Rulings of the Tax Commissioner

February 28, 2024

Re:     § 58.1-1821 Application: Corporate Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the assessment of corporate income tax issued to and paid by ***** (the “Taxpayer”) for the taxable year ended March 31, 2018.  I apologize for the delay in responding to your appeal.  

FACTS

On its federal income tax returns, the Taxpayer reported net operating losses (NOLs) for taxable years ended March 31, 2013, 2014, 2015, and 2017.  After carrying over net operating loss deductions (NOLDs) for the taxable years ended March 31, 2012 and 2016, it carried the remaining 2015 NOLD forward to offset federal taxable income (FTI) for the taxable year ended March 31, 2018.  

As a result of fixed date conformity modifications to FTI, the Taxpayer had positive Virginia taxable income (VTI) for the taxable years ended March 31, 2015 and 2017.  Under review, the Department adjusted the NOLD carryover to offset the Taxpayer’s Virginia FTI for the 2014 and 2016 taxable years and reduced the amount available to carryover to the taxable year ended March 31, 2018.  As a result, an assessment was issued.

The Taxpayer appealed the assessment, contending that no NOLD should have been utilized in 2014 and 2016 taxable years because they reported federal net operating losses (NOLs).  In addition, the Taxpayer asserts that the Department could not apply an unused NOLD carryforward to a year which was beyond the limitations period for claiming a refund.  

DETERMINATION

Net Operating Loss Computation

Generally, Virginia income tax law does not address the NOLD.  Nonetheless, Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required.  Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia.  For corporate income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with FTI.  Because Virginia starts its computation of corporate income tax with FTI, the Department allows an NOLD to the extent it is allowable in computing FTI as calculated for Virginia income tax purposes.  

Title 23 of the Virginia Administrative Code (VAC) 10-120-100 B 5 provides the methodology for a corporation to use to calculate NOLD carrybacks and carryforwards for purposes of Virginia’s corporate income tax.  Under this regulation, a Virginia NOLD modification must be determined for the taxable year in which an NOL occurred.  This Virginia NOLD modification must be carried back and forward in the same manner as the NOLD.  

Although they are reported on a schedule of adjustments (currently, Form 500 Schedule ADJ), fixed date conformity additions (FDCA) and subtractions (FDCS) are not considered Virginia modifications.  Rather, these exceptions identified in Virginia Code  § 58.1-301 are added to or subtracted from FTI as computed under the IRC in order to determine a corporation’s FTI for Virginia income tax purposes.  See Public Document (P.D.) 18-126 (6/26/2018).  A corporation’s Virginia FTI is calculated by starting with FTI as reported on the federal income tax return, adding the FDCA, and then subtracting any FDCS.  The formula for determining Virginia FTI would be as follows:

FTI + FDCA - FDCS = Virginia FTI

For Virginia income tax purposes, a corporation will have an NOL only if the formula results in a number that is less than zero.  If FDCA exceeds the total of a loss reported on a federal return plus FDCS, the corporation will not have an NOL for federal income tax rules as conformed to by the Code of Virginia.  Conversely, if FDCS exceeds FTI plus FDCA, the taxpayer will have an NOL for Virginia income tax purposes even if it does not report an NOL on its federal return.  Such an NOL can be carried back and forward in accordance with the rules established under IRC § 172, except for the five-year carryback allowed under IRC § 172(b)(1)(H).  See Virginia Code § 58.1-301 B 2.  

Citing 23 VAC 10-120-100 B 5 (i), the Taxpayer contends that Virginia’s conformity to the IRC means that it could not claim a NOLD on any Virginia tax return for a taxable year in which it could not claim an NOLD on its federal return.  Specifically, the Taxpayer cites the portion of the regulation that states “Virginia law has no provision for a [NOLD].  Therefore, a NOLD is allowable for Virginia purposes only to the extent the NOLD is allowed as a deduction in computing [FTI].” 

Conformity, however, is limited to terms used in the Virginia income tax statutes that have the same meaning as those used in the IRC.  See P.D. 99-99 (5/6/1999).  Consistent with this authority, Virginia has chosen not to conform to certain provisions of the IRC for the purposes of computing Virginia corporate income tax.  As stated above, fixed date conformity additions and subtractions are exceptions to the IRC that may result in a FTI for Virginia income tax purposes that is different than the FTI reported a federal income tax return.  

When considered in context, the regulation cited by the Taxpayer is not intended to limit the NOLD only to years that it had a positive FTI reported on its federal income tax return.  The figure that ultimately represents the FTI reported for Virginia income tax purposes reflects a certain limited number of provisions of the IRC to which Virginia expressly does not conform. The regulation simply stands for the proposition that NOLDs may be carried forward or backward against such FTI in the same manner that federal law allows.  See P.D. 16-22(3/8/2016).

In this case, the Taxpayer’s federally reported NOLs had to be adjusted by its FDCAs and FDCSs resulting in net positive Virginia FTI for the taxable years ended March 31, 2015 and 2017.  As such, no NOLD for these taxable years was eligible to be carried forward and used to offset the Taxpayer’s FTI for the taxable year ended March 31, 2018.  Therefore, previous Virginia FTI NOLs would be required to be carried over to the 2014 and 2016 returns before they could be used for the 2017 taxable year.

NOLDs must be taken by taxable year in sequential order to the extent that a taxpayer has positive FTI.  See IRC § 172 and Treas. Reg. § 1.172-4(b)(1).  In this respect, the manner in which the Department applied the NOLD for Virginia income tax purposes was no different than how a corporation would be required to claim a NOLD for federal income tax purposes.  

Unclaimed Deductions

Citing Internal Revenue Service (IRS) Revenue Ruling (Rev. Rul.) 81-88 (1981-1 C.B. 585), the Taxpayer contends that it cannot be required to take an unclaimed deduction in a taxable year that is outside of the statute of limitations for refunds and therefore, the Department was not permitted to reduce the NOLD claimed for the taxable year ended March 31, 2018, by applying an unclaimed NOLD to the taxable year ended March 31, 2015.  

In Rev. Rul. 81-88, the issue involved an unclaimed deduction unrelated to the NOLDs at issue.  The unclaimed deduction was outside of the statute of for the taxpayer to have filed an amended return to claim a refund as to that deduction.  For purposes of applying the NOLD carryback, the IRS cited a special rule with respect to NOLD carrybacks in Treas. Reg. 301.6511(d)-2(a)(3) which provided that an adjustment for a NOLD that is not barred by the statute of limitations should be the first adjustment made where there are barred items as well in the claim for refund.  As such, for the purpose of determining the amount of overpayment as a result of the carryback, the IRS ruled that the unclaimed deduction could not reduce the amount FTI against which an NOLD carry forward was applied.

The ruling, however, also stated that special rules of Treas. Reg. § 301.6511(d)-2(a)(3) do not apply when the amount of an NOLD may be carried from a closed year forward.  Rather, the amount of the NOLD carryover must be determined under the usual rules set forth in IRC § 172.  Thus, in the second example given in the ruling, the taxpayer was permitted to include an amount of an unclaimed deduction that fully exceeded the taxpayer’s FTI in a prior taxable year outside the statute of limitations for a refund for purposes of accurately computing the NOLD carryforward from that year.       

In the present case, the Department reduced the NOLD claimed on the Taxpayer’s Virginia return for the taxable year ended March 31, 2018, by the amount of the NOLD carryforward that the Taxpayer should have claimed on prior Virginia returns but did not because these actions involved adjusting the computation of an NOLD carryforward.  Unlike the taxpayer in Rev. Rul. 81-88, the Department’s determination of  the NOLD carryforwards is consistent with the IRS’s determination of the carryforward amounts in the second example in Rev. Rul. 81-88.

In addition, Virginia Code § 58.1-1812, with certain exceptions, generally mandates the issuance of tax assessments within three years from the date the tax became due.  In order to determine the correct FTI for a taxable year, however, the Department has found it proper to examine NOLDs for taxable years outside the limitations period and make positive or negative adjustments to these amounts as appropriate.  See P.D. 94-154 (5/23/1994).  Such adjustments do not constitute assessments prohibited by Virginia Code § 58.1-1812.  As such, the Department was allowed to alter NOLDs for taxable years that may already have been outside the limitations period for issuing assessments in order to carryforward accurate NOLDs to subsequent taxable years.  

Accordingly, the Department properly adjusted the remaining NOLD carryover the Taxpayer could claim for the taxable year ended March 31, 2018, and the assessment is upheld.  Because a balance of interest remains, the Taxpayer will receive an updated bill.  The Taxpayer should remit the balance due within 30 days of the bill date to avoid possible collections actions.

The Code of Virginia sections, regulation and public documents 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/4218.B