Did SRLY rules limit post-acquisition losses of a Virginia affiliate or parent losses incurred before the group had Virginia nexus?

Subject

SRLY did not limit the stated post-acquisition affiliate or parent losses

Plain-English summary

Virginia ruled that the described losses were not limited by the federal separate-return-limitation-year rules. Company X generated a post-acquisition short-year loss after becoming a member of the parent's federal group. That loss was not a SRLY loss merely because no other member had Virginia nexus that year.

The ownership-change SRLY limitation applied to Company X's earlier loss carryovers, not to losses generated by the parent. The parent's losses from the acquisition year or earlier could carry to a Virginia consolidated return if they were included in federal taxable income, even though the parent had not been subject to Virginia tax when those losses arose.

What this means for you

• Virginia NOL treatment generally follows the federal taxable-income starting point.
• Federal group membership, not Virginia nexus of the other members, controlled whether the post-acquisition short year was separate for SRLY purposes.
• Pre-acquisition affiliate losses and parent losses require different ownership-change analysis.

Common questions

Was Company X's post-acquisition loss subject to SRLY?

No. It already satisfied the ownership requirements for membership in the parent's group.

Did the parent's lack of Virginia nexus in the loss year bar carryforward?

No, if the carryover was included in the parent's federal taxable income.

Citations and references

• Va. Code § 58.1-301.
• Treas. Reg. § 1.1502-21(c).
• Virginia Public Document 89-136.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-126

Original ruling text

August 7, 2009

Re: Ruling Request: Net Operating Losses and Separate Return Limitation Year

Dear *:

This is in response to your letter requesting a ruling concerning the impact of a separate return limitation year ("SRLY") on net operating losses ("NOL").

FACTS

The Taxpayer, the corporate parent of an affiliated group, is headquartered and domiciled outside of Virginia. The Taxpayer and its Virginia nexus affiliates currently file a consolidated Virginia Corporation Income Tax Return.

The Taxpayer acquired 100 percent of the stock of Company X. Company X had nexus in Virginia and had been filing separate Virginia returns for several years prior to the acquisition. In the year of acquisition, Company X filed a short year separate federal return reflecting its separate income up to the date of acquisition by the Taxpayer. Company X incurred a modest taxable loss on its separate short year return ending on the date of acquisition. From the date of acquisition through the end of the taxable year, Company X filed as part of the Taxpayer's federal consolidated return. Neither the Taxpayer nor any affiliate (other than Company X) had nexus in Virginia in the acquisition year. Accordingly, Company X filed a separate Virginia short year return reflecting NOL for the same post-acquisition period as the Taxpayer's federal consolidated return.

You state that the post-acquisition NOL generated by Company X in the post-acquisition short year would not be subject to SRLY limitations established by Treas. Reg. §1.1502-21(c) in determining the amounts available for carry forward to a Virginia consolidated return. You also state that the NOL generated by the Taxpayer during the acquisition year or prior would not be subject to the SRLY limitations established by Treas. Reg. §1.1502-21(c) in determining the amounts available for carry forward to a Virginia consolidated return.

DETERMINATION

In general, Virginia income tax laws do not address NOL. 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 NOL deduction to the extent that it is allowable in computing federal taxable income.

Generally, NOL reported on a separate return can be carried over to and used on a consolidated return. Treas. Reg. § 1.1502-21(c), however, provides that the NOL carryovers and carrybacks of a member of an affiliated group arising in a "separate return limitation year" ("SRLY") may not exceed the amount of consolidated taxable income contributed by the loss-sustaining member for that taxable year. SRLY means any separate return year of a member or of a predecessor of a member. SRLY limitations only apply to the net operating loss carryovers and carrybacks in a SRLY year. Therefore, the post-acquisition NOL generated by Company X would not be subject to SRLY limitations in determining the amounts available for carry forward to a Virginia consolidated return because Company X satisfied the ownership requirements to be a member of the Taxpayer's group, even though no other member of the group had Virginia nexus that year.

The SRLY limitation applies to a corporation which has had an ownership change. Therefore, the SRLY limitation would apply to NOL carryovers of Company X, not the Taxpayer. The NOL generated by the Taxpayer during the acquisition year or prior would not be subject to the SRLY limitations in determining the amounts available for carry forward to a Virginia consolidated return. The fact that the loss 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 NOL carryover on a Virginia return if the carryover is included in its federal taxable income. See Public Document 89-136 (April 28, 1989).

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