State Tax Ruling

Plain-English summary

This ruling resolves a dispute over whether a corporation had to file a separate Virginia statement to forgo the two-year carryback of a net operating loss (NOL). The taxpayer filed separate (non-consolidated) federal and Virginia corporate income tax returns and reported NOLs in 2013 and 2014, which it carried forward and deducted against income in 2015 and 2016. On audit, the Department concluded the taxpayer had never properly elected to skip the two-year carryback, so the Department carried the losses back to 2012 instead, fully absorbing them there and creating an assessment for 2015 and 2016. The taxpayer paid the assessment and then filed a refund claim, arguing no separate election was required.

The Tax Commissioner agreed with the taxpayer. Virginia generally follows federal law on the NOL deduction because Va. Code § 58.1-301 ties Virginia's tax terminology to the Internal Revenue Code, and Virginia taxable income starts from federal taxable income. Under IRC § 172, an NOL could be carried back two years or forward twenty. Virginia's own regulation, Title 23 VAC 10-120-325 B 2, only requires a corporation to file a separate statement forgoing the carryback for Virginia purposes when an affiliated group files its Virginia and federal returns on a different basis (for example, a federal consolidated return that includes companies not subject to Virginia tax). That separate-statement requirement exists specifically to cover situations where the group's Virginia and federal NOL positions could diverge.

Here, the taxpayer was not part of any affiliated group for either federal or Virginia purposes, so the regulation's separate-election requirement did not apply to it at all. Because the taxpayer's federal and Virginia returns were filed on the same (separate-company) basis, it was simply bound by the election it had already made on its federal return under IRC § 172(b)(3) to forgo the two-year carryback. No additional Virginia paperwork was needed.

Based on that determination, the Commissioner remanded the case to the auditor to recompute the NOL carryforwards consistent with the ruling, and directed that refunds, with applicable interest, be issued for the 2015 and 2016 taxable years once the adjustment was made.

What this means for you

Business owners and corporations without affiliated groups

If your corporation files separate (non-consolidated) federal and Virginia returns and is not part of an affiliated group, you generally do not need to file a separate Virginia statement to forgo an NOL carryback -- your federal election under IRC § 172(b)(3) carries over automatically because your Virginia and federal filings are on the same basis.

Affiliated groups and consolidated filers

If you are part of an affiliated group that files its federal return on a different basis than its Virginia return (e.g., a federal consolidated return that includes non-Virginia-taxable members), Title 23 VAC 10-120-325 B 2 still requires you to attach a separate statement to your Virginia return for the loss year to forgo the carryback -- this ruling does not eliminate that requirement for groups in that position.

Accountants and tax professionals

When advising on Virginia NOL carryback elections, first confirm whether the client is part of an affiliated group and whether its Virginia and federal returns are filed on the same or a different basis; that threshold question determines whether a separate Virginia statement under Title 23 VAC 10-120-325 B 2 is even required, per this ruling and the prior determinations it cites (P.D. 88-106, P.D. 93-83, and P.D. 11-57).

Common questions

Q: Does every corporation need to file a separate Virginia statement to forgo an NOL carryback?
A: No. Per this ruling, the separate-statement requirement in Title 23 VAC 10-120-325 B 2 only applies to a corporation or affiliated group that files its Virginia and federal returns on a different basis. A standalone corporation filing separate returns for both is bound by its federal election alone.

Q: What happened to the taxpayer's assessment in this case?
A: The Department had assessed additional 2015 and 2016 corporate income tax after carrying the NOLs back to 2012. The Commissioner determined this was incorrect, remanded the matter to the auditor to recompute the NOL carryforwards, and ordered refunds with interest for 2015 and 2016 once adjusted.

Q: Why does Virginia look to federal tax law for NOL treatment?
A: Virginia income tax law does not independently address the NOL deduction. Under Va. Code § 58.1-301, Virginia terms and computations generally follow the Internal Revenue Code, and Virginia taxable income starts from federal taxable income, so Virginia allows an NOL deduction to the extent it is allowed federally under IRC § 172.

Q: Does this ruling change the rule for affiliated groups?
A: No. The Commissioner reaffirmed that affiliated groups filing Virginia and federal returns on a different basis still must attach a statement to the Virginia return for the loss year to elect out of the carryback, consistent with prior rulings P.D. 88-106, P.D. 93-83, and P.D. 11-57.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-301 (Virginia terms follow IRC meaning unless otherwise required)
• Va. Code § 58.1-1821 (application for correction of erroneous assessment)
• Title 23 VAC 10-120-325 B 2 (Virginia election to forgo NOL carryback)
• IRC § 172 (federal NOL carryback/carryforward periods)
• IRC § 172(b)(3) (federal election to forgo carryback)

Related Virginia public documents cited in the ruling:

• P.D. 88-106 (5/12/1988)
• P.D. 93-83 (3/26/1993)
• P.D. 11-57 (4/12/2011)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-184

Original ruling text

November 10, 2020

Re: § 58.1 1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek a refund of the corporate income tax paid by * (the “Taxpayer”) for the taxable years ended December 31, 2015 and 2016.

FACTS

The Taxpayer filed separate federal and Virginia corporate income tax returns for the taxable years at issue. It reported net operating losses (NOLs) in the 2013 and 2014 taxable years that it carried forward and utilized to claim a net operating loss deduction (NOLD) against federal taxable income (FTI) for the 2015 and 2016 taxable years. The Department audited the Taxpayer and concluded that it had failed to properly make an election to forgo the two year carryback rule for the NOLs incurred in 2013 and 2014. As such, it carried the NOL back two years fully utilizing the loss in the 2012 taxable year resulting in the assessment of Virginia corporate income tax for the 2015 and 2016 taxable years. The Taxpayer paid the assessments and appealed contending that it was not required to elect to forego the carry-back rule.

DETERMINATION

In general, Virginia income tax laws do not address the NOLD. Nonetheless, Virginia 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 FTI. For the taxable years 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.

Title 23 of the Virginia Administrative Code (VAC) 10 120 325 B 2 provides that:

A corporation or an affiliated group of corporations may elect to forgo carryback of a net operating loss or net capital loss for Virginia purposes independent of any such election for federal purposes if, and only if, the affiliated group files its Virginia and federal returns on a different basis, or files a federal consolidated return including corporations which are not subject to Virginia income tax. The election for Virginia purposes shall be made by filing a statement with the Virginia return for the loss year in the same manner as prescribed by federal law and regulations

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. 11-57 (4/12/2011). Title 23 VAC 10-120-325 B 2 allows a corporation or group of corporations to forgo the requirement of carrying back an NOL if the affiliated group files its Virginia returns on a different basis or the affiliated group includes corporations that are not subject to Virginia income tax. As such, the affiliated group must file returns on a different basis from federal filings in order to be eligible to make a separate Virginia election.

In this case, the Taxpayer was not part of an affiliated group for federal or Virginia tax purposes. Title 23 VAC 10-120-325 B 2 only applies in circumstances when there is an affiliated group filing returns on a different basis or corporations not subject to Virginia income tax because it is possible for there to be an NOL for Virginia, but not federal tax purposes or vice versa. Therefore, because the returns will be filed on a different basis for federal and Virginia income tax purposes, a statement is required to inform the Department of a taxpayer’s forgoing of the carryback. No statement is required for taxpayers without affiliates because Virginia and federal returns must both be filed on a separate basis.

The Taxpayer elected to relinquish the two year carryback period for the 2013 and 2014 NOLs it reported for federal income tax purposes under IRC § 172(b)(3). Under Virginia Code § 58.1 301, the Taxpayer is bound by the federal election because the filing status for both federal and Virginia purposes were the same. As such, the Taxpayer was not required to attach a statement electing to forego the carryback of the NOLs from the 2013 and 2014 taxable years for Virginia income tax purposes.

Accordingly, the case will be remanded back to the auditor to adjust the NOL carryforwards in accordance with this determination. Once the adjustments are made, refunds, with additional refund interest, as warranted will then be issued for the 2015 and 2016 taxable years.

The Code of Virginia sections, regulations 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/3436.B

Related Documents

88-106

93-83

11-57

11-111

18-115