Tax Type
Corporation Income Tax
Description
Loss carryback for subsidiary; Consolidated return
Topic
Computation of Income
Date Issued
10-14-1987
October 14, 1987
Re: § 58.1-1821 Application: Corporate
Dear ******************
This will reply to your letter of May 26, 1987 concerning denial of a carryback for the Subsidiary.
Facts
For the tax year ended September 30, 1985, the Taxpayers filed a federal consolidated return and a Virginia combined return. For federal purposes, the Parent had taxable income and the Subsidiary had a net operating loss. Virginia combined taxable income was a positive amount. For the tax year ended September 30, 1986, the Parent and Subsidiary each had a federal net operating loss and, after Virginia modifications and apportionment, combined Virginia taxable income in a negative amount. The Parent's loss was carried back to its separate return for the year ended September 30, 1983, but the Subsidiary's loss could not be carried back to its separate return years. The Taxpayers want to carry the Subsidiary's 1986 loss to the tax year ended September 30, 1985 along with its share of modifications. The carryback was denied and the Taxpayers request clarification.
Determination
Under Va. Code §58.1-442 and Corporation Income Tax Regulations VR 630-3-442, a copy of which is enclosed, each company filing a combined return separately computes its federal taxable income, including a net operating loss deduction, makes any modifications, and then separately allocates and apportions its Virginia taxable income using its own commercial domicile and apportionment factors. For federal and Virginia returns filed on a different basis, it is necessary to compute federal taxable income and the federal net operating loss deduction for Virginia purposes as if the returns were filed on the same basis. At that point, the resulting income or loss from Virginia sources is combined and reported on a single return.
In a Virginia combined return, the net operating loss of one company can be used to offset the income of another member of the group. This has already occurred when the Subsidiary's loss offset the Parent's 1985 income.
The Parent now seeks to carry the Subsidiary's 1986 loss back to 1985, which would increase the Subsidiary's 1985 federal net operating loss and offset more of the Parent's income. However, under federal laws and regulations, a net operating loss deduction cannot create or increase a net operating loss. Therefore, a federal net operating loss deduction cannot increase the amount of a loss reported on Line 1 of the Virginia corporation income tax return. See Corporation Income Tax Regulations VR 630-3-402 A.2.e.(iv), a copy of which is enclosed.
Virginia law has no provision for a net operating loss deduction. Thus, a net operating loss deduction is allowable for Virginia purposes only to the extent that the net operating loss deduction is allowable as a deduction in computing federal taxable income.
For these reasons, the Subsidiary's loss for the tax year ended September 30, 1986 cannot be carried back to the tax year ended September 30, 1985, but remains available to be claimed as federal net operating loss deduction in 1987 and subsequent years.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner