Document Number
Tax Type
Corporation Income Tax
Combined return; Net operating loss deduction
Subtractions and Exclusions
Date Issued
October 31, 1988

Re: Request for Ruling; Corporation Income Tax
§58.1-442 Combined Return


This is in response to your letter of August 23, 1988, and a conference held on August 31, 1988 concerning various issues in preparing a combined return.

The taxpayer is an affiliated group of corporations which file a consolidated federal return on a calendar year. Some of the affiliates are required by law to apportion income using a single factor while others use the statutory three factor formula. In prior years the corporations required to use a single factor filed a consolidated Virginia return while the other corporations were included in a combined Virginia return.

During 1987 a series of reorganizations occurred with the result that all of the single factor corporations were merged into one of the affiliates by August 31, 1987. Therefore, beginning September 1, 1987, there is only one affiliate required to use the single factor. You ask several questions which relate to the final consolidated return, subsequent combined returns and how net operating loss deductions accumulated by both groups are applied in subsequent combined returns.
The Final Consolidated Return

There have been no changes in the taxable year of any corporation for federal or Virginia purposes. If separate federal returns were filed then a short year return would have been required for each corporation as it ceased to exist, but the surviving corporation would still have a 12/31/87 year end. Therefore, a final consolidated return must be filed for the taxable year ended 12/31/87 which will include the income and expenses of all of the other single factor corporations from January 1, 1987, until each ceased to exist.

For taxable years beginning on and after January 1, 1988, there is no group of two or more affiliates required to use the single apportionment factor so a consolidated return can no longer be filed. The separate return for the surviving single factor corporation is eligible for, and must be included in, the combined return.
Net Operating Loss Deductions

There has been no Virginia net operating loss deduction (NOLD) since 1971. Beginning with 1972, when Virginia adopted federal taxable income as the starting point in computing a corporation's Virginia taxable income, a taxpayer can claim a NOLD only to the extent it is allowable in computing federal taxable income. When federal and Virginia returns are prepared on a different basis, then the federal taxable income (including NOLD) must be computed for Virginia purposes as if the federal return were filed on the same basis as the Virginia return.

Based on the information provided it appears that if a separate federal return were filed for the surviving single factor corporation it could include the losses of the other single factor corporations in its federal NOLD. Therefore, the surviving single factor corporation may include in its federal taxable income (for Virginia purposes) NOLD based on losses of the other single factor corporations.
Combined Return NOLD

In a combined Virginia return the law specifies that the income or loss, allocable income, and apportionable income must be computed separately for each affiliate before the results are combined on the Virginia return. See §58.1-442. Therefore, in computing federal taxable income for Virginia purposes a NOLD is allowable only if, and to the extent that, it would be allowable
on a separate federal return for each corporation included in the Virginia combined return.

Therefore, your statement that the "combined group had a Virginia net operating loss carryforward at December 31, 1986" is not correct under Virginia law. However, it is possible for one or more individual affiliates included in the Virginia combined return to have a net operating loss carryforward.

One of the earliest policies developed by the department with respect to federal NOLD and Virginia taxable income is that a federal NOLD cannot create or increase a federal net operating loss. Therefore, a federal NOLD cannot reduce federal taxable income below zero for Virginia purposes. This policy has been incorporated into the Corporation Income Tax Regulations promulgated in the Fall of 1984 at VR 630-3-402.

When this long standing policy is applied in the context of a combined Virginia return the results are as follows:
      • In the taxable year that a loss is incurred by one affiliate it may create a negative federal taxable income and offset income, additions and subtractions, allocable income, and apportionable income of other affiliates in a combined Virginia return.
      • NOLD attributable to such a loss may be carried back and forward in computing the separate federal taxable income (for Virginia purposes) of the affiliate which incurred the loss, but such NOLD cannot create a negative federal taxable income which would offset the income of any other affiliate.
Virginia Additions and Subtractions

The issue of Virginia additions and subtractions in a combined return where federal NOLD exists is also relevant.

In late 1971 when the department was implementing the law which allowed all taxpayers to benefit from NOLD via federal taxable income, it was recognized that special policies were required to prevent a taxpayer from receiving a multiple Virginia tax benefit from a single federal loss. One such policy, already mentioned above, prevented a single loss from offsetting Virginia additions and subtractions in every year to which its associated NOLD is carried until absorbed by positive federal income.

A second policy required Virginia additions and subtractions in the year of the loss to follow the associated NOLD in proportion to the NOLD used to offset federal income. For example, if 50% of a 1987 loss is carried back to offset 1984 federal taxable income, then 50% of the 1987 Virginia additions and subtractions must also be carried back to 1984. This policy is also set out in VR 630-3-402.

When the department began granting permission for affiliated groups of corporations to file a combined Virginia return after the 1981 law created the filing status, it was recognized that taxpayers could receive a double Virginia tax benefit. The double benefit occurs because in the year of the loss the negative federal taxable income would offset additions and subtractions of the loss corporation as well as the income, additions, subtractions, allocable income and apportionable income of other affiliates, yet the full amount of the loss would also be carried to other taxable years as a federal NOLD.

Therefore, every letter granting permission to file a combined return contained a condition that such a double tax benefit would not be allowed. The actual mechanism to prevent the double tax benefit was not published until regulation VR 630-3-442.F was promulgated in the Fall of 1984. As can be seen from the regulation, the formula in U. S. Treasury Reg. §1.1502-79 is adapted for the limited purpose of computing the amount of Virginia modifications which follow a federal NOLD.

I trust that this letter answers your questions about how federal NOLD is reported in a combined Virginia return as well as how some of these policies came about. If you need any additional information please let me know.


W. H. Forst
Tax Commissioner

Last Updated 08/25/2014 16:46