December 16, 2015
Re: Net Operating Loss Deductions Arising from Casualty or Theft
Dear *****:
This will reply to your letter appealing the denial of your Taxable Year 2006 amended Virginia return, which was submitted with a net operating loss deduction ("NOLD") carryback.
FACTS
In Taxable Year 2009, you ("the Taxpayer") realized eligible theft losses that qualified as a federal NOLD. The Taxpayer timely filed amended federal and Virginia individual income tax returns for Taxable Years 2006 and 2007, reporting the NOLD carryback.
The Internal Revenue Service ("IRS") initially delayed processing the Taxpayer's amended federal returns pending further examination. After the Taxpayer provided additional information to the IRS, adjustments were made to the amended federal returns and refunds were issued in September, 2011.
Under review, the Department of Taxation ("the Department") denied the Taxpayer's amended Virginia return for Taxable Year 2006 because the carryback period for the Taxpayer's 2009 NOLD exceeded two years. The Taxpayer appealed the Department's determination, asserting that he is entitled to carryback the 2009 NOLD for three years for Virginia income tax purposes because such NOLD arose from theft and Virginia conforms to the federal provision that retains a three-year carryback period for NOLDs arising from casualty or theft.
DETERMINATION
Virginia income tax laws do not address the computation or application of NOLDs. Nonetheless, Va. Code § 58.1-301 provides that the 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 clearly "conforms" to federal income tax law in that it starts the computation of Virginia Taxable Income with federal adjusted gross income ("FAGI").
Under IRC § 172(b)(1)(A), a NOLD generally may be carried back two years and carried forward twenty years. However, under IRC § 172(b)(1)(F), the portion of an individual's NOLD arising from casualty or theft may be carried back three years and carried forward twenty years. Taxpayers may elect to forego the NOLD carryback pursuant to IRC § 172(b)(3). Unless such an election is made, the NOLD 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.
Under one of the exceptions found under Va. Code § 58.1-301, to Virginia's conformity to the IRC, Virginia does not allow the election of three-, four-, and five-year carryback periods for NOLDs generated in Taxable Years 2008 and 2009 permitted under IRC § 172(b)(1)(H). See Va. Code § 58.1-301 B 2. Accordingly, taxpayers who elect an extended carryback period for such NOLDs on their federal income tax returns must adjust their FAGI for Virginia income tax purposes, as if the carryback period for such NOLDs was limited to two years.
With the exception of the federal carryback election permitted under IRC § 172(b)(1)(H), Virginia allows federal NOLDs to be carried back for the same period as is allowed under the IRC. See Title 23 of the Virginia Administrative Code 10-110-84. Thus, in accordance with federal income tax law, Virginia retains the three-year carryback period for the portion of an individual's NOLD arising from casualty or theft.
CONCLUSION
Based on the specific facts of this case, it appears the Taxpayer's NOLD for Taxable Year 2009 arose from theft. Accordingly, the Taxpayer properly carried back the excess NOLD from Taxable Year 2009 to Taxable Year 2006. The Taxpayer's Taxable Year 2006 amended Virginia return should be processed as filed. The Department will process and review the Taxpayer's Taxable Year 2006 amended Virginia return and issue a refund, with applicable interest.
The Code of Virginia sections and regulation cited are available online in the Laws, Rules, and Decisions section of the Department's website, located at www.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner