Rulings of the Tax Commissioner

Diane McQ Strickland, Judge, Retired Circuit Court for the County of Roanoke
809 Oakwood Dr. S.W. Circuit Court for the City of Roanoke
Roanoke, Virginia 24015 Circuit Court for the City of Salem

George M. Shanks, Esquire
Linda D. Elliott, Esquire
Miller, Earle & Shanks, PLLC
560 Neff Avenue, Suite 200
Harrisonburg, Virginia 22801

Elizabeth B. Meyers
Assistant Attorney General
900 East Main Street
Richmond, Virginia 23219

Re: Nathan H. Miller and Kimberly H. Miller v. Virginia Department of Taxation CL11001514-00

Dear Counsel,

Enclosed is the Court's opinion in the captioned case. I request that counsel for the Defendant prepare an order embodying the ruling and submit it to counsel for the Plaintiff's for endorsement and presentment to the Court.

By copy of this letter to The Honorable Chaz W. Evans-Haywood, Clerk, I am forwarding the Plaintiffs' tax records and Exhibit 16 which were received in camera. I direct that these documents be filed under seal.

• • • • • • • • Very truly yours,

• • • • • • • • Diane M. Strickland
                Judge Designate

cc: w/enclosure: Hon. Chaz W. Evans-Haywood, Clerk[[{"fid":"469","view_mode":"default","fields":{"format":"default","field_file_image_alt_text[und][0][value]":"note","field_file_image_title_text[und][0][value]":""},"type":"media","attributes":{"height":240,"width":511,"class":"media-element file-default"}}]]


VIRGINIA: IN THE CIRCUIT COURT OF ROCKINGHAM COUNTY

NATHAN H. MILLER and
KIMBERLY H. MILLER,

• • • • Plaintiffs
        OPINION

V. CL11001514-00

VIRGINIA DEPARTMENT OF TAXATION,

• • • • Defendant

On August 26, 2011, Craig M. Burns, Tax Commissioner for the Commonwealth of Virginia, Department of Taxation ruled that the Plaintiffs could not carry a 2008 net operating loss deduction to their 2007 Virginia Income Tax Return. Plaintiffs filed their Complaint pursuant to Section 58.1-1825 of the Code of Virginia, 1950 as amended, challenging the ruling. The Defendant Filed a Demurrer and argument was heard thereon on July, 11, 2012. The Court overruled the Demurrer and the defendant filed its Answer. Evidence was heard and the matter was argued before the Court on September 28, 2012.

On September 30, 2009, Plaintiffs filed a 2008 Net Operating Loss Amendment to their 2006 Virginia Income Tax Return. Thereafter, Plaintiffs' 2008 Federal Tax Returns were audited by the Internal Revenue Service and their net operating loss was reduced. Plaintiffs then submitted a Second Amended Virginia 2006 Tax Return reflecting the revised audited 2008 net operating loss. When the Second Amended Tax Return was processed by the Defendant, no refund was issued. Plaintiffs had claimed credit for taxes paid to Maryland in 2006, and as a result, all taxes paid to Virginia for that year had already been refunded.

Plaintiffs then requested a ruling from the Defendant that they be allowed to apply their 2008 net operating loss to their 2007 Virginia Tax Return. Tax Commissioner Craig M. Burns issued the Defendant's ruling denying the request, based upon the conformity of Virginia income tax laws to the Internal Revenue Code pursuant to Va. Code § 58.1-301 (1950 as amended). Commissioner Burns found that in accordance with provisions of the Internal Revenue Code, Plaintiffs had carried their 2008 net operating loss back to 2006 on their federal return using it to reduce their Adjusted Gross Income. As a result, the Plaintiff's 2006 Virginia tax liability was also reduced. Because the entire net operating loss was claimed on the Plaintiffs 2006 Federal Tax Return, Plaintiffs could not claim the deduction again on their 2007 Federal Tax Return. Accordingly, under the conformity law, there being no independent Virginia provision for claiming net operating loss, the Plaintiffs were also precluded from claiming the deduction on their 2007 Virginia Return. The opinion letter of Commissioner Burns is filed with the Defendant's Demurrer herein.

The standard for this Court's review was confirmed by the Supreme Court of Virginia in LZX Inc. v Virginia Department of Taxation, 269 ha. 105; 606 S.E2d 797 (2005). The Court shall give "great weight" to the interpretation of the tax laws by the Department of Taxation, and its assessment shall be considered "prima facie correct." 269 Va. 109. The burden is placed upon the Plaintiffs to demonstrate that, the determination was "manifest error or in total disregard of controlling evidence."
269 Va. 109. This Court "should not overturn the Department's decision unless the assessment is contrary to law, was an abuse of discretion or was the product of arbitrary, capricious, or unreasonable behavior". 269 Va. 110.

Plaintiffs argue that they received no benefit from Virginia in 2006 for their net operating loss because they had already received a full Virginia tax refund due to the credit claimed for taxes paid to Maryland. Plaintiffs, however, did receive an AGI reduction in 2006 attributable to the net operating loss deduction, and thus reduced AGI was declared for their Virginia return. They maintain, however, that if permitted to carry the deduction to the 2007 Virginia Tax Return, they would receive an additional credit of $58,321. Plaintiffs have submitted a Bureau of National Affairs monograph discussing the background of the net operating loss deduction in support of their position. However, their witness, CPA Richard Yancey acknowledged on cross that the monograph applies only to the Internal Revenue Code provisions, not Virginia law. Mr. Yancey further conceded that he did not know of any provision of Virginia law pertaining to net operating loss, excepting § 58.1-301B(2) of the Code of Virginia, which is not relevant to the issue before this Court.

Plaintiffs contend that Virginia law did not contemplate this situation and that this Court should exercise broad remedial powers pursuant to Harper v Virginia Department of Taxation 250 Va. 184, 462 SE2d 892 (1995). However, the Virginia Supreme Court's guidance in LZX Inc. is clear that this Court must give great weight to the Department's determination and must assume it to be prima facie correct. Plaintiffs evidence falls short of establishing that the ruling of Commissioner Burns, is contrary to the law, or an abuse of discretion, or the product of arbitrary, capricious or unreasonable behavior. Having failed to meet their burden of proof, the Plaintiffs request to apply their 2008 net operating loss to their 2007 Virginia Tax Return must be denied.