March 4, 2026
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ***** :
This will respond 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, 2017.
FACTS
The Taxpayer and its subsidiaries filed consolidated federal and Virginia corporate income tax returns for the 2017 taxable year. The Taxpayer reported a net operating loss (NOL) from prior taxable years that it carried forward and utilized to claim a net operating loss deduction (NOLD) against its federal taxable income (FTI). Under audit, the Department concluded that the Taxpayer had provided insufficient documentation to support its NOL carryforward. The auditor also adjusted the Taxpayer’s federal taxable income for the 2011 through 2017 taxable years to account for capital loss additions and cancellation of debt income that impacted the NOL available for the 2017 taxable year.
In addition, the Taxpayer had characterized one subsidiary (the “Subsidiary”) as a financial corporation for apportionment purposes. The Department determined that the Subsidiary was not a financial corporation and, even if it was a financial corporation, it had not elected to be taxed as a financial corporation. The audit staff adjusted the Subsidiary’s apportionment factors accordingly. Finally, the Department disallowed an amount that the Taxpayer had characterized as nonbusiness income not subject to apportionment.
The Taxpayer submitted an application for correction contending that the adjustments to its NOLD did not properly account for NOLs derived from taxable years that occurred before a bankruptcy reorganization and did not correctly account for certain adjustments to its NOL attributable to cancellation of debt income and capital loss addback. The Taxpayer also contends that the Subsidiary properly apportioned its income as a financial corporation because no election was required. Finally, the Taxpayer argues that it correctly reported its nonbusiness income based on established case law.
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 FTI, Virginia allows a NOLD to the extent that it is allowable in computing FTI.
The NOL at issue was derived from taxable years that preceded the Taxpayer’s bankruptcy reorganization in 2009. The Taxpayer received a private letter ruling from the Internal Revenue Service (IRS) providing, in relevant part, that the Taxpayer would inherit the NOL of the dissolving company as of the reorganization date. It appears that the auditor believed the Taxpayer was only permitted to inherit the NOL of the predecessor company as of the time of its dissolution several years after the 2009 reorganization. However, the PLR is clear that the TP would inherit the NOL as it existed at the time of the reorganization itself. On appeal, the Department has confirmed it was in fact that NOL the Taxpayer began carrying forward.
In addition, the Department erroneously increased the Taxpayer’s FTI for certain taxable years following the reorganization in an attempt to account for cancellation of indebtedness income and capital loss addbacks. With respect to the cancellation of indebtedness income, the Taxpayer had already reduced its NOL carryforward to account for this income, which was again attributable to the later dissolution of the predecessor organization. See IRC § 108. Further, it is unclear on what basis the audit staff added back capital loss deductions.
Finally, the Taxpayer points out several other errors impacting the FTI showing on the Department’s schedule of audit adjustments, namely a NOL for the 2015 taxable year that was not carried forward on the schedule and a federal revenue agent report (RAR) adjustment for the 2016 taxable year that did not occur.
Based on the foregoing, the adjustment to the Taxpayer’s NOLD will be reversed. Because the determination with respect to the NOLD will result in the full abatement of the assessment, the remaining issues are moot.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****.
Sincerely,
Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia
AR/4259.X