05-47 | Virginia Tax

Tax Type

Individual Income Tax

Description

Federal election to carry the NOL forward instead of carrying the NOLD back

Topic

Clarification

Date Issued

04-06-2005

April 6, 2005

Re: § 58.1-1824 Protective Claim: Individual Income Tax

Dear *****:

This will respond to your letter in which you file a protective claim for refund of Virginia individual income tax paid by ***** (the "Taxpayers"), for the taxable year ended December 31, 1999.

FACTS

The Taxpayers moved to Virginia in 1999 from the ***** ("State A"). The Taxpayers reported a net operating loss ("NOL") on their 2000 federal individual income tax return. For federal tax purposes, the loss was carried back to the 1998 taxable year. After the net operating loss deduction ("NOLD") was disallowed on the Taxpayers' 1998 amended State A income tax return, the Taxpayers amended their 1999 Virginia individual income tax return to reflect the loss carry back from the 1998 federal return.

The Department disallowed the NOLD on the Taxpayers' 1999 amended Virginia individual income tax return because Virginia requires that any allowable NOL must be carried back to the same year as it was claimed for federal purposes. The Taxpayers filed a protective claim for refund, claiming that the Department improperly disallowed the NOLD. The Taxpayers contend that the Department's disallowance of the NOLD on the 1999 Virginia return discriminates against taxpayers who move into Virginia from another state. The Taxpayers request that the Department accept the NOLD claimed on the Taxpayers' 1999 Virginia income tax return as filed and issue a refund.

DETERMINATION

Pursuant to the authority granted the Tax Commissioner by Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, your request has been treated as an appeal under Va. Code § 58.1-1821.

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in they Internal Revenue Code ("IRC"), unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI"). As such, Virginia allows federal NOLDs to the extent that they are included in computing FAGI. See Public Document ("P.D.") 92-133, 8/4/92.

The Taxpayers assert that the Department has allowed a corporation to claim a NOLD on the Virginia corporate income tax return that had been carried back to a different taxable year for federal income tax purposes. See P.D. 99-242 (8/27/99). In that case, the corporation was a division of a parent corporation and was included in the parent's federal consolidated return. The corporation filed a separate Virginia income tax return.

The allowance of the NOLD in P.D. 99-242 was contingent on the corporation following federal rules for a separately filing corporation. The NOLD was properly carried back on the federal consolidated return pursuant to IRC § 172. Likewise, the NOLD was appropriately carried back and then forward on the corporation's separate Virginia income tax return in accordance with the IRC. Under this ruling, the Department required the NOLD to be utilized to the extent it was included in computing federal taxable income. Because the corporation was included in a consolidated group for federal income tax purposes and filed separately for Virginia income tax purposes, the federal rules applied differently. As such, the Department was not permitting the corporation to utilize the NOLD in a different manner for state and federal income tax purposes. Instead, the difference in the utilization of the NOLD resulted from the differences in the way the corporation was required to report its federal taxable income to the federal government and the Department.

The Taxpayers should have started their computation of Virginia taxable income with the same FAGI as reported on their federal income tax return for all of the years at issue. Because the NOL was not carried back to 1999 on the Taxpayers' federal income tax return, the Department correctly disallowed the NOLD claimed on the Taxpayers' 1999 Virginia individual income tax return.

The Taxpayers further contend that the Department's policy discriminates against taxpayers that move into Virginia. I disagree. Under Virginia's structure, NOLDs are consistently allowed to the extent included in computing federal taxable income for the taxable year. In the Taxpayers' case, the NOLD must be carried back to a period prior to their residing in Virginia. If the situation were reversed and the Taxpayers moved out of Virginia, they could carry back an NOLD generated while they are residents of another state, including State A, to their Virginia individual income tax return. Likewise, a taxpayer that moves into Virginia may use a NOLD carried forward from a taxable year prior to becoming a resident of Virginia. This policy, consistently applied, does not discriminate against residents or nonresidents of Virginia.

The Taxpayers further state that they were required to carryback the NOLD to their 1998 federal income tax return, but could not do so in Virginia because they were not residents at the time. Again, I disagree. The Taxpayers were not required to carry back the NOLD to their 1998 taxable year. IRC § 172 permits taxpayers to waive the NOL carryback provisions and elect to carry the NOL forward. The election to forego the carryback is made by filing the required statement with the federal return. The same treatment would be required in order to determine Virginia taxable income. See P.D. 88-106 (5/12/88) and P.D. 93-83 (3/26/93). The Taxpayers could have made a federal election to carry the NOL forward instead of carrying the NOLD back to the 1998 taxable year.

Because the NOL for the 2000 taxable year was carried back to the 1998 taxable year for federal income tax purposes, the Taxpayers may not claim a NOLD from the 2000 taxable year on their 1999 Virginia individual income tax return. Accordingly, your request for refund is denied.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions regarding this determination, please contact in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/53598E

Rulings of the Tax Commissioner