Could a nonresident carry forward Virginia pass-through losses when no corresponding federal net-operating-loss deduction remained?

Subject

Net Operating Loss

Plain-English summary

Virginia would not create a state-only net-operating-loss carryforward when no corresponding federal deduction remained. The nonresident reported Virginia income from pass-through entities in 2010 and tried to offset it with losses attributed to those entities from earlier years.

The earlier losses had been entirely absorbed by other income on the taxpayer's federal returns. Because no federal NOL deduction carried into 2010, none could be used on the Virginia return.

Virginia starts from federal taxable income and generally allows an NOL deduction only to the extent it is allowed federally. The ruling said Virginia law did not provide an independent Virginia NOL merely because the taxpayer received no practical benefit from the losses in a home state that imposed no individual income tax.

Result: the assessment was upheld.

What this means for you

• Track the owner's federal NOL history, not only losses shown on Virginia pass-through schedules.
• A Virginia-source loss does not automatically remain available for a later Virginia year if federal income absorbed it.
• A home state's lack of individual income tax did not create a separate Virginia benefit.

Common questions

Q: Why did Virginia look to the federal return?
A: Virginia's computation starts with federal taxable income and uses federal meanings unless state law requires otherwise.

Q: Did prior Virginia pass-through losses alone create a carryforward?
A: No. A corresponding federal carryforward had to be available for the year claimed.

Q: What was the outcome?
A: The 2010 assessment remained due, subject to the revised bill and interest terms in the determination.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-325.
• Public Documents 92-133 and 10-168.
• Miller & Miller v. Department of Taxation, Circuit Court of Rockingham County, CL11001514-00 (Oct. 2, 2012).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-47

Original ruling text

April 2, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to your client, * (the "Taxpayer"), for the taxable year ended December 31, 2010.

FACTS

The Taxpayer, a resident of * (State A), filed a Virginia nonresident individual income tax return for the 2010 taxable year and reported income from certain pass-through entities doing business in Virginia. The Taxpayer, however, offset the income by carrying forward net operating loss deductions (NOLDs) attributable to the entities from prior taxable years.

Under audit, the Department disallowed the offset for the NOLDs because no NOLD was reported on the Taxpayer's federal income tax return. As a result, an assessment was issued. The Taxpayer appeals, contending that he will receive no tax benefit from the losses if he is not allowed to carry them forward for Virginia income tax purposes.

DETERMINATION

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as "an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources."

In general, Virginia income tax laws do not address net operating losses. 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, 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. As such, no NOLD can be carried forward to any year without a corresponding carryforward being permitted for federal income tax purposes. See Public Document (P.D.) 10-168 (8/10/2010).

In this case, the Taxpayer carried the NOLDs forward to the 2010 taxable year for Virginia income tax purposes but not for federal income tax purposes. Based on the information provided, it appears the net operating losses (NOLs) reported in previous taxable years were entirely offset by other income reported on the federal income tax return. As such, the Taxpayer could not apply the NOLDs to offset FAGI on his 2010 federal return. Under such circumstances, no NOLD could be claimed on the 2010 Virginia return.

In this case, the Taxpayer claims Virginia should permit the NOLDs because he could not receive a benefit from the NOLDs because he resided in State A, which does not impose an individual income tax. Regardless whether a taxpayer receives a benefit or not, however, there is no express authority in the Code of Virginia for a Virginia net operating loss. See P.D. 92-133 (8/4/1992) and Miller & Miller v. Department of Taxation , Circuit Court of Rockingham County, CL11001514-00 (10/2/2012).

Accordingly, the assessment is upheld. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the revised bill.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5551581366.M