Tax Type
Individual Income Tax
Description
Taxable income of partners; Unified net operating loss carryback
Topic
Partnerships
Date Issued
12-28-1993
December 28, 1993
Re: Request for Ruling:
Dear***************
This will reply to your letter of June 26, 1992 in which you request a ruling concerning the ability of ***********(the "Taxpayer"), a partnership that files a unified nonresident Virginia return on behalf of its nonresident partners, to amend prior year unified returns in order to carry a unified loss back to prior taxable years at the entity level.
FACTS
Pursuant to Virginia Regulation (VR) 630-4-391(C)(2), in 1988 the Taxpayer obtained permission to file a unified return on behalf of its partners. The Taxpayer earned income from Virginia sources in taxable years 1988 and 1989 and filed a unified return on behalf of its nonresident partners each year.
In taxable year 1990, the Taxpayer incurred a loss from its operations. A portion of this loss was apportioned to Virginia, using the standard apportionment factor for a motor carrier. You have requested permission to amend the 1988 and the 1989 unified returns to offset the income reported to Virginia in such years by the apportioned 1990 loss.
RULING
There is no express authority in the Code of Virginia for a Virginia net operating loss, net operating carryback, or net operating loss carryover. However, the starting point for determining an individual's Virginia taxable income is federal adjusted gross income. The starting point for determining a corporation's Virginia taxable income is federal taxable income. Therefore, the starting point for determining Virginia taxable income is affected by the federal net operating loss deduction. Virginia only allows a net operating loss carryback to a prior taxable year to the extent that such loss has been carried back to such prior year for federal purposes.
Partnerships and S corporations are pass-through entities that file informational federal returns. The partners or shareholders report their respective share of the entity's income or loss on their respective federal returns. Accordingly, there is no federal net operating loss carryback on the entity's federal return.
Had the Taxpayer not filed a unified Virginia return on behalf of its partners, each partner would have been obligated to file separate Virginia returns. In such case each partner would independently determine whether or not a federal net operating loss existed after taking into account gross income and business deductions from all sources, not just partnership income. If a federal net operating loss does exist, each partner files a federal carryback claim where appropriate to carry back the net operating
A partner is only allowed to carry back its share of the partnership's loss to a prior year for Virginia purposes to the extent such loss is carried back for federal purposes. For example, if the partner used the entire loss for federal purposes in the year that the loss was incurred, such partner would only be entitled to offset other Virginia source income in the year that the loss was incurred. The partner would not be entitled to carry back the loss to prior taxable years for Virginia purposes since the loss would not have been carried back for federal purposes.
A unified return is an administrative convenience which allows partners or shareholders to pay their respective Virginia tax at the entity level. The need for filing a separate Virginia return for each partner or shareholder is also eliminated. It does not transform a pass-through entity into a taxable entity, nor does it transfer the tax liability of the underlying partners and shareholders to the entity. It is merely a privilege extended by the department to taxpayers, at the taxpayer's election. The unified return does not decrease the tax liability of any partner or shareholder, nor is it intended to do so. In fact, the tax paid on a unified return will usually be more than the cumulative tax which would be paid if individual Virginia returns were filed. Each entity must decide if the convenience afforded justifies the potential increase in tax.
If a loss incurred on a Virginia unified return is allowed to be carried back and offset against income reported on a unified return from a prior year, the entity and its owners would receive an advantage that could not be achieved if individual Virginia returns had been filed. In effect, a Virginia net operating loss would be created which is clearly not authorized by the Code of Virginia. The privilege of filing a unified return is not intended to create an economic advantage for the entity.
There are also many collateral issues that cannot be ignored. The tax liability paid on the unified return is that of the underlying partners or shareholders, and not that of the entity. Because the ownership of the entity or of the respective shares of the entity may change, there is no guarantee that the loss on a unified return is "attributable" to the same owners who paid tax in a prior year. Also, because of federal at-risk rules, passive loss rules, and basis limitations, there is no way to determine the ability of the underlying partners or shareholders to utilize losses at the entity level. To ignore these federal limitations would be a departure from the conformity to federal taxation upon which Virginia taxation is based. There is no authority for such a departure.
In summary, there is no express authority in the Code of Virginia which would allow a unified net operating loss carryback. To do so would create an economic advantage that separate filers would not enjoy. However, the failure to allow a unified net operating loss carryback does not mean that unified return filers will be denied a tax benefit as a result of their method of filing. The convenience of filing a unified return in lieu of separate returns for each owner will usually result in the loss of certain benefits that could otherwise be obtained through separate returns. This is a choice that taxpayers make at the time of electing a unified return. Accordingly, I find no alternative but to deny your request.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6258M
Rulings of the Tax Commissioner