Tax Type
Individual Income Tax
Description
Net operating loss deduction; New resident
Topic
Taxable Income
Date Issued
09-03-1985
September 3, 1985
RE: Virginia Code Section 58.1-1821 Application
Dear ****
This is in reference to your letter of July 1, 1984 in which you make application for correction of the assessment of additional individual income tax for 198O and to your letter of November 3, 1984 in which you provided additional information to my staff.
FACTS
You moved into Virginia during taxable year 1978 and established a business here. The result of this business venture was a loss that qualified for net operating loss treatment for federal income tax purposes. Federal tax law, I.R.C. Section 172(b)(1), required that any net operating loss be carried back to the third preceding tax year first and then brought forward. Therefore, you amended your 1975 federal income tax return to reflect the carryback of the 1978 net operating loss.
You did not file a 1978 Virginia income tax return since you had no tax liability to Virginia. When you filed your 1979 Virginia income tax return, you carried forward the amount of negative Virginia taxable income that you would have had on your 1978 Virginia income tax return, had you filed one. You did this because the loss occurred in Virginia and for federal income tax purposes the loss was carried back to a year in which you had no Virginia income tax liability. After carrying the 1978 loss forward to 1979, you had a negative Virginia taxable income on your 1979 Virginia income tax return. This negative amount of Virginia taxable income was then carried forward and used to reduce Virginia taxable income on your 1980 Virginia income tax return.
The department disallowed the carryforward of this loss to your 1980 Virginia return and issued an assessment for additional income tax and interest for taxable year 1980. You now petition for correction of this assessment on the grounds that you were acting on information you received as the result of a telephone call to the department in 1980, asking advice on the Virginia treatment of this federal net operating loss.
DETERMINATION
There is no provision in the Code of Virginia for a Virginia net operating loss. However, since the starting point on a Virginia individual income tax return is federal adjusted gross income, there is an implied provision for net operating losses to the extent that such losses are included in federal adjusted gross income.
With only this implied provision for net operating losses, there can be no carryback or carryforward of a loss to any year in which there is not a carryback or carryforward for federal purposes. The transitional modification provisions of Virginia Code Section 58.1-315 are the only exceptions to this rule and they are not applicable in this case.
In retrospect, you should have filed your Virginia income tax returns for 1978, 1979 and 198O to reflect the federal adjusted gross income as reported on your federal income tax returns. Since you filed an amended federal income tax return for 1975 to reflect the carryback of the 1978 net operating loss, any 1975 state income tax adjustment which might be available, should have been made on the return for the state in which you were a resident in that tax year.
There can be no carryforward of your 1978 federal net operating loss nor any carryforward of your negative 1979 Virginia taxable income. Any assessment of additional income tax for 1979 is now barred by statute. The assessment for 198O was timely. Therefore, I must deny your application.
Sincerely,
W. H. Forst
State Tax Commissioner
RE: Virginia Code Section 58.1-1821 Application
-
- Individual Income Tax
Dear ****
This is in reference to your letter of July 1, 1984 in which you make application for correction of the assessment of additional individual income tax for 198O and to your letter of November 3, 1984 in which you provided additional information to my staff.
FACTS
You moved into Virginia during taxable year 1978 and established a business here. The result of this business venture was a loss that qualified for net operating loss treatment for federal income tax purposes. Federal tax law, I.R.C. Section 172(b)(1), required that any net operating loss be carried back to the third preceding tax year first and then brought forward. Therefore, you amended your 1975 federal income tax return to reflect the carryback of the 1978 net operating loss.
You did not file a 1978 Virginia income tax return since you had no tax liability to Virginia. When you filed your 1979 Virginia income tax return, you carried forward the amount of negative Virginia taxable income that you would have had on your 1978 Virginia income tax return, had you filed one. You did this because the loss occurred in Virginia and for federal income tax purposes the loss was carried back to a year in which you had no Virginia income tax liability. After carrying the 1978 loss forward to 1979, you had a negative Virginia taxable income on your 1979 Virginia income tax return. This negative amount of Virginia taxable income was then carried forward and used to reduce Virginia taxable income on your 1980 Virginia income tax return.
The department disallowed the carryforward of this loss to your 1980 Virginia return and issued an assessment for additional income tax and interest for taxable year 1980. You now petition for correction of this assessment on the grounds that you were acting on information you received as the result of a telephone call to the department in 1980, asking advice on the Virginia treatment of this federal net operating loss.
DETERMINATION
There is no provision in the Code of Virginia for a Virginia net operating loss. However, since the starting point on a Virginia individual income tax return is federal adjusted gross income, there is an implied provision for net operating losses to the extent that such losses are included in federal adjusted gross income.
With only this implied provision for net operating losses, there can be no carryback or carryforward of a loss to any year in which there is not a carryback or carryforward for federal purposes. The transitional modification provisions of Virginia Code Section 58.1-315 are the only exceptions to this rule and they are not applicable in this case.
In retrospect, you should have filed your Virginia income tax returns for 1978, 1979 and 198O to reflect the federal adjusted gross income as reported on your federal income tax returns. Since you filed an amended federal income tax return for 1975 to reflect the carryback of the 1978 net operating loss, any 1975 state income tax adjustment which might be available, should have been made on the return for the state in which you were a resident in that tax year.
There can be no carryforward of your 1978 federal net operating loss nor any carryforward of your negative 1979 Virginia taxable income. Any assessment of additional income tax for 1979 is now barred by statute. The assessment for 198O was timely. Therefore, I must deny your application.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner