What does Virginia Ruling of the Tax Commissioner P.D. 21-27 conclude about Net Operating Loss (NOL) : NOL Deduction (NOLD) - Election to Forego Carryback?

Subject

Net Operating Loss (NOL) : NOL Deduction (NOLD) - Election to Forego Carryback

Plain-English summary

A corporation (the "Taxpayer") filed federal returns as part of a consolidated group but filed separate Virginia corporate income tax returns. In 2012 the Taxpayer had a net operating loss (NOL) that it carried forward and used as a net operating loss deduction (NOLD) against its federal taxable income for 2013 through 2016. The Virginia Department of Taxation disagreed with that approach: it concluded the Taxpayer had never properly elected to forego the standard two-year carryback rule for the 2012 NOL, so the Department instead carried the loss back two years, used it up entirely in 2013, and issued Virginia corporate income tax assessments for 2015 and 2016 (years that, under the Department's approach, no longer had the NOL available to offset income).

The Taxpayer appealed, arguing it had, in fact, satisfied Virginia's regulatory requirements for forgoing the carryback.

The Tax Commissioner sided with the Taxpayer. Virginia's own income tax law does not separately address the NOLD; instead Va. Code § 58.1-301 conforms Virginia terminology to the Internal Revenue Code, and because Virginia taxable income starts from federal taxable income, Virginia allows a NOLD to the same extent it is allowable federally under IRC § 172. Under Title 23 VAC 10-120-325 B 2, a taxpayer must file a statement with its Virginia return for the loss year "in the same manner as prescribed by federal law and regulations" to elect out of the carryback, and the Department has long required that statement to be attached to the original Virginia return for the loss year.

For a member of a federal consolidated group, Treas. Reg. § 1.1502-21(b)(3) normally requires a separate election statement to waive the entire carryback period; a corporation filing its own separate federal return, by contrast, only has to check a box on federal Schedule K. Here, the Taxpayer attached a separate pro forma federal return to its 2012 Virginia return and checked the "forego carryback" box on that pro forma return's Schedule K -- but it did not attach a distinct statement to the Virginia return itself. The Commissioner found this was enough anyway: in an earlier ruling, P.D. 87-78 (2/27/1987), the Department had treated a similar pro forma federal return attached to a Virginia return as itself constituting the election to forego carryback. Because the checked box on the Taxpayer's pro forma return showed the same intent the Department had already accepted in P.D. 87-78, the Commissioner held the Taxpayer had made a valid election. The case was remanded to the auditor to carry the 2012 NOL forward (not back), and the 2015 and 2016 assessments were ordered adjusted accordingly.

What this means for you

Corporations in a federal consolidated group filing separate Virginia returns

If your federal group elects to waive an NOL carryback, do not assume that checking the Schedule K box alone will satisfy Virginia's separate documentation expectations -- the Department's stated rule under Title 23 VAC 10-120-325 B 2 is that a statement electing to forego carryback must be attached to the original Virginia return for the loss year. This ruling shows the Department can still honor a pro forma federal return with the box checked as sufficient evidence of intent, but that outcome depended on a specific prior precedent (P.D. 87-78) and the Taxpayer having attached that pro forma return to its Virginia filing. The safer practice is to also attach an explicit statement to your Virginia return in the loss year.

Accountants and tax professionals advising on NOL carryback elections

The Department reiterated that it "has consistently held" a carryback-waiver statement must accompany the original Virginia return for the loss year, citing P.D. 88-106 (5/12/1988), P.D. 93-83 (3/26/1993), and P.D. 05-47 (4/6/2005). Whether a substitute document (like a checked box on a pro forma federal return) will suffice appears to be evaluated case-by-case against whether it shows the same intent as documents accepted in past rulings -- it is not a guaranteed substitute for a clear written election statement.

Businesses correcting a Virginia NOL carryback dispute on audit

This ruling illustrates one path to relief: if the Department auditor applied a mandatory carryback you intended to forego, you can appeal under Va. Code § 58.1-1821 and point to whatever documentation you filed with your original Virginia return (even if imperfect) to show your election intent, drawing on how the Department has treated similar documentation in the past.

Common questions

Q: What did the Department originally do to the Taxpayer's 2012 NOL?
A: The Department concluded the Taxpayer had not properly elected to forego the two-year carryback, so it carried the 2012 NOL back two years, fully used it up in the 2013 taxable year, and assessed Virginia corporate income tax for 2015 and 2016 because the NOL was no longer available to offset those years.

Q: What did the Taxpayer actually attach to its returns?
A: The Taxpayer attached a separate pro forma federal return to its 2012 Virginia corporate income tax return and checked the box on that pro forma return's federal Schedule K indicating it would forgo the two-year carryback. It did not attach a separate statement to the Virginia return itself.

Q: Why did the Commissioner rule in the Taxpayer's favor despite no separate Virginia statement?
A: The Commissioner relied on an earlier ruling, P.D. 87-78 (2/27/1987), where a similar pro forma federal return attached to a Virginia return was treated as the election to forego carryback. Because the Taxpayer's checked Schedule K box on its pro forma return showed the same intent as the taxpayer's return in P.D. 87-78, the Commissioner found a valid election had been made.

Q: What is the difference between the election rules for consolidated versus separate federal filers?
A: Under Treas. Reg. § 1.1502-21(b)(3), a corporation that files as part of a federal consolidated group and wants to waive the entire carryback period must attach a statement to its return for the election to be valid. A corporation filing its own separate federal return does not need to attach that statement -- it only needs to check the box on federal Schedule K.

Q: What happened to the assessments after this ruling?
A: The case was remanded to the auditor so the 2012 NOL would be carried forward (not back), and the corporate income tax assessments issued for the taxable years ended December 31, 2015 and 2016 were to be adjusted in accordance with the determination.

Citations and references

Statutes:

• Va. Code § 58.1-301 (Virginia's conformity to the Internal Revenue Code)
• IRC § 172 (net operating loss deduction, including carryback and carryforward periods)
• Title 23 VAC 10-120-325 B 2 (requirement to file a statement electing to forego the NOL carryback, in the same manner as prescribed by federal law and regulations)
• Treas. Reg. § 1.1502-21(b)(3) (consolidated-return requirement to attach a statement waiving the entire carryback period)

Related Department rulings cited in the text: P.D. 87-78 (2/27/1987), P.D. 88-106 (5/12/1988), P.D. 93-83 (3/26/1993), and P.D. 05-47 (4/6/2005).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-27

Original ruling text

March 2, 2021

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 assessment issued to * (the “Taxpayer”) for the taxable years ended December 31, 2015 and 2016.

FACTS

The Taxpayer and its affiliates filed consolidated federal and separate Virginia corporate income tax returns for the taxable years at issue. The Taxpayer reported a separate net operating loss (NOL) in the 2012 taxable year that it carried forward and utilized to claim a net operating loss deduction (NOLD) against its federal taxable income (FTI) for the 2013 through 2016 taxable years. The Department concluded that the Taxpayer had failed to properly make an election to forgo the two year carryback rule for the NOL incurred in 2012. As such, it carried the NOL back two years then forward, fully utilizing the loss in the 2013 taxable year and assessments of Virginia corporate income tax were issued for the 2015 and 2016 taxable years. The Taxpayer appeals the assessments contending that it satisfied Virginia’s regulatory requirements for forgoing the two-year carryback 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 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 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 “ . . . in the same manner as prescribed by federal law and regulations.” 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).

For the 2012 taxable year, Treas. Reg. § 1.1502-21(b)(3) requires taxpayers that file a consolidated federal return and elects to waive the entire carryback period must attach a statement to its return in order for the election to be valid. Corporations filing a separate federal return are not required to attach this statement. Such corporations are merely required to check the box on the Federal Schedule K indicating that it will forgo the carryback period.

While it filed as part of a federal consolidated group, the Taxpayer attached a separate pro forma federal return to its 2012 Virginia corporate income tax return. It checked the box on federal Schedule K indicating that it was forgoing the two year carryback. No statement was attached to the Virginia return indicating that it intended to forego the NOL carryback.

In P.D. 87-78 (2/27/1987), the Department treated a pro forma federal income tax return for the 1983 taxable year that was attached to the Virginia corporate return to be considered the election to forego the NOL carryback period for a loss incurred for the 1982 taxable year. The pro forma return contained the statement that the FTI of the separate company less the federal NOL carryover from the prior taxable year equaled the adjusted FTI on a separate company basis. In this case, the box checked on the pro forma federal return demonstrated to the Department the same intent to forego the carryback as had the return provide by the taxpayer in P.D. 87-78.

Therefore, the Taxpayer has made an election to forego the two year carryback as required by Title 23 VAC 10-120-325 B 2. Accordingly, the case will be remanded back to the auditor in order for the NOL incurred during the 2012 taxable year be carried forward. The assessments issued for the taxable years ended December 31, 2015 and 2016 will be adjusted in accordance with this determination.

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/3506.B

Related Documents

87-78

88-106

93-83

05-47