November 10, 2020
Re: § 58.1 1821 Application: Corporate Income Tax
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.
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.
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 *****.
Craig M. Burns