Tax Type
Corporation Income Tax
Description
Taxable income; Modifications to federal taxable income; Net operating losses of subsidiary
Topic
Computation of Income
Date Issued
08-27-1999
August 27, 1999
Dear *****
This will respond to your letter in which you make application for correction of assessments of corporate income tax for the taxable years ended March 31, 1995 and 1996 to ***** (the "Taxpayer'). I apologize for the delay in responding.
FACTS
The Taxpayer was a division of its parent corporation (the "Parent') until April, 1989 at which time it was incorporated as a separate subsidiary corporation. For the taxable years ended March 31, 1991 and 1992, the Taxpayer sustained net operating losses ("NOLs'). For federal tax purposes, these NOLs were carried back to the taxable years ended March 31, 1988 and 1989 of the Parent and to the March 31, 1990 return of the Taxpayer. For Virginia tax purposes, these same NOLs were carried back to the taxable year ended March 31, 1990 and forward to March 31, 1994 and 1995, respectively, of the Taxpayer.
On audit, the NOLs carried forward were disallowed and additional tax was assessed. The Taxpayer protests these adjustments contending that it could not carryback the NOLs to the taxable years ended before March 31, 1990, because it did not exist.
DETERMINATION
Virginia income tax laws do not address net operating loss deductions (NOLD's). However, because the starting point in computing Virginia taxable income is federal taxable income, Virginia allows NOLD's to the extent that they are allowable in computing federal taxable income.
When federal and Virginia income tax returns are prepared on a different basis, federal taxable income must be computed for Virginia tax purposes as if the federal income tax return was filed on the same basis as the Virginia income tax return (including NOLD's). In computing federal taxable income for Virginia purposes, NOLD's are allowable only if, and to the extent that, they are allowable for federal income tax purposes, or would be allowable if like returns were to be filed.
Because the Taxpayer files a consolidated federal income tax return with the Parent, the NOLD's in question could be carried back and offset income on the taxable years ended March 31, 1988 and 1989 when the Taxpayer was a division of the Parent. However, in as much as the Taxpayer files a separate Virginia return, the NOLD's could not carried back to these years because the Taxpayer did not have any federal taxable income on a separate company basis for the taxable years ended March 31, 1988 and 1989. As such, the auditor incorrectly disallowed the NOLD's carried forward on the Taxpayer's Virginia returns for the taxable years ended March 31, 1994 and 1995.
The audit assessments have been adjusted to allow the correct amount of the NOLD's to be carried forward. Refunds will be issued in due course. Worksheets showing the proper method for computing the NOLD carry forwards are enclosed. If you have any questions regarding these computations, please contact ***** of the Office of Tax Policy at *****.
Dear *****
This will respond to your letter in which you make application for correction of assessments of corporate income tax for the taxable years ended March 31, 1995 and 1996 to ***** (the "Taxpayer'). I apologize for the delay in responding.
FACTS
The Taxpayer was a division of its parent corporation (the "Parent') until April, 1989 at which time it was incorporated as a separate subsidiary corporation. For the taxable years ended March 31, 1991 and 1992, the Taxpayer sustained net operating losses ("NOLs'). For federal tax purposes, these NOLs were carried back to the taxable years ended March 31, 1988 and 1989 of the Parent and to the March 31, 1990 return of the Taxpayer. For Virginia tax purposes, these same NOLs were carried back to the taxable year ended March 31, 1990 and forward to March 31, 1994 and 1995, respectively, of the Taxpayer.
On audit, the NOLs carried forward were disallowed and additional tax was assessed. The Taxpayer protests these adjustments contending that it could not carryback the NOLs to the taxable years ended before March 31, 1990, because it did not exist.
DETERMINATION
Virginia income tax laws do not address net operating loss deductions (NOLD's). However, because the starting point in computing Virginia taxable income is federal taxable income, Virginia allows NOLD's to the extent that they are allowable in computing federal taxable income.
When federal and Virginia income tax returns are prepared on a different basis, federal taxable income must be computed for Virginia tax purposes as if the federal income tax return was filed on the same basis as the Virginia income tax return (including NOLD's). In computing federal taxable income for Virginia purposes, NOLD's are allowable only if, and to the extent that, they are allowable for federal income tax purposes, or would be allowable if like returns were to be filed.
Because the Taxpayer files a consolidated federal income tax return with the Parent, the NOLD's in question could be carried back and offset income on the taxable years ended March 31, 1988 and 1989 when the Taxpayer was a division of the Parent. However, in as much as the Taxpayer files a separate Virginia return, the NOLD's could not carried back to these years because the Taxpayer did not have any federal taxable income on a separate company basis for the taxable years ended March 31, 1988 and 1989. As such, the auditor incorrectly disallowed the NOLD's carried forward on the Taxpayer's Virginia returns for the taxable years ended March 31, 1994 and 1995.
The audit assessments have been adjusted to allow the correct amount of the NOLD's to be carried forward. Refunds will be issued in due course. Worksheets showing the proper method for computing the NOLD carry forwards are enclosed. If you have any questions regarding these computations, please contact ***** of the Office of Tax Policy at *****.
Rulings of the Tax Commissioner