Could a corporation carry 2004-05 net operating losses forward without attaching Virginia elections, or offset later assessments after refund deadlines expired?

Plain-English summary

Virginia upheld the assessments because the corporation did not timely elect to forgo carrying its 2004 and 2005 losses back. Virginia required an election statement with the original state return for each loss year. The taxpayer's later filing history did not replace that formal election.

Without the elections, the auditor properly disallowed the loss carryforwards claimed in 2006 and 2007. By then, the taxpayer was outside the three-year period for amending the earlier returns and claiming the refunds that carrybacks could have produced.

Virginia also rejected equitable recoupment. The taxpayer originally had a statutory avenue for relief but did not act before the limitations period expired, and the Department lacked authority to allow a late refund or credit.

What this means for you

• Attach the required Virginia statement when electing out of an NOL carryback.
• Do not rely on filing behavior to imply a formal election.
• Calendar refund and amended-return deadlines independently of an audit.
• Equitable arguments generally do not extend a clear statutory deadline.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-1823.
• IRC § 172; Treas. Reg. § 301.9100-2T.
• 23 VAC 10-120-325 B 2.
• P.D. 88-106 (May 12, 1988); P.D. 93-83 (Mar. 26, 1993); P.D. 05-47 (Apr. 6, 2005).
• Commonwealth v. Holland, 211 Va. 530, 178 S.E.2d 506 (1971).

Subject

Taxpayer failed to act within the statute of limitations.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-111

Original ruling text

June 17, 2011

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2006 and 2007. I apologize for the delay in the Department's response.

FACTS

The Taxpayer and its affiliates were audited for the 2006 and 2007 taxable years. Numerous adjustments were made, resulting in assessments of additional corporate income tax and interest. The Taxpayer agreed to all of the adjustments except for the disallowance of net operating loss deductions (NOLDs) carried forward from the 2004 and 2005 taxable years.

The auditor concluded that the Taxpayer had failed to properly make an election to forgo the two-year carryback rule for the net operating losses (NOLs) incurred in 2004 and 2005. The Taxpayer is now barred by the statute of limitations from filing amended returns for the taxable years to which the NOLDs could have been carried back.

The Taxpayer appeals the audit results, contending the Department's auditor misapplied federal and state regulations and the Taxpayer made a proper election by its actions. In the alternative, the Taxpayer seeks an equitable resolution to this matter by permitting a credit against the audit assessments for the amount of the refund the Taxpayer would have received if it had carried the NOLDs back.

DETERMINATION

Net Operating Loss Carryback

In general, Virginia income tax laws do not address the NOLD. Nonetheless, Va. Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), unless a different meaning is clearly required. Because the starting point in computing Virginia taxable income is federal taxable income, Virginia allows a NOLD to the extent that it is allowable in computing federal taxable income (FTI). For the taxable year at issue, IRC § 172 specifies that a NOLD can be carried to the two taxable years prior to and the 20 taxable years subsequent to the taxable year in which the loss is incurred.

Under IRC § 172(b)(3) and Treas. Reg. § 301.9100-2T, a taxpayer is entitled to relinquish the carryback period by including a statement with the federal return or amended return. Under Title 23 of the Virginia Administrative Code (VAC) 10-120-325 B 2, taxpayers are required to file a statement with the Virginia return for the taxable year in which the NOL occurred. The Taxpayer contends that the purpose of this election is to commit a taxpayer to forgo the carryback period, so that the taxpayer cannot file an amended return to redistribute the NOLD to prior years. It argues that the Taxpayer's filing history clearly demonstrates that it had no intent to file amended returns and redistribute the NOLDs.

I disagree with this interpretation. Title 23 VAC 10-120-325 permits an election to forgo the carryback of an NOL independent of any federal election provided the taxpayer files its federal and Virginia returns on a different basis. Thus, Virginia's requirement that a taxpayer file a statement with the Virginia return in order to make the election would not be subject to the interpretation of a similar federal regulation. Further, the Department has consistently held that a statement must be attached to the original Virginia return for the taxable year in which the NOL was incurred. See Public Document (P.D.) 88-106 (5/12/1988), P.D. 93-83 (3/26/1993) and P.D. 05-47 (4/6/2005).

In this case, the Taxpayer did not indicate anywhere on its 2004 and 2005 Virginia tax returns that it intended to elect to forgo the carryback of the NOLDs incurred in those taxable years. As such, the auditor properly disallowed the NOLDs in 2006 and 2007.

Equitable Recoupment

The Taxpayer proposes that, should the Department rule that the election was not made, permitting a credit against the audit assessment for the amount of the overpayment of tax that would have resulted if the Taxpayer had carried the NOLDs back would result in an equitable resolution.

The Taxpayer's proposal amounts to a form of equitable recoupment. The Department has addressed the doctrine of equitable recoupment in P.D. 94-312 (10/12/1994). The Department found that the Virginia Supreme Court set the standard for equitable recoupment in Virginia when it stated, "It is well settled that the common law continues in force in Virginia except as altered by statute." See Commonwealth v. Holland , 211 Va. 530, 178 S.E.2d 506 (1971).

Equitable recoupment is not applicable to this situation. When the Taxpayer's 2004 and 2005 returns were filed, Virginia's requirements regarding NOLDs had been clearly articulated in a regulation and a number of published rulings. At the time the returns were filed, Virginia statutes did not bar the Taxpayer from filing amended returns and claiming a refund for the appropriate taxable years. It was only after the expiration of the three-year statute of limitations for the 2004 and 2005 taxable years that the Taxpayer was barred from claiming a refund. The Taxpayer had an avenue for relief, but failed to act within the statute of limitations.

The Department must rely on the clear language of Va. Code § 58.1-1823. Based on the law, the Department does not have the authority to permit a refund more than three years after the due dates of the returns on which the NOLs were reported. The Taxpayer's request to have a refund of income taxes overpaid for the 2003 taxable year applied against the audit assessments must be denied.

Accordingly, the assessments for the 2006 and 2007 taxable years are upheld. A bill with updated interest will be issued to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, you may contact at **.

The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Appeals and Rulings Division at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4536523861.B