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