Document Number
14-34
Tax Type
Individual Income Tax
Description
Taxpayers computed their NOL carrybacks and carryovers without regard to any Virginia NOLD modifications.
Topic
Computation of Tax
Federal Conformity
Records/Returns/Payments
Date Issued
03-10-2014

March 10, 2014



Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek the correction of the individual income tax assessment issued to your clients, ***** (the "Taxpayers"), for the taxable year ended December 31, 2010.

FACTS


The Taxpayers incurred a net operating loss (NOL) in the 2008 taxable year. For federal income tax purposes, the Taxpayers carried back the 2008 net operating loss deduction (NOLD) to the 2004 taxable year. Because Virginia does not conform to this federal five-year NOLD carryback rule, the Taxpayers carried back the 2008 NOLD to the 2006 taxable year. The entire amount of the NOLD was not used in 2006 and the remainder was carried over. The Taxpayers also incurred NOLs in 2007 and 2009. As such, the Taxpayers carried the 2008 NOLD forward to the 2010 taxable year.

In computing the amount of federal adjusted gross income (FAGI) reported on their 2010 Virginia individual income tax return, the Taxpayers made adjustments for the 2008 NOLD. Because the 2008 NOLD had already been completely used for federal income tax purposes, the Taxpayers did not report the corresponding NOLD carryover in computing the FAGI reported on their federal return.

Under audit, the Department adjusted the Virginia return to match the amount of FAGI reported on the federal return and issued an assessment. The Taxpayers appealed, contending that the return properly accounted for the amount of the 2008 NOLD that carried forward for Virginia income tax purposes.

DETERMINATION


Net Operating Loss Deduction

Virginia income tax laws do not address the computation or application of NOLDs. Nonetheless, Va. Code § 58.1-301 provides 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), with certain exceptions, unless a different meaning is clearly required. For individual income tax purposes, Virginia generally conforms to federal law in that it starts the computation of Virginia taxable income with FAGI.

Generally, IRC § 172(b)(1)(A) permits NOLs to be carried back two years and carried forward 20 years from the year of loss. Taxpayers may, however, elect to forego the NOL carryback pursuant to IRC § 172(b)(3). Unless such an election is made, the NOL must first be carried back to the earliest of the carryback years. The resulting NOLD, to the extent it exceeds taxable income for the taxable year to which it is carried, is carried forward to the next earliest taxable year in chronological order until it is completely absorbed.

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-110-84, Virginia allows federal NOLDs to the extent that they are included in computing FAGI. Generally, an NOLD cannot exceed the amount of the FAGI for the taxable year to which it is carried. As such, the FAGI reported on a Virginia income tax return cannot be less than zero for a taxable year in which a taxpayer is claiming an NOLD.

Further, under one of the conformity exceptions, Virginia does not allow the five-year carryback period permitted under IRC § 172(b)(1)(H). See Va. Code § 58.1-301 B 2. Accordingly, a taxpayer must report the difference between the amount of the NOLD claimed on a federal income tax return and the amount usable for Virginia income tax purposes as a fixed date conformity adjustment. A separate schedule should be attached to the Virginia return to reconcile the amount of the NOLD used to the amount of the NOL carried over.

Contrary to Virginia policy, the Taxpayers subtracted the entire amount of the NOLD directly from FAGI on their 2010 Virginia return, resulting in a negative balance. Further, because the Taxpayers carried back the NOLD five years for federal income tax purposes, the usable amount of the 2008 NOLD should have been reported as a fixed date conformity subtraction. Accordingly, the Department properly adjusted the Taxpayers' return to match the amount of FAGI reported on the 2010 federal return.

According to the evidence provided, however, the Taxpayers are entitled to carry over a portion of the 2008 NOLD to offset 2010 FAGI. The amount of the 2008 NOLD that can used in the 2010 taxable year would be limited to the amount permitted under Treas. Reg. §1.172-5 and reported as a fixed date conformity subtraction. A separate schedule should be maintained and attached to the Virginia return in order reconcile the amount of the NOLD used to the amount of the NOL carried over.

Virginia Modifications

In addition, under Title 23 VAC 10-110-82 and 10-110-83, certain Virginia NOLD modifications must be made to any item that is a component of the federal NOLD. The net result of these modifications, which relates to the loss year, follows the federal NOL to the taxable year in which the loss is utilized. The Virginia NOLD modification applies in the same proportion as the amount of NOLD that is used. Title 23 VAC 10-110-83 contains examples of how to calculate Virginia NOLD modifications and includes model worksheets.

The amount of Virginia NOLD modifications to be applied to the carryback or carryforward year must be reported on the Virginia return corresponding to such carryback or carryforward year as a separate Virginia addition to, or subtraction from, FAGI, as the case may be. Taxpayers report the applicable amount of the Virginia NOLD modification as an addition or subtraction on Virginia Schedule ADJ (Form 760-ADJ). In addition, taxpayers should attach a worksheet to the return showing the computation used to calculate such amount. In this case, it appears that the Taxpayers computed their NOL carrybacks and carryovers without regard to any Virginia NOLD modifications.

Based on this determination, the Taxpayers must amend their 2010 Virginia return, ensuring that the appropriate schedules and worksheets are attached. The amended return should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. Upon receipt, the return will be reviewed and processed, and the assessment will be adjusted as warranted. If the return is not received within the time provided, the assessment will be adjusted based on the information available and collection action will resume.

In addition, the Taxpayers should re-evaluate any returns on which they reported a NOLD and file amended returns as appropriate. The Code of Virginia section and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

            • Craig M. Burns
              Tax Commissioner


AR/1-5488773533.M

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46