Could a holding company carry pre-Virginia net operating losses into its new Virginia consolidated group?

Subject

Pre-nexus holding-company losses could enter the Virginia consolidated group

Plain-English summary

Virginia allowed the holding company's remaining pre-Virginia net operating losses to offset income of the Virginia consolidated group. The company had generated losses while its headquarters functions were in another state and it lacked Virginia nexus, then moved those functions to Virginia and joined the group's 2008 Virginia return.

Virginia began with federal taxable income, including federally allowable NOL deductions. A loss was not disqualified merely because it arose before the company became subject to Virginia tax.

Because the federal and Virginia groups were not identical in prior years, the NOL had to be recomputed as if the holding company had filed separate federal returns before joining the Virginia group. The remaining losses could offset group income and carry forward under the federal rules then in effect, even though some losses had been used in the former state.

What this means for you

• Pre-nexus losses were not automatically lost when the company later entered Virginia.
• Federal availability remained the starting point for the Virginia NOL deduction.
• A different Virginia filing group required a same-basis, separate-return computation.
• Losses already used elsewhere reduced what remained available factually, but other-state use did not itself bar the remaining amount.

Common questions

Did the company need Virginia nexus when the losses arose?

No. The ruling said lack of Virginia taxability in the loss year did not by itself prevent carryover.

How were prior losses computed for Virginia?

As if the holding company had filed separate federal returns for the years before it became subject to Virginia tax.

Citations and references

• Va. Code § 58.1-301.
• 23 VAC 10-120-320.
• P.D. 89-136 and 91-191.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-108

Original ruling text

June 24, 2009

Re: Ruling Request: Net Operating Losses

Dear *:

This is in response to your letter requesting a ruling concerning net operating losses ("NOLs"), which were generated in a year in which the taxpayer's holding company was not subject to Virginia income tax and some of the NOLs were previously utilized in the holding company's former state.

FACTS

The Taxpayer is a holding company of an affiliated group of corporations. Some affiliates own and operate facilities in Virginia and have participated in a Virginia consolidated income tax return for many years. The holding company's headquarters' functions were previously performed in another state, but such functions are now performed in Virginia. The holding company has been included in the group's federal consolidated income tax return, but previously lacked nexus with Virginia and accordingly was never included in the group's Virginia consolidated tax returns. The holding company will now be included in the affiliated group's Virginia consolidated tax return for the 2008 taxable year.

On a separate company basis, the holding company generated NOLs in prior years that were absorbed in the group's federal consolidated returns. The NOLs were generated over a period of several years while the holding company's functions were performed in the former state and, with one exception, the NOLs were not utilized to reduce taxable income in that state. Because the holding company is now a member of the Virginia affiliated group due to the relocation of the headquarters' functions to Virginia, the taxpayer requests a ruling on whether prior year losses will be available to offset the federal taxable income of the Virginia affiliated group.

You state that you believe NOLs will be available for a deduction to offset the Virginia taxable income of the Virginia consolidated group even though the losses were generated in a year in which the holding company was not subject to Virginia income tax and even though some of the NOLs were previous utilized in the holding company's former state. You also state that you believe the remaining NOLs will be available to carry forward to subsequent tax years until fully used, subject to the 20-year carry forward limitation.

DETERMINATION

In general, Virginia income tax laws do not address NOLs. Nonetheless, Va. Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code ("I.R.C."), unless a different meaning is clearly required. Because the starting point in computing Virginia taxable income is federal taxable income, Virginia allows a NOLs deduction to the extent that it is allowable in computing federal taxable income.

The holding company generated NOLs in prior years that were generated while the holding company's functions were performed in the former state. The fact that a NOLs was incurred in a year when the Taxpayer was not subject to Virginia income tax does not limit the Taxpayer's ability to see the NOLs carryover on a Virginia return if the carryover is included in its federal taxable income. See Public Document 89-136 (April 28, 1989).

When federal and Virginia returns are prepared one a different basis, the federal taxable income (including NOL) must be computed for Virginia purposes as if the federal return were filed on the same basis as the Virginia return. See Public Document 91-191 (August 30, 1991) and 23 VAC 10-120-320. In this case, that means that the NOLs is computed as if the holding company filed a separate federal return for all taxable years before it became subject to Virginia tax.

Therefore, even though some of the losses were previously utilized in the holding company's former state, the remaining losses would be available to offset the Virginia taxable income of the Virginia consolidated group. Accordingly, the remaining NOLs will be available to carry forward to subsequent tax years until fully used, subject to federal rules for NOLs carry forward, which currently provide a 20-year carry forward limitation.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to different results.

I hope the foregoing has responded to your inquiry and should you have additional questions, please contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner