Tax Type
Individual Income Tax
Description
Net operating loss carryback
Topic
Taxable Income
Date Issued
11-18-1987
November 18. 1987
Re: Virginia Code §58.1-1821 Application
Individual Income Tax
Dear *****************
This is in reply to your letter of March 6, 1987 in which you make application for correction of the individual income tax assessment issued to your client, ********** for taxable year 1982.
FACTS
************* (Taxpayer) suffered losses in taxable year 1985 which qualified under federal income tax law (I.R.C. §172 et al) for treatment as a net operating loss. For federal income tax purposes the entire amount of the net operating loss was carried back to taxable year 1982. Taxpayer filed an amended Virginia individual income tax return for taxable year 1982 to reflect the carryback of the federal net operating loss. The adjustments made to this amended 1982 Virginia return by the department resulted in the Taxpayer owing additional tax for taxable year 1982, rather than receiving a refund as shown on the return.
The department's adjustment to the Taxpayer's 1982 return was based upon the requirements set forth in Virginia Regulation 630-2-311.1 - Individual Income Tax: Net operating Losses. You contest the department's interpretation and application of Section 4 of the above Regulation.
DETERMINATION
There is no express statutory authority under the Code of Virginia for a separate Virginia net operating loss. However, since under Virginia Code §58.1-322 the starting point in the computation of Virginia taxable income is federal adjusted gross income, and the federal carryback or carryforward of a federal net operating loss is reflected in federal adjusted gross income, Virginia taxable income is affected by a federal net operating loss to the extent that it is reflected in federal adjusted gross income.
Virginia Regulation 630-2-311.1 requires that "Virginia Modifications" be made to certain enumerated items and to other items that are components of a federal net operating loss that Virginia law treats dissimilarly. Section 4, "Treatment of the Virginia modifications in the loss year", states:
A. Modifications follow loss.
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- The addition, subtraction and itemized deduction or deduction for zero bracket amount modifications shall be combined. The net result of these loss year modifications will follow the federal loss to the year in which the loss is utilized. It will be applied in the same proportion as the amount of loss that is absorbed. Thus, if the federal net operating loss is fully utilized in a carryback or carryforward year, the entire net amount of Virginia modifications will be applied to such year. If however, the federal net operating loss is partially utilized in each of several years, the net Virginia modifications will be applied in the same ratio to the several years. For example, if 50% of a 1984 federal net operating loss is carried back to 1981, then 50% of the 1984 net Virginia modifications will also be carried back to 1981.
- The addition, subtraction and itemized deduction or deduction for zero bracket amount modifications shall be combined. The net result of these loss year modifications will follow the federal loss to the year in which the loss is utilized. It will be applied in the same proportion as the amount of loss that is absorbed. Thus, if the federal net operating loss is fully utilized in a carryback or carryforward year, the entire net amount of Virginia modifications will be applied to such year. If however, the federal net operating loss is partially utilized in each of several years, the net Virginia modifications will be applied in the same ratio to the several years. For example, if 50% of a 1984 federal net operating loss is carried back to 1981, then 50% of the 1984 net Virginia modifications will also be carried back to 1981.
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- However, if in the loss year the positive Virginia modifications are greater than the federal net operating loss, Virginia negative modifications, plus the amount of Virginia personal exemptions and deductions, then Virginia taxable income for the loss year will be greater than zero. Under those circumstances, the net positive Virginia modification shall be limited to the amount of the federal net operating loss. For example, if the 1984 federal net operating loss is ($9,000), Virginia additions are $18,000, and Virginia subtractions are ($5,000), then 1984 Virginia taxable income is $2,100 (assuming the taxpayer is single, under age 65 and claims the Virginia standard deduction). The net modification ($18,000 - $5,000 = $13,000) will be limited to the amount of federal net operating loss, i.e. $9,000. Therefore, if $6,000 of the federal net operating loss is carried back to 1981 then $6,000 of the net positive Virginia modification will also be carried back to 1981.
In your client's case, since the entire amount of the net operating loss from taxable year 1985 was utilized in taxable year 1982, any "Virginia Modifications" applicable to taxable year 1985 will be carried with the net operating loss to taxable year 1982.
In your client's loss year (1985), the positive Virginia modifications are greater than the federal net operating loss, Virginia negative modifications, plus the amount of Virginia personal exemptions and deductions; however, your client's Virginia taxable income was less than zero.
You assert that Section 4 (B) of the Regulation is applicable to your client and that the "Virginia Modifications" which are carried back to the carryback year should be limited to the amount of the net operating loss and should not give rise to taxable income in the carryback year. Section 4 (B) states in part:
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- However, if in the loss year the positive Virginia modifications are greater than the federal net operating loss, Virginia negative modifications, plus the amount of Virginia personal exemptions and deductions, then Virginia taxable income for the loss year will be greater than zero. (Emphasis added.)
- However, if in the loss year the positive Virginia modifications are greater than the federal net operating loss, Virginia negative modifications, plus the amount of Virginia personal exemptions and deductions, then Virginia taxable income for the loss year will be greater than zero. (Emphasis added.)
The proper application of Virginia Regulation 630-2-311.1 to your client will require that the amount of the net "Virginia Modifications" carried back to the carryback year not exceed the amount of the net operating loss. This will result in a "wash" transaction for taxable year 1982. Accordingly, your client's amended 1982 return will give rise to neither a refund nor to an assessment. The current assessment for taxable year 1982 will be abated.
Sincerely.
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner