. § 1212(a)(1)).
• Alternative apportionment: A statutory mechanism allowing deviation from the standard apportionment formula when it does not fairly reflect in-state activity (RSA 77-A:3, II(a)).

5. Conclusion

Hologic, Inc. v. Comm'r, N.H. Dep't of Revenue Admin. establishes that New Hampshire’s RSA chapter 77-A requires water’s-edge combined groups to compute net income—including capital loss carrybacks—on a member-by-member basis under the Internal Revenue Code before aggregation. As a result, one member’s capital loss carryback cannot offset another member’s capital gain.

The Court also confirmed that this member-specific approach does not violate New Hampshire’s tax-uniformity provisions or the Federal Commerce and Due Process Clauses, emphasizing that apportionment (and the availability of alternative apportionment) is the constitutional safeguard against taxing extraterritorial value. The decision, finally, validates the DRA’s regulations requiring separate member computations and provides a clear roadmap for how capital transactions must be reflected in combined reporting going forward.