Could unused Virginia rental losses create a Virginia-only net operating loss deduction in a later resident year?

Plain-English summary

The taxpayers reported Virginia rental losses on nonresident returns for 2010 through 2012, then tried to subtract the accumulated losses after becoming Virginia residents in 2013. The losses had already been deducted in computing federal adjusted gross income in the earlier years.

Virginia held that it had no separate state net-operating-loss deduction. With no federal NOL deduction entering 2013 federal adjusted gross income, the Virginia-only subtraction was unavailable and the assessment was upheld.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322
• P.D. 92-133 and P.D. 14-47
• Miller & Miller v. Department of Taxation, CL11001514-00

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-39

Original ruling text

March 29, 2018

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 * (the “Taxpayers”) for the taxable year ended December 31, 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, residents of * (State A), filed Virginia nonresident income tax returns for the 2010 through 2012 taxable years. In each case, they reported a loss from operating rental property in Virginia. After they moved to Virginia, the Taxpayers filed a resident return for the 2013 taxable year and subtracted the cumulative losses as a net operating loss deduction (NOLD) in computing their Virginia taxable income. The Department denied the subtraction and issued an assessment, on the basis that the NOLD was not reflected in the Taxpayers' federal adjusted gross income (FAGI) for the 2013 taxable year. The Taxpayers' appealed, contending that the NOLD carried forward on the Virginia return because the losses were not used in prior taxable years to offset any other Virginia taxable income.

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 Virginia 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. Nevertheless, Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Virginia Code § 58.1-322.

Because the starting point in computing Virginia taxable income is FAGI, Virginia allows a NOLD to the extent that it is allowable in computing FAGI. See Title 23 of the Virginia Administrative Code (VAC) 10-110-84. 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).

The Taxpayers incurred losses from operating the Virginia rental property and reported such losses on their Virginia nonresident returns for the 2010 through 2012 taxable years. Because they had no other Virginia source income, the losses were never used to offset other income on those returns. The losses, however, were deducted for the purposes of computing the Taxpayers' FAGI for the 2010 through 2012 taxable years. As such, the losses were not available to reduce the Taxpayers' FAGI for the 2013 taxable year. Instead, the Taxpayers carried the losses forward and subtracted them as a NOLD in computing their Virginia taxable income for the 2013 taxable year. Because of Virginia's conformity to the IRC, however, if no NOLD was permitted for federal income tax purposes for the 2013 taxable year, no NOLD could be claimed on the Virginia income tax return. See P.D. 14-47 (4/2/2014).

The Taxpayers assert that they have not received any prior tax benefit for the losses for Virginia income tax purposes. The Taxpayers also assert that claiming the NOLD for Virginia income tax purposes did not result in a double deduction because it was not used in computing their 2013 FAGI. Regardless whether a taxpayer receives a benefit or not, there is no express authority in the Code of Virginia for a Virginia net operating loss. See P.D. 92-133 (8/4/1992), P.D. 14-47 and Miller & Miller v. Department of Taxation , Circuit Court of Rockingham County, CL11001514-00 (10/2/2012).

Accordingly, the assessment is upheld. The Taxpayers will receive an updated bill, which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the date of the assessment to avoid the accrual of additional interest.

The Code of Virginia sections, regulation 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/1155.M