October 4, 2019
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 year ended December 31, 2015.
FACTS
The Taxpayer and its affiliates filed consolidated federal and separate Virginia corporate income tax returns for the taxable years at issue. The Department audited the Taxpayer and several adjustments were made to the taxable years ended December 31, 2013 through 2015. The Taxpayer contests some of the adjustments, each of which will be addressed separately below.
DETERMINATION
Net Operating Loss Carryback
The Taxpayer reported a separate net operating loss (NOL) in the 2014 taxable year that it carried forward and utilized to claim a net operating loss deduction (NOLD) against its separate federal taxable income (FTI) for the 2015 taxable year. 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 2014. As such, it carried the NOL back two years then forward and fully utilizing the loss in the 2013 taxable year.
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. The Taxpayer contends that both Public Document (P.D.) 87-78 (2/27/1987) and P.D. 93-83 (3/26/1993) permit a taxpayer to forego the notification requirement.
In P.D. 87-78, 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 Taxpayer contends that it filed a pro forma 2015 federal return along with its 2014 Virginia corporate return showing that it elected to forego the NOL carryback. In P.D. 87-78, the pro forma return contained the statement that the federal taxable income 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, while the Taxpayer’s 2015 pro forma federal return showed a carryforward of an NOL from a prior year, it did not contain any statement, such as the one in P.D. 87-78, which can be construed as foregoing the carryback.
The Taxpayer also contends that it was not required to make an election because it could not carryback its 2014 federal NOL since it reported a loss on its 2012 consolidated federal. The Taxpayer asserts that P.D. 93-83 is applicable because the Department determined that a taxpayer could forego the carryback requirement even though no notification was filed. In P.D. 93-83, a taxpayer filed amended returns for the two years prior to its loss year in order to carryback its NOL. It could not file the amended returns because the statute of limitations had passed. As such, the Department allowed the taxpayer to carryforward its NOL if it could either provide a statement allowing it to forego the carryback or show that there was insufficient FTI to against which to carryback the loss.
Pursuant to Title 23 VAC 10-120-100 B 5 v, members of an affiliated group that file a consolidated return and separate Virginia returns must compute FTI and the net operating loss deduction (NOLD) as if each corporation had filed a separate federal return for all the affected years. As such, a taxpayer that files separate Virginia corporate income tax returns must offset its NOL against the FTI on a separate, rather than a consolidated, corporate basis. In this case, the Department’s records show that the Taxpayer had sufficient FTI in the 2012 and 2013 taxable years if it filed separate federal returns. As such, its factual circumstances can clearly be differentiated from those of the corporation in P.D. 93-83.
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 P.D. 88 106 (5/12/1988), P.D. 93 83 and P.D. 05 47 (4/6/2005). Thus, the Taxpayer’s treatment of its 2014 NOL for federal income tax purposes has no bearing on Virginia’s requirement of an election to forego the carryback of an NOL.
NOL Modifications
Title 23 VAC 10-120-100 B 5 provides the methodology that a corporation filing a return on a separate basis must use to calculate the NOLD carrybacks and carryforwards for corporate income tax purposes. Under this regulation, a Virginia NOLD modification must be determined for the taxable year in which an NOL occurred. This Virginia NOLD modification must be carried back and forward in the same manner as the NOLD.
Fixed date conformity additions and subtractions are not considered Virginia modifications. Rather, these exceptions identified in Virginia Code § 58.1-301 are added to or subtracted from FTI as computed under the IRC in order to determine a corporation’s FTI for Virginia income tax purposes. A corporation’s Virginia FTI is calculated by starting with FTI as reported on the federal income tax return, adding the fixed date conformity addition (FDCA), and then subtracting any fixed date conformity subtraction (FDCS). The formula for determining Virginia FTI would be as follows:
FTI + FDCA - FDCS = Virginia FTI
For Virginia income tax purposes, a corporation will have an NOL only if the formula results in a number that is less than zero. If FDCA exceeds the total of a loss reported on a federal return plus FDCS, the corporation will not have an NOL for Virginia income tax purposes. Conversely, if FDCS exceeds FTI plus FDCA, the taxpayer will have NOL for Virginia even if it does not report an NOL on its federal return. Such an NOL can be carried back and forward in accordance with the rules established under IRC § 172, except for the five-year carryback allowed under IRC
§ 172(b)(1)(H). See Virginia Code § 58.1-301 B 2.
The Taxpayer contends that the Department incorrectly calculated the modification carried back from the 2014 taxable year because it removed the fixed date conformity additions and subtractions. The Department’s calculation correctly included the additions and subtractions without the fixed date conformity additions and subtractions. It does, however, include an insubstantial and nonmaterial math error.
Property Factor
Virginia Code § 58.1-409 provides that the property factor consists of the ratio of the average value of a taxpayer’s real and tangible personal property owned or rented and used in Virginia over the like property located everywhere. See Title 23 VAC 10-120-160 through 10-120-180. Under Title 23 VAC 10-120-170 B, the value of property included in the property factor is generally its basis for federal income tax purposes at the time of acquisition and including any subsequent capital additions and improvements or partial dispositions by reason of sale, exchange, or abandonment. The Department was unable to reconcile the amounts reported on a schedule to the amounts reported on the Taxpayer’s 2013 through 2015 federal returns so the denominator was adjusted to the totals reported on the federal schedule. The Taxpayer contends that the Department did not make a complimentary adjustment to the numerator to reflect the Virginia property original cost basis.
At the request of the Department, the Taxpayer has provided additional information purporting to account for the property values reported on its federal income tax returns’ balance sheets and the corresponding property values in Virginia. The Department has not been able to reconcile the property factor with the documentation provided by the Taxpayer.
Payroll Factor
Virginia Code § 58.1 412 provides that the payroll factor is a fraction, the numerator being the total amount of compensation paid or accrued within Virginia during the taxable year by a corporation and the denominator being the total compensation paid or accrued everywhere during the taxable year.
Pursuant to Title 23 VAC 10 120 20, the Department considers the term “employee” to have the same meaning as used in IRC § 3121(b). As such, the Department will accept the gross amounts reported to the IRS on Form W 2, Form W 3, Form 940 or the accounting records of the corporation, provided that all of the employees of the corporation are included in such reports in determining the total compensation in the denominator of the payroll factor. See P.D. 90 91 (6/12/1990).
The Department reduced the denominator of the payroll factor to reflect the amount of salaries and wages and officer compensation reported on the Taxpayer’s 2015 federal return. The Taxpayer contends that the amount reported in the denominator of the payroll factor on its Virginia return reflects the amounts reported to the IRS on Form W-3 and Form 940. The Taxpayer has provided these forms to the Department and additional documentation reconciling the payroll factor reported on its 2015 Virginia return. As such, the denominator of the payroll factor will be adjusted accordingly.
Sales Factor
Virginia Code § 58.1-414 addresses the computation of the sales factor and provides:
the sales factor is a fraction, the numerator of which is the total sales of the corporation in the Commonwealth during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year, to the extent that such sales are used to produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income.
Virginia Code § 58.1-302 defines the term “sales” as the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. The sales factor includes all gross receipts that are included in Virginia taxable income and are connected with the conduct of the taxpayer’s trade or business within the United States only the net gain from the transactions are included. See Title 23 VAC 10-120-210.
The Department adjusted the sales factor denominator for the 2014 and 2015 taxable years by reducing the denominator to reflect the amounts reported on the Taxpayer’s federal return. The Taxpayer contends that the Department used the net proceeds from the sale of ordinary assets rather than gross proceeds when calculating the denominator of the sales factor.
Pursuant to Title 23 VAC 10-120-210, the sales factor includes the net proceeds from the sale of intangible property and the gross proceeds from the sale of tangible property. The Taxpayer has provided documentation showing the net sale price of the settlement of a hedging transaction during the 2015 taxable year. As such, the proceeds of this sale should be included in the denominator of the sales factor. The Taxpayer reported a gain for the 2014 taxable year and a loss for the 2015 taxable year for the sale of ordinary assets.
CONCLUSION
Based on the above analysis, the Department’s adjustments to the Taxpayer’s carryback and carryforward of its NOL are correct. The Taxpayer has provided documentation to show that the amount of its sales and payroll factors were accurately reported on its Virginia corporate income tax returns for the taxable years at issue. The Department was not, however, able to reconcile the Taxpayer’s property factor.
The case will be remanded back to the auditor to reconcile the Taxpayer’s property factor for the taxable years at issue and to adjust the audit in accordance with this determination. Once the adjustments are made, updated bills or refunds will then be issued. The Taxpayer should remit payment of any remaining liability within 30 days of the date of the revised bills to avoid the accrual of additional interest.
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 Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1842.B